Wednesday, July 04, 2012

Who will bail out Germany?

This is the question economist Detlev Schlichter has asked in today’s City AM.

Seems ridiculous right? After all, Germany is bailing out the rest of the Eurozone. Its economy is growing, its budget deficit is low. Greece is the basket case of the Eurozone, with Portugal, Italy, Spain, Cyprus and Ireland not far behind. If you were look at who would be next, both Belgium and France appear on the scene, because both have high public debt, budget deficits and are structurally sclerotic economies (imagine Belgium without the massive EU bureaucracy sucking in money from across Europe and consuming in Brussels).

Germany though? Well yes. It is, once again, wilful blindness to reality. Germany’s public debt is 81% of GDP, this having risen from 61% in 1999. That should indicate that there is a day of reckoning to come. Yes the budget deficit is low, but in an environment of steady growth, low unemployment and very low interest rates (meaning public debt can very cheaply be refinanced), Germany isn’t able to run a surplus. Remember how the Keynesians say that in good times you can run a surplus and pay down the debt you incur in the bad times. Well this is the good times for Germany, and it can’t run a surplus. Why?

Quite simply, the German state is lumbered with the same burgeoning welfare state and social policies that have already been bankrupting its southern neighbours. The difference is that the economic growth Germany is experiencing for now, and the low interest rates are slowing the inevitable slide towards that day of reckoning.

Schlichter points out that in 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”. He blames this as an inheritance from the Helmut Kohl administration, an ostensibly “right wing pro-business” government. He says it implies effective government debt in excess of 200% of GDP. It is Germany’s ticking time bomb.

The difference with France and the south of Europe is that Germany has a more liberal labour market than all of them, but that isn’t hard. Germany’s state may be more efficient in tax collection and operation than the southern states, with much less corruption, but again that isn’t hard. It was the centre-left government of Gerhard Schroeder that implemented modest reforms (Agenda 2010). He liberalised labour laws, reduced the size of the welfare state and reduced regulation. Merkel has been unable to continue this further, even though she started her administration in a grand coalition with the leftwing SPD opposition, after he resigned as leader as his party had lost badly in the 2005 election. The message was clear. You don’t get re-elected in Germany after implementing radical reforms.

You can now see why Angela Merkel doesn’t want Germany to be the saviour of the rest of the Eurozone anymore – Germany cannot afford it. German voters are as attached to their big generous welfare state as other Europeans, but they have been immune to actually paying for the full costs. The legacy has been rising debt.

So when the protestors in the rest of the Eurozone think Germany will write them cheques to bailout their own bankrupt welfare states, they are deluded. For not only can Germans not afford that, they can’t afford their own. The difference is that German politicians are hoping that no one notices for now, and that the problem becomes someone else’s. On top of that, German taxpayers are carrying, still, the burden of the deeds of their ancestors as guilt that makes them at least partly amenable to helping the rest of the Eurozone.

The problem is that if German taxpayers/voters and politicians don’t confront their own bubble of debt and overspending, they too will face a crisis. That will indeed be a Eurozone crisis, a European crisis and a global one. That’s if Japan and the United States haven’t dealt with their similar looming crises in the meantime.

1 comment:

Jeremy Harris said...

It all adds up to a decade or two of stagnation, which of course, will be blamed on Capitalism, so regulation and trade controls will be introduced turning a stagnation into potentially a depression. Depressing stuff.