The
balanced budget in Germany is largely the result of lower interest
payments due to the European debt crisis. These benefits tend to be
larger than the expenses, even if Greece does not repay any of its
debts.
Halle
Institute for Economic Research
The balanced
budget in Germany is largely the result of lower interest payments
due to the European debt crisis. Research from the Halle Institute
for Economic Research (IWH) – Member of the Leibniz Association
shows that the debt crisis resulted in a reduction in German bund
rates of about 300 basis points (BP), yielding interest savings of
more than EUR 100 billion (or more than 3% of gross domestic product,
GDP) during the period 2010 to 2015. A significant part of this
reduction is directly attributable to the Greek crisis. When
discussing the costs to the German tax payer of saving Greece, these
benefits should not be overlooked, as they tend to be larger than the
expenses, even in a scenario where Greece does not repay any of its
debts.
Faced with
crisis, investors look for safe investments (flight to safety).
During the debt crisis within the Euro area, Germany benefited
disproportionally from this effect: Any time there was bad news about
Greece, yields on German government bonds fell, and any time there
was good news about Greece, German government bond yields rose. The
effects are symmetric and amount to 20 to 30 BP a day for important
events, such as the time in January of this year when the likelihood
of a Syriza victory in the elections became high, or a little later
when the new Tsipras government refused any further talks with the
Troika of European Central Bank (ECB), European Union (EU) and
International Monetary Fund (IMF). Similar effects emerged this June,
when first the Tsipras government decided in favour of a referendum
and its subsequent (negative) outcome (lower German yields), and also
when Greece succumbed to the demands of the creditors a week later
(higher German yields). Good news about Greece during late 2014 and
mid 2015 cumulatively would have resulted in 160 basis points higher
German interest rates on public debt alone. Other countries also
benefited of course, for example the U.S., the Netherlands or France,
but the effects are significantly smaller.
While it is
clear that the German interest burden was reduced by the Greek
crisis, it is difficult to translate these yield reductions into
actual Euro budgetary savings. The IWH used a standard policy rule
(Taylor rule) to simulate a hypothetical German government bond yield
in a scenario, in which German interest rates would be independent
from the European debt crisis. We show that this approach yields a
good approximation for German bund interest rates without the
imbalances resulting from the debt crisis. Using this methodology and
the actual maturity structure of German public debt, the savings of
the German budget are estimated to be more than EUR 100 billion (or
in excess of 3% of GDP) during the course of 2010 to 2015.
By most
accounts, Germany’s share in the bailout package (mostly through
the European Stability Mechanism – ESM – and the ECB, but also
the IMF and some minor direct exposure) amounts to no more than EUR
90 billion, including the package currently being negotiated. Hence,
in case Greece defaults on its debts and there is no recourse to any
of the collateral (e.g. underlying the ECB’s Emergency Liquidity
As-sistance, ELA), the maximal uncertain and future costs of
bailing out Greece to Germany are smaller than the benefits already
accrued to the German budget. Even if Greece indeed does not repay
any of its loans, Germany comes out ahead. If Greece does pay or pays
at least in part, the savings are substantial.
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