Germany’s finance ministry just reported a €41 billion federal budget deficit at the end of April earlier today. For a country that has long been the “frugal superpower” of Europe, the deficit number is quite the red flag for something at this stage of the year. It all continues to point to major economic and structural strain, suggesting Germany’s fiscal wiggle room has completely vanished.
As a reminder, Germany used to operate under a strict constitutional “debt brake”. That rule limited the federal structural deficit to just 0.35% of GDP. And while the €41 billion deficit at the end of April is just a rolling cash-flow figure, the latest budget deficit-to-GDP ratio estimates should fall between 3.6% and 4.0% of GDP.
And mind you, that is already an understatement. Germany’s finance ministry has warned that its internal baseline projects the figure to be as high as 4.75%. That considering the fact they are using creative accounting such as exploiting the EU’s “national escape clause” for sudden defense spending to under-report the deficit to be around 3.5% to 3.7%.
Why does this all matter?
For one, a massive deficit this early in the year indicates that Germany’s financial savings are pretty much gone. It also reaffirms that whatever Germany is facing, it is no longer a temporary issue. Instead, Europe’s largest economy looks to be facing up against a prolonged structural crisis. Tax revenues are underperforming because the broader economic performance has hit a standstill.
In that lieu, it is pretty much a role reversal in the case of Germany. For the longest of time, they have been picking on other European nations to stick to the 3% limit rule set out by the EU. The rule dictates that no country’s yearly deficit should be bigger than 3% of its economy. Right now, Germany is at risk of blowing past that – rather comfortably might I add.
And the issue for Germany is that there aren’t going to be any quick fixes.
In trying to appease and bolster political sentiment back home, they have cut down on its source for cheap energy i.e. Russia oil and gas while at the same time spending heavily on military/defense and subsidising green industries.
Compounding that is the shift in the global industry landscape, where China has now gained significant market share in the likes of automotive and machinery. And suddenly, Germany is collecting far less tax money than it used to before.
Thus, it is ironic that they are now facing the possibility of being put under an Excessive Deficit Procedure (EDP) by the EU for blowing past the 3% limit
