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