German Finances in Cautious Clover

Here’s some news that I have not seen reported elsewhere, and I really don’t know why:

That’s 12.1 billion, as in euros: it is a surplus, and it is the bottom-line result of the German Federal Government’s budget over 2015. Further:

The reasons for this are the good economic conditions and high level of tax-receipts. For Finance Minister Wolfgang Schäuble (CDU) this surplus turned out to be double as much as was expected in November.

No wonder we see Schäuble there leaning on his hands with such a smug look on his face: for him, it’s job well done!

Actually, good economic conditions pretty much automatically mean high tax-receipts, at least for any government which has its act together in the tax-collecting department, which Germany certainly does. But where did those good economic conditions come from? Well, the Germans do what they do well, as everybody knows; among other things, that means a healthy Mittelstand or layer of mid-sized companies (usually privately owned) making all sorts of capital equipment held in such regard by the rest of the world that demand for it is largely price-inelastic (that is, that demand takes little or no hit even if prices rise, e.g. due to currency fluctuations). The result is Germany’s long-standing status as the world’s #1 exporter, these days contested only with China.

So there is all that, a set of character traits contrasting sharply with others said to be more typical of other areas of Europe (mainly to the South) now experiencing quite worse economic conditions. Germany also implemented its so-called “Harz Reforms” around ten years ago, consisting of a series of changes to labor market regulation which made it easier to hire and to fire workers, and which resulted in a suppression of German labor costs which made the prices for native manufactures even more competitive internationally. And finally there is the effect of the euro: No matter how much it might be derided there (e.g. as the teuro, from the German word for “expensive”), one thing that is clear is that, by taking away Southern European nations’ ability to devalue their currencies when their own products became too uncompetitive, the euro locked in a high degree of export superiority for goods from the North, and thus flows of money there – and so relative prosperity, and high tax-receipts. (This also can mean – to some extent – that the economic troubles afflicting Europe’s periphery are not these countries’ fault.)

So Where to Spend the Bounty?

That big pot of money is there – billions of euros, twice as big as had been expected – so the question naturally arises: What to do with it? Ideally, having accumulated in German Federal coffers, the money would be spent in such a way to recycle it back to the other EU states from which it largely came, in such a way to share the wealth and the prosperity a bit more broadly around the European continent. This could be something as simple as an accelerated raising of German workers’ wages, so that they spend more and some of that more they spend are goods and/or services from elsewhere in the EU.

That’s not what is going to happen, though. Rather, according to this piece, much of the money will go to the obvious need: Wir schaffen das!, i.e. “We can do it!” That is, it will be devoted to dealing with the flood of Third World asylum-seekers of which more than 1 million have shown up on Germany’s doorstep through 2015 (with many more expected still to come). The German government largely attends to this problem by sending money to the lower-level Bundesstaat and local governments that actually have to deal with the incoming refugees on the ground. So these elements will get more money. (Not that that will solve the problem; it has become clear recently that considerable political and inter-cultural obstacles also need to be addressed, with solutions that largely cannot only rely upon money.)

There is also another consideration. Successful governing in Germany necessarily means keeping in the back of one’s mind the Biblical tale of Joseph in Egypt, of the seven fat years followed by the seven lean years. German official have to be especially careful with their budgets, considering that an amendment they passed to their Constitution in the recent past mandates that the federal budget deficit be no more than 0.35% of GDP – and that provision comes into effect starting now, in 2016. That means any surplus – no matter how unexpected it may be – to some degree must be husbanded with a view for any bad times ahead (although that same amendment permits greater deficits than 0.35% of GDP in case of national emergencies, whether economic or natural-disaster in nature).

This mandated caution looks even more reasonable in light of some additional news:

Germany’s economic growth for 2015 is expected to come in at 1.7%. What is more, more-or-less the same rate is expected for calendar 2016. Many would see that as low – especially in comparison to economic growth in developing countries, especially China. It’s pretty much also low in comparison with rates that the US is starting to hit again.

Then again, compared to European standards, 1.7% is pretty good, due to Europe’s (and especially Germany’s) continued graying and population loss, over-regulation and other factors. Further, as this FAZ piece adds, “comparatively few currently have to worry about their jobs: The situation on the labor market is at a historically favorable level.”

Still, in absolute terms you could say 1.7% is low. As we see, Germany has been able to extract from that a very nice federal government budget-surplus. But one must still be cautious.

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