Germany: A Dose of Its Own Medicine

Schäuble’s Secret Austerity Plan for Germany – Published on Spiegel Online International, by Christian Reiermann and Michael Sauga, Dezember 24, 2012  (Photo-Gallery – Translated from the German by Paul Cohen).

The German government and opposition are pledging higher benefits for pensioners, families and the long-term unemployed ahead of elections next year, but Finance Minister Wolfgang Schäuble is secretly planning cutbacks to prepare for a weakening economy and possible fallout from the euro crisis … //

… Historic Cuts Looming:

What the Finance Ministry officials have listed under the seemingly innocuous title “Medium-Term Budget Goals of the Federal Government” is nothing less than the most comprehensive austerity program in postwar German history. In order to avoid forcing the government to incur additional debt, the officials are scrutinizing subsidies, entitlements and welfare benefits worth tens of billions of euros.

There are also plans to raise taxes. Finance Ministry officials propose increasing the reduced VAT rate of 7 percent — which currently applies to such items as food, books and streetcars tickets — to the regular VAT rate of 19 percent. This alone would allow the state to collect an extra €23 billion ($30 billion) every year.

Schäuble’s team wants to slash €10 billion from the federal government’s contributions to the German health fund, which currently helps to stabilize premiums in the statutory health insurance system. At the same time, they know that Germany’s statutory insurers will require more money over the coming years as the population’s life expectancy increases. This has led them to consider introducing a surcharge on income tax to support the system. The experts call this a “health solidarity tax.”

The plan also calls for state pension funds to do their part. At the same time, Schäuble intends to counteract the expected labor shortage. Since the baby boomer generation of the 50s and 60s will go into retirement in the future, Germans will be expected to work longer. The ministry envisages the retirement age remaining at 67, but the retirement benefit period will have “to be linked to life expectancy.” In other words, the older Germans get, the longer they will have to work — if need be, beyond the age of 67.

Measures to Discourage Early Retirement: … //

… Bank Bailouts, Euro Crisis Pose Budget Risks:

To make matters worse, Finance Ministry officials say that it’s also possible that Berlin will have to absorb the costs of its bank bailouts. At the height of the financial crisis, the German government supported ailing financial institutions such as Hypo Real Estate, Commerzbank and WestLB with capital injections and guarantees amounting to nearly €180 billion. Large quantities of toxic assets were transferred to so-called “bad banks.”

But it’s questionable whether these banks will ever be able to completely pay back this money. If that is the case, the federal government will have to waive its claims and permanently absorb the debt.

Schäuble’s team foresees the possibility of a similar development with the euro rescue. Indeed, “irrevocable ESM payment defaults” is one of the reasons they list for their contingency plans. Behind the bureaucratic jargon lies the concern that Germany — despite the government’s solemn statements to the contrary — will have to pay for the euro rescue.

Germany is currently supporting the European Stability Mechanism (ESM) to the tune of at least €190 billion. A portion of these guarantees and loans could actually be lost if Greece’s government creditors forgive some of the country’s debt. The losses to German public coffers could then easily amount to tens of billions of euros.

Consequently, Finance Ministry officials contend that the government will have to make cutbacks elsewhere in the future. Now, in a scenario that euroskeptics have long been warning about, German Chancellor Angela Merkel’s government has finally admitted, for the first time, that to balance out the impact of the monetary crisis it will have to reduce expenditure for pensioners and people taking early retirement.

Germany Didn’t Impose Austerity On Itself:

The paper by the Finance Ministry officials contains a further admission. The next finance minister will have to make up for what Schäuble has failed to accomplish. Merkel’s most important minister forced half of Europe to submit to austerity measures while the Germans were spending money hand over fist at home.

The current center-right coalition of Merkel’s Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the pro-business Free Democratic Party (FDP) ignored the opposition’s warnings and pushed through a costly childcare allowance that pays mothers who stay home €150 per child per month. Starting in mid-2014, over €1 billion per year will be budgeted for this expense. Public coffers are also missing €1.8 billion every year because the FDP managed to push through a bill eliminating a €10-per-quarter copay charge for visiting the doctor or dentist, payable since 2004 by people in the statutory — meaning non-private — health insurance system. But perhaps the most blatant example of overgenerous public spending during the coalition’s current term was the tax reduction for hotel owners, which costs the government roughly €1 billion a year. The political process that preceded each jump in spending was always the same. Schäuble grumbled audibly, but ultimately agreed.

No wonder the opposition now accuses him of having failed. “The increased revenues from the economic recovery were not completely used to reduce deficit spending,” says SPD finance expert Carsten Schneider. “This government demands harsh austerity measures from other European countries,” he argues, “while it lavishly spends its own tax revenues.”
Schäuble’s team apparently has a similar view of the situation — and even the boss himself has recently changed his tune. Schäuble says that he wants to run again in the next election, and he could even see himself serving another term as finance minister.

And, in keeping with his style, he is carefully preparing the Germans for hard times with his signature inscrutable Schäuble-speak: “We cannot allow ourselves to believe that the current positive situation is automatically secured for the future,” he says. He goes on to say that sound public finances are “not a notion created by stubborn finance ministers, but rather the prerequisite for prosperity and social security.” In plain language: Germany is going to start subjecting itself to some iron fiscal discipline.
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