Argentina and Germany: two very different fiscal problems

Finding a responsible path forward will shape their destinies

Argentina and Germany are polar opposites when it comes to fiscal responsibility, yet both are in the news for budget policy. In Argentina, Javier Milei – the president-elect – rightly recognises the imperative of slashing the country’s habitual massive deficits and monetary financing, which have spawned a legacy of high/hyperinflation and serial defaults.

In contrast, Germany’s governing coalition must tackle fundamental challenges to the country’s growth model while managing the future of the ‘schuldenbremse’ (debt brake), given the most recent German constitutional ruling. Finding a responsible path forward is critical for their destinies.


Milei won Argentina’s presidential elections on a campaign for radical change. His proposals to dollarise the economy, abolish the central bank, cut fiscal spending by 15% of gross domestic product and eradicate government ministries will confront reality. But abstracting from his extreme proposals, the essence of his argument is correct: Argentina must slash fiscal deficits and monetary financing and liberalise the economy.

Campaigning and governing are different animals. Already, Milei is backing away from some controversial proposals. Regardless, his plans most likely portend a deep upfront recession coupled with a peso crash. Milei is unlikely to be able to deliver in full. Voters may want change, but they will find the entrée unappetising. His party holds only a few parliamentary seats and lacks a majority in the Senate even with the support of uncertain allies. The opposition is well entrenched, as are labour unions and protections.

Milei is right to pursue immediate adjustment. After the 2015 elections, President Mauricio Macri opted for a strategy of liberalisation, fiscal gradualism and restoring capital market access quickly by settling with creditors, which boosted Argentina’s debt. Little fiscal consolidation was achieved early on and, when rapid consolidation became essential, the ensuing recession undergirded the Peronist party’s victory in 2019.

Argentina desperately needs reform. Dollarisation is a diversion – Argentina doesn’t have the dollars for such a regime. There are tricks to sidestep the supposed fiscal discipline dollarisation or abolition of the central bank would impose. Rather than falsely believing in a magic bullet, the country would be better off focusing on painfully hard fiscal work, stopping central bank monetary financing and maintaining a realistically valued exchange rate. Argentina should also pursue another external debt restructuring, rather than add to debt.

Given Argentina’s decades of failed economic policies and political quagmires, there is little reason to believe this time will be different. The international community, especially the International Monetary Fund, should lend a helping hand only when – not if – Argentina implements strong reforms. Actions must replace promises.

The IMF can no longer be an enabler, even if Argentina owes the Fund more than $40bn. Unflinching tough love is needed. If Argentina does not immediately implement sound policies, the IMF must step back and let Argentina run arrears, even though painful for all concerned.


The German constitutional court in Karlsruhe has again reared its head, this time with a ruling that limits workarounds under Germany’s debt brake – schuldenbremse.

The schuldenbremse, which constitutionally limits Germany’s structural budget deficit to 0.35% per annum except in declared emergencies, is excessively rigid and not fit for purpose. It may have made sense at the time of its inception in 2009, given the country’s mindset and legacy of deficits in the 1990s and early 2000s after reunification (Figure 1).

Figure 1. Germany’s government balance after reunification

Percentage of GDP

Source: IMF World Economic Outlook Database, October 2023


Backed by former finance minister Wolfgang Schauble’s ‘schwarze null’ (black zero) budget balance policy, Germany swung to fiscal surpluses between 2012-19. Notwithstanding the euro crisis, growth over the decade held up reasonably well as Germany imported growth through its massive current account surpluses.

Germany deserves praise for its admirable dedication to stability-orientated policies, discipline and tackling adjustment in the 2000s after reunification. Its society is committed to fiscal discipline. There is little risk of tolerating excessive or out-of-control debt and deficit surges.

But Germany’s export-orientated growth model was already ‘kaputt’ at the start of this decade. Developments since then have reaffirmed this. Potential growth is slowing in advanced economies and China, limiting exports. Germany’s auto industry has pivotally supported exports, but is losing out to China. Energy dependence on Russia has been torn asunder by the invasion of Ukraine and the West’s response. Germany faces pressing climate and infrastructure needs and must boost military spending after decades of freeriding on America’s defence umbrella.

Germany must tackle these challenges to reorientate its growth model. Given its robust fiscal position, the country should readily and responsibly borrow for these purposes and run deficits. In view of the schuldenbremse, though, Germany has relied on fiscal manoeuvres beyond the formal budget. Karlsruhe is questioning this practice.

The coalition’s decision to retroactively suspend the 2023 debt brake begs the question of what to do in 2024. Germany is most likely now in recession and at best growth will be stagnant in 2024. A move to fiscal consolidation will reinforce economic stagnation, complicating the necessary overhaul of Germany’s outdated growth model.

Germany could outright suspend the debt brake in 2024, though that could run up against Free Democratic Party resistance or further legal challenges. The coalition could instead suspend the debt brake, given stagnation, while appointing a fiscal commission to make recommendations to the government for new fiscal rules that would maintain discipline, take into account European discussions and tackle Germany’s outdated growth model. The commission could review expenditure rules, golden rules, capital budgeting, other countries’ experiences and budget transparency, given the profusion of copious special accounts. Even if abandoning the schuldenbremse would require constitutional reform and be politically difficult, it is time for Germany to leave the debt brake behind.

Argentina and Germany – one with a reputation for longstanding economic malpractice and the other as the embodiment of stability and responsibility – face enormous budgetary challenges. How they tackle these will shape their economic destinies.

Mark Sobel is US Chair of OMFIF.

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