Just imagine: A doctor develops an ingenious diagnostic tool that can avoid misdiagnoses in many diseases, but the vast majority of his colleagues don’t want to use it because they think misdiagnoses are just part of the risk of patients’ lives that you simply have to accept. You would certainly say that this position is irresponsible and call for the state to ensure that the majority of physicians vacate their traditional positions and use the new instrument. You think that is unrealistic? Any sensible medical practitioner, you believe, would strive to help patients as much as possible, and consequently would never cling to traditional but outdated methods without reason.

Now I will tell them a story from economics. Nearly a hundred years ago, a group of economists discovered that you can’t look at and judge a person’s or a government’s decision to spend more or less money than before in isolation, because each such decision inevitably has repercussions on other people and on businesses, which in turn respond to it. If, for example, private households spend less of their income, i.e. put more aside, the companies from which they would otherwise have bought have lower revenues. Every income in the economy is also an expenditure, and vice versa.

That’s a ridiculously simple insight, you’ll say. It’s true. As early as the 1950s, some clever officials at the Deutsche Bundesbank set out to calculate the balance of income and expenditure in the various sectors of the economy. But it is precisely this ridiculously simple insight that has been simply ignored in Germany for the above-mentioned almost one hundred years by the vast majority of economists, I am talking about an estimated 95 percent, and by the entirety of politicians responsible for economic issues. Even the top of the Bundesbank has kept this realization under wraps for decades.

Savings and debt

For fiscal and monetary policy, however, it is crucial to know how much private households spend in total of the income they have received – from the corporate sector and from the state – as wages and salaries? What proportion of this do they take to the bank month after month? What do the companies do if each month they get back only 90 percent of the amount they pay out to their employees? How can they pay out 100 percent of the salaries again the next month, they made a big loss? In order to restore the balance sheets of companies when households are saving, it seems that someone would have to spend exactly the ten percent of income on purchases of goods that households have been saving. But who would that be?

It would have to be someone who did not receive this saved amount, which in Germany is about 10 billion euros per month, from the companies, because it doesn’t help the companies if they only get back what they previously paid out. Someone would have to spend money that he (or she!) does not have. Let’s imagine that there is such a crazy person or institution, then the world would be fine again: the companies would pay out 100 billion and would get back 100 billion even if the private households saved ten billion, because our crazy person took out ten billion euros as a loan and spent it completely.

But what if we can’t find a madman willing to spend money he doesn’t have? Then, and this is another simple consideration, companies will start laying off workers in the first month in order to limit their losses. Many households that were counting on a fixed income that would have allowed them to save ten percent will be disappointed and will have to revise their savings plans and their spending plans downward. The result is usually called a recession.

You can’t have a recession without crazy people spending money they don’t have! If one group of the economy wants to save, it needs another group to incur debt of the same amount so that at least there is no recession. If, when looking at balances, one finds that, as is the case in many countries in the world today, private households and also companies are savers, the last remaining domestic sector, the state, obviously has to ask itself whether it can save come hell or high water – for example, as is being demanded in Europe right now, in order to reduce its debt level. But if the state saves during a recession, it will only make the recession worse and will have to step in with its own debt in the end, because otherwise social cohesion will be seriously threatened.

But, interject the particularly clever German economists at this point: Germany and the Netherlands reduced their public debt in the years before Corona without a recession. This is also true, but it is not a way out of the dilemma. In fact, the two countries have turned foreign countries into debtors. By means of relative wage and price reductions in the monetary union, they induced consumers and investors in other countries to spend money they did not have.

Because the goods of the two wage-cutters were so cheap, they exported less, i.e. took in less, than they imported, i.e. spent. Germany and the Netherlands took in more than they spent, and consequently had current account surpluses. But not all countries in the world can do this, because the world has no foreign countries. If Europe as a whole were to try it, the Americans would be the first to seal off their markets, because they do not want to run up even more foreign debt year after year than they already do.

What is politics allowed to do?

These are extremely simple, yet completely compelling considerations. Yet German and European politicians believe they can do without them. Why is that? If politicians were to ignore indisputable physical laws such as the law of conservation of energy, science would go on the barricades and declare the acting politicians crazy. Nothing happens in the economic sciences because so-called science has made itself the beadle of political interests and – without regard for logic – parrots everything that suits the ideology of the big market and the small state.

The result is political decisions that will have fatal consequences for many generations. Christian Lindner, the German finance minister, and his advisor Lars Feld act as if these connections did not exist. Neither do they talk about Germany’s current account surpluses as a precondition for government savings in the past, nor do they point out that it is not simply a question of political will whether a country can reduce its government debt or not.

German ignorance is taken to the extreme, however, by the president of the Deutsche Bundesbank, Joachim Nagel, who not only, like almost all his predecessors, simply ignores the sector balances calculated in his institution. He says it is crucial “that member states continue to have sufficient incentives to align their fiscal and economic policies in a sustainable manner and to reduce debt levels.” “Incentives,” then, are needed by countries that have no objective way whatsoever to reduce their public debt because their private sector is saving and Germany is blocking the way via foreign debt.

The man also says in all seriousness that “effective fiscal conditionality” must be imposed on the countries that the ECB may help to fend off speculators in the capital markets. This can mean nothing other than imposing fiscal conditionality on government austerity precisely where it can never be effective. Over the past thirty years, Italy has saved more on the part of the state than any other country in Europe. The fact that it has nevertheless failed to reduce its public debt is not due to a lack of political will or insufficient “political incentives,” but is solely due to the fact that the constellation of other balances in the Italian economy has made successful government saving impossible.

Ultra posse nemo obligatur, the impossible cannot be required, is a legal principle whose importance can hardly be overestimated. This is precisely what is at stake in Europe. If Germany does not stop demanding the impossible from its neighbors, it will see things happen that are still considered impossible today.