Germany’s economy is only king in the blind valley of the Eurozone

Photo of Angela Merkel

A. Merkel, Photo by World Economic Forum

On Tuesday, July 3, London business paper City A.M. ran an editorial I wrote on Germany. The text is below.

In the present debate on the Euro crisis, Germany is frequently portrayed as a model of economic strength, a beacon of fiscal prudence and a proponent of structural reform. Her resources seem endless and her government debt an indisputable ‘safe-haven’. If only Germany shared her strength and resources more generously, the Euro debt crisis could be solved. But this is an optical illusion. Sooner or later, markets will wake up to the reality of the country’s fundamental weaknesses and grave challenges.

Over the 13 full calendar years of the life of the Euro, Germany accumulated an additional EUR900 billion in public debt. The overall debt load rose from EUR1,200 billion in early 1999 to EUR2,100 billion at the end of 2011, or from 61 per cent to 81 per cent of GDP. Remember that it was Germany that pushed through the Maastricht criteria, among them a debt-to-GDP ratio of no more than 60 per cent. Germany met this benchmark – barely – in only 3 of 13 years and presently has little chance to get there ever again. Only for 4 of those 13 years did Germany’s deficit stay within the Maastricht Treaty’s recommended limit of 1 percent, and on 7 occasions it exceeded the ‘maximum’ of 3 percent.

True, last year’s deficit of 1 percent looks respectable when compared to most of the Eurozone, or Britain (8.4 per cent) or the US (8.7 per cent). But this was achieved after two years of 3 percent growth, record-low borrowing costs and the lowest unemployment rate in 20 years. Even then, the German state could not balance its books. And these rosy conditions will certainly not last. As elsewhere, artificially low interest rates are, for the time being, sustaining a mirage of profitability and prosperity in large parts of the German economy, in particular the financial sector.

More important is the fact that Germany sits on a ticking fiscal time bomb and nothing has been done in years to diffuse it. Over the past four decades, Germany extended considerable, unfunded promises to the populace, mainly in the areas of public health insurance, state pensions and the public care insurance, the latter an expensive inheritance of the last ‘conservative’ government under Helmut Kohl, Merkel’s mentor. These commitments constitute, at minimum, ‘implicit’ government debt in excess of 200 per cent of present GDP, at a minimum.

The Germans like their welfare state and their appetite for reform is strictly limited. The modest, but not unimportant, measures to liberalize the labour market that Germany now feels give her the right to lecture others on the topic of structural reform, all date back to the second Gerhard Schroeder government ten years ago. Nothing has happened under Merkel. No wonder, these reforms cost Schroeder the chancellorship.

Germany is not an exception. Like most other ‘mature social democracies’ Germany is slowly but surely going broke. Differences to Greece and Spain are of speed and degree only, not of direction. It is utter recklessness that the country has now taken it upon itself to be the backstop for the entire continent. Once Spain has officially joined the casualty list, 80 per cent of EFSF funds will have to come from just 3 countries: Germany, France and Italy. That would mean a bill in excess of EUR200 billion for Germany right away, more than 8 percent GDP. But as Italy or various national banking sectors could be next in line, demands on German funds are practically limitless.

Banks in the periphery are haemorrhaging deposits, which are flowing to a considerable degree to Germany. At the level of the national central banks, these transfers are not being settled. This allows banking sectors in the periphery to replace vanishing client deposits with ECB-funds, and thus limit asset sales and balance sheet contraction at local banks in Spain and Greece. This puts the Bundesbank in the uncomfortable position of being a de-facto creditor to other central banks. At the end of May, Target 2 balances at the Bundesbank stood at EUR700 billion, about 27 per cent of German GDP.

Germany may well be ‘last man standing’ in the Euro drama but that only means that there will be no-one left to bail her out. Bunds as safe-haven investments are another bubble ready to burst.


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Note to my readers


  1. John Campbell says

    It is great to see your brilliant analysis get out to a wider audience. I look forward to seeing more fingers pointing at the naked emperor – especially with such powerful arguments. We need to keep hammering at the truth of our politicians’ madness.

    I remain convinced that we are nearing a tipping point in public opinion. An Ipsos-Reid poll taken recently in that hotbed of radical public opinion – Canada – was revealing.

    95% of Canadians believe that federal politicians have nothing (44%) or very little (51%) in common with average Canadians. 31% said they don’t really trust, while 26% don’t at all trust the federal government to do the right thing.

    This cynicism is the kindling and the Austrian economists must educate us so the fire to come allows us to rebuild a free and strong economy. People are looking for answers and you Detlev are invaluable in the process of spreading this knowledge. Keep it up – get the message out there beyond this blog!

  2. says

    Thank you for this honest look into Germany’s fiscal situation within the EU. Here in the U.S. the general tenor of public news reports on the situation in the Eurozone, and implicitly the allusions to the ECB, have given the impression that Germany will be the bastion of fiscal safety for its EU partners, and all will in the last analysis be well. It appears that view amounts to little more than “whistling past the graveyard.”

    Keith Töpfer

  3. Randall says

    Read your book – excellent! It boggles the mind how no one can see that this is nothing more than the old game of monopoly except that no one really goes bankrupt. When all the money is held by a few players or the bank, another tray of monopoly money is introduced into the game and it goes on. So when will the music actually stop?

    The malaise in the EU is the same the world over and in most G20 nations. Other countries who proclaim to not be in the same muddy ditch as the EU are just being snobs. The only difference is time. Germany can not bail out the EU alone and when Italy comes to the door, hat in hand, for help, the situation is likely to unwind.

    Canada boasts of not having these systemic problems, but the reality is the government took billons and billions of guaranteed mortgage insurance provisions off of the Canadian banks balance sheets and into taxpayer hands and the finance minister stands up and says that “our banks did not need a bail out”. What a joke. The total indebtedness might not be as large as the US, UK or EU countries, but the problem is the same.

  4. Vance says

    Can anyone out there tell us what is actually happening on the ground in Germany? Where I live in Oz we get German tourists telling me that there is actually a fairly nasty sort of austerity happening quietly in Germany. Health benefits, low income assistance are down, schools are underfunded, the poor are doing it increasingly tough.
    I fear this winding down of services in Germany to pay for the foolish backstopping of beggar Eurozone countries is a stealth attack on the populace is being under-reported.

  5. Innovation rules says

    As a supplement to this article:
    1. Germany is almost unique in the EU for having restructured their social programs and liberalizing some of their labor laws.
    2. As you highlighted, the current EU situation is not even the final round of the financial struggle. It is only the warm-up bout for the Goliath of a government debt fight to come in the next 20-30 years. Germany will not avoid this showdown; it will still face the result of its demographic Ponzi schemes.
    3. The EU story is really about the abdication of many of our elite professions; how does one competently rate risk in a climate of socialized losses, artificial interest rates, and unreadable, bank and nation financial statements obscured and watered down by Basil and the rule of law.

  6. michele p. says

    Germany does not have a real public health. Germans are required to be insured if they want to have access to medical care. Many Germans don’t have it at all and will be turned away from German hospitals and doctors. Those who have insurance pay prohibitive prices. If you add health insurance costs, energy costs and real inflation to the huge fiscal pressure, Germany is just too expensive and getting worse every year.

  7. says

    bonds would collapse 40% lower. Be asuersd that when they do finally sell off he will tell everyone he called the top again. even though he has been calling it for the past 10 years! Great advice!


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