Germany Back in the Black

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In addition to boosting corporate profits, the boom has created many new jobs. This has led to just under a million new workers paying taxes and social security contributions into the treasuries of national, state and local governments, as well as the social insurance system.

On the flip side, the costs of unemployment to the Federal Employment Agency and the federal government are lower than they were a few years ago. Both developments -- higher tax revenues and lower unemployment expenses -- are fueling the surpluses.

This has economists wondering whether the sudden flood of cash could disappear in the next downturn as quickly as it appeared. While this is a distinct possibility, it is not inevitable. In fact, the government's permanent income base has improved considerably. "This is a result of the increase in the rate of value-added tax at the beginning of the year, as well as significant steps toward reducing government subsidies," says IfW expert Boss. The latter effort includes, for example, a reduction in subsidies for commuters and homeowners.

According to the European Commission, Germany's elimination of its deficit is mainly structural, which means that it is more likely to be permanent. Seen in this light, the strong economy only contributed half a percentage point to reducing the deficit in both 2006 and 2007. The deficit was reduced overall by 1.5 percent in both years.

This leads to the conclusion that the strong economy contributed one percentage point of GDP to offsetting the government budget deficit. Germany originally had only committed itself to improving its structural deficit by half a percentage point each year.

Needless to say, the German figures are welcome news for the European Commission. Unofficially, European Commissioner for Economic and Monetary Affairs Joaquín Almunia and his Eurocrat colleagues in Brussels have had nothing but praise for Germany's performance. For notorious debtor countries like Portugal and France, Germany is now being held up as a model of how determination and a bit of luck can quickly put a budget back on track.

But economic uncertainty is not the only potential threat to this unexpected surplus. There is also a significant risk that politicians of a different stripe will redistribute the financial windfall to the people. This is how former Finance Minister Franz Josef Strauß, who, in the 1960s, was the last finance minister to accumulate a significant surplus, described his experiences with other politicians' inability to establish government reserves: "You'd be more likely to see a dog establish a sausage reserve."

He could be right. Politicians, both Christian Democrats and Social Democrats alike, are already dreaming up ways to spend all the extra cash. Topping the list of priorities in both parties within the ruling coalition government is an extension of the amount of time the unemployed are entitled to full benefits. Opponents fear that the measure could cost up to €3 billion.

Politicians are also eyeing other expenditures. For example, the federal government wants to determine whether the current rates of welfare payments for the long-term unemployed are sufficient. And after years of holding back, public servants will likely manage to negotiate a substantial wage hike next year.

The Scandinavian countries have demonstrated that it is indeed possible to resist such temptations and produce surpluses for an extended period of time. Sweden has been running a surplus of at least 2 percent of its GDP for the past three years. Denmark has been even more successful, achieving surpluses of over 3 percent for many years now. The Scandinavians have apparently managed to control their urge to spend money.

Translated from the German by Christopher Sultan

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