How the Merkel Government Makes up Its Statistics

Since the founding of the Federal Republic in 1949, the German government always used to be known for sound accounting, especially when it came to public finance.

No longer. A closer look at the finances of the German government reveals that it is not true that the government is reducing its debt level. The official debt/GDP ratio may be improving but, properly calculated, the debt level is actually going up.

The German government uses fiscal accounting. This means you purely look at revenues and expenditures of a specific year and the resulting difference ends up yielding a budget surplus or a deficit.

Companies do it differently — and properly. They have also to consider future liabilities, like pension payments. Each additional promise for future payments needs to be accrued on the balance sheet and leads to a higher future liability.

Real world parallels

In the real world, the same holds true for government promises, like future payments for health care and pensions. Whenever a government changes the law that result in future payment obligations, like setting a lower retirement age and/or promising higher pensions, this increases the future liabilities and therefore the overall debt level of a government.

Not so in the surreal world of politics. The reason is simple: If the German state were to use proper accounting methods, one would immediately see that such a promise made would increase the public debt level significantly.

Contrary to her image of reliability and circumspection, during the reign of Angela Merkel the debt level of the Federal Republic increased by 12% of GDP in 2016 alone, due to higher pension payments and a lowered retirement age.

The consequences are no secret. In a report, the German finance ministry highlights these burdens and calculates that, in order to prevent future tax increases, it would be necessary to put aside between 1.2% and 3.8% of GPD per year already today. This equals between 36 and 115 billion euros.

Doubly stupid

The German government pursues a strange policy indeed. On the one hand, it is not investing in the country, therefore undermining the future ability to generate income and wealth and forcing German savings abroad, fostering unsustainable trade surpluses. On the other hand, it is increasing the hidden liabilities, which will become an unmanageable burden in the future.

The current government, consisting of a (shrunk) grand coalition of Merkel’s CDU/CSU and the Social Democrats (SPD), continues moving in the same direction at full speed. Investments will be reduced even more while pension levels will be guaranteed for a longer time. In 2045, this decision alone is estimated to lead to higher expenses of 100 billion euros per year.

The total level of unfunded liabilities is estimated to be in the range of 3,500 billion Euro. Of these, at least 1,000 billion are the result of the policies implemented by the governments of Angela Merkel in the last 12 years.

Failed migration policy

One way out of the conundrum Germany faces — high pensions and social welfare spending in a society that is aging and shrinking as rapidly – would be to attract migrants. While there is broad political consensus on that goal, what is forgotten by most is that migration only ends up being a net positive for society if immigrants are as productive as the existing population. Work force participation and average income need to be on the same level.

Here comes the rub. Already before the migrant crisis of 2015, German immigration policy going back to the 1960s fell well short of that goal. We now have decades worth of reliable economic statistics that most migrants from Muslim countries – a very large part of the German migrant population — have a significantly higher risk of being poor and of receiving social welfare.

Workforce participation and average income are thus significantly lower than in the existing population. In future, there is no improvement in sight. Quite the opposite. A main reason for the recent migration wave lies in the fact that many migrants are attracted by Germany’s generous social welfare levels.

Better qualified and better educated migrants much prefer the United States, Canada and Australia. They find these English-speaking destinations more attractive not just because of having no language problem, but also because of their much lower levels of taxes and social contributions.

Thus, instead of smartly operating in the migration sector — securing the funding of the welfare state for existing citizens of Germany — the kind of immigration Germany embraces actually leads to a higher financial burden and further increases the hidden liabilities of the German government.

The idealists look away

That is a fiscal reality that none of the idealists so keen on open immigration care to understand or be concerned about. Curiously, they do not even notice the inconsistency between their adamant warning cries about old-age poverty and the migration policies they favor.

Wherever one stands on the policy issue itself, the facts remain the facts. The uncontrolled migration wave due to the open border policies of Angela Merkel has increased the problem. Migrants from Muslim countries have a lower work force participation and on average significantly lower incomes than all other migrant groups and Germany’s population.

The future costs resulting from the migration wave of 2015 alone are estimated to be in the range of 900 billion Euro. If the children of these migrants fail to integrate into the labor market – which, given past experience, is highly likely – the total costs can easily reach 1,500 billion euros, according to actuarial studies by Professor Raffelhüschen at the University of Freiburg.

The list is long

Compared with these numbers, the other financial burdens created by the governments of Angela Merkel – notable though they are – almost pale. Germany’s famed, but failed “Energiewende,, exiting nuclear power and embarking on an unplanned and poorly organized shift towards renewable energy, will cost German consumers at least 500 billion euros. Germans already have to contend with the highest prices for power in Europe, double the level of France.

The failure to address the root causes of the eurozone crisis – which I have discussed several times in The Globalist (here and here) — will also lead to additional burdens for Germany. It is fair to assume that the unwillingness of Angela Merkel to deal with excessive debt burdens and diverging competitiveness will cost Germany – in which form remains to be seen – at least 1,000 billion euros over the coming years.

Economic disaster

Trying to assess the total economic damage done by Angela Merkel and her governments over the past 12 years leads to a disturbing calculation. The total costs of the policy decisions made under her tutelage amount to between 3,700 billion and 4,700 billion euros.

That is why speaking of Germany as a “rich country” is a travesty. Germany’s politicians in the Age of Merkel have focused on spending the previously accumulated riches, instead of doing the prudent stuff, i.e., investing to secure future incomes and welfare.

Once this becomes more mainstream knowledge, one can count on significant political turbulence. Nobody likes waking up from their dream of being a rich country. Somehow people are starting to recognize what has gone wrong over the last years as can be seen in the polls.

Coming from over 40% of the national vote, Angela Merkel’s CDU-CSU currently polls at 28%. Meanwhile, her partner in government, the Social Democrats, are firmly on track to political irrelevance, currently polling at around 17% nationally.

Meanwhile, the Alternative for Germany (AfD) – with its policy mix of anti-migration and socialist redistribution — is gaining broad acceptance. Unfortunately, this will not make things any better.

Conclusion

Germany is a poor country and we are soon to find out. No pleasant outlook and a disastrous result of Angela Merkel’s policies.