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The Real Problem of German Public Debt: Unfunded Pensions

September 18, 2007

Tonight there was an interesting documentary on the French-German TV channel arte. It was about the absurd level of public debt in Europe and in the United States. But the very definition of public debt was definitely wrong: Public dept is NOT the sum of all public-sector bonds by which the state borrows money from the financial markets. This is just mirroring the past, it sums up the figures of all contracted cash debts. What about the future? An insurance is collecting money from its clients, every month and every year. But during this time the insurance has already a debt to its customer that is defined by the insurance sum. If I am going to die my family will get a certain amount of money from my insurance. It’s a debt of the insurance. But an insurance is an intelligent economic entity and it has securities for this case. An insurance has funds in order to pay the future debt.

The German state is different. For more than fifty years it has pampered the public service with a special privilege: Public servants don’t need to pay anything for their pensions (which are way higher than in the regular and mandatory pension scheme for employees). OK, that’s a scandalous injustice. But it’s more. It’s one of the world’s most stupid financial and economic moves since World War I. The stupid thing about it is that those pensions are unfunded. That means that the really big chunk of public debt in Germany is in the FUTURE. Why do we worry about 1.500 billion € of public debt when there are 4.500 billion € waiting for us in the next 20 years. This amount must be payed by public households IN ADDITION to anything else. It’s ridiculous. Germany is mathematically bankrupt and nobody has noticed it. Neither the European Central Bank (ECB), nor Standard&Poor’s or some witty German journalists. They even didn’t notice that the public debt in Germany has grown by more than 30 billion € just because the ECB has increased the interest rate for the European financial markets in six steps by 2,0% since December 2005. Thus the public dept in all European countries has become much more expensive. Now, the Federal Republic of Germany had its highest tax increase since its foundation on January 1st 2007. The VAT rose from 16% to 19%. The additional annual tax revenue for the state is expected to be 40 billion €. Well, we should happy now to be able to pay the increased cost of our debt (42 billion € interest only for the Federal State in 2006, the Federated States and municipalities excluded). But was this really the plan? Germany is a strange country. It’s extremely productive and innovative, even well organized. But concerning economic and financial issues this country is just blind and ignorant. We will see the outcome of this ignorance within the next few years. My forecast is that this federal state will not survive the results of its mistakes in public finance. The deadline is 2015.

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