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Multi-level Finance and the Euro Crisis

Multi-level Finance and the Euro Crisis

Causes and Effects

Studies in Fiscal Federalism and State-local Finance series

Edited by Ehtisham Ahmad, Massimo Bordignon and Giorgio Brosio

Representing a unique contribution to the analysis and discussion of the unfolding Eurozone crisis in terms of the relationship between central and local government, this book addresses a number of important fiscal and political economy questions. To what extent have local and regional governments contributed to the crisis? To what degree have subnational services and investments borne the brunt of the adjustments? How have multi-level fissures affected tensions between different levels of government from the supranational to the local? This volume covers these and many other critical issues that have been largely ignored despite their relevance.

Chapter 3: History of the constitutional debt limits in Germany and the new ‘debt brake’: experiences and critique

Georg Milbradt

Subjects: economics and finance, public finance


To understand the reasons behind the concept of the German debt brake, which was subsequently introduced in a modified form at the European level, we have to look to history. The German population lost its monetary assets twice in the twentieth century. The first time was after the hyperinflation crisis of 1923 that followed World War I, when currency inflation resulted in an incredible exchange rate of 1 trillion old Marks: 1 RM (Reichsmark). The second time occurred after World War II, when the currency reform of 1948 resulted in an exchange rate of 100 RM: 6.5 DM (Deutsche Mark) in the West, and greater losses in other German territories. A West German bailout helped to avoid a third sharp devaluation after the fall of communism in East Germany. The reason behind these drastic devaluations of currency was that German governments financed their expenditures primarily via debt, and used the printing press directly or indirectly. The resulting hyperinflation caused great hardship and is often considered a key element in the ascent to power of the fascist government. Therefore, aversion to debt financing and inflationary policy is deeply enshrined in German collective memory.

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