HANDELSBLATT EXCLUSIVE

Germany Nearing Budget Red Zone

Deu Euro Kaufkraft
The money Germany's government has to spend is dwindling. Source: AP Photo/Michael Probst

It was a good run, but Germany’s budget windfall couldn’t last forever.

Europe’s largest economy will see its surplus shrink from €26 billion ($27 billion) in 2016 to just €4 billion in 2017, according to a study by the German Institute for Economic Research (DIW) obtained by Handelsblatt.

By 2018, Europe’s largest economy will run a deficit like most of its European neighbors, according to the Berlin-based forecaster. 

Not everyone agrees with the forecast. Germany’s stability council, a body of federal and state finance ministers, has predicted that the surpluses will continue until 2020.

But Kristina van Deuverden, an analyst with DIW, said the budget surplus will shrink because of slowing growth in employment and tax revenue.

While much of Europe has struggled with joblessness in recent years, the unemployment rate in Germany has dipped below 5 percent to set a 25-year record low for the country. A decade ago, nearly 10 percent of the German workforce was jobless.

The decade-long trend of rising employment, however, will come to an end and the unemployment rate will increase significantly as Germany works to integrate a large wave of refugees into the country’s workforce, according to a forecast by the Handelsblatt Research Institute.

Germany’s coalition government has agreed to spend €22 billion more in 2017 and €25.1 billion more in 2018, according to DIW. The spike in spending will further pressure the budget, which the federal government has balanced since 2014.

“There’s no money there for election gifts when it comes to taxes,” Ms. Van Deuverden said.

The forecast comes at a bad time for Finance Minister Wolfgang Schäuble and Chancellor Angela Merkel. It means there’s little room for tax cuts in the run-up to Germany’s 2017 federal elections.

German economic growth is also projected to slow by nearly half to 0.9 percent in 2017, according to the Handelsblatt Research Institute.

Britain’s exit from the European Union and U.S.-led protectionism in the wake of Donald Trump’s election victory are expected to hit German exporters hard.

The United States is Germany’s most important trading and Britain is one of its most important markets in Europe, with 15 percent of all German exports going to two English-speaking countries.

“Global trade has clearly lost its dynamism since 2011,” said Bert Rürup, the president of the Handelsblatt Research Institute, a research arm of the Handelsblatt publishing group.

 

Donata Riedel reports on economic policy. To contact her: riedel@handelsblatt.com

 

 

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