Germany has struggled to push through with its fiscal consolidation measures, but the country’s economy has been performing better than most other eurozone countries. For those who want to understand why the government has struggled so much, here are four important reasons why the Euro Hangs On After Tough Week As German 4Q GDP Growth Stalls:
Budget Spending – The true cost of the plan to cut spending was recently revealed by the Financial Times. When Germany adopted the deficit cap in the Eurozone, its fiscal plan had to include a spending cap. However, as the budget deficit grew, it was more economical to simply cut spending rather than cut income tax.
Germany’s budget is comprised of large debts and non-performing assets. In effect, this means that no one individual can take on all the credit risk, as creditors have provided an equity debt scheme that makes debt more manageable for a country. The fact that the UK’s banking system had defaulted at the time of the economic crisis, and lenders had frozen much of their money supply, ensured that the solution to the problem was a banking system bailout.
The finance minister has had to release some funds into the banking system so that it can start lending again. This decision does not bode well for the future of the banking sector. It also means that the German banking sector is a lot more vulnerable than most financial institutions to a sudden liquidity crunch.
The German economy is actually suffering from austerity as much as the rest of the continent, as the political will to implement fiscal reforms has been stifled. Monetary policy has been used in Germany as a tool of fiscal policy, which means that unless the government’s cash position improves, German economic growth will remain lackluster and inflation will rise.
Many of the large trade deficits are being filled by exporters who are, in essence, subsidising their domestic competitors. For example, the economic slump in Germany has made German steel producers think twice about production, and many firms who export produce at a loss.
Low inflation in Germany is also due to an economic downturn that has lowered the demand for cars, trucks and other commodities. Consumption is being supported by the country’s high wage structure. German workers must be paid very high wages to attract employers, and this has led to low productivity.
Many small-scale firms are unable to compete with their larger competitors. The only way these firms can compete is to cut costs and employ fewer workers.
A weak sales market means that many consumers do not have sufficient disposable income to spend. If they do spend, it is usually on items that are either no longer on sale or have been discounted, meaning that a large percentage of the spending goes to empty shelves.
Public spending is often higher in the Netherlands, the Netherlands, and the UK. This has led to the German economy being relatively more balanced than the Dutch, and therefore much less vulnerable to sudden changes in the Dutch economy.
Debt is always a difficult subject, but the larger the debt the greater the chance of becoming insolvent. To protect the public purse, it is vital that the debt in the Eurozone remains limited. It is important to note that the smaller the debt, the less likely it is that an international financial crisis will affect the whole continent.