Growing Like Germany: Local Public Debt, Local Banks, Low Private Investment

Local government debt in Germany crowds out private investment to the tune of one percent of GDP per year. The reason: forced to lend to local governments by their statutory mandate, local public banks try to “make up” for the low yields on municipal debt by charging SMEs higher rates in locally segmented credit markets. This effect is exacerbated by the dire straits of municipal finances in Germany which, we argue, is a direct consequence of the debt brake at the federal and state levels that shifted many expensive government tasks to municipalities.