There is no doubt that Germany’s considerable aversion to debt has far-
reaching consequences. In particular, some critics point to the underfunding of
German companies, an accusation that appears justified by international
However, more aggressive levels of borrowing by companies and
households might only provide a temporary boost to economic momentum.
German households and businesses consider their low levels of debt to be one
of the main factors in their success, not least in light of demographic challenges.
The principle of prudence has been established as the fundamental approach of
any respectable businessman since the Middle Ages.
This principle is enshrined
not only in the nation’s thoughts and actions but also in the German Commercial
Code (HGB) and accounting standards. Even today its application enables
many unlisted companies – including some major corporations – to disclose low
profits and thus establish valuation reserves.
In practice, these reserves have a
counter-cyclical effect which can be beneficial during a company-specific crisis
or general economic recession. The time thus gained can reduce the pressure
to make decisions and thus facilitate a company’s strategic realignment.
Combined with the country’s low levels of debt, the principle of prudence is one
reason why Germany has largely been spared from economic excesses and
speculative bubbles, at least for the past 70 years.
One of the few exceptions was the East German property bubble in the years
following reunification. The state granted sizeable special accelerated
depreciation allowances on investments to reconstruct East Germany’s real
estate stock. The bubble resulting from these misguided tax incentives saw
lending volumes rise by an average of 10% per year between 1990 and 1995.
The resulting excess supply and high vacancy rates in the mid-1990s caused
house prices in the East to fall by more than 20% with this price erosion only
coming to an end in the current real estate cycle that began in 2009. However,
the overall impact on the German market, with a price reduction of around 5%,
was modest. A comparison with house price bubbles in the US, Ireland and
Spain illustrates how relatively small these price corrections were at a national