We all know Germany (and the German minister of Finance Schauble in particular) were raising hell about giving Greece another pile of cash before any strict reformation measures were pushed through and approved. That was understandable as Germany was very likely the European country which has experienced the worst period of inflation in the past 100 years, and it wanted to prevent another Weimar-disaster altogether.
In a quite extensive report from the Halle Institute for Economic Research, the authors have tried to establish the total impact of the Greek debt crisis on the German government budget, and the results are even more stunning than what you’d originally be inclined to think.
According to the data, the interest rate Germany had to pay on the newly issued government bonds dropped like a stone, and as far as we’re aware, this is the first official report trying to calculate the total benefit of the lower interest rates for the German government. As you can see on the previous picture, there was a huge difference between the price Germany had to pay in 2009 versus this year, and the researchers are estimating the benefit to in excess of $100B per year.
Okay, enough about the past, what does this mean about the future? Even though Germany is opposed against too much government interference in the financial system as well as pumping too much liquidity in the financial markets (by the ECB), it sure looks like it definitely doesn’t dislike the current low-yield environment as it saves billions of euros on an annual basis.
Let’s try to put a number on this. The total German government debt is approximately 1.8 trillion EUR. Every one percent difference in the yield it has to pay on its debt has an impact of 18B EUR per year on the government budget. That means that if the long-term interest rate goes up to 3%, the German Ministry of Finance will have to cough up an additional 40B EUR in interest payments. As the total pool of labor force is approximately 44 million, every tax payer in Germany would see its annual tax bill increase by 1000 EUR per year.
Germany has no choice. It’s currently running a budget surplus of 0.7% , but this would entirely evaporate when the periods of low interest rates ends, and based on our estimates and the current data, if no tax increases would be pushed through, Germany’s budget surplus would easily be converted into a budget deficit of approximately 1%. This could push the country towards a vicious circle as with a budget deficit, the total debt position would increase, making the country less appealing for bond investors which would in turn increase the required risk premium on its government bonds.
Germany will never admit it in public, but it actually loves the low yield environment. As does every other country either in Europe or North America.
And you know what? It’s addictive. Why would anyone ever want to raise the interest rates again when you’re saving tens of billions of euros per year? Germany LOVES this situation and is in no rush to provide Greece a sustainable solution. The stubborn ‘negotiation technique’ is just a strategy to extend this situation as long as possible.
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