Interview with economist Michael Burda: ‘Germany has to do its part’

The German government on Monday night agreed to a €50-billion stimulus package, but will it be enough to bolster Europe’s largest economy? The Local spoke with Prof. Michael Burda, director of the Institute for Economic Theory at Berlin’s Humboldt University.

Interview with economist Michael Burda: 'Germany has to do its part'
Will the stimulus ignite growth or simply burn taxpayer cash? Photo: DPA

Germany has been widely criticised for dragging its feet in the wake of the global financial crisis. Is such criticism valid?

Germany is biggest economy in both the European Union and the eurozone, so if it isn’t doing what Europe is expected to do in response to the crisis, Germany will drag down that average. And that’s why a lot of people are paying attention to what Germany is doing. On the other hand, in Germany’s defence, this is an election year, and people still expect some sort of solid fiscal responsibility from their politicians. But the priority should be to pass some sort of demand stimulus. If they don’t do it now it will be too late. The same effort later on might not have the same effect.

But Germans also didn’t really believe they were responsible for all of this. Most economists are convinced that the United States was at the root of the crisis, but the rest of the world bought into it and it’s a globalised problem now – it’s become a real economic problem, not just a financial problem like last year. So even if Germany thinks it was the fault of the US or UK because of lax regulation of financial markets, it’s now everyone’s problem. It’s spilled over into the things Germany cares about – machinery and high-end cars.

How does the German response compare to other big economies such as Britain, France and the United States?

There’s been a recognition lag here. It’s like you’re sitting on the beach and you see a tsunami coming. You still have 20 minutes to decide what to do. Then you really have to act decisively. Europe at least has had the benefit of seeing the tsunami hit the United States. But Germany is not a very Keynesian place. Tinkering with the (economy’s) motor is not what a lot of politicians here like to do. But this is a very serious situation. This is something we haven’t seen in decades. This is shock that will create a chain of events. Germany is not really used to doing this kind of stuff.

Is this perhaps the problem with Chancellor Angela Merkel’s grand coalition? The parties are pulling in different directions?

Having a grand coalition has all sorts of disadvantages but it also ensures everyone is onboard. No one is blocking. I was actually very encouraged by what happened last night. Every party wanted to put their little stamp on it so they could say they got something for their constituency. But that’s all secondary to what we need right now – which is a good jolt of demand to prop up the economy, because otherwise a lot of people are going to be losing jobs.

What’s your take on Berlin’s latest €50-billion stimulus package?

That’s not a whole lot if you look at the numbers – especially if you look at the US, which is pushing for a much bigger programme. If they go for $750 or $800 billion and get it through the Congress that’s a huge stimulus. That corresponds to the gravity of the situation as American experts see it right now. I do think there’s a difference here. The European real economy will be affected less. A lot of this is self-interest. Why should Germany do something for the United States right now? Within Europe you might have a real problem, however. If people think Germany is dragging its feet while France and Britain appear to be very much on the side of the United States that could push Germany to do more.

The bottom line on this package is going to be that it’s too modest right now. One can’t really afford to be a penny-pincher right now. All this concern about the deficit – I agree with the Maastricht criteria, but right now we’re in a situation where if we don’t save the European economy in the near term the euro area might eventually break up. These are drastic scenarios that people don’t want to talk about.

Germany is the world’s biggest exporter. How much is really in other people’s hands? If other economies are underperforming will they still by fancy German cars and machinery?

Europe is still a mosaic – it’s not like the US. When (Barack) Obama becomes president he can just say the federal highway system will be refurbished. He can just do it. The lag between decision and implementation is short. But in Europe, sovereign states have to decide. And European economies are quite open these days. Germany exports and imports around 40 to 50 percent of its gross domestic product. It’s like California – which has an even higher export rate than Germany’s. Think of (Governor Arnold) Schwarzenegger being asked to provide fiscal stimulus for the entire country. That’s a bit much. But Germany has to do its part. Germany can’t be expected to pull everyone out of this problem, but if it doesn’t do its part it won’t work either. The expectation is now that Germany takes a leadership role and inspires the laggards to do something too. But the coordination problem is enormous in Europe.

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7 tips for how to survive as a freelancer in Germany

Taking the decision to go it alone and freelance in Germany can be a daunting prospect. But, if you do it right, it can be an exciting and liberating path. Here are some of our top tips on how to survive.

7 tips for how to survive as a freelancer in Germany

1. Get a tax advisor

The German tax system is complicated, even for Germans. All the associated paperwork uses the Amtsprache (authority language) which is more like legalese than ‘normal’ German, and mistakes when filling out tax forms can cause you, at best, a massive headache and, at worst, a costly fine. So it’s best that you employ someone who knows what they’re doing to help you out.

That person is called a Steuerberater (tax advisor) in Germany. They will help you register with the tax office, correspond with them and submit your tax declarations.

Be aware that, in Germany, different deadlines apply for tax returns depending on whether you employ an official tax advisor or not. If you are doing the tax return on your own, the deadline for submitting your annual tax return is earlier than if you use a tax advisor’s services. 

READ ALSO: What NOT to do when you’re freelancing in Germany

When looking for a tax advisor, a top tip is to use your network to get recommendations. Ideally, you want someone who will do more than just fill in the forms for you, but who will actually advise you on how best to manage your business finances so that you can make tax savings.

2. Keep your accounting in order

The better you keep your own accounts in order, the easier it will be for your tax advisor to compile your tax declarations and therefore the cheaper their services will be.

As a freelancer, there are a lot of costs you can deduct from your taxes – from train tickets, working materials, to meals out – so it’s best to keep hold of all your receipts and to keep them in good order.

2 euros and 50 cents lie on a receipt in a beer garden. Photo: picture alliance/dpa | Peter Kneffel

In Germany, you’re obliged to keep hold of receipts for two years, in case of a tax inspection, so it’s a good idea to photocopy the type of machine-printed receipts you get from restaurants so that they stay legible for a long time.

There are also a few things to be aware of when writing your own invoices. Firstly, make sure that you include your tax number. This isn’t the 11-digit Steueridentifikationsnummer that everyone gets when registering in Germany, but the 10-digit Steuernummer you get from the Finanzamt after registering yourself as a freelancer. 

Most companies won’t pay you if you don’t have this on your invoices so make sure you include it.

You should also make sure that you number your invoices properly – ideally in ascending order so that you can easily keep track of them. You are not allowed to issue two invoices with the same number and if you do so and the finance office notices, you could face an inspection of your whole accounting system.

There are numerous great accounting software programmes you can use to help you, such as Lexoffice and Sevdesk and, even if you have to pay for them, the costs will be tax deductible!

3. Find out if you’re eligible for financial support

In Germany, there are several opportunities for freelancers to gain financial support and to cut their outgoings, and its worth finding out if you’re eligible for them.

If you’re claiming unemployment benefits under ALG 1 and are thinking about becoming a freelancer, the employment office offers a special type of financial support to help you to get your freelance business off the ground.

Called the Grundungszuschuss (“foundation grant”) the payment is a six-month grant equalling your monthly entitlement under ALG 1 plus €300 towards your insurance costs can be applied for those in receipt of this unemployment benefit.

READ ALSO: Will freelancers benefit from Germany’s €300 energy allowance?

If you are engaged in some form of artistic profession in Germany – which can include journalism to pottery – you may be entitled to membership to the Kunstlersozialkasse (artists’ social insurance).

Being a member of the KSK means you only have to pay half of your health insurance and pension contributions, and the KSK will pay the rest.

4. Work out how much you think you will earn

As with starting any business, you need to have some idea of your expected earnings from the outset.

If you’re just starting out as a freelancer, or have some freelance gigs on the side of an employment position, then it might be worth considering registering yourself as a Kleinunternehmer (“small business”).

As a Kleinunternehmer, you can currently earn up to €22.000 per year without having to charge VAT and having to submit only yearly tax declarations. 

An income tax declaration form lies on a table. Photo: picture alliance/dpa/dpa-Zentralbild | Hans-Jürgen Wiedl

Be aware that if you are registered as this kind of freelancer, you must include the following sentence in your invoices: ‘Gemäß § 19 UStG wird keine Umsatzsteuer berechnet’ which means ‘In accordance with Paragrah19 of the German VAT law, no VAT has been added to this invoice.’

READ ALSO: Everything you need to know about your German tax return in 2022

If you think you will earn more than €22.000 per year, you will need to pay Umsatzsteuer (VAT) and will have to submit tax declarations in advance and more often. Depending on how much you earn, this could be every month or every quarter. 

5. Get your insurance in order

In Germany, it’s a legal requirement to have health insurance.

If you’ve just made the move from employment to being a freelancer and want to keep the same health insurer, you should get in contact with your health insurance provider straight away to tell them about your change of circumstances. They will ask you to re-register and to tell them your projected freelance earnings for the year, so they can amend your monthly fees.

If you don’t keep your health insurer provider updated, you could continue to be charged the higher rate that you had from your previous salary.

The insurance cards of the health insurance companies DAK, AOK, Barmer and Techniker-Krankenkasse TK lie with euro notes under a stethoscope. Photo: picture alliance / dpa | Daniel Karmann

It’s not just health insurance you need to think about as a freelancer. It’s also wise to think about protecting yourself from any sort of claims that could arise as a result of any working mishaps. 

If, for example, you lose your laptop which contains confidential client information, you need to be protected against claims.

That’s why it’s good to have both Betriebshaftversicherung (business liability insurance) and Rechtschutzversicherung (legal protection insurance).

6. Plan your time wisely

All of these bureaucratic obligations take time. So it’s really important that you take account of that when planning your time. For example, planning half a day a week to deal with your invoices, filing, emails to clients, and conversations with authorities can be really beneficial when scheduling your working time. 

7. Grow your network

As a freelancer, networking is absolutely crucial to success. 

Keep an up-to-date profile on websites like LinkedIn and German equivalent XING and keep in contact with anyone you’ve ever worked with, no matter how brief the contact was. 

Having a network is not only about getting more clients, but also about building a support network in your field to exchange advice, tips and generally for your own enrichment. 

Participating in workshops related to your field, going to seminars, and meet-ups, can be great ways of broadening your network.