The Current Financial Position of a Eurozone, and Key Issues in Germanys Budget Setting Process - Term Paper Example

Academic Essay- Budgeting Process 1. Introduction Budgeting is the important exercise of allocating financial resources to various public sector. Budgeting is also considered as a tool of financial administration[Wor07]. It ensures accountability and transparency of the public fund. It enables the government to plan and manage its financial resources. Every country formulates its national budget every year. There are four distinctive phases involve in the overall budget setting process like; budget preparation, authorization, execution and accountability[Pay12]. It also involves a series of steps like determine the overall economic targets, revenue and expenditure. The objectives of every national budget are somehow common. The first objective is to set up the fiscal targets and level of expenditure. Likewise, addressing operational efficiency and performance issues, allocating resources and formulating strategies of achieving targeted objectives. The national budget of the country is also the reflection of the fiscal policies of the country and its effectiveness[Rut10]. In this essay, the budgeting issues of “Germany” has been discussed. Moreover, the essay also explains how the current fiscal and debt crisis of Eurozone affects the budgeting process of Germany. 2. Brief Background of the Current fiscal position of a Euro Zone The Eurozone is facing acute fiscal and sovereign debt crisis[Mar143]. There are many European countries that are fiscally unsustainable and continuously borrowing from other European countries and international monetary funds (IMF) just to avoid defaulting. The three biggest examples are Greece, Ireland and Portugal who are facing high public debt and defaulting risk[Reb111]. The Eurozone crisis started from Greece in 2009 that turned into severe economic and political crisis. The Eurozone is facing four kinds of crisis. The first is high debt and public debt, deficit in many countries of Europe. The second is a weak banking system. The third is a high unemployment rate and economic crisis in Europe. The last is trade deficits in many countries of the Europe[MRA12]. There are many countries that have high imports and few exports that makes the overall Eurozone crisis severe. The key issue behind the present Eurozone crisis is incompetent policies of former governments and their leaders. The complex policies of European countries to tackle the present crisis are increasing the anxiety in the European market. The crisis had been revealed by the Greek government in 2009, when they announced the former government misreporting the budgets and left the country in acute debt crisis. The fake reporting of the financial position of the country done to gain the confidence of the investors, but after the revelation the fiscal sustainability became vulnerable of many European countries[Jam12]. There were many countries who took initiatives to tackle such a crisis. Italy and Spain were the two countries who played prominent role in dealing with the Eurozone crisis. At the same time, the efforts were not adequate and they failed to introduce the appropriate policies and measures to solve such a crisis. The financial unsustainably increased and crisis turned into a political crisis. The austerity measures of the European government to handle the crisis received severe backlash from the public. The strong European countries started giving bailout packages to the weaker one, but such a policy didn’t prove successful because the response was very slow[Ard09]. But recently the European Union in European summit announced the new plan of measures to deal with the Eurozone crisis. The first and foremost feature of the plan is to reform the European banking system by introducing new policies and appoint a single bank over the supervision of the Eurozone[Reb111]. Similarly, the other measure is to provide the rescue funds to the weak economies like Greece. There are many consequences of the Eurozone fiscal crisis on the global economy. The US economy is also suffering due to Eurozone economic and fiscal crisis because the EU and the US have the largest bilateral trade and investment ties that why the EU and the US both working together to deal the Eurozone fiscal crisis[Pau12]. 3. Budgeting process of Germany Budgeting is an important tool of financial administration of a country. Different countries chose different techniques of formulating their budgets like some use zero-based budgeting and some use planning, programming budgeting and so on[Pay12]. Budgeting in Germany is conducted on the basis of well-developed legal, constitutional and administration framework at the federal level. The budgeting process of Germany has all components of modern budget that is the reason the fiscal performance of Germany is far better than the other European countries even in the current Eurozone crisis. The constitutional and legal framework of Germany gives adequate attention to specification of rules and principles of budgeting process. Some of the significant principles are universality, specificity, timeliness, financial sufficiency and many others. The package prohibition is the significant component of Germany’s budget. The package prohibition ignores all the unrelated items that not related to the budgets. The documentation of the budget includes the detail of financial allocation and programs. Moreover, the budget of Germany also writes down the detailed strategic plan of each program along with its financial allocation budget[Rol14]. i. Relationship between Executive and Legislature in Budgeting process of Germany Executive and legislative both play significant role in the budgeting process in any country. Budget is a tool of financial administration and maintaining accountability in a country. In every democratic nation, budgeting is a system of delegating power and maintains check and balance over the financial matters of the country that’s why effective budgeting is a pre-requisite of ensuring the accountability. Government plays important role in the process of establishing and formulating the budget[MAN05]. In the government, both executives and legislature act as the arm if, they both work in harmony during the budgeting process. The equal distribution of power between the legislature and executive of preparing the budget is a vital component of a democratic country. In the case of Germany, the participation of both executive and legislature is prominent in every phase of formulating the budget. The Germany budgeting process includes three steps. The first step is information, the second is consultation and third and last one is accountability. In the first step information, executives play the prominent role in supplying information and collecting information about the previous budgets and their effects from the general public. The main focus of the first step is to inform the general public of Germany about the budgeting process and urge them to participate in the budgeting process. The second step, which is consultation. In consultation, both executive and legislature have important roles and influence at this step. The major decisions are taken in this step about the allocation of financial resources to different sectors[Ian10]. All the members of executives and legislatures involve in this step and formulate the budget. In the last step which is accountability, legislature plays a dominant role than executives. The accountability tools that can use by Germany’s executive to ensure the accountability of the budgeting process is to check and balance, appropriation and re-appropriation and formulation of laws and policies regarding accountability. On the other hand, the legislature can call the corrupt leaders under the dock that are responsible for wasting the financial resources. The most important difference between the budgeting process in Germany and other countries is its participatory process. All the legislature and executive are equally responsible for all financial matters. On all the level both executives and legislature members take a decision on the consultation basis that is the reason Germany has still strong economy despite of the acute Eurozone crisis[Mic071]. ii. Fiscal constraints in the economic model in setting Germany’s budget The economic model of the federal republic of Germany reflects the characteristics of one of the decentralized public sector economy in the world. The important players of Germany’s economic model are Lander and Gemeinden. The landers represents the federal state and Gemeinden represents the local communities. Both these players are responsible for almost 60% of the total public sector spending in the economic model of the Germany[Lau94]. At the same time, the cost of German lifestyle is increasing and makes the public sector inefficient. Even, the fiscal and monetary policies of Germany are very prudent despite of this Germany is facing fiscal constraints. There are many efforts are being taken by the government of Germany to tackle the current fiscal constraints. The reforms in the fiscal rules are being used as the measure of eliminating the fiscal constraints of the economic model of the budgeting process. The fiscal rules hold both constitutional and legal provisions to ensure the fiscal discipline. Germany is using the “common pool method” in which the government of Germany is using the integrated approach to deal with both economic and financial constraint. The approach dependents on the timely and reliable information about the subnational finance, introduction of bailout packages and the provision of adequate base to the revenue of the country[Ter121]. Furthermore, the German system of fiscal equalization is also used as the measure of tackling the recent fiscal constraints of the budget. It is a measure which ensures the roughly equal per capita revenue for the state and states the clear distinction of the future and current bailout packages and their impact on the economic model of the country. Germany is also solving its soft budget constraints through fiscal equalization and bail out initiative. The present fiscal equalization helps the government of Germany to respond the negative shocks of the economy and also controlling the variety of microeconomic and political factors to minimize the deficit of the budget and other fiscal constraints in the budgeting process[Jon05]. iii. TCSG (Treaty on Coordination, Stability and Governance) The European Council introduced a “Fiscal Compact” to tackle the debt crisis of the Eurozone. It was supported by 26-27 European Union countries Moreover, there were some non-Eurozone countries who also showed their support for the fiscal compact[Vau121]. Only UK was the only country non-Eurozone country that showed no support as David Cameroon was afraid of the fiscal compact long-term effects. But ultimately UK also supported the fiscal compact on the ground that it would not affect the UK financial services industry. The 26 members adopted the intergovernmental agreement outside the institutional framework of the European Union. In January 2012, the informal European Council formulated the Treaty on stability, Coordination and Governance in the Economic and Monetary Union (TSCG). The TSCG entered into force after 12 ratification. All the members of the treaty, whether they were members of the Eurozone or non-Eurozone members had different reviews and response on the TSCG[Val12]. The Chancellor of Germany, Angela Merkel described the intergovernmental treaty as the move that was not desired. Angela Merkel wanted other amendment in the European Union treaty preserve the budget discipline. On the whole, Germany played an important and vital part in introducing the treaty on coordination, stability and governance and Angela Merkel was the real winner. Germany pressurized the European Union and its members to introduce such a treaty changes and succeed in its move. Angela Merkel had a dominant role in the formulation of treaty changes and also in Euro Area’s strategy[Vau12]. Where, the Germany was the winner of the treaty, but at the same time, it was not costless. Even in the process of amending the treaty many other members of the European Union malign Angela Merkel that she is introducing all the changes just for the benefit of the Germany. In response, Angela Merkel explained the Euro crisis as the move of “alienation process” that brings all the European countries closer to one another. Moreover, Germany also showed disagreement on the United Kingdom stance of not supporting the treaty in the first place[Vau121]. Germany did not consider the United Kingdom as the important partner in the formulation and amendment of the treaty. Moreover, many opposition leaders in Germany also questioned the legality of the TSCG. In 2012, government of the Germany sets special parliamentary budget committee of the nine panel members to take quick decision under TSCG. The treaty of coordination, stability and governance made the budget policy as the responsibility of the whole Bundestag[Jør13]. The full Bundestag and its forty-one strong members of the budget committee have a responsibility to use the European stability mechanism in their budget making process and decision making related to the budget. Furthermore, Germany also insisted to introduce the EU financial transaction tax and European Union growth fund to support the treaty of coordination, stability and governance for the substantiality of the Eurozone[Vau12]. iv. Fiscal Sustainability The fiscal sustainability is defined as the possibility of continuing the existing or current fiscal policy of the next year. The sustainable policies are those that can be continued for the next years because country earn profit from those policies. On the other hand, unsustainable fiscal policies are those that need some changes and modifications[Fab09]. The sovereign debt sustainability has attracted the attention of the world, when the Eurozone faced a crucial debt crisis. At that time, where weak European economies were suffering, there were also many big economies like Germany were also facing fiscal unsustainability. The debt-to-GDP ratio has also increased during this time of crisis that has never been at this level. The public debt has also been an important issue after experiencing disastrous impacts of public debt in two world wars[Hei131]. The history of fiscal substantiality was very smooth. The history of public debt of Germany has been divided into four separate phases. Each phase explains the fiscal policies and its sustainability. The first phase span from 1850-1870, the fiscal policies were sustainable, but the change of governance structure made it bit unsustainable. The second is from 1871-1913 in which the event of the First World War happened, but both first two eras were peaceful and there were no changes or modifications introduced in both phases. The third phase is from 1923-1948, in this phase the World War 2 affected the whole economy of the Germany that was the reason the budget deficit and fiscal unsustainability were appeared[LRC97]. Similarly, the last phase, which is from 1948 to present has also fiscal unsustainability due to Eurozone crisis. Thus, Germany only faced unsustainability in the World War 2 and now in Eurozone crisis. There is a dire need that public finance of Germany must introduce consolidation to deal with fiscal unsustainability. The major reason of recent fiscal unsustainability in Germany is its development policies and complex fiscal rules. The complex fiscal rules have many loopholes, but at the same time the Government of Germany claims that these rules are significant in restricting the growth of public debt and budget deficit[Hei13]. The only solution of current fiscal unsustainability of Germany is the introduction of fiscal consolidation. The current fiscal policies of Germany need modification and reforms. As, Germany is not providing tax autonomy to balance the spending demands of their budget. Thus, there is a dire need of providing tax autonomy at the sub-federal level to deal with the fiscal unsustainability[Hei13]. 4. Key issues in Germany’s budget setting process Germany is facing organizational issues in the budget preparation process. The strategic framework is required for the clear roles and policies of the executives and legislative members. The clear and smooth relationship of various levels of Germany’s budgeting process is missing. The relationship between each level of the must be created with the help of law. There is a need of close coordination and coherent decision making in the Germany’s budgeting process. Moreover, the first step of the budgeting process in Germany is information in which it is the only responsibility of the executives to provide information about the budgeting process. It is one of the crucial steps of Germany’s budgeting process. It creates lots of problems for the executives and other members of the government because it is difficult to measure the results of this significant step of the budget process[Odi04]. On the positive side, Germany parliament is one of the most influential and fiscally prudent legislature. The Bundestag has ensured the accountability process of budge by integrated the role of an audit committee in approving the budget. The audit committee gives its approval before passing any finance to any sector. It makes the accountability level higher and minimize the loss of finance. The documentation of the budget is done under the guidance of ministers and ministers checks it on a frequent basis and specify its strategic objective to each policy. It gives special power to the legislative and executive member that is known as “qualified freeze”. The qualified freeze is a real reflection of democratic culture and its values. On the other hand, the parliament of Germany lacks in monitoring the overall budgeting process because they have very few sources of gathering evidence based monitoring of the financial allocation. The communication process of the budgeting process of Germany is also not very effective. The centralization of power at many levels of federation makes the overall communication process more complex. There is a need of introducing bottom to top budgeting, communication system to make the overall budgeting system of Germany more effective and powerful[ALü05]. 5. Conclusion To sum up, it can be concluded from the above discussion that the Eurozone is facing acute crisis. Even the strong economies like Germany and France are also facing fiscal constraints. The detailed analysis of Germany’s budgeting process reveals that the fiscal policy condition of Germany is deteriorating just because of the recent Eurozone crisis. The budget deficit is also increasing. The government of Germany played a pivotal role in managing the Eurozone crisis. Moreover, Germany is also taking other measures to solve the current fiscal constraints. The measure that has been taken by the Germany government are fiscal equalization and fiscal adjustments to managing the crisis. The high debt to GDP ratio has become alarming for the Germany’s government. Moreover, the tax revenue is still below the expectations. There is a dire need of introducing effective structural and organizational reforms in the budgeting process as well as in the fiscal adjustment policies of Germany. References Wor07: , (World Bank, 2007), Pay12: , (Haerifar, 2012), Rut10: , (Carlitz, 2010), Mar143: , (Esposito, 2014), Reb111: , (Nelson & Mix, 2011), MRA12: , (Anand & Dash, 2012), Jam12: , (Haidar, 2012), Ard09: , (Ardagna, 2009), Pau12: , (Belkin, et al., 2012), Rol14: , (Alter & Blöndal, 2014), MAN05: , (MANSFELDOVÁ, 2005), Ian10: , (Lienert, 2010), Mic071: , (Ruesch & Wagner, 2007), Lau94: , (Laufer & Heinz, 1994), Ter121: , (Ter-Minassian, 2012), Jon05: , (Rodden, 2012), Vau121: , (Miller, 2012), Val12: , (Kreilinger, 2012), Vau12: , (Miller, 2012), Jør13: , (Mortensen, 2013), Fab09: , (Balassone & Tommasino, 2009), Hei131: , (Burret & Feld, 2013), LRC97: , (L.R.Cohn, 1997), Hei13: , (Burret & Ko¨hler, 2013), Odi04: , (Sallard, 2004), ALü05: , (Lübke, 2005), Read More