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© 2006 International Monetary Fund

January 2006

IMF Country Report No. 06/16

Germany: 2005 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Germany

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 2005 Article IV consultation with Germany, the following documents have been released and are included in this package:

  • the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 28, 2005, 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 September 19, 2005. 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 supplement to the staff report, based on follow-up discussions with the new government that ended on December 14, 2005. The supplement was completed on December 28, 2005.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January 11, 2006 discussion of the staff report that concluded the Article IV consultation.

  • a statement by the Executive Director for Germany

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

  • Selected Issues Paper

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

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: Internet:

Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

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Staff Report for the 2005 Article IV Consultation

Prepared by the Staff Representatives for the 2005 Consultation with Germany

Approved by Michael Deppler and Adnan Mazarei

September 19, 2005

  • Discussions took place in Berlin, Frankfurt, Bonn, and Munich during June 15-28, 2005. Meetings were held with Bundesbank President Weber, State Secretaries Koch-Weser (Ministry of Finance) and Pfaffenbach (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 (BaFin). The mission also met with the Finance Ministers of the Länder Governments of Hesse (in the West) and Brandenburg (in the East), federal parliamentary representatives, social partners, associations of financial institutions, and research institutes.

  • Following the general elections on September 18, 2005, a second round of discussions is planned for November. A supplement will report on these discussions prior to the Board meeting.

  • The team comprised Messrs. Chopra (Head), Traa, Odenius, Braumann, Danninger (all EUR), and Cihak (MFD). Mr. Meissner, Germany’s Alternate Executive Director, attended the discussions.

  • The authorities released the mission’s concluding statement and intend to publish this report. Last year’s Article IV staff report was published as IMF Country Report No. 04/341 following the IMF Executive Board meeting on October 25, 2004.

Main Websites for German Data

Data in this Staff Report reflect information received by August 31, 2005. More recent data may be obtained directly from the following internet sources:

German Federal Statistical Office

Deutsche Bundesbank

Ministry of Finance

Federal Labor Agency

Information on German economic statistics can be found at the Special Data Dissemination Standard website of the IMF


  • Executive Summary

  • I. Introduction

  • II. Background

  • III. Policy Discussions

    • A. The Economic Outlook

    • B. Fiscal Policy

    • C. Labor Market Issues

    • D. Product and Service Markets, and Trade Policy

    • E. Financial Sector Developments and Policies

    • F. Other Issues

  • IV. Staff Appraisal

  • Text Boxes

  • 1. Past Fund Policy Recommendations and Implementation

  • 2. Competitiveness

  • 3. German Consumption Growth—a Regional Comparison

  • 4. Why is Germany’s Deficit so Large?

  • 5. A Preliminary and Illustrative Public Sector Balance Sheet

  • Tables

  • 1. Basic Data

  • 2. General Government Finances

  • 3. Balance of Payments

  • 4. The Core Set of Financial Soundness Indicators for Banks, 1998–2004

  • 5. Encouraged and Other Financial Soundness Indicators, 1998–2004

  • 6. Financial System Structure

  • Figures

  • 1. Economic Performance, 1992–2006

  • 2. Competitiveness and Exports 1980–2005

  • 3. Profitability, Leverage and Capacity Utilization 1991–2004

  • 4. Interest Rates and Credit Developments

  • 5. Financial Indicators

  • 6. Quarterly GDP Growth Contributions, 2004–06

  • 7. Comparison of Business Cycles, 1970–2005

  • 8. Fiscal Projections, 2000–50

  • 9. Employment Growth and Coverage of Collective Wage Agreements

  • 10. Market Regulation Indices Relative to the EU-15 Average, 2003

  • 11. Relative Market Valuation and Distance to Default

  • Appendices

  • I. Public Debt Sustainability

  • II. Staff Analytical Work on Germany 2001–05

  • III. Fund Relations

  • IV. Statistical Issues

Executive Summary

Germany faces serious economic challenges and needs decisive, forward-looking policies to raise employment, investment, and output growth. Germany is wealthy but has a highly regulated economy that is financing a generous welfare state. Rigidities from this structure impose long adjustment periods after shocks such as unification, rapid regional and global economic integration, and pressures from aging. Problems manifest themselves in three interrelated features:

  • Low and declining trend growth, and most recently weak domestic demand despite strong exports.

  • High and long-lasting unemployment, with high reservation wages and gross labor costs.

  • Persistent fiscal pressures, and public finances and welfare programs that are not sustainable under current policies.

Implementing a sound reform strategy with a clear timetable offers the best prospect for building confidence and revitalizing growth. The staff recommends that the strategy encompass the following mutually-reinforcing elements:

  • Fiscal consolidation to reach structural balance by 2010 and help secure long run fiscal sustainability. Emphasis should be on reducing distortions via cutting subsidies and tax expenditures, recalibrating entitlement benefits, cutting payroll taxes, and raising the retirement age. Institutional reforms to improve incentives for better fiscal management are also important.

  • Labor market reforms to reduce high unemployment and raise labor utilization, thus limiting the effects of aging on growth and public finances. Reforms need to facilitate job creation and include: allowing wage setting to reflect local labor market imbalances and productivity differentials; switching central wage bargaining to the firm level; and cutting employment protection legislation to boost employment of the most vulnerable workers.

  • Product and services market reforms to boost the effectiveness of labor market reforms. By increasing competition in product and services markets, wage moderation will be passed on to lower prices, and result in faster output and employment growth. Regulations and administrative hurdles need to be reduced to make the business climate more conducive to job creation, particularly in the service sector.

  • Financial sector reforms to make the sector more dynamic and place it in a better position to support growth. The banking sector’s continued fragmentation limits economies of scale and risk diversification. Abolishing limits on intraregional competition and opening up public sector banks to private capital would facilitate market driven restructuring, foster returns to scale, and bolster profitability.

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Staff Report for the 2005 Article IV Consultation Supplementary Information

Prepared by the European Department

Approved by Michael Deppler and Adnan Mazarei

December 28, 2005

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Public Information Notice (PIN) No. 06/4


January 18, 2006

International Monetary Fund

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Washington, D. C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

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January 11, 2006