fact finder
Germany’s national debt is at a record high, many media reported. That 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 reported in unison at the end of July. Because according to the Federal Statistical Office (Destatis), the federal, state, local and social security funds were in debt at the end of 2022 with 2,368 billion euros – 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, ie 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 the economist Achim Truger, Professor of Socioeconomics at the University of Duisburg-Essen. Because the nominal number is not a suitable factor to compare the national debt with past values. “Over a longer period of time, a country’s economic output grows steadily,” says Truger. This is Germany’s gross domestic product according to destati 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 uses taxes and levies on the nominal gross domestic product, taxes and state spending also increase over the years,” says Truger. “And when the state then runs a deficit to pay for something that it doesn’t get paid for through taxes, then of course these amounts also increase nominally.” Together with inflation, this means that a new record value for nominal government debt can be announced almost every year.
“When reports come that there is a record level of debt, then many think: Oh, the debt is incredibly high and that might even be dangerous,” says Truger. The number is hardly meaningful in itself. “For long-term comparisons, national debt is always set in relation to economic output.” This is the only way a valid statement can be made about the financial development of a country.
debt ratio has fallen
Martin Beznoska, senior economist for financial and tax policy at the German Economic Institute (IW), also points to this. A more suitable parameter for assessing a country’s debt situation is the debt-to-GDP ratio, for example. “The debt-to-GDP ratio is a better indicator because it compares debt to the government’s potential for revenue generation,” says Beznoska.
The debt ratio is the ratio of government debt to nominal gross domestic product. For Germany, the debt ratio in 2022 was 66.3 percent. That means the total debt was 66.3 percent of the gross domestic product. Compared to the two previous years, the debt ratio in Germany has improved: in 2020 it was 68.7 percent, in 2021 69.3 percent. Before the outbreak of the corona pandemic, however, it was still 59.6 percent.
“The pandemic and the war of aggression in Ukraine have led to numerous debt-financed government aid and 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 in 2010 was 80.2 percent.
When does it become a problem?
Beznoska says there is disagreement in economics at what level the debt ratio poses a serious problem for a country. 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 been able to do this in recent years; the EU-wide average was 84 percent in 2022.
“Generally speaking, if the debt-to-GDP ratio drifts for 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 keeps rising, then at some point the country will already be in deficit just because of the interest.” In the worst case, there could be a state bankruptcy at some point when the capital markets no longer believed that the state could service its debts.
In the US, the debt ratio is more than 100 percent, in Japan even more than 200 percent. Nevertheless, the risk of a state bankruptcy is currently low in these countries, says Truger. In addition to the strong economy of the two countries, this is also due to the fact that the debts are in the local currency. Because of this, government bonds can be bought with the help of the central bank if necessary in order to stabilize the price. A state bankruptcy is thus virtually ruled out.
According to Truger, the situation is different for countries that have debts in a foreign currency. In the event of a crisis, they might no longer be able to service the foreign currency debt because their own currency would be devalued. As a result, their central banks would have no opportunity to decisively counteract this. Greece, for example, threatened 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 the financial situation of a country – for example the rating of a country’s creditworthiness or the interest burden ratio. This indicates what percentage of its total budget a debt-ridden state 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 one,” says Beznoska.
“If a state has to pay off a lot of debt, then it needs a lot of money quickly,” says Truger. “And if that is a very high amount and the interest rates are also very high, then a state can have payment difficulties.” For Germany, however, this is currently not a problem.