I would like to convey my authorities’ gratitude for productive and insightful discussions during this year’s Article IV consultation. Staff’s efforts to reach out to a broad range of stakeholders like think tanks, SMEs, and the financial sector are very welcome and resulted in a balanced and comprehensive assessment of the German economy. My authorities also welcome the innovative approach of presentation staff has chosen in the report as for example the section on “point and counterpoint” and the Risk Flow Chart that more clearly expresses the intertwined relationship of potential risks than the traditional Risk Assessment Matrix.
My authorities agree to the main thrust of the staff appraisal. I would like to highlight Germany’s strong fundamentals, healthy balance sheets, appropriate fiscal position, solid private consumption, and its positive role as anchor of stability in the region. At the same time, my authorities recognize that they also have homework to do: uncertainty needs to be reduced and investment strengthened, and potential growth should be raised by appropriate structural reforms and demographic challenges have to be dealt with.
Recent developments and outlook
The German economy remains highly competitive and economic growth remains overall robust. Against the background of substantial trade linkages, my authorities are aware that favourable global economic developments and steady growth in Europe are very important for a positive economic outlook for Germany.
At the same time, the domestic resilience of the German economy has substantially improved. Employment in Germany has been increasing steadily over the past few years accompanied by wage growth roughly in line with productivity growth resulting in robust private consumption as the main driver of economic growth.
In 2012, Germany registered a growth rate of 0.7 percent. However, the dynamics declined steadily over the course of the year. Causes for the weak performance at the end of 2012 were lingering uncertainties resulting from a tangible slowdown in the world economy, financial market tensions and the situation in the Euro Area dampening the propensity of German firms to invest.
However, my authorities expect the German economy to expand again in 2013 and growth will gain strength over the course of the year. After a weak first quarter – which was mainly weather-related – my authorities expect the economy to start catching up and growth is projected to reach 0.5 percent for the whole year, slightly better than projected by staff. For 2014, the outlook is clearly positive. Against the background of strong fundamentals – favourable cash flow situation of the private sector, low interest rates, and increased domestic demand – my authorities project a growth rate of 1.6 percent.
Economic activity will mainly be driven by domestic demand contributing 0.7 percentage points and 1.5 percentage points to GDP growth in 2013 and 2014 respectively. In view of the positive development of disposable income of private households and moderate inflation, a leading role will be played by consumer spending and private-sector investment in housing. Furthermore, once the uncertainty among investors dissipates, companies are likely to set aside their reluctance and start to realise deferred investments. Net contribution to growth from exports will be weaker than in previous years: slightly negative in 2013; slightly positive in 2014.
Germany, External Stability, and the Euro Area
Staff’s balanced analysis of Germany’s current account in the staff report and the 2013 Pilot External Sector Report is welcome. The analysis shows that rebalancing is on its way. As staff rightly points out, the current account surplus with the Euro Area has been steadily declining since 2007. The overall trend might gain even more momentum as investment in Germany picks up and consumption holds up robustly. As stated in earlier Article IV discussions, I would like to highlight that the German current account surplus is not the result of targeted policy measures but the outcome of complex market processes and high (especially non-price) competitiveness of German enterprises. In addition, as staff highlights in both the staff report and the 2013 Pilot External Sector Report, policy gaps and the need for fiscal consolidation elsewhere play an important role.
My authorities’ view coincides with staff’s analysis that a fiscal stimulus in Germany to support demand in other European countries would not be advisable. As discussed in the German-Central European Supply Chain-Cluster Report and in the staff report, fiscal spillovers from Germany to the rest of the Euro Area are limited whereas healthy balance sheets serve as a buffer against shocks and generate positive spillovers that extend well beyond Germany.
My authorities agree with staff that the German economy plays an important role as an anchor of regional stability. This puts a premium on prudent policies to safeguard Germany’s sound balance sheets and ensure relatively low debt to GDP ratios in the household, corporate and government sectors. My authorities are therefore committed to ensuring that the newly introduced and enhanced European procedures for economic and budgetary monitoring are implemented rigorously. There must be no relaxation in the efforts to reform – this also applies to Germany. Moreover, my authorities are fully committed to an integrated and well-functioning EU and Euro Area that serves the interest of all member states. A strengthened European integration is crucial to the long-run prosperity of Germany with its very open economy. Against this background, Germany fully subscribes that changes to the EMU architecture are necessary to create a stronger and more sustainable and resilient monetary union. I would like to emphasize that substantial progress has already been achieved in this regard.
This progress is also important in the shorter term to reduce uncertainty and thereby catalyze held-up investment in Germany. My authorities remain somewhat more optimistic than staff that uncertainty will recede against the background of strong European policy commitment to reforms and the measures already taken by other Euro Area member states and measures adopted at the regional level.
Germany’s role as an anchor of regional stability has to be kept in mind when discussing policies to reinvigorate growth. Prudent macroeconomic and macroprudential policies as well as structural reforms play an important role in reinvigorating strong, sustainable, and balanced growth and firmly anchoring expectations of market participants. This will also contribute to further reduce uncertainty about economic prospects so as to trigger investment that has been postponed so far.
In 2012, Germany’s general government balance posted a small surplus. The balance is projected to stay close-to-balance or in surplus in the coming years.
My authorities broadly concur with staff’s fiscal policy analysis. They remain committed to letting automatic stabilizers operate freely. Above that, the fiscal stance in 2013 will even be mildly expansionary given a considerable reduction in taxes, social insurance contributions and fees totalling nearly € 8 billion for companies and private citizens. While my authorities also agree that fiscal overperformance should be avoided, the recent better than expected outcome in Germany largely reflects reform dividends without exercising a dampening impact on economic activity.
The German economy is expected to grow above economic potential next year with a high level of employment, rising disposable income, and low interest rates. Against this background, my authorities agree with staff that there is no macroeconomic reason for proactive fiscal policies to support growth. A discussion about exceptional measures could even be counterproductive at this point in time, as it could undermine strong consumer confidence in Germany. During the crisis, the German authorities demonstrated that they can react quickly to exceptional circumstances.
I would also like to emphasize that the debt-to-GDP ratio in Germany is still high and demographic pressures are looming. Therefore, it is important that fiscal policy also focuses on the medium term. It is my authorities’ objective to reduce the debt ratio by maintaining the current targets for the structural fiscal balance in compliance with the “debt brake” enshrined in the constitution and the commitments at the EU and Euro Area level. The debt-to-GDP ratio – which rose markedly in particular due to the stabilisation measures taken in response to the crisis – is forecasted to decline to below 70 percent of GDP by 2017.
Structural reforms are indispensable to address the demographic challenges Germany is facing and to increase potential growth. Against this background, my authorities are committed to further increasing the overall efficiency of public expenditure and to further reforms on the labour market, improving infrastructure, a comprehensive energy strategy, higher and more effective R&D spending, improving the general framework for competition, and facilitating access to financing for SMEs.
The positive developments on the labour market in recent years resulted not only from the good economic situation, but in large part from labour market reforms, reliable labour relations, and prudent wage agreements. It is now important to build on this success and further improve the functioning of the labour market. My authorities’ comprehensive Skilled Workers Strategy is geared towards averting shortages of skilled labour and mobilizing individuals through new opportunities. Improving parent’s ability to combine career and family commitments through promoting a family-friendly working environment and an expansion of childcare facilities is a central part of this strategy. Furthermore, education and training are strengthened and the EU Directive on Highly Qualified Employment was implemented to attract skilled workers from abroad.
My authorities attach great importance to state of the art and well functioning infrastructure. For this reason, the Infrastructure Acceleration Programme II provides additional resources for the construction of new or the upgrading of existing federal transport infrastructure. Furthermore, the revision of the Telecommunications Act optimises the framework for the expansion and construction of high-speed networks and creates incentives for investment in new networks. This supplements my authorities’ Broadband Strategy. Further to this, a Strategy for Smart Networks has been developed in the first half of 2013.
Germany’s energy policy is based on a secure, affordable and environmentally sustainable energy supply. My authorities launched a fundamental restructuring of Germany’s energy supply towards renewable energy and higher energy efficiency (“Energiewende”). In this context, competition in the energy sector is to ensure that all consumers can benefit from low-cost energy.
Federal Government spending on research and development (R&D) is rising continuously. The High-Tech Strategy foresees R&D activities in five main areas: climate/energy, health/nutrition, communications, mobility, and security. Also in the context of the High-Tech Strategy, an innovation policy concept has been drafted with a view to taking further measures to strengthen Germany’s already high innovative capacities.
The Federal Government has improved the general framework for competition in Germany. The revision of the Act against Restraints of Competition (“8. Novelle des Gesetzes gegen Wettbewerbsbeschränkungen”) has come into effect at the end of June. It aims at improving conditions of competition, particularly in the areas of merger control, the abuse of dominant positions, provisions on fines, and procedures governing violations of anti-trust rules.
By introducing the new Venture Capital Investment Grant, my authorities aim to improve access to capital for young, innovative companies. It supplements the European Angels Fund and the High-Tech “Gründerfonds”. The new Mezzanine fund of fund for Germany has also been set up with the aim of expanding the availability for SMEs of financing which can substitute for a lack of equity.
Financial sector policies
I welcome staff’s assessment that banking system soundness has improved and that progress has been made in implementing several FSAP recommendations. With financing costs being at very low levels in wholesale and retail markets, German banks are taking advantage of the historically low level of policy rates. In general, banks do not experience difficulties with funding and loans to the private sector are growing robustly. Moreover, with regard to the Landesbanken, substantial restructuring measures have enabled them to develop profitable, sustainable business models.
Furthermore, I am pleased to report that the German Financial Stability Act entered into force on 1 January 2013. It established a Financial Stability Commission (FSC) composed of members from the Federal Ministry of Finance, the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank. The commission can issue warnings regarding threats to the stability of the German financial system and make recommendations to German public institutions that aim at averting those threats.
Moreover, intensity and effectiveness of SIFI supervision has been stepped up in line with FSB recommendations and proposals. It is my authorities’ view that cross-border cooperation of microprudential supervision is most efficient if organized alongside the structure of the most important parts of the supervised group. Within the European Economic Area (EEA), Capital Requirement Directive (CRD) provisions and European Banking Authority (EBA) guidelines form a material part of supervisory cross-border cooperation. Additionally, there are efficient supervisory cooperation arrangements in place which contributes especially to an enhanced cooperation with supervisory authorities domiciled outside the EEA.