By - Paisafatafat Blog
The economic slump brought in the wake of the novel coronavirus pandemic, reached new lows for Germany as its ratio of Debt to GDP (gross domestic product) rose from 60% to 75.25% this year. The German ministry of finance, in its statement, mentioned that this has come about as a consequence of all the means and measures adopted along with the heavy borrowing the country got into in order to buffer the COVID-19 economic flurry.
The debt to gross domestic product ratio actually helps in the comparison of a particular country’s total economic output of the year with its sovereign debt. Sovereign or national debt is the amount of money the government of a country owes to creditors from outside the nation. Over a period of time, these figures reveal the amount of expenditure incurred by a government as opposed to the total revenue it earns.
Its output on the other hand is measured by GDP or Gross Domestic Product. It is fundamentally the value of everything that is produced in a country. This value however implies the total or final value of a product and not of individual components or parts thereof. For instance, when a country is manufacturing apparel, individual parts such as buttons, fabric, etc. do not count, but the total value of the piece does.
The ratio of debt to GDP for a country is a crucial tool for various segments of the government including leaders of the nation, economists and investors. It helps them get an idea on where the country stands in its ability to pay off debts. The lower the ratio, the better are its economic prospects and the greater is its ability to make the payments. A high ratio on the contrary implies that it is not making enough to help it in paying off its debts.
The ratio also allows investors in government bonds to make a comparison of debt levels between various countries of the world.
For instance, in the year 2017, Germany’s debt was $2.7 trillion as compared to that of Greece which stood at $514 billion. However, Germany’s GDP that year was $3.8 trillion while that of Greece was $281 billion. This made the debt to GDP ratio of Germany 72% and that of Greece 182%, making it incumbent for Germany to go to the rescue of Greece.
Again, during the years 2008-9, the economic system of Germany was deeply hit by a financial crisis when the annual economic growth rate dropped to a meagre 1% (in 2008) and further down to -4.7 % (in 2009). Around this time the Debt to GDP ratio in Germany had distended to 82% by the year 2010 from 64% in 2007.
The current economic situation and financial policy in Germany, the largest country in the EU, as per the statements issued by its ministry of finance, is getting cast out, keeping in mind the current battle against the coronavirus pandemic and its economic ramifications.
This month shows the recession levels in Germany’s private sector to have snowballed into an all-time nadir due to the coronavirus outbreak and subsequent measures and policies being adopted as a measure of containment.
Its PMI or Purchasing Manager’s Index that is used as a means of tracking the manufacturing and services sector which, in tandem, accounts for more than two-thirds of the country’s economy, plummeted from 35.0 last month to 17.1., the lowest reading ever recorded.
The services sector got hit largely because of the lockdowns imposed to contain the coronavirus outbreak.
Image Source: Reuters