Economic weekly

Grecian Formula Losing its Luster

Preparing Ballot Boxes And Voting Booths For Sunday’s Greek Referendum
Wolfgang Schäuble is not a popular man in Greece. Source: Getty

Greek myth

For the Greek government and its lenders, seemingly unending discussions and late-night negotiations have been part of everyday life for a long time. While media interest from some quarters has waned, their financial crisis continues unabated. On April 7 the news arrived – once again at the proverbial last minute – that a breakthrough on an agreement for a further extension of the country’s third bailout plan had been achieved.

However, “breakthrough” does not mean “agreement.” The conflict between the International Monetary Fund and the German government, represented by Finance Minister Wolfgang Schäuble, has not yet been resolved. To get the third bailout package through the German parliament in 2015, Germany insisted on the involvement of the IMF with several loan commitments. It wanted not only the organization’s expertise, but its money as well.

But the fund has to date been unable to bring itself to make this further loan commitment. The IMF’s statutes prohibit it from granting financial assistance to countries whose ability to repay their debts is not guaranteed. Before promising any further loans to Greece, the IMF is therefore calling for a reduction in the country’s interest payment obligations, which will add up to €120 billion ($129 billion) by 2040. Mr. Schäuble is categorically refusing to agree to this.

It’s bordering on denial of reality if the minister really believes that Greece will be able to save or grow its way out of the debt trap it is caught in and that it will duly pay back all the loans it has received. One thing that is likely to be certain, however, is that the IMF will not withdraw from the Greek bailout program before September 24, the date of the German parliamentary elections.

The burden of compulsory contributions on private households in Germany is indeed considerable. However, it is not proof that contributions are too high.

Tax brakes

During the Easter break, in which financial news was thin on the ground, one headline in particular dominated the debate. As in previous years, almost all media pointed out that Germany was in second place among members of the Organisation for Economic Co-operation and Development in terms of the “burden” of taxes and social security contributions. According to the OECD’s latest calculations, a single average earner who is subject to social security contributions has to pay 49.4 percent of their gross salary to the tax authorities and social security organizations.

This is the second-highest figure in the developed world, after Belgium at 54 percent. However, this viewpoint disregards the scope and quality of the state services that are financed with these funds. One major reason for the undeniably substantial tax and contribution ratio for those on lower and medium incomes in Germany is the social insurance contributions that are charged up to the contribution assessment ceilings, which – unlike tax – must be offset against the right to benefit from Germany’s very comprehensive and still generous social security system.

The burden of compulsory contributions on private households in Germany is indeed considerable. Unless we look at how they are used, however, it is not proof that contributions are too high. Above all, this ratio says nothing about particularly high levels of redistribution under the tax system – as more than a few commentators would have us believe.

Surplus to requirements

If we believe the spring report of research institutions commissioned to draw up a joint forecast, investment conditions in Germany do not look especially positive. The high current account surplus, which has been widely criticized, is evidence that investment conditions in other countries are better than in Germany, the report concludes. Companies that operate internationally apparently see things differently. According to the most recent annual survey by consultancy A. T. Kearney, Germany knocked China out of second place in the rankings of the most attractive investment locations last year. The United States continues to occupy the top spot. Germany was in third place in 2016 and in seventh place in 2013.

Trump’s burden

Fiscal policy has continued to shape the debate about the United States over the past few days. Donald Trump has become very popular with stock market operators following his announcement that he plans to loosen regulation of the financial system, implement tax breaks for companies and rejuvenate the United States’ crumbling infrastructure with massive investment programs financed through loans.

In contrast, the International Monetary Fund warned against the huge risks these promises pose to the global economy in the run-up to its annual conference, which starts today. The latest economic forecast of the Washington economists, which is thoroughly positive and anticipates acceleration in worldwide economic growth this year and next year, changes nothing about these risks.

The IMF fears that the price of the US dollar will rise if the US Federal Reserve raises interest rates even faster than planned. This would place a massive burden on emerging countries with large volumes of debts denominated in dollars. However, it considers Mr. Trump’s protectionist drum-beating more dangerous, and says that it could strengthen forces that are opposed to free trade and disintegrative movements in other countries. These warnings are undoubtedly accurate, but by no means new.

Recommended read

As an analysis this week, I have chosen a guest contribution by Hans-Werner Sinn published on Wednesday. Under the title Look Closer to Home, my Munich-based economics colleague attempts, in a didactically skilled manner, to refute Donald Trump’s allegations that Germany has manipulated the exchange rate of the euro against the US dollar downwards in order to secure competitive advantages in international trade.

Admittedly, Mr. Sinn does not forget to accuse the ECB of indirect currency manipulation through its ultra-loose monetary policy. Not least, he says that the “potpourri of attractive financial products” developed by the financial sector has helped drive up the US dollar and undermined the competitiveness of the US export industry. My suggestion: reach your own verdict.


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