How much has the German government saved as a result of zero interest rates?

If in the popular press Mario Draghi becomes Draghila, the truth is that data in hand, thanks to the unlimited liquidity of the central bank and the risk-free status of German bunds, the federal government has saved over 200 billion euros in interest expenses on government bonds over the last decade. Savings that most likely translated into lower taxes and a generous pay increase for civil servants. Handelsblatt.de writes

It is always the same ritual: every year, when Olaf Scholz's (SPD) man in charge of the public budget, State Secretary Werner Gatzer (SPD), presents the next federal budget, he is asked how much more he could save on interest expenditure. And each time, Gatzer states that we are already at the "end of the line". There really is nothing left to save. And every time the public budget is mentioned, politicians feel they are being played for a fool.

And 2020 is a perfect example of how that works. In 2016, in fact, the federal government in its financial planning for 2020 assumed an interest expenditure of 21.9 billion euros. In the end, however, just €6.5 billion was spent, so much less than had been planned. And this has been going on for years. Since the outbreak of the financial crisis, interest rates have fallen to rock bottom and stayed there. Many savers are on the verge of despair because they are no longer earning interest on their savings. But there is also a big winner: the state.

In fact, since the financial crisis of 2008, thanks to low interest rates, the federal government in total has saved €210.8 billion in undisbursed interest expense compared to what was originally budgeted. This is the result of a response by the Ministry of Finance to a parliamentary question from the Greens available to Handelsblatt.

In its financial planning for the years 2008 to 2020, in fact, the federal government originally planned to have to spend a total of 533.9 billion euros on debt interest payments. "The sum of the amounts carried forward to the end of the budget years in the years 2008 to 2020" in the end amounted instead to only 323.1 billion euros, according to the answer to the question from the Federal Ministry of Finance. A difference of almost 211 billion euros.

With the newly issued government bonds, the federal government even earned 6.9 billion euros last year. Instead of charging interest, in fact, when the state went into debt with them, investors had to pay the German government additional money.

Germany as a safe haven

The reason for this nonsense is because investors around the world are looking for safe investments. Regulatory requirements are forcing insurance companies, for example, to invest their money in securities that are considered safe. And German debt securities are considered particularly safe. The fact that the government hardly has to pay any interest on debt anymore, and in some cases can even earn money when it has to issue new debt, is playing a decisive role in the German debt debate.

For a long time, in fact, the "Schwarze Null", i.e. a balanced federal budget, was considered acceptable by a large political majority. And the balanced budget anchored in the Basic Law was considered sacrosanct. Because of the Coronavirus, however, the "Schwarze Null" is now a thing of the past, but the balanced budget in the constitution is also increasingly under fire, recently even the head of the Chancellery, Helge Braun (CDU), suggested its relaxation.

The SPD, the Greens and the Linke, but also many economists, are calling for the low-interest-rate phase to be used to create more debt and to use 500 billion euros for an investment plan.

According to Sven-Christian Kindler, of the Greens, real interest rates in major industrialized countries, including Germany, have been falling steadily since the 1980s. "The Union's alarmism about the danger of rising interest rates serves only to justify their ideological stance against debt, and has nothing to do with economic reality. Those who in such a situation intend to give up borrowing money to finance the cost of the crisis and investments are acting against all economic rationality".

The argument is as follows: when interest rates are low and debt costs nothing, it would be foolish not to take advantage of it. Germany needs to make some major public investments, investments in climate protection, digitization, education and affordable housing. "That's why now is the right time to launch a large €500 billion investment fund to be spent over ten years," Kindler said. For this, the balanced budget should be reformed.

However, the Union does not want to move away from a balanced budget. There are also economists who warn against accepting low interest rates as if they were a gift from God. If interest rates were to rise again, Germany's interest expenditure would quickly rise again, they argue. In 2008, for example, the federal government spent 40 billion euros just to pay interest - and at that time the debt level was lower than it is today.

This is why the CDU/CSU do not want to move too far away from a balanced budget. Financial policy could therefore become a central point of contention during the upcoming election campaign.