Debt that is falling into oblivion

by Larissa Müller

Germany is a founding member of the European Union, now being the biggest economy in the EU and the fourth largest worldwide. Despite its title of the Export World Champion 2012 and a high level of social security and human development, an economy of the size of Germany faces numerous challenges on everyday basis. And the risk falling into oblivion is always there. The growing national debt, mostly in combination with the current Euro-zone crisis, worries the whole nation. The economic issues such as retirement arrangements and unemployment are getting more and more of public attention. The Germans simply start to wonder how much of the financial burden they will need to carry in form of taxes in the future…

 

Source: http://im.media.ft.com/content/images/23f17eca-d805-11e0-8f68-00144feabdc0.img
Source: http://im.media.ft.com/content/images/23f17eca-d805-11e0-8f68-00144feabdc0.img

At first sight, the solution seems obvious: traditional budget cuts. However, this may not be a sufficient resolution for the indebtedness any longer. The size of debt is just too high to merely start an austerity program. Furthermore, Germany is financially bound to the whole economic environment of the Euro-zone. With every hour, the European debt grows by 100 million Euros. Countries such as Greece, Portugal, Spain and Ireland are heavily indebted. Germany, as their main creditor, also carries the burden of non-refundable arrears. Some economists claim that Germany could already give their cars away for free to some of their European neighbour states, since these EU-citizens buy German cars with German money anyhow. The political statements during the elections in September did not indicate any specific solution to the problem and economic experts accuse the German government of gambling with the wealth of the whole country by ignoring the ever-growing national debt. Doing so, in combination with the Euro-zone financial issues, means accepting the fact that future generations will not be able to live up to the standards we are blessed to enjoy right now – such as social welfare in forms of pensions or unemployment benefits.

 

Solutions at hand

First of all, Germany has to manage a way of interrupting the vicious circle of debt-accumulation and map a strict austerity program to cut the arrears. One solution, similar to the case of company insolvency, could prove to be a strategy: the creditors and the debtors negotiate how to save the business. Everyone has to accept the cut-backs in payments to get out of the debt trap and save their jobs.  Additionally, the management is replaced to increase the chance of saving the business in its entirety. Furthermore, the creditor should consider relieving the borrower from some part of the debt and negotiate the conduction of efficient reforms in return. This of course applies to both Germany and the Union, since their fates are inevitably entwined. Besides reforming the business activity support program, a more concrete suggestion would be the introduction of sinking funds. These funds would include the backlogs of the states and the private sector, which would be paid off after 20 years. These annual pay-offs would amount to approximately 1.2% of the GDP per year.

 

One of the conditions for reducing debt is the accomplishment of a trade surplus by the country. Germany should nationalize the banks and devalue the Euro. Only then could it produce an export boom which being a source of profit used for the repayment of debt.. The devaluation of the Euro can only occur with cuts in wages and accepting the sacrifices of the higher unemployment rate. It is too late to just cut spendings, we also have to cut existing debt and generate inflation. In reality, it is hard to produce an inflation in a heavily indebted world. Difficult it may sound, the economists agree that if we do not act now, we will regret that twice as much in the future. We just need to conduct a harsh cut on the debt as a part of an overall long-term reform program. These arrangements are easier to accomplish with a healthy economy and a more prospective and realistic economic policy.  

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