Thanks to negative interest rates at the ECB, record low unemployment, and a desire to maintain a balanced budget, Germany’s Budget Surplus Hit a Record High since reunification in 1991.
Chancellor Angela Merkel is singing a happy tune, but the austerity message will not play well with most of the Eurozone.
Germany’s statistical office on Thursday reported the country was in the black by €23.7bn last year, with local, state and central government coffers benefiting from record-low unemployment and ultra-cheap debt finance stemming from the European Central Bank’s mass purchases of sovereign bonds.
Chancellor Angela Merkel’s government, which has vowed to maintain a balanced budget as a cornerstone of its economic policy, hailed the larger surplus. “These figures show that Germany is doing well,” said Jens Spahn, deputy finance minister. “We invest more than ever — and still have surpluses.”
The difference between what Germany sells abroad and what it buys — the current account surplus — was about 8 percent of gross domestic product last year. The size of the surplus has stoked criticism from economists, multilateral organizations and the new US administration, that Germany’s export-led growth was a corollary to a build-up of debt in other countries and was putting the global economy at risk.
In a sign that government spending could also become a battleground in September’s federal election, the centre-left Social Democrats, the chancellor’s junior coalition partner, have called for part of the surplus — the €6.2bn attributable to central government — to be used to fund infrastructure investment.
The chancellor’s Christian Democrats want the surplus to be employed to lower government debt, which, at an estimated 68.2 percent of GDP, remains above the ceiling of 60 per cent set by EU rules.
With disagreements between the coalition partners, this year’s windfall is likely to fund a cash reserve set up to support the country’s influx of refugees after the migrant crisis in 2015. Wolfgang Schäuble, Germany’s finance minister, said he will set aside an expected surplus for 2017 to cut income tax.
Maastricht Treaty Recap
Running a surplus for the benefit of migrant workers seems crazy. Imagine if Greece or Italy did the same thing.
Please note that German government debt is well above the Maastricht Treaty limits.
Government Budget Deficit
The ratio of the annual general government deficit relative to gross domestic product (GDP) at market prices, must not exceed 3% at the end of the preceding fiscal year (based on notified measured data) and neither for any of the two subsequent years (based on the European Commission’s published forecast data). Deficits being “slightly above the limit” (previously outlined by the evaluation practice to mean deficits in the range from 3.0–3.5%), will as a standard rule not be accepted, unless it can be established that either: “1) The deficit ratio has declined substantially and continuously before reaching the level close to the 3% limit” or “2) The small deficit ratio excess above the 3% limit has been caused by exceptional circumstances and has a temporary nature (i.e. expenditure one-offs triggered by a significant economic downturn, or expenditure one-offs triggered by the implementation of economic reforms with a positive mid/long-term effect)”. If a state is found by the Commission to have breached the deficit criteria, they will recommend the Council of the European Union to open up a deficit-breached EDP against the state in accordance with Article 126, which only will be abrogated again when the state simultaneously comply with both the deficit and debt criteria.
Government debt-to-GDP ratio
The ratio of gross government debt (measured at its nominal value outstanding at the end of the year, and consolidated between and within the sectors of general government) relative to GDP at market prices, must not exceed 60% at the end of the preceding fiscal year. Or if the debt-to-GDP ratio exceeds the 60% limit, the ratio shall at least be found to have “sufficiently diminished and must be approaching the reference value at a satisfactory pace”. This “satisfactory pace” was defined and operationalized by a specific calculation formula, with the entry into force of the new debt reduction benchmark rule in December 2011, requiring the states in breach of the 60% limit to deliver – either for the backward- or forward-looking 3-year period – an annual debt-to-GDP ratio reduction of at least 5% of the part of the benchmark value being in excess of the 60% limit. If both the 60% limit and “debt reduction benchmark rule” is breached, the Commission will finally check if the breach has been caused only by certain special exempted causes (i.e. capital payments to establishment of common financial stability mechanisms, like the ESM) – because if this is the case they will then rule an “exempted compliance”. If a state is found by the Commission to have breached the debt criteria (without this breach solely being due to “exempted causes”), they will recommend the Council of the European Union to open up a debt-breached EDP against the state in accordance with Article 126(), which only will be abrogated again when the state simultaneously comply with both the deficit and debt criteria.
Euro Area Debt-to-GDP
Debt to GDP Ratios by Country
Source: Trading Economics
Let’s Pretend
The Maastricht Treaty on which the Eurozone was founded is a complete joke. It was never enforced and clearly never will be.
The odds of changing the treaty for literally anything are zero. Every country would have to agree.
Meanwhile, every nation pretends it will soon be in compliance and the reviewers pretend that will happen.
Finally, Greece is compelled to comply with primary budget surplus demands of 3.5% of GDP so it can pay back creditors including Germany and France.
Let’s pretend that will happen too.
Mike “Mish” Shedlock
What sort of world do we live in where nearly every single country runs a deficit? It is so common when a country runs a surplus it is shocking.
Germany needs a LOT of surplus years. With 2.308 trillion euro in debt, a 23.7 billion euro pay-down would qualify as a ‘weak’. They only need 97 more years like that…. Interest payments excluded, of course.
Who knows? Maybe the EU can shame them into forgiving all of Greece’s approx. $15.3 bil euro in bi-lateral loans owed to Germany. They are going to lose them anyway when Greece defaults, so they might as well get some good press while they can./sarc Schauble should be thinking about a loan-loss reserve instead of lowering taxes.
With floating currency, the government debt is just another aspect of the money supply. Depending on the size of the private sector, many countries could monetize their entire public debt without much fuss. Japan, the US, other powerhouse economies that have strong currencies by virtue of the strength of their private sectors, could monetize their debts.
Greece will never be off the hook. They will have to surrender assets, starting with any gold transferred to ECB or direct Frankfurt.
Is it a real surplus or just a deficit that is not as large as the treaty allows? Government and its lackeys excel at obfuscation so that the bottom line truth is hard to get at.
If it’s a real surplus, then taxes should be lowered. Governments should neither run deficits nor surpluses. I don’t expect perfection, but one should expect spending to be cut or taxes raised when a deficit occurs and one should expect taxes to be cut (and spending NOT increased) when a surplus occurs.
Naturally, bureaucrats think that spending should always be increased, thus my skepticism that an actual surplus has occurred.
Robs, and within a narrow view only, the budget surplus is above 0 as far as I know, but the low/negative rates in place mean governments are ‘saving’ large amounts on their treasury debt servicing costs which translates into less deficit/more surplus. The weaker euro at low rates means more exports hence more revenue hence more surplus. There are so many ‘checks and balances’ in the whole framework, so many outside parameters and incidentals, though, that it is very hard to really understand what is going on.
Where Germany and many EU countries are at odds with Maastricht is government debt to GDP. Many are supposed to reduce this figure to 60% but aren’t… not forgetting that monetizing by low rates increases GDP and therefore makes the figure appear to shrink, which seems to be part of the route along with ‘fausterity’ which neither of which give results that are anything like a move towards the agreed limits.
One man’s surplus is another man’s deficit.
If they sucked in more exports from southern Europe it would help.
Meanwhile, German families remain the 2d poorest (net worth) in Europe….
Perhaps the Germans could use a little of that surplus to fund their NATO deficit.
That “surplus” is generating resentment – among the other EU countries, and especially in the U.S (both for the Germans not carrying their NATO weight and because part of that surplus comes from trade with us). That surplus may turn out to be very expensive.
Now, now! Just because the US had a trillion dollar student loan bubble and every so often get reminded how to get higher education for free in Germany is no reason to cause resentment. Perhaps they could find a surplus battalion of troops to do a tour of duty in, say, Fallujah, Iraq and let the US take a breather in the world’s policeman setup.
I see Germany cooks their books just like we do. Who in their right mind believes they have a budget surplus with a million new mouths to feed on the public dole.
It’s much cheaper to feed those guys, than it is to build them in the first place. Which “we” paid for. One bomb, invasion and neocon wet dream at a time.
Good times in Germany.
If I was a young German entrepreneur I would open up a chain of dry cleaning shops that specialized in Burka’s.
Either that or Halal Fast Food. Bryani is in. Bratwurst is out.
You couldn’t go wrong.
The surplus money will eventually end up in welfare programs
The amusing aspect is that the ECB is being treated like some third party. Actually it’s accounts should be consolidated into the German ones because when Spain, Italy, Greece, Portugal etc. fall away (due to the parlous state of their finances) Germany is effectively underwriting it.
Mish, I am confused by your graph of debt to GDP. I have seen others say China’s debt is close to 300%. What is the difference here?
The surplus is to be used as a buffer against Brexit to minimise the impact of the EU instigating heavy tariffs that will be reciprocated or the hit to German exports to UK even if no tariffs.
Schauble gave a cautious budget Autumn 2015 and mentioned the caution needed because of the risks from elsewhere.
They really don’t like the US and being a bit simple, you run a deficit to defend them. Wake-up.
The EU is a larger market than China but China derided if growth slows, EU has been stagnant.
Euro is 2nd currency behind USD. They are a bigger commercial threat to the US than China.
They are mercantilst, no better (if not worse) than China.
Trump isn’t wrong about everything.
Greenspan spoke of the US’s “contingent liabilities*”.
*the balance sheet of TBTFs (not just banks). Said no way the United States would allow JPM to fail … and so their multi $trillion balance sheet potentially “inherited” by US taxpayers.
And when – not if – Deutsche Bank needs to be bailed by German taxpayer???????
Yet, Angela can’t figure out a path to Germany’s 2% commitment to NATO until 2024. Hmmm.
Merkel celebrating a german budget surplus…
Wonderful contrast, no? she’s sitting on a pile Euros, surrounded by Greek, Spanish, Italian, etc. insolvency.
How clueless can she be?
The establishment elites are nowhere near as competent as many people believe them to be…
They do have a game plan to rival the US.
Transfer of gold to Frankfurt was all part of a much larger plan as they see themselves on the ascendency and the US in decay. Trump a symptom.
The US has been asleep at the wheel for too long and looking in the wrong place. China at least pays to defend itself. Germany rides on a low Euro because of its dominance over others sharing it that can’t compete whilst not spending on defence.
When defence shortfalls were mentioned Junker said (he’s not even German) Germany can’t spend upto 2% of GDP as it surplus would be used up. The EU needs it no doubt.
So, US runs a deficit to keep the EU running.
Enjoy!
US runs a deficit to help EU run/invest in the US
or
EU investment in the US funds its trade deficit spending abroad ( as in trade deficit with EU)
https://www.forbes.com/sites/timworstall/2016/06/22/americas-trade-deficit-is-largely-paid-for-by-european-investment-in-american-manufacturing/#2a2601f444f9
I didn’t mean trade deficit. How much of that 20T is NATO where others don’t pull their weight?
Trade surplus gives higher budget
“Export is income, income is subject to taxation, and the taxes are the revenue of the government. So that, the more you export, the more the government earns.”
https://www.quora.com/How-does-trade-deficit-or-surplus-affects-government-budgets
So US trade deficit is also German budget surplus, and US budget deficit through less revenue.
Pieces of a puzzle.
The EU is statist, rigit, drowning in red tape. It can’t even handle youth unemployment!
Want to start a business in DE? M o n t h l y accounting & tax payments will be necessary. Then there are all those protected professions. Try to get permission to work as a photographer!
Yes, the Euro’s weakness has been pushing exports and damping down imports. But there will be a price to pay called WELFARE LOSSES.
I will try not to post this again but it is informative. Next part of the plan is service sector (financial) dominance.
It accounts for the colour revolution in Ukraine too and goading Putin. Soros in there somewhere in all probability, he has form.
It is a commercial 4th Reich. This time they will win without firing a shot.
“On 9 September 1914, the Imperial Chancellor, Bethmann-Hollweg, wrote: “Russia must be thrust back as far as possible from Germany’s Eastern frontier and her domination over non-Russian vassal peoples broken…We must create a Central European Economic Association through common customs treaties to include France, Belgium, Holland, Denmark, Austria-Hungary and perhaps Italy, Sweden and Norway….
All members will be formally equal but in practice under German leadership and must stabilise Germany’s economic dominance over Central Europe”.”
The goal is not German dominance over Central Europe, it’s the uber-wealthy of Germany having dominance over Central Europe. The German state is just a tool to make that happen.
Much like Anglo dominance over much of the world prior to WWII followed by Anglo-American dominance after WWII. The German elite just want their cut of the pie. The nation states are mechanisms, the populations of which can be discarded once the dominance is achieved. As has happened in the United States.
Without massive transfer payments, the Euro will be doomed. Do consider the Target 2 debt owed to Luxembourg, The Netherlands and Germany alone. About 1 tr € and no collateral in sight. These imbalances won’t disappear and Germany & France may laugh about how they burdened the Greeks with about 200 bn € used to bail out Greece’s CREDITORS. But ultimately, that debt won’t get paid back either.
All this dishonesty… Something is gonna blow up one day. And there is hope that Spain will lead the way: http://wolfstreet.com/2017/02/23/former-imf-chief-dozens-of-former-bank-execs-just-got-sentenced-to-jail/
The Greek Debt is mostly collaterized these days. After the last round of hysteria in 2013, Schäuble made certain to add in provisions that Greek gov’t pledged hard assets with nice cash flows.
It is engraved in the psyche of Europeans now… ‘ or do you want another war ? ‘
To escape that whatever goes, even if it does lead to war, as we are not in a position to understand the nature or wishes of those that rule.
So even the loss of the previous wars is leverage enough to govern with, the fact that war occurred at great expense to all is fear enough to dictate with, by whoever or whatever is behind this endless disgrace.
The hatred that seeps into societies and nations is untraceable in its origin, the shadow of blame falls wherever it leaves a stain. The goodwill is financialised, the empty bowl of the beggar is a symbol of the might of the conquerors, it is the still small voice of calm in the outrage of a decadence that only worships power, inviting it to a grace that it will not be capable of understanding, as its nature is to trample the weak once no more use for them is found, and once it cannot disguise itself behind them.
Make that French leadership – Olaf Henkel wrote an article in Handelsblatt showing how France has won every battle over the years. Getting about 15 bn net p.a. through the EU…
I don’t believe Germany has a surplus at all. Not disputing if the FT reported “the official record” correctly, just think the official numbers are missing half the accounts.
Did they count the trillions in bad loans, ECB “sovereign” IOUs that were never agreed to by voters/taxpayers, etc — as “income”? Accounts receivable from customers that can’t pay isn’t actually a receivable.
Did they count the cost of all the uninvited “guests” that Merkel allowed into the country? Extra police costs, court costs, property damage, loss of economic activity because people are scared of crime? How about perpetual welfare costs?
When all the accounts are aggregated, instead of the select subset that Merkel wants to talk about, there is no surplus in Germany.
I suspect both common German voters and the uber-wealthy German industrialists understand the accounts are wrong.
The report is about government debt to GDP, not private or total debt to GDP. The last time I looked, private debt was at least as much as government debt and in addition to it in the US. Total debt was at a then all-time high in the US in 1929 but dropped considerably during the Depression to a much lower level at the beginning of WWII. This means that the USG has little room now for expansion and that includes going to war.
On the basis of government debt to GDP, Russia looks pretty good and Japan looks pretty bad.
I’m not buying this. Just the unfunded pension obligations for existing and future retirees (5.25 million civil servants…) will add another trillion or more to the real world debt.
Mercedes has been running ads: 0 down & 0% interest. Wonna lease a small van? What matters is the present and the future. Past GDP growth, past export surpluses and past higher tax collections won’t cut it when the brown matter hits the fan and the Bundesbank will have to be recapitalized. (Because those >800 bn € Target 2 claims = assets won’t be there to be collected. But hey, Merkel can try explaining how she will get those >100 bn € back from Greece.
consumer demand for german products is goosed in 2 ways:
1. ECB interest rate insanity leading to 0% or 1% interest to buy a german car.
2. Governments all around Europe get into more and more debt and use this debt to pay for the welfare state which in turn creates consumer demand inside their countries which leads to the local shopkeeper being able to buy that Mercedes, Audi or BMW.
.
company demand for german products is goosed in 2 ways:
1. ECB interest rate insanity leading to 0% or 1% or 2% interest to buy german machinery for the company.
2. Governments all around Europe get into more and more debt and use this debt to pay for the welfare state which in turn creates consumer demand inside their countries which leads to the local companies being able to fund payments of german machinery.
.
The current state of EU is:
debt-bubbles:
government-debt-bubble, consumer-debt-bubble, company-debt-bubble
As a consequence of debt bubbles:
fake demand, unsustainable consumption, fake shows of wealth.
.
When demand is FAKE the companies profiting about that FAKE demand have FAKE earnings.
.
Add to that the retirement costs for tens of millions of people that are NOT paid in advance and even the little that is collected in advance is invested in stock benefiting from FAKE demand.
If there was really a surplus, they could finally eliminate the 5.5% “Solidarity Surcharge” they tacked onto Germans’ taxes years ago to finance the reunification.
If AfD had half a brain, they would add things like this to their one-trick pony platform… It might resonate with the more squeamish voters who stay away because they think AfD are racists for opposing immigration.
Mish this is exactly what is wrong with EU. Treaties, laws and agreements that no one cares about. They are worthless pieces of paper and still EU pretends to be serious organization. You cannot be serious if you do not enforce your own treaties and laws. As you say it’s a complete joke. This is exactly why middle class and former left voters vote for politicians like le pen – EU is not serious, it is all smoke and mirror.