Abstract

Weak Financial Points of the German Economy

For all its efficiency compared to other countries, for a long time now the German economy has exhibited clear symptoms of structural weaknesses, especially in the financial field. One grave feature is the inadequate net assets for firms, which have dropped within 16 years from nearly 30 % of the balance-sheet total to about 20 %. The chief cause of inadequate net asset formation is too low earnings of the firms. They diminish a firm’s capability of strengthening its capital basis out of its own resources and they impair the chances of procuring risk capital on the market. The earnings of firms have ben reduced not only by foreign trade factors, particularly the two jumps in petroleum prices and the inadequate manner in which the domestic distribution process coped with them, but also by the rising burden of taxation, including all types of levy. A second weak point is the increase in short-term indebtedness relative to the total borrowings of firms, in which connection importance attaches to interest-rate considerations, which under certain circumstances make it seem advisable to borrow short-term funds at high rates in the hope of being able later on to consolidate debts on more favourable terms for longer periods. This, however, introduced additional uncertainties into the financing structure. Low net assets and the declining proportion of long-term borrowings made many firms more sensitive to interest-rate changes, which play an important role especially in phases of steeply rising interest rates, but which has also become a problem on account of market fluctuations of interest rates in both directions over the course of the years. Those fluctuations are, above all, an expression of greater disequilibria at home and in the rest of the world, that is, of the higher inflation rates, balance-of-payments disequilibria, greater instability of exchange rates, and growing deficits in government budgets. Smaller interest-rate fluctuations, and hence less uncertainty in the planning data of firms, can be achieved, if the mentioned disequilibria at home and relative to the rest of the world can be diminished. The remedy for the financial weaknesses lies, of course, in improving the earning capabilities of firms. Without sufficient earnings there can be neither adequate self-financing nor enough incentive to provide risk capital. Over and above this, the continuing development of our economy calls for innovative, risk investments, which cannot be financed mainly with borrowed funds. But since these problems will hardly be able to be solved by selffinancing within the firms alone, the question of provision of risk capital presents itself, for which terms and conditions would have to be improved. This means primarily: stimulation of share issues and the foundation of (or conversion into) public companies. In this connection it should be examined whether it is possible in the field of taxation and with respect to issuing costs to remove some of the existing obstacles, and whether it is generally advisable to subject profits retained by firms for internal financing of investments, and hence of jobs, to the same high tax rates as individual highbracket income, which now serves as a yardstick for the height of the corporate income tax rate and the marginal personal income tax rates.