BERLIN: The German treasury has predicted “substantial sustainability risks” to the country amid reports that the Eurozone is set for further bailouts because of fears over another sovereign debt crash.
Despite Germany’s Federal Finance Minister Wolfgang Schauble running a 2015 surplus of US$13.5 billion, experts in his department are predicting “substantial sustainability risks” to Germany’s long-term debt-to-GDP ratio because of an aging population.
A report to be put before Schäuble next week, states that — unless Germany starts making huge cuts to its state budget now — it will be unable to sustain the debt burden caused by an aging population and a low birthrate.
Unless the finance minister takes drastic action, the German debt-to-GDP ratio will reach 220 percent by 2060 — massively above the 60 percent limit set out under the Maastricht agreement of 1992. Germany — being a central pillar of the Eurozone — is under huge pressure to keep within the fiscal rules of the single currency agreement.
The report — leaked to the newspaper Welt am Sonntag — suggests that state spending will have to be capped each year over the next five years by around 5.8 percent. At its most pessimistic, Germany would need to start cutting US$26 billion annually.
This figure is seen as difficult to achieve given the current strain on the federal budget owing to the refugee crisis, which has seen 1.1 million migrants arrive in Germany.
The grim news comes as cracks began to appear in one of the recent Eurozone bailouts over sovereign debt: Portugal. The country’s new left-wing government has promised to roll back the austerity measures demanded by Brussels.
That — in turn — has caused panic on the markets as investors continue to sell-off Portuguese government bonds because of fears of fiscal instability, which could lead to their value being rated “junk” by the credit rating agencies, which could lead to the country failing its bailout obligations.
Meanwhile in Italy, the value of Banca Monte dei Paschi, Italy’s third-largest bank, has plummeted by 60 percent since the start of this year because many are pulling money out of Italian banks — as well as Italy as a whole — because of the country’s dire financial position.
Following the 2008 banking crisis, Italy has been struggling to get its economy on track — particularly in the south, where the unemployment rate is 22 percent — only slightly below Greece’s. Many are unable to repay their debts, which could precipitate another bailout crisis.
Meanwhile, Greece — which is on its third bailout from its creditors — is still struggling. It is back in recession and Athens is facing a huge backlash against unpopular austerity measures, including increased taxes and pension reforms. Without growth, the country is hardly likely to meet the tough deficit and debt-reduction targets demanded of its creditors — ironically — chief among whom is Germany.
