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Many media reported that Germany’s national debt is at a record high. This is true in terms of the pure nominal number, but from the point of view of experts this is not very meaningful.
“National debt is rising to a record high,” several media outlets reported in unison at the end of July. According to the Federal Statistical Office (Destatis), the federal government, states, municipalities and social security were in debt with 2,368 billion euros at the end of 2022 – and thus 47.1 billion euros more than in the previous year.
If you look even further into the past, the national debt appears even more drastic: in 2012, the total debt was 2,068 billion euros, or 300 billion less. In 2002 it was only 1,277 billion euros, almost half as little as in 2022. Has Germany’s economic situation deteriorated so dramatically within twenty years?
Nominal number not a suitable factor
No, says economist Achim Truger, professor of socioeconomics at the University of Duisburg-Essen. The nominal figure is not a suitable factor for comparing national debt with past values. “Over a longer period of time, a country’s economic output grows steadily,” says Truger. This was Germany’s gross domestic product according to Destatis in 2002 at 2,198 billion euros, in 2012 at 2,745 billion euros and in 2022 at 3,877 billion euros.
“Since the state accesses the nominal gross domestic product through taxes and duties, taxes and government spending also grow over the years,” says Truger. “And if the state then runs a deficit in order to pay for something that it does not get paid for through taxes, then of course these amounts also become larger and larger in nominal terms.” Together with inflation, this means that a new record level of nominal national debt can be announced almost every year.
“When reports come out that there is a record level of debt, many people think: Oh, the debt is incredibly high and that might even be dangerous,” says Truger. The number itself is hardly meaningful. “For long-term comparisons, national debt is always set in relation to economic performance.” This is the only way to make a valid statement about the financial development of a state.
Debt ratio has fallen
Martin Beznoska, senior economist for financial and tax policy at the German Economic Institute (IW), also points this out. A more suitable parameter for assessing a country’s debt situation is, for example, the debt ratio. “The debt ratio is a better indicator because it puts the debt in relation to the potential that the state has in terms of revenue,” says Beznoska.
The debt ratio compares national debt with nominal gross domestic product. For Germany, the debt ratio was 66.3 percent in 2022. This means that total debt was 66.3 percent of gross domestic product. Compared to the previous two years, the debt ratio in Germany has improved: in 2020 it was 68.7 percent and in 2021 it was 69.3 percent. Before the outbreak of the corona pandemic, however, it was still at 59.6 percent.
“The pandemic and the war of aggression on Ukraine have led to numerous debt-financed government aid and economic stimulus measures,” says Beznoska. As a result, the debt ratio increased as a result of these measures. The financial crisis at the end of the first decade of the current century also showed that economic crises drive up the debt ratio: The debt ratio in Germany was 80.2 percent in 2010.
At what point does it become a problem?
The point at which the debt ratio becomes a serious problem for a country is controversial in economics, says Beznoska. In 1997, the EU member states stipulated in the so-called Maastricht criteria that the debt ratio should not exceed 60 percent. However, many member states have not achieved this in recent years; the EU-wide average was 84 percent in 2022.
“In general, if the debt ratio drifts over several years, it becomes a problem,” says Beznoska. Because then the debt threatens to take on a life of its own. “If the interest burden on a national budget continues to rise, then at some point the country will already be in deficit just because of the interest.” In the worst case scenario, a national bankruptcy could occur at some point if the capital markets no longer believe that the state can service its debts.
In the USA the debt ratio is more than 100 percent, in Japan it is even more than 200 percent. Nevertheless, the risk of national bankruptcy in these countries is currently low, says Truger. In addition to the strong economies of the two countries, this is also due to the fact that the debts are in local currency. This means that, with the help of the central bank, government bonds can be purchased if necessary in order to stabilize the price. This virtually eliminates the possibility of a national bankruptcy.
According to Truger, the situation is different for countries that are in debt in a foreign currency. In the event of a crisis, they might no longer be able to service their foreign currency debts because their own currency would be devalued. As a result, their central banks would have no opportunity to decisively counteract this. Greece, for example, was threatened with national bankruptcy in 2010 with a debt ratio of 143 percent.
More Sustainability criteria
In addition to the debt ratio, there are other sustainability criteria that are used to assess a country’s financial situation – for example the rating of a country’s creditworthiness or the interest burden ratio. This indicates what percentage of its total budget an indebted country has to spend to pay off the interest on its national debt – in Germany it was 3.2 percent in 2022. “The debt ratio is more of a long-term indicator, the interest burden ratio is a short to medium-term indicator,” says Beznoska.
“If a state has to pay off a lot of debt, then it quickly needs a lot of money,” says Truger. “And if that is a very large amount and the interest rates are also very high, then a state can run into payment difficulties.” However, this is currently not a problem for Germany.