Thursday, July 18, 2024

Germany braced for Europe’s next debt crunch

Must read

It means the German government is simultaneously in a very strong financial position but dangerously constrained on what it can do with its money, says Holger Schmieding, chief economist at Berenberg bank.

“Germany has much more fiscal headroom than almost any other country – it just doesn’t allow itself to use it. Our debt is low, our deficit is reasonable. Our debt is, if anything, declining as a share of GDP,” he says.

“Yet we are stuck with a debt brake that seemed to make sense 10 or 15 years ago, but does not make sense now.”

While Germany has prided itself on prudence, the coalition government headed by Chancellor Olaf Scholz also took a beating in the European elections, much like Emmanuel Macron’s party.

Scholz’s Social Democrats (SPD) came third, with just under 14pc of the vote, the Greens were fourth on 11.9pc. The more free market Free Democratic Party (FDP), which rounds off the coalition, secured just above 5pc. The Christian Democrats (CDU) – the party of the previous chancellor, Angela Merkel – led the way on 30pc, followed by the far Right Alternative for Germany (AfD), which won almost 16pc of the vote.

That made the frictions of coalition politics even more painful than usual ahead of last week’s budget agreement.

The parties ultimately clinched a budget deal that sticks to tight borrowing rules while trying to enhance economic growth by getting more people to work beyond the retirement age and to help migrants enter the job market.

Economists say that one of the reasons why it no longer makes sense for Germany to stick to its fiscal straitjacket is the new threats facing Europe’s largest economy following Russia’s invasion of Ukraine.

But there are other financial strains too.

Germany’s population is ageing, putting pressure on its public finances as pensions and healthcare spending rise. At the same time, the number of workers is plunging, not only as a share of the population but in absolute terms too.

The UN predicts that between 2020 and the mid-2030s, the number of people aged between 20 and 69 in the country will drop by around five million, or close to one-tenth.

Latest article