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German GDP swells on sex, drugs and weapons

, August 14, 2014, 0 Comments

German GDP swells on sex, drugs & weaponsThe European Union’s new rules for calculating GDP come into effect Sept. 1 and include revenue from prostitution, drugs and weapons trading. The new standards could also make debt levels seem lower than they really are.

What do research and development, prostitution, drug smuggling and arms trafficking have in common? They are all seen as economic activities, and starting Sept. 1, they will be counted as part of Germany’s annual economic performance, or gross domestic product, in line with new calculation standards.

The new figures include revenues from prostitution and the sale and smuggle of illegal drugs.

“All relevant economic activities should be counted without any moral judgement,” Norbert Räth from Germany’s statistical office, Destatis, told DW.

According to official estimates, there are around 400,000 prostitutes in Germany, 20,000 of whom are men. Altogether they earn 14.6 billion euros ($19.5 billion) a year. Minus various expenses, such as rent in brothels, work attire and condoms, and the statisticians get a gross value added of roughly 7.3 billion euros.

For drugs, it is the same story. Surveys commissioned by the Federal Health Ministry allow officials to estimate the prevalence of drug use in Germany. This figure is then multiplied by the respective prices on the black market – something Germany’s Federal Criminal Police Office knows very well.

Even the amount of money the state spends on armaments is now subject to the new rules.

“The production of weapons has, of course, always been included,” Räth said.

But until now those costs had always been written off as a state expense. Now they are considered an investment.

Fudging the numbers?

Now countries in the EU have a uniform method of calculating their GDPs. And when new items are added to GDP calculations, it grows.

One could speculate that there is an ulterior motive behind the new system, namely one that sugarcoats Europe’s sovereign debt. Even if overall debt is not reduced, the debt ratio sinks when GDP increases.

“We are going to have to categorically deny that,” said Norbert Räth from Germany’s statistical office, Destatis. “The whole process is not politically motivated. It hasn’t been all along.”

For Räth, who is responsible for calculating Germany’s GDP, the primary concern is establishing an international comparison of data.

“There have been no political impulses,” Räth said.

Sugarcoating is hardly worth it

The new calculation methods have, in fact, been a matter of discussion at the United Nations since 2003. In 2008, the new System of National Accounts (SNA) was introduced.

Australia was the first to implement it, while the United States calculates its GDP according to rules adopted in July 2013. In the European Union, France and the Netherlands do their math according to the new standards. From Sept. 1 on, all EU countries will be required to adhere to the same standards.

The new rules are hardly suited to sugarcoat Europe’s debt level. Wolfgang Nierhaus from the Ifo Institute in Munich, Germany, did the math based on figures from the year 2011.

“Regarding public debt ratios, this would reduce the EU average by 1.9 percentage points,” Nierhaus said.

In Germany, the rate would drop by 2.3 percentage points from 80 to 77.7 percent of GDP. Such a change would likely be described as “marginal,” according to Nierhaus.

From advance payments to investments

The new rules also apply to the calculation of expenditure on research and development. Previously, these were regarded as advance payments that more or less disappear during production. Now companies are obligated to record what they spend on research and development as an investment.

Experts have been calling for this to happen for a long time, because research and development are, in fact, investments in the future – something that will represent the largest chunk in the new GDP calculations.

“I can’t give you a concrete number,” Räth said. “We will publish one soon. But overall the level of domestic product could rise by around 3 percent, or 80 billion euros.”

“Of that number, three-quarters come from the new standards for counting research and development,” he added.