(Bloomberg) -- Lars Feld doesn’t come off as a hardliner.
He has a kind voice, a soft handshake, a gentle smile. A stud shimmers on his left ear. In his office at the Walter Eucken Institute, an economic think tank in the western German city of Freiburg, piles of manuscripts and case studies cover half of the room; bookshelves extend up to the ceiling, an unadorned desk sits by the window.
But appearances can be deceiving. Feld is one of the leading advocates of a particularly German strand of economics that staunchly opposes public debt.
From his perches in Freiburg and Berlin, where he serves as an advisor to Finance Minister Christian Lindner, Feld has helped shape the controversial fiscal policies that have hamstrung Europe’s biggest economy as it struggles with stagnation and blocked calls from partners like France and Estonia for more joint European debt issuance to fund an urgent ramp-up in defense spending.
“If calling for solid public finances is considered radical these days, then we have a serious problem,” Feld says of his critics.
The economist feels vindicated by the post-election mayhem in neighboring France, where concerns about a spike in state spending prompted markets to increase the risk premium they demand to hold government bonds.
“It was reassuring to see the spread, it is important that the financial markets have a disciplining effect. It ensures that politicians think carefully about what is fiscally possible,” Feld says, adding that a new euro crisis can’t be ruled out yet.
Debt has become an existential issue in Europe. After the unrestrained borrowing during the pandemic, investors and officials are starting to focus on public finances again, and not just in highly-indebted countries like France, which is facing monitoring under the European Union’s budget rules.
While Social Democrat Chancellor Olaf Scholz and Economy Minister Robert Habeck, a Green Party leader, have fought to jump-start Germany’s economy through more public spending, Lindner, whose Free Democrats are the smallest party in this fractious coalition, has blocked their path.
After months-long negotiations over next year’s budget, Lindner — with help from Feld’s protégé, a state secretary in the ministry — finally pushed through cuts in all ministries except defense.
To Feld, this shows that it is possible to set spending limits if needed. Despite intense pressure from its coalition partners, the Free Democrats managed to adhere to Germany’s so-called debt brake.
This controversial mechanism, written into the German constitution, restricts government net new borrowing to 0.35% of the country’s annual output.
Adopted after the financial crisis in 2009 and enacted in 2011, many economists now regard the brake as outdated. Germany needs to upgrade its crumbling railways and roads, ditch fossil fuels, rebuild its army to fend off a belligerent Russia and break its dependence on China. Feld is one of the only economists to insist that any of this is possible with the debt brake in place.
Berlin’s relatively low debt levels have moreover prompted Feld’s critics to argue that Germany could easily tackle all these challenges without destabilizing anything. Including off-budget funds, which don’t fall within the debt limit policy, Germany is expected to have a total debt of 64% of its gross domestic product this year — well below the EU average, which is around 82%; France is at 110%; the US at around 100%.
Feld, whose first job was as a nurse in a psychiatric institution, has a unique view of the situation. He believes that European countries don’t have their finances under control, which poses a danger for Germany as the “guarantor” of the European Central Bank’s balance sheet and the EU’s budget.
If financial markets lose confidence in a Eurozone member, it could create a downward spiral. France and Italy are too big to be bailed out by Germany, Feld says, and one can’t expect the ECB to rush to the rescue.
“The next global economic crisis might originate in the bond markets,” he warns.
The son of a bank clerk who once specialized in insolvencies, Feld came to appreciate the debt brake around the turn of the millennium, when he became a professor at the University of St. Gallen. Switzerland implemented debt limits long before Germany, and the idea of putting guardrails on state spending appealed to him.
Upon returning home, Feld joined the vanguard of German economists lobbying for a debt brake, and became a vocal proponent of ordoliberalism, a Freiburg-based offshoot of neoliberalism that tries to keep the vagaries of politics in check and balance capitalist with social objectives.
Feld isn’t formally a member of the Free Democrats, but his fingerprints are all over the party’s policies. He is “regularly in touch” with Lindner, and holds a unique advisory role in Germany’s most powerful ministry. The finance minister has summoned Feld’s market-first philosophy to oppose billions in subsidies for struggling companies, support a veto of an EU proposal to phase out combustion engines, weaken the EU’s supply chain law and cut unemployment benefits.
A ministry report earlier this year also used one of Feld’s studies to argue that Germany’s spending limit had no impact on the country’s investment activity.
“Lars Feld is the right man in the right place,” said economist Hans-Werner Sinn, who came to international attention in the early 2010s by pushing aggressively for austerity measures against Greece.
Within the Finance Ministry, said a person familiar with its internal workings and the economic scene in Germany, who asked to remain anonymous for professional reasons, Feld’s influence can’t be overestimated. He’s more of a politician than an economist, the person added — opportunistic and sometimes ruthless.
Upon hearing this, Feld shifts in his chair, trying to keep his anger in check. “People say things like that to discredit me,” he responds, dismissing the criticism.
Even though a majority of Germans want to leave the debt brake as-is, according to a poll from a public broadcaster, that may not be enough to keep Lindner’s party in power. Most of Germany’s political establishment and economists agree that in order for the government — or any future government — to make Germany more competitive, the policy must be reformed.
That is unlikely to happen under the current coalition, and it’s not clear whether the Free Democrats will be part of the next one. With the party struggling to stay above the 5% threshold required to enter parliament, it’s now banking on its ability to tell voters that it stayed true to its core principles and resisted pressure to waste taxpayers’ money. Whether that’s a vote-winning strategy remains to be seen.
And how would Feld feel about no longer being able to simply call up the Finance Ministry? To return to being a scholar after having been one of the most quietly influential economists in German politics? It’s simple, Feld responds. He’s not tied to parties. “If someone asks me to, I will serve my country,” he says with a smile.
--With assistance from Zoe Schneeweiss.
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