In terms of the overall fiscal position, Germany’s budget surplus continues to flatter the overall
picture for the euro area. Ex-Germany, the budget deficit of the rest of the euro area is almost
unchanged on a year ago. In terms of Debt/GDP ratios, for Germany, the figure currently stands at just
61% (the lowest level since 2003); it’s at 96% for the rest of the region; and 86% for the euro area as a
whole. So where does this leave the euro area in its quest for more activist fiscal policy and what role
does the ECB and interest rates play? The argument that the German government should be raising its
expenditure is well rehearsed and there has been some shift in that direction. For instance, as a share
of GDP, government investment in Germany is now above the levels recorded in Italy and in Spain and in
nominal terms stands €20bn per year higher than it did in 2014. Overall however, €20bn is almost
completely irrelevant to the euro area economy and even in the scheme of the German economy represents
less than 0.6% of GDP. Similarly, while there is a lot of focus on government borrowing costs, in
reality, this preoccupation completely misses the bigger picture. What matters in terms of budget
deficits is nominal GDP growth and rising tax receipts. What sets Germany and Italy apart is not whether
interest payments are €10bn per year higher or lower, but that in Germany total tax revenues are 30%
higher than they were in 2011 (giving the government close to €400bn per year in potential extra
spending). In Italy annual tax revenues since the end of 2011 are up just €73bn (up just 9%). And as a
result, borrowing costs and exact levels of debt interest payments are given disproportionate
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