Germany
Recent Economic Developments

This paper reviews economic developments in Germany during 1990–95. In early 1995, both western and eastern Germany seemed well poised to continue on their respective growth paths. However, the economy was then confronted by a sharp nominal appreciation of the deutsche mark—translating into a 5½ percent real effective appreciation between December 1994 and June 1995, most of it during February—which brought with it significant risks to exports and thereby to investment and to the recovery in general.

Abstract

This paper reviews economic developments in Germany during 1990–95. In early 1995, both western and eastern Germany seemed well poised to continue on their respective growth paths. However, the economy was then confronted by a sharp nominal appreciation of the deutsche mark—translating into a 5½ percent real effective appreciation between December 1994 and June 1995, most of it during February—which brought with it significant risks to exports and thereby to investment and to the recovery in general.

I Output. Employment, and Inflation 1/

1. Output

a. Overview

The German economy has entered its third year of recovery, following the boom-bust cycle triggered by the unification-related fiscal expansion (Chart I-1). After falling a little over 1 percent in 1993, real GDP grew by close to 3 percent in 1994. 2/ According to staff estimates, an output gap of some 1 3/4 percent remained in western Germany at the end of 1994. 3/

CHART I-1
CHART I-1

Germany Output and Unemployment

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: Deutsche Bundesbank; and IMF staff estimates.1/ Based on an estimated production function in which factor inputs are set to their assumed full employment levels.2/ Data through 1991 estimated on the basis of official unemployment rate as a percentage of dependent labor force.

Regional developments remain quite disparate, though less so than in the past. The broad trends in the all-German data are all but determined by developments in western Germany, which accounts for some 90 percent of all-German GDP. West German output reached a trough in the first quarter of 1993, and grew by 2 1/4 percent in 1994. Its recovery has followed the pattern of previous cycles, starting with exports and spreading to investment (Chart I-2). Eastern Germany, by contrast, has been growing rapidly since 1991, following the output collapse that occurred with unification, with growth reaching over 9 percent in 1994. Investment, and especially construction, has been the main driving force here. While east German “exports” (including to western Germany) have been growing rapidly recently, their level remains very low and their contribution to growth similarly small. Fiscal consolidation has put a damper on consumption in both parts of Germany, but higher wage increases in the east have allowed consumption there to grow somewhat faster than in the west.

CHART I-2
CHART I-2

Western Germany Components of Demand During Recessions 1/

(Peak=100)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: Deutsche Bundesbank.1/ Data are seasonally- and calendar-adjusted, and in 1991 prices.2/ 1974 quarter one for 1974-75 recession; 1980 quarter one for 1980-82 recession; 1992 quarter one for 1992-93 recession

Mirroring trends in the components of demand, sectoral developments have also been distinct in western and eastern Germany. In western Germany, the manufacturing sector was the centre of cyclical weakness, with output dropping by 8 percent in 1993, before recovering by 3 1/4 percent in 1994 (Table I-1). In eastern Germany, growth has been led by the construction sector, which has registered growth in excess of 20 percent in each year since 1991, as well as by services. However, with the improvement in export performance, the manufacturing sector too has been gaining momentum.

Table I-1.

Germany: Output in Manufacturing and Construction

(Percentage changes at 1991 prices) 1/

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Source: Deutsche Bundesbank.

Data are adjusted for the number of working days in each quarter.

Percent change over 1994 Q1. Data for manufacturing are subject to large margins of uncertainty--see caveats in text.

In early 1995. both western and eastern Germany seemed well-poised to continue on their respective growth paths. However, the economy was then confronted by a sharp nominal appreciation of the deutsche mark (translating into a 5 ½ percent real effective appreciation between December 1994 and June 1995, most of it during February), which brought with it significant risks to exports and thereby to investment and to the recovery in general.

Unfortunately, this key event coincided with the emergence of what might be termed a statistical vacuum. Severe lags in data availability arose from the beginning of 1995, as the coverage of many statistics shifted from a west German to a united German basis, and sectoral classifications were brought into line with EU standards. No national accounts are yet available for the first quarter of 1995, and other real sector data that have been released are likely to be subject to substantial revisions.

For what they are worth (and the Federal Statistical Office has cautioned against putting too much credence on them), industrial production data suggest a decline in the early months of 1995; but surveys by the Ifo economic research institute show capacity utilization in west German manufacturing rising further in the first two quarters of 1995 (from 84.6 percent in December 1994, to 86.1 percent in June 1995). Output in the west German construction sector–where the data are more reliable, as the changeover to EU-standard sectoral classifications will not take place until 1996–declined significantly in the first quarter of 1995, but part of this fall was probably due to bad weather conditions. Other indicators too are mixed, as will be noted below. All in all, it would seem that growth continued in the first half of 1995, though probably at a somewhat slower pace than during 1994. Leading indicators recorded a marked deterioration in the wake of the appreciation, but have shown signs of stabilizing.

b. Aggregate demand

Following the pattern of previous recoveries, growth was initially led by exports (Chart I-3, and Table I-2). After registering a fall of 6 percent in 1993, exports rose by 7 percent in real terms in 1994, and by close to 10 percent during the course of the year. 1/ The strengthening of exports was underpinned by growth in the US, the UK, and some developing countries, and later in the rest of continental Europe, as well as by important restructuring efforts in industry, which yielded large productivity gains. The volume of foreign orders, at the end of 1994, stood 18 percent above its level at end-1993, with a good part of this rise having come in the last four months of the year.

CHART I-3
CHART I-3

Germany Exports and Exchange Rate

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Sources: Deutsche Bundesbank; Bundesministerium fuer Wirtschoft; and IMF, International Financial Statistics.1/ Based on relative normalized unit labor costs in manufacturing.2/ Three-month moving average. Western Germany before July 1990.3/ Western Germany. Breaks in series January 1991 and January 1995. Changes in reporting procedures cost doubt on the reliability of data from January 1995 onward.4/ Percentage of firms surveyed expecting an increase in exports, less percentage expecting a reduction.5/ Percentage of firms surveyed expecting on improvement In their situation, less percentage expecting a deterioration.
Table I-2.

Germany: Main Expenditure Components of GDP

(Percentage changes from a year ago)

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Source: Statistisches Bundesamt.

Contribution to the growth of GDP.

More recently, export prospects have been clouded by the marked appreciation of the deutsche mark. Like other developments, export performance in the early part of 1995 is difficult to assess. No official data on export volumes have been released, but values and (not very reliable) price indices suggest a pause in export growth during the first four months of the year. Nevertheless, the strong growth in foreign orders toward the end of 1994 points to significant increases in exports still in the pipeline. The official data on export orders, for their part, show a gradual and significant weakening from end-1994 through April 1995, with a pick-up in May. These data, however, are bedeviled by problems related to the change in sectoral classification. Surveys of export orders in the engineering and automobile industries (representing some of Germany’s most prominent exports) have as usual produced volatile results, but not such as to suggest a worsening trend during the first half of the year--quite the opposite in the case of the automobile industry. Export expectations, which had begun to weaken in late 1994, fell sharply from February onward, but stabilized in May. 2/ Business confidence followed a similar pattern.

The various components of private fixed investment have shown a mixed pattern (Chart I-4). In eastern Germany, sharp increases in investment (especially in construction, but also in machinery and equipment) have been the mainstay of rapid growth since it began. Nor was the picture for investment uniformly negative in western Germany even during the recession, which saw solid growth in residential construction, resulting from an immigration-related backlog in housing demand. In 1994, housing construction was further boosted by temporary tax concessions, so that it rose by close to 9 percent. As expected, residential construction orders in western Germany dropped sharply in the first quarter of 1995, when the tax concessions expired, but there remains a backlog of orders to fill.

CHART I-4
CHART I-4

Germany Domestic Demand 1/

(DM billions, 1991 prices)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: Deutsche Bundesbank; and IMF staff estimates1/ Seasonally and calendar adjusted.

At the same time, business investment in western Germany was one of the main factors behind contracting domestic demand during the recession. In 1993, it fell by 14 percent in real terms--an absolute amount greater than the entire reduction in west German GDP. However, as capacity utilization neared its long-run average, business investment began to turn around in the latter part of 1994, with year-on-year growth in real terms reaching 2 ½ percent by the end of the year. According to the latest survey of investment intentions, conducted in March-June 1995 (after the exchange rate appreciation, though perhaps before firms had had time to take it fully into account in their plans), manufacturing firms are planning to increase their investment by no less than 12 percent in real terms in 1995. Thus despite the appreciation and the fall in business confidence that followed it, fixed investment still seems set to take over from exports some of the role of supporting the recovery.

Private consumption, in the meantime, has remained subdued in the wake of tax increases, wage restraint, and persistently high unemployment. Real household disposable income is estimated to have risen only a little in 1994, after falling in 1993. 1/ As households smoothed their consumption patterns in the face of these setbacks, and as interest rates declined, the saving ratio, which had already dropped by ¾ percentage point in 1993, fell further by perhaps 1/2 percentage point. Real private consumption thus grew modestly (1 ¼ percent) in 1994 (Chart I-4).

There is little information available on developments in private consumption thus far in 1995. Retail sales--the data for which are subject to considerable uncertainties due to the changeover in statistical methods--have been erratic, but have generally hovered around their level of the second half of 1994. In general, consumption is likely to have remained subdued, despite rather higher wage increases than last year, because of the weakness of employment and the reimposition in January 1995 of the 7 1/2 percent “solidarity” surcharge on income tax. Consumer confidence, which had climbed steeply through the third quarter of 1994, has since remained fairly stable.

Both public consumption and public investment, meanwhile, have been held back by fiscal consolidation. Public consumption rose a modest 1 1/4 percent in real terms in 1994, while public investment grew by only 3/4 percent.

Thanks to the strengthening of investment in particular, and to the usual contribution from stockbuilding in the early stages of a recovery, total domestic demand rose by a healthy 2 1/2 percent in real terms in 1994. In turn, the growth in demand brought a rise in imports, by 6 percent in real terms, following a contraction by a similar amount in 1993. 2/ Early indications from import values and price indices suggest that the volume of imports in the first few months of 1995 stagnated, but it was still some 6 percent higher than a year earlier.

On balance, for Germany as a whole, the foreign sector made a small (1/4 percent of GDP) positive contribution to growth in 1994. However, eastern Germany’s heavily negative, and still deteriorating, foreign balance looms large in this result: in western Germany alone, in keeping with the role of exports in boosting the recovery there, the foreign balance made a contribution to growth of 3/4 percent of GDP.

2. Employment and unemployment

The flipside of the major restructuring efforts and productivity improvements in industry has been that unemployment has declined disappointingly slowly as the recovery has taken hold (see Chart I-1).

In western Germany, unemployment (seasonally adjusted) reached a peak of close to 2.6 million people, or 8.3 percent of the labor force, in May 1994. Net job losses had by then been occurring uninterruptedly for over two years, to total some 900,000, or 3 percent of total employment. Job losses continued, though at a slower pace, throughout the remainder of 1994 and into 1995, before employment finally appeared to stabilize in April 1995. At the same time, and reflecting the usual cyclical response of the labor force, unemployment declined by some 60,000 people (the equivalent of less than 0.2 percent of the labor force) from its peak in May 1994 to February 1995. Half of this decline, however, was undone in the following four months as unemployment crept back up, probably in response to the twin shocks of the exchange rate appreciation and higher-than-expected wage increases, and the accompanying uncertainty and erosion of business confidence.

Developments have recently been rather more encouraging in eastern Germany. Following its collapse after unification, employment appears to have reached its trough around the turn of 1993-94, and most recently (April 1995) its year-on-year growth rate has reached 2 1/2 percent. At the same time, the number of these workers who were on short-time work has fallen further. Admittedly, about half of the growth in employment over the past year has been in jobs supported by active labor market policies. But it is clear that the long-awaited turnaround in the east German labor market has taken place. Reflecting the rise in employment, unemployment has fallen noticeably, by some 170,000 (about 2 percent of the labor force), between the first half of 1994 and the first half of 1995. Nonetheless, unemployment remains high, at 13 1/2 percent (seasonally unadjusted) in June 1995.

3. Wages

The weak labor market in 1994 brought considerable wage restraint (Chart I-5). In western Germany, negotiated hourly wage increases averaged 2 percent, compared with inflation of 3 percent, and, because of reductions in hours, monthly wages rose a mere 1 3/4 percent. In parallel, in eastern Germany, the process of wage convergence with the west slowed down significantly. At an average 9 percent, negotiated hourly wage rises remained high, but they were only about half as high as those registered the year before. Here again, monthly wage increases, at 7 1/2 percent, fell short of the hourly increases negotiated.

CHART I-5
CHART I-5

Germany Wages and Inflation

(Percent change from a year ago)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: Deutsche Bundesbank; and IMF staff estimates.1/ United German CPI is calculated from western and eastern CPIs, using the weights of east and west in total private consumption.2/ Western Germany.3/ Western Germany through 1990, united Germany thereafter.

Of potentially even greater significance in the 1994 wage round were path-breaking agreements in a few sectors to increase flexibility in wages and in working practices. The metal-working and chemical industries agreed on “corridors” for working hours, whereby within the corridor weekly working time could be shortened or lengthened with proportionate changes in pay. In addition, the chemical industry agreed to allow new recruits to be paid (for a year) wages 5-7 1/2 percent below the negotiated tariff, and 10 percent below if they were recruited out of long-term unemployment.

The 1995 wage round, however, took a rather different course. A pace-setting agreement in the west German metal-working sector, concluded just prior to the exchange rate appreciation, provided for monthly wage increases of 4 percent in 1995, and 3 percent in 1996 (by way of exception, this agreement covered two years). It also reaffirmed a reduction in weekly working time to 35 hours, to be implemented in October 1995, so that hourly wages will rise on average by 4 3/4 percent in 1995 and by 5 percent in 1996.

As is usually the case, the headline monthly wage increase in the metal-working industry served as a benchmark for other sectors in western Germany; but in the absence of widespread agreements on reductions in hours, hourly wage increases elsewhere were generally kept in the range of 3 1/2 to 4 percent. Public sector employees in the west settled for an increase of 3 percent in 1995. The average negotiated hourly wage increase, economy-wide in western Germany, is thus in the neighborhood of 3 1/2 percent--well above the 2 percent of 1994, despite inflation that is now about a percentage point lower than it was then.

In eastern Germany, the process of wage convergence continues, at a pace that varies from sector to sector. In the key metal-working industry, tariff wages were raised from 87 percent to 94 percent of the west German level in mid-1995, so that--taking into account wage increases in the west--they will have risen over 15 percent during 1995. Many employers in the east, though, continue to pay below-tariff wages. In surveys conducted in early 1995, one third of enterprises, accounting for 16 percent of east German employment, reported paying wages below the tariff. 1/ Unlike in western Germany, where most firms pay above-tariff wages, only 6 percent of east German enterprises, accounting for a similar fraction of employment, reported paying wages above the tariff. Only 27 percent of employers in eastern Germany were found to belong to employers’ associations, and one third of these were considering revoking their membership. 1/

There were virtually no further advances toward flexibility in wages and working practices in the 1995 wage round. An exception to this was the adoption, in the chemical industry (traditionally the most radical), of a clause that would permit a firm to “opt out” of full payment of the Christmas bonuses stipulated in the collective agreement, subject only to the agreement of the firm’s Workers’ Council. This move, while minor in itself, does represent a departure from the traditional pattern whereby “opt-outs” have had to be ratified by the trade union (which is less likely to grant approval than the workforce itself, if, for instance, jobs are threatened).

4. Prices

Consumer price inflation had proved surprisingly resilient during the recession (Chart I-5, and Table I-3). While, in western Germany, producer prices for goods stabilized as early as 1992, consumer prices continued to rise under the influence of increases in the cost of housing (related in part to east-west migration), rises in the prices of services provided by cash-strapped local authorities, and indirect tax increases (particularly the January 1994 increase in the tax on mineral oil). On average in 1994, CPI inflation still amounted to 3 percent, down from a (year-on-year) peak of 4 3/4 percent in early 1992.

Table I-3.

Germany: Inflation

(Percentage change from a year ago)

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Source: Deutsche Bundesbank; and staff estimates.

Based on staff estimates of the impact of the mineral oil tax increase in January 1994.

April-May 1995 over April-May 1994.

By late 1994, however, the (three- and six-month) annualized rate of CPI inflation was running at 2 to 2 1/4 percent, a level near which it stayed in the first few months of 1995. An uptick in inflation in June 1995 was associated mainly with a rise in travel prices--which may have been somewhat overstated in the index, which does not take discounts into account--and preliminary data suggest that inflation went back to its earlier pace in July.

CPI inflation in eastern Germany, which was for years well above the west German rate, has declined noticeably as the eastern price level has approached that of the west. Since late 1994, east German CPI inflation has been running at levels comparable to, or below, west German ones–although one more increase in eastern rents took effect on August 1, 1995, and will probably temporarily push eastern inflation back above the western level.

In the meantime, (west German) producer prices began to edge up during 1994, with their (three-month) annualized rate of increase reaching 3 1/4 percent in February 1995. Rises in import prices, and particularly increases in commodity prices, played an important role in this regard. By December 1994, import prices--which had fallen almost continuously from mid-1991 to late 1993--stood some 2 1/4 percent above their level of a year earlier. The sharp appreciation of the deutsche mark, however, provided relief on this front, and import prices fell a cumulative 1 1/2 percent between January and May 1995. In turn, import prices provided relief for producer prices, which rose very little between February and May.

II. The Public Finances

Over the past two years, Germany has made considerable further progress in addressing the budgetary consequences of unification. The general government deficit has been reduced to 2 1/2 percent of GDP and off-budget borrowing substantially curtailed. Corrected for the economic cycle, the underlying deficit is even smaller and the public debt ratio, which has ballooned in recent years, has probably now reached its peak (Chart II-1). Progress on the institutional front has also been made with the new Laender being integrated into the revenue sharing arrangements between the Federal Government and the Laender as of this year. Responsibilities for servicing unification-related debt have been clarified and the cost to the public accounts made more transparent.

CHART II-1.
CHART II-1.

Germany General Government: Deficits and Debt 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Sources: Data provided by the authorities; and IMF staff estimates.1/ Data before 1991 are for western Germany only.

Fiscal policy continues to be oriented toward completing the job of fiscal consolidation. At the same time, reducing the high tax burden, itself partly a legacy of the success to date in reining in the budget deficit (Chart II-2), has moved up the list of policymakers’ priorities. Sizable tax cuts are the main item on the 1996 budget agenda--although for the most part the timing and shape of these cuts have been dictated by constitutional court rulings. Provided there is continued restraint on expenditure growth at the lower levels of Government, the draft budget proposal would accommodate the tax cuts without a rise in the general government structural deficit, even though the federal deficit would widen somewhat. Over the medium term, the aim of fiscal policy is to limit expenditure growth to no more than 3 percent a year (about 1/2 percent a year in real terms). Under the authorities’ macroeconomic projections, this would bring the ratio of expenditure to GDP back to the level in western Germany immediately prior to unification and provide room for both a reduction of the general government deficit to 1 percent of GDP in 2000 and additional tax cuts equivalent to about 1 1/2 percent of GDP. Beyond 2000, Germany is expected to face considerable pressures on social spending associated with a rapidly aging population.

CHART II-2.
CHART II-2.

Germany General Government Revenue and Expenditure 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: Statistisches Bundesamt; and data provided by the authorities.1/ Data for western Germany only before 1991.

1. Institutional developments

The territorial authorities comprise the Federal Government, the states or Laender, and the local authorities (Gemeinden, plus a number of subsidiary budgets or special funds, which for the most part grew out of the process of unification. The general government sector comprises the territorial authorities and the social security funds.

At the beginning of 1995, the temporary agreement in the Unification Treaty for the funding of the new Laender was replaced by more permanent arrangements. The German Unity Fund (GUF), which was set up as a temporary conduit for resources to the new Laender to compensate for their low tax base, ceased current operations and the new Laender were formally integrated into Germany’s system of revenue sharing. 1/ At the same time, unification-related debt was gathered into a new fund, the Inherited Debt Fund (Erblastentilgungsfonds). The new fund took over, at the beginning of 1995, DM 102 billion in debts of the Credit Fund (Kreditabwicklungsfonds) and DM 205 billion in debts of the Treuhand privatization agency, which was wound up at end-1994. In addition, just over DM 30 billion in debts of eastern German housing enterprises was incorporated in mid-1995. The Treuhand and housing debt, together amounting to nearly 7 percent of GDP, had formerly been outside the general government sector.

The Federal Government is a net loser in financial terms from the new arrangements, which were agreed in 1993 under the so-called Solidarity Pact. 2/ While it will no longer make substantial transfers to the GUF, it will receive a lower share of VAT revenue, provide additional transfers to other levels of government (mainly in the east), contribute the bulk of the financing for the new Inherited Debt Fund, and finance the three successor companies charged with tying up the Treuhand’s unfinished business. However, the re-imposition of the solidarity surcharge on income taxes is expected to limit the net cost of the new arrangements to the Federal Government to about DM 13 billion in 1995. 3/ From the beginning of 1996, the federal budget will also bear the full cost of financing the deficit of the Railway Fund (Bundeseisenbahnvermögen) that arises from servicing railway debt and pension liabilities.

At the lower levels of government, the western Laender are also (small) net losers out of the Solidarity Pact: although they gain additional VAT revenue and save on transfers to the GUF, they will have to make substantial equalization transfers to the eastern Laender under Germany’s system of resource pooling among states. By contrast, the financial position of the eastern Laender is improved.

In other institutional developments, the Post Office (Bundespost) and telephone company (Deutsche Telekom) were converted from public enterprises to public limited companies in 1995. Currently, both remain 100 percent publicly owned, although it is the intention to privatize part of Deutsche Telekom next year and use the cash raised from the sale to capitalize the corporation. Finally, a new long-term nursing care fund was added to the social security sector in 1995.

2. Developments in 1994 1/

Fiscal consolidation continued in 1994. The authorities’ Savings, Consolidation and Growth Program, in conjunction with very low public sector wage increases, provided the basis for expenditure restraint. 2/ In addition, revenues were augmented by an increase in petroleum taxes. Against a background of an unexpectedly strong resumption of economic growth after the 1993 recession, the consolidation efforts were reflected in a decline in the general government deficit to 2 1/2 percent of GDP from 3 1/4 percent in 1993. The 1994 outcome for the general government deficit was 1 percent of GDP below that anticipated in Germany’s EU Convergence Plan of November 1993. Allowing for the considerable slack still existing in the economy the general government structural deficit is estimated to have been about 1 1/4 percent of GDP in 1994. However, on top of this, extra-budgetary borrowing by the Treuhand amounted to over 1 percent of GDP.

Owing in part to the unexpected strength of the economic recovery--at the time of the draft budget, real GDP growth in 1994 was projected to be only 1 to 1 1/2 percent, or less than half the eventual outcome--the federal deficit fell some DM 20 billion (0.6 percent of GDP) short of original estimates. Favorable cyclical factors were most evident in net savings of DM 3-4 billion in transfers to the unemployed and higher-than-expected tax revenue. The federal budget also benefitted from one-time revenues from higher Bundesbank profits, asset sales, and income from state-owned firms in the east.

The deficits of the Laender and local authorities also fell short of the 1994 Financial Plan estimates and the collective deficit of the lower levels of government remained broadly unchanged from its 1993 level. Expenditure growth was limited to under 2 percent in the western Laender and local authorities mainly because low pay settlements kept growth in personnel expenditures (which represent about 40 percent of the total budget) in check, and because of cuts in investment spending. Expenditure growth in the eastern Laender was somewhat faster, in large part because further wage catch up to western levels added considerably to personnel expenditures. However, in the eastern local authorities expenditure was unchanged from 1993 levels, as the effects of wage catch up were offset by sizable job cuts. Even so, staffing levels at the local level remained well above west German norms (see tabulation below). The deficit of the special funds of the territorial authorities shrank by DM 5 billion, to DM 10 billion, owing to a sharp reduction in borrowing by the GUF (as planned), which was only partly offset by the new Railway Fund recording a DM 5 billion deficit.

Regional Population per Public Worker 1/

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Staff estimates based on data supplied by the Ministry of Finance.

The social security funds remained in surplus equivalent to about 1/4 percent of GDP in 1994. A sizable increase in contribution rates (from 17.5 percent to 19.2 percent) enabled the pension funds to reduce their overall deficit despite rapid growth of expenditure in eastern Germany due to further adjustment of pension rates to western levels and a reduction of the processing backlog. 1/ Despite the deficit, the pension funds’ fluctuation reserves--which had risen sharply in 1990-92--remained comfortably above the required statutory level of cover for one month’s expenditure. The reduced deficit of the pension funds was counterbalanced by a decline in the surplus of the health funds, which experienced a strong rebound in expenditure growth following a fall in expenditure in 1993, the year when health reform was introduced. 2/ Net borrowing by the Treuhand, in what was its last operational year, amounted to nearly DM 40 billion or about 1 1/4 percent of GDP.

3. Developments in 1995

A further significant withdrawal of fiscal stimulus is taking place this year. The main source of withdrawal is the reintroduction of the 7 1/2 percent “solidarity” surcharge on income taxes, expected to generate DM 26 billion (3/4 percent of GDP) in additional revenue. An increase in the tax on insurance (from 12 to 15 percent) and a doubling of the wealth tax on most assets to 1 percent will raise a further DM 4 billion (0.1 percent of GDP). The tax increases will broadly offset the cost to the territorial authorities of servicing the newly transferred debts of the Treuhand and eastern German housing sector and a decline in the surplus of the social security funds, leaving the general government deficit unchanged at 2 1/2 percent of GDP. As the economy is still estimated to be operating below potential, the general government structural balance would be about 1 1/2 percent of GDP. While this would be a little higher than in 1994, it would be a more representative measure of the underlying fiscal position because sizable off-budget borrowing by the Treuhand would have been eliminated. Indeed, including the effect of eliminating this borrowing, the amount of fiscal withdrawal would be close to 1 percent (see Annex). Gross public debt is expected to rise to 58 percent of GDP at end-1995, compared with 50 percent at end-1994, but the rise is almost fully accounted for by the assumption of the Treuhand and housing debt.

The 1995 federal budget, which only received parliamentary approval in early June 1995, calls for a deficit of DM 49 billion–roughly unchanged from the 1994 outturn despite the additional net burden to the Federal Government of the institutional changes described in section 1 above. 1/ The revised budget target is some DM 20 billion below the draft budget estimate, which had been formulated in the summer of 1994 when it was still expected that the economic recovery would be weak and the 1994 deficit outturn considerably higher. In addition, the 1995 federal deficit will benefit from one-time revenue gains of about DM 13 billion from the return of unused cash reserves from the Treuhand and two east German banks that are being privatized.

The authorities expect the lower levels of government to reduce their collective deficit in 1995--the eastern Laender and local authorities significantly so on account of the more generous intra-government transfers they will receive. In the case of the western Laender, this will require growth in expenditures (excluding the effect of higher transfers to the east) to be limited to 3 percent, a limit that appears feasible in light of the latest public pay settlement. 2/ The new long-term nursing care fund is expected to generate some savings on social assistance for the local authorities. The deficit of the special funds is expected to remain at DM 10 billion as an increase in the borrowing by the Railway Fund (to DM 9 billion) would be offset by the elimination of the deficit on the German Unity Fund.

Official estimates anticipate a decline in the surplus of the social security funds in 1995. Following a partial reversal (to 18.6 percent) of last year’s increase in contribution rates, the pension funds are expected to experience a rising deficit that is to be financed by a further drawdown in reserves. The surplus on the health funds is expected to dwindle, helped by a reduction of the contribution rate to 13.0 percent in 1995 from 13.2 percent in 1994. However, the new long-term care fund is expected to show a surplus of the order of DM 5 billion largely because contributions, levied at a rate of 1 percent, went into effect at the beginning of the year but benefits (for outpatient care only) were not available until April 1. Benefits for inpatient care will begin on July 1, 1996 when the contribution rate is to be raised to 1.7 percent.

4. 1996 budget plans

The 1996 budget agenda is dominated by the need to accommodate two rulings by the Constitutional Court that imply significant revenue losses. The first, dating from a decision in September 1992, mandates that subsistence income should be exempt from taxation. The authorities’ proposals in this regard would cost about DM 16 billion (1/2 percent of GDP). 1/ The second more recent ruling outlaws the coal penny (Kohlepfennig), a tax on electricity use for financing subsidies to the coal industry, that would have raised about DM 7 billion (0.2 percent of GDP) in 1996. In addition, the authorities have sanctioned an increase in child benefits at a budgetary cost of DM 4-5 billion (just over 0.1 percent of GDP), which can be taken in the form of either a higher tax allowance or higher direct benefits (Kindergeld). The revenue loss of these measures is thus expected to be on the order of DM 30 billion (3/4 percent of GDP), of which two thirds would fall on the Federal Government. 2/ However a number of measures to eliminate tax loopholes would claw back about DM 4 billion of this. 3/ Proposals for a third stage of business tax reform have so far been rejected by Parliament because no consensus could be reached on how to compensate the local authorities for the scrapping of the local business capital tax (Gewerbekapitalsteuer), even though the lost the territorial authorities as a whole would have been made up through less generous depreciation allowances. 1/

Against this background, the draft 1996 federal budget calls for tight expenditure restraint. Adjusted for the definitional changes associated with the new system for distributing child allowances, expenditure would be 1.3 percent below the expected 1995 outturn. Some of this decline would reflect cyclical factors. But even after deducting the most obvious source of cyclical saving--the expected elimination of DM 7-8 billion of transfers to the Federal Labor Office--other federal expenditure would barely grow in nominal terms and would decline by 1 1/2 to 2 percent in real terms. Measures for restraining expenditure include: personnel reductions of 1 percent, on top of decisions not to fill vacancies from 1995 and to eliminate some so-called temporary jobs; cuts in investment, including a freeze on railroad spending at 1994 levels; and cuts in unemployment assistance. 2/ Expenditure restraint would limit the increase in the federal deficit in 1996 to Ml 11 billion, taking it to DM 60 billion, despite the DM 20 billion cost of the tax cuts and the abolition of the coal penny, a reduction of DM 15 billion in the exceptionally high level of nontax revenue received in 1995, and the cost of taking over the financing of the Railway Fund (DM 10 billion).

Official plans assume that the Laender and local authorities will limit expenditure growth in 1996 to the medium-term target of 3 percent. If this is achieved and federal budget plans met, the deficit of the territorial authorities (administrative basis) would be unchanged at just under 3 percent of GDP. After taking into account differences in accounting practices as well as an expected surplus of 1/4 percent of GDP for the social security funds, this would translate into a general government deficit of about 2 percent of GDP on a national account basis. 3/ Under staff macroeconomic assumptions (which are very close to official projections), this would imply a 1/4 percent of GDP decline in the structural deficit, to 1 1/4 percent of GDP. By this measure, fiscal policy would be contractionary, but the amount of withdrawal would be very small by comparison with the experience of the past four years.

5. Longer-term demographic pressures

A rapidly aging population is likely to place considerable strains on the public finances in the first quarter of the next century. These strains will be felt most keenly by the social security funds, where future pension liabilities are unfunded and where demand for age-related medical care is likely to increase substantially. Pensions for public sector workers will also be a source of rising expenditure pressure for the territorial authorities. Under current institutional arrangements, the already high social security contribution rates would have to rise steeply to finance the future expenditure pressures. This suggests both a need for early reform of the social security system and a need to continue the process of fiscal consolidation in order to provide a sound fiscal base to meet longer-term challenges.

Demographic projections portray a rapidly aging population after the year 2000. Under various scenarios for immigration, the proportion of the population aged 60 and over would increase to 33-35 percent by 2030, from 23 percent in 2000 and 20 1/2 percent in 1992 (Table II-1). Over the same period, the number of persons of prime working age is projected to shrink in absolute terms. Thus, despite a projected decline in the proportion of the population aged under 20, the overall dependency ratio would increase considerably: by 2030 the total number of children and old people would roughly equal the number of persons of prime working age compared with a dependency ratio of 0.72 in 1992. These trends in demographic profile are not unique to Germany, but are rather more pronounced than in many other OECD countries.

Table II-1.

Germany: Demographic Trends

(In millions)

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Sources: Statistisches Bundesamt, Wirtschaft und Statistik, July 1994; and OECD Social Data Bank, 1988.

Ratio of population aged under 20 and 60-and-over to population aged 20 to 60.

Rising outlays and a shrinking tax base will put a double squeeze on the finances of the social security funds, despite the passage of pension reform legislation in 1992. Key elements of that legislation included: linking the adjustment of pensions to changes in net, as opposed to gross, wages; phasing in between 2001 and 2012 a retirement age of 65 for both men and women; 1/ and linking the adjustment of the annual federal grant to the pension funds to developments in the contribution rate as well as changes in gross earnings. Even so, projections made by the Social Advisory Board in July 1994 estimate that, in the absence of further reforms, the contribution rate for the pension funds would have to rise to about 27 percent in 2030, compared with 18.6 percent in 1995. This estimate is broadly replicated in scenarios prepared by a private research group, PROGNOS AG, which projected that the contribution rate would have to rise to 25.5 to 27.8 percent by 2030, depending on various assumptions, particularly regarding immigration. 2/

Given the link between the federal grant and contribution rates, upward pressures on contribution rates would also place an expenditure burden on the Federal Government. A further direct fiscal burden of aging will come from a rising number of retired civil servants, whose pensions are the responsibility of the territorial authorities. The problem is especially great for the Laender and local authorities. Estimates suggest that, helped by rising life expectancy, the number of retired civil servants could increase by more than 50 percent to over 1.2 million by the year 2030.

An alternative way of looking at the impact of the aging population is to estimate the budgetary consequences if there were no increase in taxes or contribution rates to meet projected pension and health spending pressures. Estimates by the OECD (forthcoming Economic Survey). for example, show that with taxes and other expenditures unchanged as a percent of GDP, the general government primary balance would move from a surplus of 1 1/4 percent of GDP in 2000 to a deficit of nearly 5 percent by 2030. Because of unfavorable debt dynamics, the rise in the overall deficit would be even greater. Depending on interest rate assumptions, it would rise to 9 to 11 percent by 2030, when the net debt ratio would be more than twice its 1995 level.

ANNEX Fiscal Consolidation Since Unification

Developments in the cyclically adjusted general government balance since unification indicate a considerable fiscal adjustment effort, even though the actual deficit has remained in a fairly narrow range (2 1/2 percent to 3 1/2 percent of GDP). To derive the structural balance, revenues are scaled by the ratio of potential-to-actual output while unemployment benefits (benefit payments by the Federal Labor Office plus unemployment assistance paid by the Federal Government) are scaled by the ratio of the structural (NAIRU)-to-actual unemployment rate. In this way, the estimated structural balance compensates for weak tax receipts and unusually large expenditures on unemployment benefits when the economy is operating below potential, as it has been in the last few years.

From a position of balance in 1989, the general government accounts swung to a deficit of 3 1/2 percent of GDP in 1991, the first year after unification. Adjusted for an overheated economy, the structural deficit is estimated to have exceeded 5 percent of GDP--the swing to deficit being entirely due to an increase in structural spending to some 51 percent of potential GDP (Table II-2). In 1995, however, it is estimated that the structural deficit will have been reduced to 1 1/2 percent of GDP. Roughly two thirds of the underlying improvement in the fiscal accounts has been effected through revenue measures and one third through expenditure restraint.

Table II-2.

Germany: Structural Budget Balances

(In percent of potential GDP)

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Sources: Ministry or Finance; Bundesbank, Monthly Report, February 1995; and staff estimates.

Change in general government structural balance less Treuhand borrowing. A positive number represents a withdrawal of fiscal stimulus.

In percent of actual GDP.

Post Office only in 1994.

Actual minus potential output as a percent of potential output.

Nevertheless, the general government accounts do not give a complete picture of fiscal developments because of the sizable amount of off-budget public borrowing that has taken place since unification. In particular, borrowing by the Treuhand averaged just over 1 percent of GDP in each of 1991-94, while borrowing by the Railways and Post Office, largely to finance investment in eastern Germany, together averaged about 3/4 percent of GDP. The elimination by 1995 of much of this borrowing--or its assimilation into the accounts of the territorial authorities--implies that the consolidation effort since 1991 has been even greater than is measured by the decline in the general government structural deficit alone.

The winding up of the Treuhand at end-1994 had two particularly important consequences for the interpretation of fiscal developments in 1995. First, the Treuhand’s accumulated debt is now being serviced by the territorial authorities at a cost of approximately 1/2 percent of GDP a year--which is a measure, in some sense, of the permanent fiscal legacy of the Treuhand. The extra interest expenditures more than account for an estimated small rise in the structural general government deficit in 1995; i.e., under a consistent institutional coverage, the structural deficit would have fallen slightly in 1995. Second, other deficit-financed spending of the Treuhand of about 3/4 percent of GDP was eliminated in 1995. 1/ Since this would have a direct impact on economic activity it should be included in a measure of the fiscal withdrawal. Overall, the fiscal withdrawal would be of the order of 1 percent of GDP in 1995, made up of a small fall in the general government structural deficit (when adjusted for the accounting effect of bringing the Treuhand’s debt service cost on-budget), plus the elimination of non-interest Treuhand expenditures.

III. Monetary Policy and Developments 1/

Monetary policy is conducted within a framework of annual targets for broad money (M3) with the objective of achieving lasting price stability. Beginning in September 1992, and with the economy in recession, the Bundesbank began to reverse the earlier increases in official short-term interest rates that had been necessary to counter strong unification-related inflationary pressures. The process of lowering rates continued into the economy’s recovery phase–despite often conflicting signals from M3–but was halted in mid-1994. However, after official rates had been kept constant for about nine months, declining money supply and a steep appreciation of the deutsche mark provided grounds for a further cut in the discount rate in March 1995. The exchange rate has subsequently stabilized and there has been a modest resumption of monetary growth.

1. Monetary targets and the policy framework

Even though monetary growth has continued to be erratic, the Bundesbank has persevered in its practice of announcing target ranges for M3 reflecting its belief that over the medium term the relationship between M3 and inflation remains stable. The target range for 1995--which was reaffirmed in July 1995--is 4-6 percent, the same range as for 1994. It is based on growth of potential output of 2 3/4 percent a year, 2 percent inflation, and a 1 percent decline in trend velocity implying a point estimate for the annual average warranted growth of M3 of 5 3/4 percent. 2/ A downward adjustment was made to compensate for high average monetary growth in 1994, and the resulting target was expressed as a range, anchored as usual on the fourth quarter of the preceding year.

Two minor modifications to the target framework were made in 1995. The first was presentational: in the first few months of the target period, annualized monetary growth rates are now calculated and reported with reference to both the current and the previous year’s target base period. The objective is to provide perspective on fluctuations in M3 at the beginning of the year, which can be magnified out of all proportion when growth rates are annualized over a short time span. The second innovation was to increase the attention paid to developments in M3-extended in recognition of the potentially distortionary effects on the monetary aggregates of portfolio adjustments between money and near-money substitutes. 3/ This modification was motivated by the introduction in August 1994 of money market funds, which are now included in M3-extended but not in M3 on the grounds that, despite their liquidity, they are more in the nature of an interest-sensitive investment asset with no direct payment function. No formal target exists for M3-extended, but its development is now discussed (with a one-month reporting lag) in the Bundesbank’s monthly press releases.

The record of monetary targeting since unification has been poor. M3 overshot the target range in each of the three years 1991-93, with the amount of overshooting quite sizable in 1992 (Table III-1), The target was met in 1994, but only after a decline in M3 in the second half of the year reversed considerable earlier overshooting, while in the first six months of 1995, M3 growth has been way below its target range. The main problem for monetary targeting appears to be short-run instability of money demand. Over a long period of time, it is quite possible that money demand is stable, as was the case before unification: indeed, despite all the target overshooting in the early 1990s, M3 growth between the beginning of 1991 and mid-1995 has been at little more than a 6 percent annual pace–not much faster than growth of nominal GDP. 1/ But over shorter periods of time, M3 growth has clearly been very erratic (Chart III-1).

Table III-1.

Monetary Targets and Performance

(In percent)

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Based on period-average seasonally adjusted data, except for 1991, which uses an average of unadjusted end-month data.

Annualized growth rate from 1994:Q4 to June 1995.

CHART III-1.
CHART III-1.

Germany Monetary Policy Targets and Instruments

(In percent)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: Deutsche Bundesbank.1/ Annualized growth from fourth quarter of preceding year minus central target growth rate.2/ Monthly average data.

In other institutional developments, the Bundesbank lowered the minimum reserve requirement ratio for sight deposits from 5 percent to 2 percent, and for savings deposits from 2 to 1 1/2 percent, effective August 1, 1995. Ratios for time deposits remain at 2 percent. At the same time, banks will no longer be able to offset average domestic cash holdings against reserve requirements. The latest cut in reserve requirements was the third in as many years and was aimed at reducing the competitive disadvantage of German banks and the circumvention of reserve requirements via offshore deposits. Nevertheless, the Bundesbank remains committed to retaining minimum reserve requirements as a tool of monetary management and is lobbying for their use by the future European Central Bank. The lowering of reserve requirements would release DM 7 billion in bank liquidity, but this is to be siphoned off through the Bundesbank’s repurchase operations.

2. Developments in interest and exchange rates

In the middle of 1994, the policy of gradually lowering short-term official interest rates was halted and a new phase of stable rates began. At that point, official rates stood at roughly half their August 1992 peak levels: the discount rate had been reduced to 4 1/2 percent and the key securities repurchase (repo) rate to 4.85 percent. These rates were consistent with 3-month interbank rates of around 5 percent, a level deemed appropriate for economic conditions that were characterized by steady recovery and falling (albeit slowly) inflation. In the second half of 1994 and early 1995, inflation-adjusted short-term interest rates fluctuated in a 2 to 2 3/4 percent range, somewhat below the historical average of about 3 percent. The slope of the yield curve was relatively steep following the earlier cuts in short-term rates and the sustained increase in long-term bond yields during 1994, although this is not unusual during a phase of economic recovery. 1/

The final cuts in interest rates in the first half of 1994 were made despite exceptionally strong growth in M3 (Table III-2). This growth was attributed in large part to special factors, including the partial phasing out of tax concessions for owner-occupied housing and the extension of the interest withholding tax to overseas investment funds. The latter change resulted, in early 1994, in a sizable amount of funds that had formerly been recycled into the German capital market via Luxembourg being parked in domestic monetary assets. Moreover, a flat yield curve and the turbulence in international bond markets that began around the time the Federal Reserve started to tighten U.S. monetary policy in February 1994, deterred investors from moving into longer-maturity assets. In this context, the Bundesbank (encouraged by very low pay settlements in the Spring round) came to the conclusion that a cut in short-term interest rates could facilitate a resolution of the monetary “logjam” by steepening the yield curve and thus encouraging a revival of demand for “monetary capital” (i.e., longer-term liabilities of the banking system that are not included in M3).

Table III-2.

Growth in Monetary Aggregates and Main Counterparts 1/

(In percent)

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Source: Deutsche Bundesbank, Monthly Report and Saisonbereinigte Wirtschaftszahlen.

Growth rates are adjusted to correct for changes in statistical coverage.

End-month data for Ml and M2. Monthly average data for M3 and M3-extended, where the latter are calculated from end-month levels.

Excluding Bundesbank lending. Including lending in the form of securities.

This “perverse” interest rate strategy had the hoped-for impact on the money supply and M3 stabilized between April and October 1994, thereby helping to disperse the earlier liquidity overhang. In the final quarter of 1994, the money supply began to fall. By February 1995, M3 was significantly below its 1994 fourth quarter level and, from a longer perspective, had only grown at a 3.7 percent annualized rate since the fourth quarter of 1993. M3-extended also declined around the turn of the year. At the same time, the deutsche mark began to strengthen considerably against the U.S. dollar and major European currencies--notably the French franc, pound sterling, and Italian lira. The combination of falling money supply and an appreciating exchange rate led to a reappraisal of monetary conditions. Accordingly, the discount rate was lowered by 1/2 percentage point (to 4 percent) at the end of March 1995 and the repo rate was reduced by 35 basis points to 4.50 percent. 1/ No further changes in official rates have been made since, although on August 9, 1995, the Bundesbank allowed the repo rate to edge down by 5 basis points to 4.45 percent.

Since March, 3-month market interest rates have remained close to 4 1/2 percent. The deutsche mark has eased slightly from a post-war high of below DM 1.35 per dollar at one point in March 1995 to fluctuate around DM 1.40. Within Europe, the last discount rate cut helped ease tensions in the ERM and the French franc has recovered somewhat against the deutsche mark. Nonetheless, in nominal effective terms, the deutsche mark was, in June 1995, about 4 1/2 percent above its level at the end of 1994. M3 has been growing at a modest pace since March.

Bond yields have also declined significantly since the beginning of the year after having risen steeply during the course of 1994. Like last year’s rise--which saw 10-year bond yields increase from a historically low level of 5 1/2 percent at end-1993 to almost 7 1/2 percent in the final quarter of 1994--the decline in 1995 has been a global phenomenon. Also in common with last year, the latest swing in the German bond market has been less pronounced than in the U.S. market. As a result, the small negative differential that had existed for most of 1994 between German and U.S. bond yields has been reversed. In April-July 1995, 10-year bond yields settled around 6 3/4 percent, about 1/2 percentage point above U.S. yields.

3. Developments in money and credit

Stagnant and at times declining M3 provided the salient feature of much of 1994 and early 1995 as earlier distortions to the monetary aggregates gradually unwound. By the second quarter of 1995 it appeared that the adjustment was over and M3 was showing signs of recovery. Nevertheless, in June 1995, M3 was barely above its level in the fourth quarter of 1994 (the base period for the 1995 target). Credit growth remains relatively firm, although it has slowed considerably relative to its pace in 1993 and 1994.

The surge in the money supply that was partly due to tax factors peaked in April 1994 with M3 about 6 percent above its level in the fourth quarter of 1993. 1/ The surge mainly took the form of increased demand for short-term time and savings deposits at a time when rising bond yields encouraged a wait-and-see attitude on behalf of capital market investors. However, with the yield curve steepening (helped in May 1994 by a further cut in the discount rate), monetary funds began to flow into long-term assets and M3 stagnated in May-September 1994. In this period, there was a particularly pronounced flow out of demand deposits of less than four years. By contrast, demand for short-term savings deposits continued to expand, reflecting in part a more secular trend stemming from the introduction of savings accounts that pay more market-related (and attractive) interest rates. The main counterpart to the stagnation of M3 was a revival of monetary capital formation (mainly investment in bank bonds and long-term time deposits), which accelerated to a 10 percent annualized pace.

The introduction of money market funds (foreign-based in August 1994 and domestic-based in September 1994) had a further dampening effect on M3, which began to decline in the fourth quarter of the year. Demand for such funds was at first moderate but picked up sharply in December largely because money market funds were exempted from the 1/2 percentage point rise in wealth tax (to 1 percent) that took place at end-1994. 2/ Investment in money market funds totalled approximately DM 36 billion (DM 30 billion in German-based funds and DM 6 billion in foreign-based funds), or 1 3/4 percent of the stock of M3, in the fourth quarter of 1994. Coming on top of continuing underlying weakness in money demand, the accompanying switch out of monetary assets contributed to a (seasonally adjusted) 1 percent fall in M3 between September and December 1994. 3/ M3-extended, which includes money market funds, stagnated in the same period.

The money supply (and M3-extended) continued falling in January and February 1995, despite small net sales of money market funds. One possible contributory factor was the (correct) perception that a bond market rally was beginning; certainly monetary capital formation continued at a vigorous 12 percent annual pace in this period. In more recent months, with bond yields stable again, money growth has revived slightly and the pace of monetary capital formation has slowed.

Credit growth also slowed during 1994 and the first half of 1995. The slowdown was most pronounced in credit growth to the public sector, which had been growing at a 13-14 percent annual pace at the beginning of 1994 but which slowed to a 6-7 percent pace after the first quarter of 1994. Credit growth to private enterprises and households slowed more gradually, from around a 10 percent pace at the beginning of 1994 to 7 percent by end-1994, at which rate it continued to expand in the early part of 1995. Growth of private credit was fuelled primarily by lending for housing construction in 1994--up 13 percent--helped in part by the phasing out of tax concessions for the purchase of owner-occupied houses at end-1994. By contrast, bank lending to trade and industry rose by only 3 1/2 percent, while consumer credit expanded by 6 percent in 1994.

IV. The Balance of Payments 1/

1. The current account and the exchange rate 2/

With unification, Germany’s current account position shifted abruptly from large surpluses (4 to 5 percent of GDP) in the late 1980s, to deficits close to 1 percent of GDP in 1991-94 (Chart IV-1). From a savings-investment perspective, the shift to deficit reflected both the large investment demands of eastern Germany and a fall in national savings; the latter was mainly the counterpart, at first, to the deterioration of the public finances, but later also to a (at least partly cyclical) decline in household savings and business profits. A sharp appreciation of the deutsche mark in early 1995 has significantly affected the outlook for the balance of payments, and is likely to push the current account further into deficit.

CHART IV-1.
CHART IV-1.

Germany External Current Account

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Sources: IMF, WEO database.1/ Data before 1990 refer to western Germany.2/ There are data discontinuities in 1990.3/ Current account minus public savings-investment balance.4/ General government balance less Treuhand borrowing.

The current account deficit, which widened slightly to 1 percent of GDP in 1994 from 3/4 percent of GDP in 1993, appears to be structural in the sense that it cannot be fully explained by cyclical and other transient factors. On the one hand, Germany’s relative cyclical position probably contributed to the deficit: although imports were suppressed by the fact that the economy was operating below potential in 1994, the output gap in countries forming Germany’s main export markets was even larger on average, suggesting that exports may have been suppressed even more. On the other hand, the current account probably did not yet fully reflect the effect of a sizable appreciation of the deutsche mark in 1992. 1/

Germany’s current account would not be expected to remain in structural deficit in the long term. A return to surplus would be in keeping with Germany’s traditional role (as a mature industrial economy) of supplying net savings to the rest of the world. Moreover, as noted in section II.5 above, Germany’s population is projected to age more rapidly than that of other major countries implying that the need for additional savings now is perhaps even greater. 2/ Of course, the speed at which the current account should revert to its longer-run surplus position is a much more open question. Most estimates suggest that it will be 10-15 years before eastern Germany’s capital-output ratio and income level will have converged to western German levels. Accordingly, it would be appropriate for the process of adjustment to be drawn out, most probably to beyond the turn of the decade. Nevertheless, the sharp appreciation of the deutsche mark in early 1995 is unhelpful to the adjustment process and comes at a time when the effects of unification on the balance of payments ought to be waning.

The recent exchange rate developments come on top of concerns about Germany’s external competitiveness that had already arisen in 1992, when the deutsche mark had appreciated by about 6 percent in nominal effective terms (see Chart I-3). With German labor cost inflation running ahead of that in partner countries, the real effective exchange rate based on relative unit labor costs (ULCs) in manufacturing appreciated by about 10 percent in that year. Other indices, however--in particular, indices based on a wider coverage of the business sector, or on more general inflation indicators--pointed to a much smaller loss of competitiveness, of about half this amount. 3/ In addition, German exports rebounded strongly in 1994, suggesting that whatever decline in competitiveness had occurred had by then exerted most of its impact. Most importantly, this decline in competitiveness was in any event in line with the requirements of Germany’s saving-investment position, as it served to fuel an increased demand for imports and the diversion of some of western Germany’s exports to within the new, post-unification borders.

The most recent appreciation of the deutsche mark, however, has engendered new worries. After a small further appreciation during the course of 1994 (by December, the nominal effective exchange rate was about 1 1/4 percent above its year-average level), the deutsche mark jumped by 4 1/2 percent in nominal effective terms between December 1994 and June 1995, with most of this appreciation occurring during February. The appreciation was particularly marked against the US, the UK, and Italy--three of Germany’s main trading partners–as well as against Sweden and Spain (Table IV-1, and Chart IV-2). By contrast, against ERM members the deutsche mark appreciated rather less or not at all, and against Japan--an important competitor on emerging Asian markets–it depreciated by 5 percent. With German manufacturing ULCs tentatively estimated to have risen a little faster than those of competitors over this period, the corresponding appreciation of the (ULC-based) real effective exchange rate is put at 5 1/2 percent.

Table IV-1.

Recent Exchange Rate Changes with Respect to Germany’s Most Important Trading Partners

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Sources: IMF Information Notice System (INS); IMF International Financial Statistics: and IMF staff calculations.

Competitiveness weights used in INS, and based on Wickham, A Revised Weighting Scheme for Indicators of Effective Exchange Rates, IMF Working Paper WP/87/87 (December 1987). The weights capture the relative importance in German trade of the respective country, as a destination market or supplier, in trade in manufactures and in non-oil primary commodities.

CHART IV-2.
CHART IV-2.

Germany Competitiveness Against Selected Countries and Groups 1/

(1985=100)

Citation: IMF Staff Country Reports 1995, 100; 10.5089/9781451810295.002.A001

Source: IMF, Research Department.1/ Real effective exchange rates based on relative normalized unit labor costs in manufacturing.

The recent appreciation has had a marked impact on export expectations (see Chapter I), and is likely to affect export orders and export volumes later in 1995. Nonetheless, there are several reasons to think the likely loss of export market share will be kept within bounds. First, because so many imports, especially of raw materials, are priced in US dollars, the sizable appreciation against the dollar should translate into substantial declines in many import prices, and should give exporting firms relief on the cost side. 1/ Second, the commodity composition of German exports is likely to work in their favor in the current phase of world economic recovery. Investment goods account for over half of all Germany’s exports. And after falling by a cumulative 3 1/2 percent between 1991 and 1994, real fixed investment in Europe is expected to rise by over 5 percent annually in each of 1995 and 1996, and by 4 percent annually in the remainder of the decade. 2/ Finally, perhaps partly because of the prominence of highly differentiated investment goods among German exports, and thanks to their reputation for quality and reliability, many German products are subject to relatively price-inelastic demand. Continuous improvements in non-price factors in the past have also contributed to a strengthening of Germany’s world market share beyond what could be accounted for by the geographical and commodity composition of exports. 3/

In 1994, exports rebounded from their depressed (and possibly underestimated--see Chapter I) level of the previous year, expanding by 9 percent in value and almost as much in volume (Table IV-2). 4/ Following a surge in exports toward the end of 1994, there appears to have been a pause in export growth in the first five months of 1995.

Table IV-2.

Germany: Balance of Payments

(In billions of deutsche mark)

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Source: Deutsche Bundesbank, Monthly Report, Supplement 3.

Before July 1990, western Germany only. GDP used for 1990 is the average of western and united German GDP.

In Jan.-May 1994 and 1995, so-called “Supplementary trade” is included in the trade balance but not in exports or imports.

In Jan.-May 1994 and 1995, merchandise imports are c.i.f.

Exports to the buoyant US and UK economies, as well as to Italy, rose particularly strongly in 1994, but their growth tapered off during the year as the currencies of these three countries depreciated sharply against the deutsche mark (by between 4 percent and 9 percent during 1994), and other EU countries began to play a bigger role in German exports as recovery took hold across Europe. Exports to countries in transition and to developing countries were strong, rising at double-digit rates. The appreciation of the Japanese yen (by 6 1/2 percent against the deutsche mark on average in 1994) no doubt contributed to export growth of over 20 percent to the newly-industrializing economies of Asia, and to robust growth of exports to Japan itself (up 14 percent), despite the sluggishness of the Japanese economy.

The global recovery provided a boost to Germany’s main exports, of investment goods and producer goods, which together account for 80 percent of total exports and which grew in 1994 by 10-13 percent. Exports of consumer goods, including food, also rose, but much more slowly (by 5 percent).

Imports too rose significantly in 1994, by some 8 percent in value and only a little less in volume, as demand revived. Early indications are that the volume of imports in the first five months of 1995 broadly stagnated. EU countries were the main beneficiaries of the increased demand for imports in 1994, but countries in transition too succeeded in sharply increasing (by almost 20 percent) their exports to Germany, albeit from a still rather low base.

While the trade balance strengthened in 1994 (to DM 82 billion or 2 1/2 percent of GDP), the deficit on nonfactor services continued on the rising trend it has exhibited for many years, reaching almost DM 63 billion or close to 2 percent of GDP. 1/ The rise in the deficit was fuelled mainly by a continuing rise in expenditures on foreign travel, still reflecting in part the pent-up demand for travel by east Germans, and by a further decline in receipts from foreign military agencies for troops stationed on German territory. Similarly continuing its trend of the last few years, the factor incomes surplus dwindled further in 1994, to reach a mere DM 8 billion. The post-unification current account deficits have continued to erode Germany’s net foreign assets, and since a large part of the latter are denominated in US dollars, they suffered too in 1994 (in deutsche mark terms) from the appreciation of the deutsche mark against the dollar. In both the nonfactor services and factor incomes balances, the declining trends of 1994 appear to have continued in the first five months of 1995. 1/ The deficit on transfers rose slightly to DM 61 billion in 1994, reflecting higher net transfers to the EU.

2. The capital account

The 1994 current account deficit, of DM 33 billion, was more than financed by DM 57 billion in inflows on the capital account. 2/ Within the capital account, however, strong outflows at the long end offset strong inflows at the short end–the opposite pattern from the one that prevailed in 1993. The portfolio shift in 1994 was most likely driven by a worldwide shift in maturity preferences that accompanied the normalization and steepening of the yield curve. The effect of this maturity shift was particularly marked in the early part of the year, and some reversal was evident by the fourth quarter, when long-term capital inflows turned positive again and there was some outflow of short-term funds.

Following record inflows (over DM 200 billion) into German bonds in 1993, foreign interest in German bonds fell drastically in early 1994, as bond prices started falling. Interest revived sufficiently later in the year to offset the sizable net outflows experienced in the first half of 1994, but overall net inflows were less than DM 20 billion, and much of this amount is thought to have come from German investment funds in Luxembourg, which reinvested in German bank bonds some of the funds they raised in Germany from the sale of money market certificates. Net foreign investments in German equities were minimal, at DM 1 billion.

At the same time, German residents were increasingly attracted to portfolio investment abroad, which rose by over 60 percent to DM 86 billion. Foreign currency bonds, and especially--in light of the yield differential that prevailed throughout most of 1994--those denominated in US dollars, proved much more popular than the previous year, and outflows into foreign equities also increased. Money market funds of German origin, which were set up for the first time in August 1994 in Luxembourg, attracted sizable amounts of funds, accounting for an increased outflow into foreign investment fund certificates.

Foreign direct investment in Germany has generally been rather small, typically fluctuating between DM 1-5 billion annually, and indeed turned negative in 1994, as large losses (i.e. negative reinvested earnings) booked by foreign-owned firms swamped the usual small inflows. German direct investment abroad in 1994 remained at about DM 24 billion, the same as the previous year, but down significantly from the very high levels reached in the early 1990s, in the wake of the investment boom that followed the creation of the single European market. Overall, net long-term credits to enterprises and banks, with inflows of DM 14 billion, remained close to their level of the previous year.

The bulk of credit transactions in the balance of payments consists of short-term credit transactions, which swung from large net outflows in 1993 to large net inflows in 1994. In 1993, both banks and other private agents in Germany had engaged in a considerable build-up of short-term external assets--the counterpart to the enormous inflow into the German securities market, and, in the case of the nonbank sector, a reflection of the introduction of the withholding tax on interest income. By contrast, in 1994 enterprises and individuals built up more normal amounts of external assets, and banks drew down both assets and credit lines in order to finance outflows on the current account and the long-term capital account.

Data for the first five months of 1995 suggest that short-term capital inflows again gained momentum, while long-term inflows remained positive, as they had been toward the end of 1994. At DM 26 billion, total capital inflows in January-May were robust--going some way toward explaining the appreciation of the deutsche mark--but not massive, suggesting that the exchange rate also responded to a widespread reappraisal of the value of existing holdings.

With capital inflows more than financing the current account deficit, the net external assets of the Bundesbank rose (on a transactions basis) by about DM 12 billion during 1994. 1/ Unlike in 1992-93, when ERM crises had been reflected in major fluctuations in the level of reserves (of over DM 80 billion in September 1992, and over DM 40 billion in August 1993), the pattern of reserves during the course of 1994 was relatively smooth. In the six months through June 1995, when the exchange rate appreciated, reserves rose (again on a transactions basis) by DM 14.5 billion--an amount greater than in the whole of 1994, but still far smaller than at times in 1992-93.

V. Structural Issues

1. Labor market

The Government took a large number of initiatives in the area of labor markets last year. 1/ Most importantly, replacement ratios for unemployment benefits and unemployment assistance were reduced in January 1994; 2/ a new program of employment subsidies was introduced for unemployed persons finding work in selected sectors; restrictions on working time, including the prohibition of work on Sundays and holidays, were loosened; and private job intermediation was permitted.

In addition, the Government had proposed as part of the 1995 budget that the currently indefinite duration of unemployment assistance be curtailed to two years (for a total duration of benefits of three years). However, this proposal failed in Parliament. In the hope of nevertheless securing the budgetary savings and some of the structural improvements that would have ensued from its original proposal, the Government has now proposed a set of other restrictions on unemployment assistance. Among other things, it has proposed abolishing so-called originäre Arbeitslosenhilfe- -unemployment assistance that is payable for one year to those who do not qualify for unemployment benefit (e.g., civil servants and soldiers, who do not contribute to the unemployment insurance scheme, and others who have contributed for only a short period). The Government also proposes to begin enforcing the link that already exists in law between unemployment assistance and potential earnings, whereby unemployment assistance should be calculated as a fraction of current potential earnings, rather than of earnings in the last occupation. The precise modalities whereby this rule would be implemented remain to be determined.

Several new, or renewed, active labor market policies were introduced in 1995. First, an earlier program of employment subsidies for the long-term unemployed, which was due to expire in 1994, was modified and extended to 1999. Under the new program, persons finding employment who have been unemployed for more than a year are entitled to a subsidy amounting to 60 percent of the wage (not including employers’ social security contributions) for the first six months and 40 percent of the wage for the next six months. These percentages are 80 percent and 60 percent, respectively, in the case of workers who have been unemployed for over three years. In contrast to the previous program, where firms had to grant permanent contracts from the start, firms can now give test contracts of three months, and there are signs that this innovation has significantly increased the program’s attractiveness to. employers. DM 3 billion has been allocated to this program for the period 1995-99, and 180,000 people are expected to benefit from it.

Second, training programs are being instituted, with the support of the EU Social Fund, directed at disadvantaged workers and those with learning difficulties, and focusing on basic skills such as punctuality and language. DM 3 1/2 billion has been allocated to this program for the period through 1999.

Third, the least costly but most innovative program will support the establishment of temporary employment agencies that would “lend” difficult-to-place unemployed workers to firms willing to “borrow” them under temporary contracts, and would thus reduce the risk employers perceive they expose themselves to by hiring such workers. The temporary employment agencies will receive subsidies in the form of loans (to be repaid when the agency begins to make a profit) to help with set-up costs.

Finally, in July 1995, the Government approved a set of proposals, to be presented to Parliament in the fall, aimed at facilitating the entry of social assistance (Sozialhilfe) recipients into the labor market, and curtailing the costs of the social assistance system. 1/ The proposal would set limits on the generosity of social assistance by limiting annual increases in social assistance benefits over the next three years to the national average increase in net income, and by capping social assistance, from 1999, at a level 15 percent below average net income for a five-person household in the lowest wage-earning group. In order to strengthen incentives to work, social assistance recipients would become eligible for benefits (reduced over time) during their first six months in employment, and would suffer a 25 percent reduction in the basic allowance for social assistance (equivalent to a 10-15 percent reduction in total benefits) if they refuse a job deemed acceptable by the local labor office. Finally, provision would be made for firms to receive employment subsidies, for a period of up to two years, when they hire a difficult-to-place recipient who has been on social assistance for six months or more.

2. Deregulation

In addition to measures in the area of labor markets, the Government has taken a number of other initiatives to deregulate the economy, many under the heading of the 1993 Report on Securing Germany’s Economic Future (the Standort report). 2/ Measures taken in this area over the past year include a relaxation of the rules regulating professions (in particular a loosening of the prohibition against advertising, and a new partnership law that will make it easier to build large firms), and a revision of the genetic engineering law that eased safety rules and made the approvals process faster and simpler. Proposals to repeal the 1933 law that virtually bans discounts in retail trade failed to pass. Proposals to reexamine the restrictive shop opening hours law have also met with considerable political opposition, but the Government has commissioned a study in this area.

Efforts are underway to simplify the planning and approval process for investments generally. A recent study of large European industrial companies, commissioned by the Ministry of Economy, found that among six European countries the German planning authorities took the longest (an average of 12 months, and up to three years) to approve a building license for a manufacturing plant. In addition, more extensive technical details were required to be provided in Germany than elsewhere.

Proposals to lighten the planning and approval burden were made in late 1994 by a panel of experts, the Schlichter Commission, and have been referred to a government working group. A key recommendation of the Schlichter Commission is that investors be offered a “palette” of options, ranging from lengthy ones that would offer complete certainty that a project can go ahead exactly as planned, to quicker ones that would allow the investor to start building subject to minor modifications that may be called for later in the approval process.

Deregulation at the EU level was one of the objectives of the German presidency of the EU in the second half of 1994. In September 1994, at Germany’s initiative, the European Commission charged a group of experts with the task of reviewing EU laws with a view to identifying regulation that was not cost-effective.

In the related area of competition policy, the Government is working on a new energy law and a new cartel law in line with EU legislation. The new energy law would outlaw restrictions on competition such as demarcation agreements between producers, and would improve the possibilities for potential competitors to gain access to supply infrastructure. The new cartel law, in line with EU standards, would no longer feature the exemption currently provided for the energy sector, nor those for the transport, banking, and insurance sectors (although the practical effect of removing these latter exemptions is expected to be small). In addition, under the new law, firms would be able to complain directly to the courts about violations of the cartel law; fines would be higher; and there would no longer be a provision empowering the Minister to grant exceptions.

3. Privatization

1994 saw the end of the second phase of privatization (1982-1994) by the Federal Government. 1/ In this phase, the number of firms under (full or partial) federal government ownership was reduced from 958 to under 400, and privatization revenues amounted to DM 12.5 billion. The main focus of this phase lay on the industrial sector, where the Government sold all but one (the coal mining company Saarbergwerke AG) of its stakes, and on the banking sector, where a number of medium-sized banks were turned over to the private sector.

A third phase of privatization is planned to begin in 1996 and will--compared with the second phase--include fewer, but very large enterprises. In particular, it has been decided to sell part of Telekom AG, the remaining shares in Lufthansa AG, shares in some smaller banks, part of the postal services Post AG, and in principle Postbank AG (although in this last case no target date has yet been set). In addition to these large-scale privatizations, the Government plans to sell its shares in a number of airport companies, the federal printing office, a publishing company, the Neckar AG (whose task is to improve the river Neckar as a waterway), and the company that owns motorway rest stations. No decision has yet been taken with regard to the railways Deutsche Bahn AG, or privatization of some motorways. With a view to improving the efficiency of service provision under public ownership and/or to easing future privatization, Deutsche Bahn was created as a joint stock company in 1994 and underwent a major financial restructuring, and Telekom, Post, and Postbank were turned into joint stock companies in 1995. 2/

Among the large-scale privatizations, the selling of the remaining share of Lufthansa owned by the Government (about half) will be the most straightforward one, using standard practices via commercial banks and German stock exchanges. In contrast, the selling of, as is currently planned, half of Telekom will be much more complex. Because of the sheer size of the company a multiple privatization strategy is planned: some parts will be sold via German commercial banks at German stock markets, others will be sold to international corporate investors or an international consortium. It is also planned to offer shares at the New York Stock Exchange. No official estimates of expected privatization revenues are available, but on the basis of some (widely varying) estimates of the possible market value of the firm these could be in the range DM 15 billion to DM 25 billion. These proceeds will be used to top up the very low equity base of Telekom.

In contrast to earlier privatizations, in particular in the first phase where low income earners received special incentives to buy shares, no such measures are planned for future privatizations. The Government plans instead to rely on an attractive offer price and competition between issuing banks to secure a wide distribution of shares across the economy.

There is an even greater potential for privatization on the level of the Laender and local authorities. Many of the Laender own or have shares in banks, insurance companies, utilities, radio stations, and housing, as well as in some industrial companies. An attempt to set up a joint federal-Laender committee aimed at providing support for privatization projects was not successful, and privatization at this level is therefore left to the discretion of the individual authorities involved.

4. Transfers to eastern Germany

Five years after unification, the east German economy remains highly dependent on transfers from western Germany. Net transfers rose by 7 3/4 percent to DM 139 billion in 1994, and in 1995 they are expected to rise to DM 155 billion, slightly faster than eastern Germany’s nominal GDP, implying at least a pause in the decline of the “support ratio” of net transfers to east German GDP (Table V-1).

Table V-1.

Transfers to Eastern Germany

(In DM billion)

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Source: Deutsche Bundesbank, Monthly Report, July 1995.

For western Germany, the “support burden,” expressed as net transfers in relation to GDP, has actually been rising, to 4 3/4 percent in 1994, and is expected to reach 5 percent in 1995 (Table V-1). The main reason behind this increase is that the bulk of the transfers is spent for social and labor market purposes and for pensions, and is therefore linked to the development in wages in eastern Germany. Since these have risen at double-digit rates (from 30 percent of western levels in 1990 to some 80 percent in 1995), wage and income replacement payments have likewise increased sharply--far ahead of GDP growth in western Germany.

With about 60 percent of all transfers spent on consumption and social purposes, the rest is support for public and private investment in eastern Germany. However, the amount of investment support that shows up in the form of transfers--mainly direct subsidies and tax reliefs--is only a fraction of the total support for investment. In addition to investment transfers there exists a voluminous program of publicly subsidized credit for financing investment. In total, cumulative public support for investment in eastern Germany has amounted to DM 170 billion (on a cash basis) from 1990 through 1994, equivalent to about one quarter of total investment in eastern Germany over that period. 1/ Of this amount, special loans from public banks and special funds comprised DM 117.5 billion, tax reliefs DM 26.6 billion, and direct grants DM 26.3 billion. Industrial investment has been subsidized at rates of up to 35 percent, and even 50 percent in exceptional cases; public investment, in particular by local communities in eastern Germany, has been supported at rates of up to 75 percent by transfers from western Germany.

The main elements of support to eastern Germany will remain unchanged until the end of 1996. Many programs were originally due to expire at that time, but the 1996 tax reform proposals include provision for their extension, in modified form, to the end of 1998. Under these proposals, the generosity of two of the main means of support--the investment subsidy and the special depreciation allowance--will be reduced after 1996, and these two instruments will also be targeted more strongly to relevant sectors in order to avoid free-rider effects. Compared with an unchanged prolongation through 1998, these changes are expected to reduce the fiscal burden by a cumulative DM 16-18 billion in 1997-1998.

Under the new proposals, manufacturing will become one of two favored sectors, in view of its still underdeveloped nature in eastern Germany. Thus in 1997-98 the investment subsidy of 5 percent will apply to the manufacturing sector only. In addition, the special depreciation allowance--which allows a write-off of 50 percent in addition to linear depreciation in the first five years after the investment--will be prolonged until end-1998, but reduced to 20 percent for all sectors except manufacturing, where it will be 40 percent.

The second favored sector after the shift in policy will be small and medium-sized enterprises. These firms in general have very low equity, which has resulted in two disadvantages: high risk of bankruptcy in adverse business conditions, and difficulties in access to external financing because of lack of collateral (even as these firms are likely to be particularly dependent on outside financing). Special treatment for small and medium-sized firms will consist of special investment support, including an enhanced investment subsidy of 10 percent until end-1998 for small manufacturing firms; special credit programs requiring less collateral; special treatment with regard to value added tax (payment only at the time of payment by the customer, rather than at accrual, up to an annual turnover of DM 1 million; previously the threshold was DM 0.25 million); and of special incentives for providers of equity.

Table V-2.

The Main Means of Support for Investment in Eastern Germany

(As of July 1995)

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Source: Deutsche Bundesbank, Monthly Report, July 1995.

Subsidy applies to equipment investment only and is tax free.

Cumulation of grant--mainly with investment subsidy--up to 35 percent total support is allowed in some cases.

The investment grant is decided upon on an annual basis in the budgetary planning process. After 1996 a reduction is planned, but no decision has yet been taken as to the magnitude of the reduction.

Tax relief from accelerated depreciation (DM 9.2 billion) and other tax measures, excluding the investment subsidy.

The loan programs entail multiple subsidization aspects, in particular: below-market interest rates, special grace periods, and lower collateral requirements.

VI. Trade Policy and Overseas Development Assistance

1. Trade policy

Germany had warmly welcomed the completion of the Uruguay Round. Considerable benefits are expected for the German economy from the agreements to bind and cut tariffs, the reductions in nontariff trade barriers, the new rules on government procurement, the agreement on trade in services, the agreement on intellectual property rights, and the overall strengthening of the multilateral trading system, with new possibilities for enforcement.

Following the completion of the Round, Germany considers it crucial that efforts toward further multilateral liberalization continue, particularly in the areas of financial services, maritime transport, telecommunications, the movement of persons, civil aircraft, and steel. Germany also supports a continuation of international discussions about the interface between trade and, respectively, the environment, domestic competition, and social standards. All of these issues are under discussion under the aegis of the OECD, and environmental issues also within the WTO. In Germany’s view, the complex issue of social standards needs further study, and in the first instance the ILO needs to intensify its efforts to enforce the relevant conventions.

Closer to home, the EU has, over the last year and with Germany’s support, made some further moves toward liberalizing trade in sensitive products with Central and Eastern European Countries (CEECs) and countries of the Former Soviet Union (FSU). Imports of steel from FSU countries other than Russia, Ukraine, and Kazakhstan were liberalized in 1995, and the amounts permitted to be imported under the voluntary restraint agreements with Russia, Ukraine, and Kazakhstan raised significantly. Tariff quotas on imports of steel from the Czech and Slovak republics remain in place and are due to expire at end-1995. In addition, agreements were reached to allow tariff-free outward processing of textiles in a number of CEECs (although quotas remain in place). There were also some further concessions on trade in meat and dairy products.

2. ODA and aid to transition economies

Official development assistance to DAC countries (ODA) totaled DM 10.9 billion in 1994 (Table VI-1), some 6 percent below the level of 1993. The ratio of ODA to GDP has gradually decreased in recent years, from 0.40 percent in 1991 to 0.33 percent in 1994. While the ODA ratio had started to fall in the mid-1980’s, its more recent decline can be attributed in part to budgetary pressures related to unification and to the provision of substantial assistance to economies in transition, especially Russia.

Table VI-1.

Germany: Aid and Other Resource Flows to Developing Countries and Multilateral Agencies 1/

(Net disbursements in DM millions)

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Source: OECD Development Assistance Committee; Federal Ministry of Finance.

Prior to October 1990, data refer to western Germany only. GDP used for 1990 is a weighted average of western and united German GDP.

From 1989 onward, DAC figures, excluding grants to churches and private agencies.

Primarily grants for financial cooperation, food aid, and humanitarian aid.

Grants given by non-governmental organizations (e.g. churches, societies) from their own funds or donations.

Germany continues to provide generous assistance to economies in transition. On a cash basis, these payments were of the same order of magnitude as the ODA budget in 1994 (Table VI-2). From 1990 to 1994, the overall accrued value of financial support committed to transition economies (including transferable ruble balances built up in 1990, and their accrued interest cost, as well as the German share of EU loans and loan guarantees) has totaled DM 145 billion, of which DM 45 billion was furnished to countries in central and eastern Europe. Of the total amount, DM 31 billion was provided in the form of grants, and DM 79 billion in the form of loans, guarantees, and debt rescheduling (the remainder consisting mainly of the cost of the transferable ruble balances).

Table VI-2.

Support for Economies in Transition 1/

(Billions of deutsche mark)

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Source: Federal Ministry of Finance.

Cash basis.

STATISTICAL APPENDIX

Table A1.

Germany: Key Data on Output, Income and Demand in 1994

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Sources: Statistisches Bundesamt, Volkswirtschaftliche Gesamtrechnungen; Bundesbank, Monthly Report; and staff estimates.

According to place of residence.

Estimate.

According to place of work.

Excludes social security contributions paid by employers.

Evaluated at 1994 prices.

Table A2.

Germany: Aggregate Demand

(Percentage changes at 1991 prices)

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Sources: Statistisches Bundesamt, Volkswirtschaftliche Gesamtrechnungen.

Change in percent of last year’s GDP.