Transcript: Germany’s €60bn budget hole

This is an audio transcript of the FT News Briefing podcast episode: ‘Germany’s €60bn budget hole’

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Marc Filippino
Good morning from the Financial Times. Today is Wednesday, November 29th. And this is your FT News Briefing. 

Chinese people are having a really tough time paying back their debts. And Germany is now facing a massive budget hole. Plus, international investors are looking at Mexico and saying, yeah, I like that. We’ll take a look at how the country has become an ideal place to put their money to work. I’m Marc Filippino, and here’s the news you need to start your day. 

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A record number of people in China have defaulted on their debts since the pandemic broke out. About 8.5mn people have been blacklisted by authorities for missing payments. That’s up from 5.7mn people before the pandemic started. Most of them are between 18 and 59 years old. So just to back up a bit, when we say that people have been blacklisted, we mean that they can’t do things like buy airline tickets or use mobile pay apps like Alipay. The higher number of defaulters only underscores the trouble going on in the Chinese economy. You’ve got the property sector slowdown, lagging consumer confidence and generally an economy that just won’t bounce back after its long pandemic lockdowns.

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A recent court ruling in Germany has upended the government’s spending plans and opened up a huge €60bn hole in the country’s budget. The court barred the government from using funds allotted to the Covid emergency for other things. Guy Chazan is the FT’s Berlin bureau chief and he joins me now. Hey, Guy. 

Guy Chazan
Hi. 

Marc Filippino
So tell me about this recent court ruling. What did it say? 

Guy Chazan
So the court basically struck down an accounting trick that the government had done shortly after coming to power in late 2021. Essentially what they did was they took a huge amount of money that had been raised in loans during the pandemic to cope with the effects of the pandemic. And they repurposed it or repackaged it for a fund that dispensed money for green energy projects and industrial transformation. And the constitutional court basically said that was illegal. They basically said that, you know, if you’ve raised an emergency loan, then you have to use it in the year when you’ve done that. So this was a very, very restrictive court verdict and creates an enormous headache for the current government because they have to basically redraft all their spending plans, including for 2023. 

Marc Filippino
Yeah. So, Guy, what does this mean for the current German chancellor Olaf Scholz and his government? 

Guy Chazan
Well, it’s terribly humiliating for Scholz because prior to becoming chancellor in December 2021, he was actually finance minister. And this trick with basically repackaging emergency loans was something that he did as finance minister, or he came up with the idea. So this has been a total fiasco for Scholz personally. 

Marc Filippino
Yeah. How has Scholz responded to this ruling? I saw that he spoke yesterday on the floor of the German parliament. 

Guy Chazan
Yes, that’s right. So he hasn’t actually given much detail as to how he’s going to respond. It was all very vague. He basically said that we’re in intensive consultations now as to what the 2024 budget is going to look like. They’re now facing the rather humiliating prospect of having to pass it sometime in January. So 2024 will already have begun before they actually pass the spending plan for 2024. So that’s pretty embarrassing. 

Marc Filippino
Yeah, not a great look. So, Guy, what happens to the €60bn now? Do they have to forfeit it or use it for something else? 

Guy Chazan
Well, I think what we’re talking about at this stage are credit lines, credit authorisations, as they call them here. So I don’t think that money has actually necessarily been raised yet. It’s basically a permission to raise debt rather than the debt itself. The constitutional court verdict was incredibly clear on that point that it basically said, you know, this is now null and void entirely. So that money is just gone. 

Marc Filippino
So, Guy, what does this budget crisis mean for the German economy, which has been pretty weak lately? 

Guy Chazan
The crux of it is this: Germany really poured money into this fund to dispense to sort of big green projects and big sort of industrial modernisation projects because it was very scared that it was losing the race with other big industrial economies like the US and China and Japan and also France, which have really started to launch very big public subsidy programs to attract investments in green energy. And I think that is the big fear now. And so it’s not only about the budget for next year. There’s a question mark over Germany’s economic model and investments in future technology and that kind of thing. 

Marc Filippino
Guy Chazan is the FT’s Berlin bureau chief. Thank you, Guy. 

Guy Chazan
Thank you. 

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Marc Filippino
We have talked a lot on the show about how these uncertain times are forcing companies to rethink their foreign investments. The war in Ukraine, rising tensions between the US and China, and the lingering effects of the pandemic have all made investors skittish. But one place seems to be a winner in all of this. That place is Mexico, and one city in particular is reaping a lot of the benefits. 

Christine Murray
Monterrey in northern Mexico is seeing an influx of investment and announcements of investments as companies try to shore up their supply chains and bring them closer to the United States. 

Marc Filippino
Christine Murray covers the region and she joins me now. Christine, what kind of businesses are expanding or, you know, setting up shop in Monterrey? 

Christine Murray
So there are different manufacturing companies, from Danish toymaker Lego to Taiwanese electronics company Quanta Computer. And of course, the most celebrated and covered of the investments was Tesla announcing it was going to build a gigafactory. Monterrey has been growing for a long time. You can see, you know, driving out on the roads outside the metropolitan area, lots of construction of warehouses, factories. But it’s also now becoming more international. And, you know, you even see some signs for real estate in Mandarin and in Korean. The question is, you know, how far will that move the national picture? 

Marc Filippino
Yeah, just how representative is Monterrey when it comes to foreign investment coming into Mexico more broadly? 

Christine Murray
Monterrey is definitely considered one of the biggest beneficiaries, but lots of cities in more . . . northern Mexico, like Tijuana, Ciudad Juárez, are benefiting. It also shows to many that the country can capitalise on this under the right conditions. And so in that sense, the city is something of a bellwether of what could happen in other parts of the country, too. 

Marc Filippino
Just out of curiosity, what makes Mexico so attractive to this kind of investment that you’re describing? 

Christine Murray
So obviously, number one is geographical location — right next to the United States. It’s a deeply interdependent relationship. Cities like Monterrey have several highly regarded universities that churn out graduates in engineering and other Stem subjects. So it’s a combination of different factors that in the view of some here kind of aligning in Mexico’s favour right now. 

Marc Filippino
What kind of hard proof do we have here? I mean, what sort of data supports the idea that manufacturing and investment is coming to Mexico? 

Christine Murray
So the foreign direct investment data is up. National gross fixed capital formation, which is a measure of investment in assets more broadly in the national economy, has spiked upwards. There’s definitely still debate around what the numbers exactly mean, but it’s evident in the central bank surveys of analysts that the general mood has shifted to more optimism about investment in Mexico. 

Marc Filippino
OK. This all sounds pretty good. I guess I’m wondering, though, what could hold the country back from capitalising on the fact it’s become so attractive to investors? 

Christine Murray
So there are a lot of drags on this phenomenon. The current Mexican government has earned a reputation in the private sector for being hostile to business. They say that’s not true and not a fair characterisation. But President Andrés Manuel López Obrador scrapped the state investment agency, which previously helped promote and direct investment in the country. There’s also large infrastructure challenges, so under-investment in roads, rail, a serious water problem, particularly in the north of Mexico. There’s also long-term problems with rule of law in the country and corruption in the justice system, as well as insecurity with organised criminal groups in lots of different states of the country. So there are definitely a lot of obstacles to Mexico fully capitalising on this opportunity. 

Marc Filippino
Christine Murray is the FT’s Mexico and Central America correspondent. 

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Before we go, the vice-chair of Berkshire Hathaway, Charlie Munger, died yesterday. He was 99 years old. He was consulted frequently on large takeovers and in some cases negotiated the details himself. Berkshire’s chief executive, Warren Buffett, said the company wouldn’t be where it is now without Munger’s, quote, inspiration, wisdom and participation. 

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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