The Federal Government's Interest Payments: A Look Under the Hood
Banks' detriment, Democracy's advantage: a regrettable and advantageous turn of events for the financial institutions.
Every year, the federal government shells out a whopping 35 billion euros on interest. The question is, where could this cash be better spent? Increasing child benefits, promoting electric cars, or even abolishing sales tax on essential goods are all possibilities. But is it feasible to free the federal budget from interest costs? Let's dive into the intricacies of this financial conundrum.
The Minister of Finance, currently Lars Klingbeil of the SPD, plays a peculiar game of Monopoly with the Bundesbank, the German branch of the European Central Bank. To fill his account, he can collect taxes or sell bonds. The loop opens when expenses surpass his balance; he can overdraft it, but only for a day.
When the Minister of Finance decides to sell bonds, he offers them to a select group of around 35 commercial banks, who bid for the new bond in an auction. The highest bidder wins and pays with the balance of their account at the European Central Bank. The interesting part? The European Central Bank simply generates this balance at the push of a button on the computer.
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The big question is, why this convoluted method of financing the government? Why can't the Minister of Finance sell the bonds directly to the central bank or just overdraft a central bank account, given that the balance is generated digitally anyway?
The reason lies in the idea of profit-oriented banks controlling the state. By demanding higher interest on the bonds or even refusing to buy them, they supposedly discipline the Minister of Finance. Additionally, banks profit handsomely from the bonds, while other investors are content with low-risk investments. The central bank also benefits, as it buys and sells bonds to manipulate interest rates according to its monetary policy.
It's debatable whether this model is truly democratic, given that private banks hold such power over the elected government. This complex financial mechanism is so intricate that many voters could not explain where the money comes from when the government takes on new debts.
But there's a more straightforward and cheaper solution: the finance minister should be allowed to overdraft his account at the central bank, not just for a day. He should also stop selling bonds. If this had been the norm, the finance minister's account would now be in the red by approximately 2.5 trillion euros, equal to the current national debt.
If the state had generated this money directly from the central bank, it would be 2.5 trillion euros with zero interest payments to banks or insurers - and nobody would need to pay it back. It's a tough pill to swallow for banks and investors, but good for democracy!
Behind the Curtains: The Legal and Financial Landscape
The idea of the German federal government directly overdrafting from the central bank is not as simple as it seems. Central banks in the European Union, like the European Central Bank (ECB), operate under strict rules and treaties that restrict direct financing of governments.
- Treaty Provisions: The European Union's Treaty on the Functioning of the European Union (TFEU) prohibits central banks from providing overdraft facilities or any other type of credit to public authorities or bodies of the Union. Article 123 of the TFEU clearly states that the ECB and national central banks cannot do so.
- Fiscal Discipline: The EU's fiscal rules, such as the Stability and Growth Pact, require member states to maintain sound public finances. This involves managing deficits and debt levels within specified limits, rather than relying on central bank financing.
While the German federal government cannot directly overdraft from the central bank, it can rely on traditional financing methods, such as issuing bonds to private investors. Central banks can also indirectly influence market conditions through monetary policy tools, like quantitative easing, that affect government bond yields and costs.
In summary, due to legal and regulatory restrictions, the German federal government cannot directly overdraft from the central bank. The traditional method of issuing bonds to private investors remains the most feasible option, while central banks can indirectly impact the cost of government borrowing through monetary policy measures.
The Minister of Finance could argue for direct overdraft privileges at the central bank to reduce interest payments, but this conflicts with the provisions of the European Union's Treaty on the Functioning of the European Union (TFEU), which prohibits central banks from providing overdraft facilities or any other type of credit to public authorities.
Meanwhile, the weekly newspaper, wochenour, could delve into the impact of politics on this issue, analyzing whether lobbying efforts by banks or financial sectors could lead to changes in the EU's fiscal rules and central bank regulations, potentially paving the way for direct overdraft options by the German federal government.
