Economy

Finger-Wagging Germany Secretly Accumulating Trillions In Debt

While giving the rest of Europe lessons on austerity, Germany has quietly been accumulating debt, a situation that will worsen with the planned social reforms and tax cuts.

Do as I say, not as I do (Ken Teegardin)
Dorothea Siems

BERLIN - German Chancellor Angela Merkel appears intractable on the subject of austerity measures in Europe. And yet when it comes to budgetary rigor, Germany is actually not setting a good example, according to a report from the Berlin-based Stiftung Marktwirtschaft (Market Economy Foundation).

Instead of using the country's strong current economic situation to consolidate its position, "the federal government is planning a number of expensive gifts," says economist Bernd Raffelhüschen, noting in particular planned reforms of child care and health care, as well as pension and tax reforms.

The German debt has reached a record 83.2% of gross domestic product (GDP). To that must be added hidden implicit social security and pension debt. At 147% of GDP, this hidden debt significantly exceeds the official debt. If the government had to produce a profit and loss statement the way businesses do, it would have to create reserves amounting to the entire debt, which represents 230% of GDP.

However, as the government is not making the necessary provisions, that leaves them with a "sustainability gap" of 5.7 trillion euros, according to Raffelhüschen. "Before we rescue other countries we should rescue ourselves from ourselves," said the Chairman of the Stiftung Marktwirtschaft, Michael Eilfort.

Despite record revenues from taxes and social security payments following higher growth rates and the on-going jobs boom, the German government has not been able to put together a balanced budget. Because of the good state of the economy, however, the figures in Raffelhüschen's report show a decrease in total national debt for the third consecutive year. But the next recession will reverse the up trend – and the more paid out for benefits the stronger that reversal is.

Expensive reforms

The economist claims that the planned reforms to cut taxes --which have been blocked by the Bundesrat (the federal legislative body that represents Germany's 16 states)-- would have increased the total debt from 230% of GDP to 243%.

Raffelhüschen also says that healthcare reforms are not being financed. While contribution rates will be raised in 2013, the increased revenues will not be enough to cover a broader range of healthcare, for example for dementia patients.

The planned pension reform will be expensive long-term, particularly if the introduction of a "top-up" for low earners goes through. "It would represent a break with one of the basic principles of our social state, that is that all poor people should be treated equally," says Raffelhüschen. With a "top-up" of 850 euros a month, a poor senior would be getting better treatment from the government than a poor youth whose resources would be subject to review before benefits could be granted.

Also financed by debt would be the daycare money to be paid from January 2013 to parents whose toddlers do not go to a daycare center. "If you want this measure, it should under no circumstances be financed with borrowed money," Raffelhüschen says, because doing it that way means the children will end up paying for it.

Free Democratic Party (FDP) economist Hermann Otto Solms shared skepticism about the planned reforms. "If we expect other European countries to implement severe austerity measures, we have to set a good example in Germany," he said in reference to the daycare and "top-up" benefits. Consolidation should be our top priority right now, he added.

Read the article in German in Die Welt.

Photo - Ken Teegardin

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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Angela Merkel at a campaign event of CDU party, Stralsund, Sep 2021

Tobias Kaiser, Virginia Kirst, Martina Meister


-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.

France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

Europe's north-south divide lives on

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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