A German Tale - How Not Reforming Stabilised Public Debt

The German chancellor Merkel likes to call the austerity policy in southern Europe "necessary and in part painful reforms". She claims that the policies are "without any alternative". Merkel has had big plans for reforms in Germany itself after the last election, but non of those became law. Still the country has achieved a budget surplus in the first half of 2013.


According to destatis, the general government surplus, which includes federal, state, and township budgets, was €8.5 billion for the first half of 2013. The federal government was able to reduce its deficit by € 6 billion compared to the same period of last year to now -2.2 billion euros. But, this was not achieved through painful cuts, instead the expenditures increased at a lower rate than the income. Compared to last year, the general government spent 2.7 percent more.

In fact Germany did engage in a few reforms. For example, there was a mandatory quarterly fee when visiting a doctor of €10, which was cut, also the pension fund contribution of workers was reduced by 0.7 percent, while the pensions were only modestly increased. Non of those were painful, they were corrections to over-shooting of reforms in the last decade.

Instead of getting closer to a balanced budget through painful cuts, the Government consumption expenditure increased slightly, compared to the end of 2011 (careful with the graph, the y-axis begins at 99 % to show the small increase to 103.3 percent).

Germany shows - that in a recession - the best path is to engage in substantial stimulus (especially Kurzarbeit helped to prevent significant unemployment increases) to first get growth, and therefore employment back on track. The increased government income will then help stabilize the budget. After that one should think about which reforms are necessary, in fact the German experience showed, that once the economy had stabilized again, no painful reforms were needed. It was actually possible to increase pensions slightly in eastern Germany while cutting the contribution by 0.7 percent, and only slightly lowering pensions (increase below inflation) in the western states. The damage caused to the economy of Greece, Spain, and Portugal by gutting the welfare state (painful reforms) will take at least a decade to repair. Greek GDP will probably not get back to 2007 levels before the 20ies. Painful reforms did not yield any economic gains.