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© 2003 International Monetary Fund

November 2003

IMF Country Report No. 03/341

Germany: 2003 Article IV Consultation—Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2003 Article IV consultation with Germany, the following documents have been released and are included in this package:

  • the staff report for the 2003 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 14,2003 with the officials of Germany on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on October 3, 2003. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff supplement of October 29, 2003 updating information on recent developments.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 3, 2003 discussion of the staff report that concluded the Article IV consultation.

The document(s) listed below have been or will be separately released.

  • Selected Issues Paper

  • Financial System Stability Assessment

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

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Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

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Staff Report for the 2003 Article IV Consultation

Prepared by the Staff Representatives for the 2003 Consultation with Germany

Approved by Michael Deppler and Martin Fetherston

October 3, 2003

  • Discussions took place in Berlin, Frankfurt, and Bonn during July 4-14, 2003. Meetings were held with Minister of Finance Eichel, Bundesbank President Welteke, State Secretaries Koch-Weser (Ministry of Finance) and Tacke (Ministry of Economics and Labor), and senior officials at the Chancellery, the Ministries of Finance, Economics and Labor, and Health and Social Security, the Bundesbank, and the Federal Office of Financial Supervision. The mission also met with the social partners, associations of financial institutions, and research institutes.

  • The team comprised Messrs. Chopra (Head), Corker, Decressin, Brunner, Klingen (all EU1), and Petersen (MFD). Mr. Bischofberger, Germany’s Executive Director, also took part in the discussions.

  • A Financial System Stability Assessment report has also been prepared as part of the Financial Sector Assessment Program (FSAP), the findings of which were discussed with the authorities during the Article IV consultation mission.

  • The authorities released the mission’s concluding statement and intend to publish this staff report. Last year’s Article IV staff report was published as IMF Country Report 02/239 following the IMF Executive Board meeting on October 23,2002.

  • A fiscal transparency ROSC was recently completed and can be found on the IMF’s external website.

  • Germany has accepted the obligations of Article VIII, Sections 2,3, and 4 (Appendix I).

  • Germany’s statistics are comprehensive and timely, and hence conducive for effective surveillance.


  • Executive Summary

  • I. Introduction

  • II. Background

  • III. Policy Discussions

    • A. The Economic Outlook

    • B. Fiscal Policy

    • C. Labor and Product Markets

    • D. The Financial Sector

    • E. Other Issues

  • IV. Staff Appraisal

  • Text Boxes

  • 1. The Short-Run Effects of Fiscal Policy on Activity

  • 2. Corporate Balance Sheets and the Investment Cycle

  • 3. Fiscal Consolidation Since Reunification

  • 4. Health Care and Pension Reforms

  • 5. Bank Profitability and Reforms

  • Tables

  • 1. Basic Data

  • 2. Budgetary Measures for 2004-2006

  • 3. General Government Accounts, Adjustment Scenario

  • 4. Indicators of External and Financial Vulnerability

  • Figures

  • 1. Germany, the Euro Area, and the G-7: Economic Performance (1992-2003)

  • 2. Comparison of Cycles, 1970-2003

  • 3. Manufacturing Capacity Utilization, 1970-2003

  • 4. Wage and Productivity Trends in the New Länder

  • 5. Interest Rate Developments, 1991-2003

  • 6. Financial Indicators, 1992-2003

  • 7. Wages, Profits, and Competitiveness, 1980-2002

  • 8. Key Economic Indicators, 1996-2003

  • 9. Corporate Leverage and Financial Balances, 1980-2002

  • 10. Coverage of Wage Bargaining, 2001

  • 11. Bank Credit to Enterprises During Downturns, 1970-2002

  • Appendices

  • I. Fund Relations

  • II. Statistical Information

Executive Summary


The economy has stagnated for the past three years and the fiscal deficit exceeds the 3 percent of GDP limit under the Stability and Growth Pact. Inflation is about 1 percent. Underlying the poor economic performance are structural rigidities, which have prolonged the adjustment to reunification-related imbalances. Recent developments have added a cyclical dimension to output weakness. Against this background, the authorities have embarked on a new, three-pronged strategy consisting of structural reforms under the rubric of Agenda 2010, more targeted public expenditure cuts, and advancing planned tax cuts.

Key issues

  • Prospects for recovery. The authorities expected that a confidence boost from their strategy would augment the effect of strengthening global growth and low interest rates. The IMF staff was more cautious about the immediate outlook: the strategy would benefit mainly the medium term while growth in the short run might be held back by the euro’s appreciation. While a mild-paced recovery appears most likely for 2004, confidence could take a hit if implementation of the strategy faltered.

  • Fiscal policy. Advancing the tax cuts will interrupt consolidation in 2004. It was agreed that to preserve credibility, quality measures needed to be specified upfront to cut the structural deficit by at least 1½ percent of GDP over 2004-06. Staff thus welcomed plans to cut subsidies and entitlements, and curtail tax expenditures, but noted that total savings were as yet insufficient. Additional fiscal consolidation measures need to be specified; further cuts in subsidies and inefficient labor market programs warrant consideration.

  • The structural reform agenda. To strengthen incentives to work, the centerpiece of the agenda is to reduce the generosity of benefits to the unemployed. Staff argued that they should be complemented by tougher requirements for unemployed persons to accept work and an easing of job protection laws. Absent reforms to entitlement programs, demographic aging will put considerable upward pressure on social contributions, and hence labor costs. Reforms to unemployment benefits are well designed. Proposals to raise the retirement age and add a demographic factor to pensions would improve prospects for long-run viability of the pension system. Early implementation is a priority.

  • Financial sector restructuring. Declining bank profitability has been exacerbated by the economic downturn. While acknowledging that restructuring is underway, the staff noted that augmenting current efforts by lowering barriers to consolidation across public and private pillars would open new avenues for restructuring. The financial system has proved to be resilient, but to help reverse the downward trend in profitability, work needs to begin on creating the legal framework to facilitate restructuring and attract private capital.

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Staff Report for the 2003 Article IV Consultation

Supplementary Information

Prepared by the European I Department

Approved by Michael Deppler and Martin Fetherston

October 29, 2003

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Public Information Notice (PIN) No. 03/132


November 6, 2003

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Germany

On November 3, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Germany.1

Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772 •

Germany: Staff Report for the 2003 Article IV Consultation
Author: International Monetary Fund