Germany: Staff Report for the 2006 Article IV Consultation

The three-point VAT increase is part of a package in which unemployment payroll taxes will be reduced. Risks to the recovery are balanced but the range of forecasts for 2007 is unusually wide. The priority for Germany is to transmit its external strength to the domestic economy, thus further broadening the recovery and creating conditions for sustained high growth. The authorities are undertaking a review of active labor market policies (ALMPs) with a view to curtailing their number.

Abstract

The three-point VAT increase is part of a package in which unemployment payroll taxes will be reduced. Risks to the recovery are balanced but the range of forecasts for 2007 is unusually wide. The priority for Germany is to transmit its external strength to the domestic economy, thus further broadening the recovery and creating conditions for sustained high growth. The authorities are undertaking a review of active labor market policies (ALMPs) with a view to curtailing their number.

I. Introduction

1. After protracted weakness in domestic demand, a strong and gradually broadening cyclical recovery is finally underway (Table 1, Figure 1). Fast export growth and record profits in the corporate sector, resulting in large part from steady business restructuring and the favorable external environment, have at last rekindled investment demand. Construction is also beginning to turn around. However, with continued wage moderation, consumption remains tepid despite an uptick in employment.

Table 1.

Germany: Basic Data

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Sources: Deutsche Bundesbank; Federal Statistical Office; IMF, World Economic Outlook; IMF, International Financial Statistics; and staff estimates and projections.

IMF staff projections.

Growth contribution.

National accounts definition

Eurostat definition.

Deflated by the national accounts deflator for private consumption.

Table 1.

Germany: Basic Data

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Data for federal government are on an administrative basis. Data for the general government are on a national accounts basis. Debt data are end-of-year data for the general government in accordance with Maastricht definitions.

Government expenditure in 2000 includes, as a negative entry, the proceeds from the sales of mobile phone licenses of euro 50.8 billion (2.5 percent of GDP). The proceeds also affect the financial (but not structural) balances and the government debt.

Including supplementary trade items.

From 1999 onward data reflect Germany’s position in the euro area. Data for 2006 refer to August.

Data for 2006 refer to the change from September 2005 to September 2006.

Data reflect Germany’s contribution to M3 of the euro area; data not shown for 2002 because of a series break.

Data for 2006 refer to October, 2006.

Data for 2006 refer to October.

Based on relative normalized unit labor cost in manufacturing. Data for 2006 refer to July.

Figure 1.
Figure 1.

Germany: National Accounts Indicators, 2000–2006

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: Federal Statistical Office, and IMF staff calculations.

2. Far-reaching adjustment of the private and public sectors have supported strong exports but held back domestic demand.1

  • Excessive wage increases in the early 1990s were followed by an extended period of wage moderation to recover competitiveness. Further, exporters responded quickly to globalization by shedding expensive workers and sourcing intermediate input production to lower cost countries.

  • The domestic economy—with high labor costs and structural rigidities—lacked the dynamism to absorb surplus labor. The bust in the large construction sector, following a unification-related boom, exacerbated the decline in employment.

  • Depressed property markets and the bursting of the equity bubble in 2000 caused a substantial increase in impaired loans earlier this decade, leading to reduced lending.

  • Meanwhile, impending aging-related expenditure pressure spurred the government to undertake important entitlement reforms and restrain spending to improve fiscal solvency. These belt tightening efforts induced households to step up precautionary savings, which slowed consumption.

uA01fig01

Exports have been the main growth driver.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

uA01fig02

The period of negative real credit growth has ended.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

3. Overall, adjustment in recent years has centered on wage moderation and fiscal containment, rather than efficiency-enhancing structural reforms (Box 1). The current government has put priority on four areas: fiscal consolidation, business tax and health care reform, and making labor markets more flexible. It is too early to say whether a major turnaround will be achieved, because all the measures in these four areas have not yet been announced.

Past Fund Policy Recommendations and Implementation

In past consultations, Directors called for comprehensive and mutually reinforcing policies to achieve fiscal sustainability and reduce structural rigidities to meet the challenges of globalization and aging.

Fiscal consolidation. Directors endorsed the authorities’ policies to reduce the fiscal deficit below 3 percent of GDP by 2007, with some Directors calling for frontloading of adjustment and greater reliance on expenditure reduction. In the event, the deficit will be reduced to well below 3 percent in 2006. The structural adjustment of over 1 percent of GDP in 2006–07 is spread more evenly than was thought earlier, and has a significant expenditure component.

Fiscal reforms. Directors called for medium-term fiscal consolidation to enhance the sustainability of public finances. Consistent with Directors’ recommendations, a first round of fiscal federalism reforms has been adopted to streamline the legislative process and give Länder more autonomy. More fundamental changes in intergovernmental financial relations are yet to be addressed.

Labor and entitlement reforms. Directors welcomed the Hartz labor market reforms but their effectiveness has been hampered by design flaws and weak implementation. There has been no progress in reforming employment protection legislation. Directors also saw a need for further recalibrating the entitlement system, and the decision to gradually raise the pension age remains to be enacted in law.

Productivity-enhancing reforms. Reforms in product and service markets have proceeded slowly. In the banking system, private investors have been recently allowed to buy shares in one Landesbank, but overall structural efficiency gains have been slim.

II. The Current Setting

4. After heavy reliance on exports, the cyclical upswing is now supported by a rebound in investment and is also aided by temporary factors. Improved sales and profit expectations and an increased rate of capacity utilization have led to a strong increase of spending on plant and equipment, notwithstanding an increase in real interest rates by 1 percent in the last six months (Figure 2). The Coalition Agreement’s €24 billion (1 percent of GDP) stimulus package for 2006–2009 has begun to take effect.2 Moreover, the World Cup soccer tournament boosted the service sector, and the phasing out of homeowner subsidies is stimulating residential construction. The VAT increase from 16 to 19 percent in January 2007 is bringing forward consumption of durables and construction activity, estimated to boost growth in 2006 by ¼–½ percentage points (and lower it by the same amount in 2007). Real growth is projected to rise to 2.3 percent in 2006 (from 0.9 percent in 2005), with nearly three-quarters of the contribution to growth coming from domestic demand.

Figure 2.
Figure 2.

Germany: Financial Indicators

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: DataStream, Bloomberg and IMF staff calculations.1/ Yields minus consumer price inflation.2/ Ten-year bund rate minus 3 month interbank rate.
uA01fig03

The recovery has gained strength.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

5. Job growth has only recently started to turn around and overall consumption has remained subdued. Full time employment has picked up for the first time in five years but the unemployment rate still stands at 10.6 percent in the national definition (8.2 in the ILO definition). The unemployment rate remains particularly high in East Germany at over 16 percent (national definition), where productivity is lower and adjustment has been hindered by large income transfers. Further, although wage costs have fallen, especially in manufacturing, they remain high in international comparison (Figure 3), resulting in continued wage moderation. Spending power has also been held back by terms of trade losses.

Figure 3.
Figure 3.

Germany: Unit Labor Cost

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: Bundesbank, OECD, and Eurostat.

6. External competitiveness is strong but restructuring of domestically-oriented sectors is lagging (Box 2, Figure 4). Germany’s large exporting companies operate globally, including by moving production capacity abroad and purchasing intermediate inputs from foreign suppliers, and have become less dependent on their home market. This has brought strong export penetration and market share gains both in advanced and emerging market countries. By contrast, restructuring in the internal market has been slower with high reservation wages for low-skilled labor, and regulations that tend to favor incumbents.

Figure 4.

Germany: External Competitiveness

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Sources: IFS, WEO, OECD, Direction of Trade Statistics, and IMF staff calculations.1/ Three-quarter moving averages.2/ Excludes Belgium and Luxembourg.
Figure 5.
Figure 5.

Germany: Quarterly Growth Projections and Inflation

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: Bundesbank, Federal Statistical Office, and IMF staff calculations.

7. Inflation is moderate. Energy and administered prices have kept headline inflation close to 2 percent in recent years. With moderate wage growth, core inflation has been around 1 percent a year. Given labor market slack, there have not been significant second round effects from energy prices. Unit labor costs in manufacturing have declined; but they have continued to increase in the more sheltered domestic sectors.

uA01fig04

Manufacturers have adjusted ULC’s, service sectors have not.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Competitiveness and External Position

German companies are competitive. Germany is the only G7 country that has gained overall market share in world exports in recent years, even during periods of euro appreciation.

Labor shedding and wage moderation have lowered unit labor costs and the current level of the real exchange rate is broadly in line with fundamentals: various analytical approaches suggest only a small undervaluation in the range of 3 to 6 percent, as calculated by Fund staff using equilibrium exchange rate models, and by the Bundesbank using an indicator of trade deflators against nineteen trading partners. At the same time, research suggests that strong foreign growth has been an even more important factor than cost reduction in boosting German exports. And, Germany’s strength in engineering products has allowed firms to benefit from the global investment cycle.

The rise in Germany’s external current account surplus to an average of 4 percent of GDP in 2000–05 largely reflected a sharp reduction in domestic investment, both by nonfinancial enterprises and households. During this period business firms repaired their balance sheets by cutting investment and increasing saving. Residential household investment was weak as disposable incomes faltered and households picked up their saving in anticipation of aging amidst uncertainty about future entitlement income. The household saving ratio is expected to fall in the course of 2006 with advance purchases prior to the VAT increase. And, as the domestic investment cycle is now turning, business net saving is also expected to drop. The public sector, however, is projected to increase its saving to bolster its balance sheet.

III. Outlook

8. Although the VAT hike is projected to slow growth in 2007, the authorities and staff expect its impact to be transitory. The 3-point VAT increase is part of a package in which unemployment payroll taxes will be reduced from 6 ½ to 4 ½ percent. Further, the stimulus package (see ¶4) is phased to have a larger impact in 2007. Finally, the global economy is projected to remain strong, favoring German (capital good) exports. The staff projects GDP growth to slow to 1.4 percent in 2007, but because growth in 2006 has been boosted by various one-time effects this does not reflect a slowing of underlying growth, which is estimated to be between 1½–1¾ percent for the two years. Inflation is expected to rise from 1.7 percent in 2006 to 2.3 percent in 2007, with a jump in early 2007 again reflecting the VAT (Figure 4). Wage demands for 2007 are picking up due to strong corporate profitability and the VAT increase, but core inflation is projected to remain between 1–1½ percent.

Real GDP forecast

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9. Risks to the recovery are balanced but the range of forecasts for 2007 is unusually wide. Downside risks stem from volatile oil prices and geopolitics, and an unexpected tightening of euro-area monetary policy. A disorderly unwinding of global imbalances could result in a sharp euro appreciation and lower growth. Faster-than-expected slowing in trading partners could soften German exports, although the increased diversification of destinations could help mitigate this. Finally, consumption remains fragile and failure to deal with needed structural reforms could dampen confidence and continue to restrain household spending. On the upside, the recovery’s momentum could get stronger if employment growth continues to gather pace and boosts household incomes. High-frequency indicators peaked in the second quarter of 2006, but they are holding up well (Figure 6). That said, it remains unclear how much spending has been brought forward into 2006 in anticipation of the VAT increase, and, therefore, how pronounced the dip will be in early 2007.

Figure 6.
Figure 6.

Germany: Sentiment Indicators, 2000–2006

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: IFO, Reuters, ZEW Institute, GfK AG, and IMF staff calculations.
uA01fig05

Export destinations are diversifying.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Medium-Term Projections, 2005–2011

(Percentage change from the previous period, unless otherwise indicated)

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Sources: Fund staff estimates.

In percent of GDP.

10. Absent a stronger push for structural reforms, the improved cyclical prospects do not change Germany’s low growth potential over the long term. In the medium run, the staff projects the recovery of domestic demand to close the output gap by 2008 and the external current account surplus to fall (Table 2). Recovering from its drawn-out adjustment, domestic demand is expected to rebound as consumption, investment, and total factor productivity recover to their longer run steady states. In the long run, however, Germany’s slowing demographics are expected to reduce potential growth to just over 1 percent a year, although progress in labor, product, financial sector and (CIT) tax reforms could improve this outlook. If policies are successful in raising labor utilization and in bringing unemployment down, growth could speed up for some years, but eventually the declining population would constrain headline growth. Long-run per capita growth would be in the range of 1½–1¾ percent a year, in line with other advanced countries.

Table 2.

Germany: Medium-Term Balance of Payments

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Source: WEO.

Germany: Decomposition of Long-Run Potential Output Growth

(Average percentage change a year, unless otherwise indicated)

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Source: IMF staff calculations.

The baseline scenario assumes a steady-state unemployment rate of 7.5 percent; in the lower unemployment scenario it drops to 5 percent in the next decade and then remains at this lower level.

IV. Policy Discussions

11. The priority for Germany is to transmit its external strength to the domestic economy, thus further broadening the recovery and creating conditions for sustained high growth. This requires policies that improve the efficiency of domestic markets and place near-term challenges in a long-run context. Such a strategy should exploit three mutually reinforcing elements: (i) improving labor market flexibility and bolstering employment to boost household income and domestic demand; (ii) raising productivity in product and financial markets; and (iii) reforming entitlements and adjusting fiscal policies to strengthen confidence in the sustainability of the welfare state.

12. The political environment is challenging and the partners in the grand coalition are having difficulty agreeing on substantial reforms. The coalition partners have taken a decisive stance on fiscal adjustment, but they are not natural allies on reforms—the labor party (SPD) tends to defend the labor welfare state and the conservative parties (CDU/CSU) tend to defend the corporate welfare state. Negotiations on reforms are therefore difficult and risk delivering awkward compromises. Senior coalition parliamentarians agreed that their task is challenging. However, they felt that the coalition is tackling pressing issues, and praised the leadership’s emphasis on harmonious relations in government. They asked that the coalition be judged on results without a premature verdict on process.

A. Fostering Employment Growth

Generous entitlements have kept reservation wages high, limited labor force participation (especially for elderly and female workers), and raised long-term unemployment. The discussions focused on boosting the effectiveness of the Hartz labor market reforms to strengthen employment growth, thus aiding domestic demand (Figure 7).

Figure 7.
Figure 7.

Germany: Labor Market, Household Income, and Savings

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: Bundesbank, Federal Statistical Office, and IMF staff calculations.

13. The authoritie’ priority in labor markets is to improve the effectiveness of the Hartz IV reforms. Many analysts and the staff stress that labor market deregulation beyond the Hartz reforms is essential, but others see labor policies as an instrument to address distributional concerns and preserve incomes for those at the bottom (Figure 8). Reflecting these differences, the Coalition Agreement did not include significant new reforms, focusing instead on improving the functioning of the Hartz legislation and evaluating the efficacy of active labor market policies (ALMPs).

Figure 8.
Figure 8.

Germany: Labor Markets, Welfare System, and Collective Bargaining

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: IFO, WSI-Boeckler foundation, OECD, and IMF staff calculations.

14. The authorities were pleased that short-term unemployment (in the UB-I system) is declining. A key accomplishment has been the recent shortening of the duration of unemployment benefits from 18 to 12 months (except for elderly workers). Together with the cyclical upturn, these sharper incentives have lowered the number of beneficiaries and the budget costs. Revenues for UB-I are firming up with contributions to social security rising as full-time jobs recover after a long decline.

uA01fig06

The loss of full-time jobs is bottoming out.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

15. The bigger challenge, however, is to lower long-term unemployment in the new UB-II system created by the Hartz IV reforms. Some two-thirds of the 4½ million unemployed are in the UB-II system, which merged the long-run unemployment system (run by the Federal Labor Office) with the welfare system (run by local governments). The new system was intended to improve job placement, lower average benefit levels, and tighten means testing. However, administration has proved more difficult than expected, benefits remained more generous than intended, job placements have been few, and means testing has been inadequate. As a result, reservation wages have remained high and there are more beneficiaries than expected, preventing the intended decline of costs from pre-reform levels.

16. Consequently, the authorities are contemplating modifications to labor policies. Final decisions are pending and the policy debate spans a broad spectrum, ranging from welfare-to-work policies to proposals to protect wage earners from market outcomes deemed socially undesirable.

  • Welfare-to-work. A government commissioned study by the Council of Economic Advisors recommends lowering the UB-II benefit level by 30 percent for those unwilling to accept jobs with local authorities. Those who accept would retain their full benefit. The rationale is to place the burden of job search on the unemployed instead of the labor office.

  • Wage subsidies. In a separate proposal, the authorities are considering introducing selective wage subsidies (Kombilöhne). A pilot program for elderly workers is being prepared.

  • Minimum wages. The introduction of minimum wages is also under consideration to “protect” against competition from immigrants from low wage countries and to limit potential fiscal costs of wage subsidies.

  • Capturing unregulated sectors. The authorities are contemplating new regulations for temporary work agencies, where jobs are growing quickly from a low base. Temporary agencies do not fall under any collective labor agreement and with the absence of minimum wage legislation this has raised concern about abusive labor practices.

17. The staff supported the welfare-to-work proposals but argued that the other proposals go in the wrong direction and risk adding further distortions. The staff recommended a shift to policies that support activity—instead of inactivity—and therefore saw merit in lowering the UB-II benefit level by 30 percent. However, minimum wages would be a serious policy error, as these would introduce subfloors in wage setting (further reducing job chances for low-skilled labor), where UB-II already effectively determines too high a reservation wage. Further, wage subsidies would run the risk of rent seeking and high fiscal costs, and regulating temporary work contracts (one of the few markets with increasing activity) would cut flexibility in the already overburdened labor market.

18. The authorities are undertaking a review of active labor market policies (ALMPs) with a view to curtailing their number. They explained that Germany has around 80 active programs and preliminary assessments indicate that most of them are ineffective. Fiscal costs amount to €16 billion a year (0.7 percent of GDP). The staff strongly supported the intention to cut ALMPs that were shown to have generated few net jobs, and instead focus on those that work well. Indeed, the multiple ALMPs are described by some as contributing to the “regulatory jungle” of labor policies.

19. The authorities noted that there was no political consensus to relax employment protection legislation. Firing costs are almost twice as high as in the OECD on average and the Coalition Agreement sought to extend the legal employment probation period from 6 to 24 months. However, because this liberalization had been made conditional on new restrictions on short-term contracts, and because the coalition partners could not agree on removing this offset, they decided to stick with the existing EPL legislation.

B. Raising Productivity to Support Growth and Wages

Regulatory barriers and significant public ownership continue to impede firm entry in product and services markets, limiting competition and restraining productivity growth. The discussions focused on rolling back public ownership, enhancing access to network industries, and lowering regulatory barriers for liberal professions and in the guilds.

20. Productivity growth has been uneven across sectors and the domestic economy remains fragmented with unexploited economies of scale. Foreign competition has stimulated adjustment and boosted productivity in the manufacturing sector, but there has been less productivity growth in domestic activity. As a result, labor productivity growth trails international performance and the domestic sectors—especially retail and wholesale trade and the liberal professions—account for a substantial share of the shortfall. Analysts note that lower productivity gains in the trade and retail sectors is related to barriers to IT adoption stemming from a lack of competition in telecommunication and other network industries. Although progress has been made in recent years, the staff noted that further liberalization is needed to facilitate the structural shift toward a services economy. For example, the OECD and EU Commission have emphasized that network industries in Germany do not face truly contested markets, despite the partial unbundling of services and privatization of some large firms in the industries (Figure 9).

Figure 9.
Figure 9.

Product and Services Markets

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: OECD, World Bank, and Paterson (2003).

21. The authorities noted that reform of network industries would continue and highlighted the following initiatives and issues:

  • Electricity. The Federal Regulatory Agency is starting to use its expanded powers to regulate (lower) pricing and enhance access for smaller operators.

  • Postal services. The last vestiges of the postal monopoly will be removed on January 1, 2008, as planned.

  • Railways. High level discussions are underway, focusing on whether the already agreed privatization of the German railways will be limited to its rolling stock or include a concession to the rail network itself. A decision will be taken soon.

  • Telecommunications. Deutsche Telecom has requested restrictions on access to its new high-speed fiber network to earn back its investment in this area. According to the authorities, the decision will depend on whether the fiber network is found to have established a new market, and thus would avoid competitive interference, or is part of an already existing market, where restrictions would violate competition agreements.

uA01fig07

Economy-wide productivity growth has been relatively weak, held back by low productivity growth outside the manufacturing (export) sector.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

uA01fig08

Retail and wholesale trade accounts for most of the productivity gap with the U.S.

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: Staff calculations based on data from Groningen Growth and Development Centre,60-Industry Database, March 2006, http://www.ggdc.net.1/ Excluding insurance, pension funding and auxiliary activities.

22. The authorities agreed that there is room to deregulate the liberal professions, but were comfortable with the guild system. Regulation for liberal professions (doctors, lawyers, notaries, etc.) is notably more restrictive than in the EU-15. The Monopolkommission has recommended revoking fixed-price lists and certain master’s licensing requirements. However, the authorities emphasized that the guild system for crafts provides significant benefits for quality control and is a major provider of apprenticeship positions. Thus, no policy initiatives are planned to reform the guild system. For liberal professions, the authorities plan to lower bureaucratic hurdles to broaden the scope for activities within the existing framework.

23. The authorities highlighted the initiative in the chancellery to reduce regulation costs. According to OECD analysis, the administrative burden on enterprises exceeds the EU-15 average in product markets and tends to favor incumbents. An independent group of experts is reviewing these costs, using models from the Netherlands and U.K. Henceforth; new proposals will be subject to a cost-benefit review before submission to parliament. The authorities target lowering regulatory costs by a quarter, or the equivalent of 1 percent of GDP, by 2009.

C. Improving the Allocation of Capital

Financial sector profitability continues to fall short of peers and strains in the banking system could reemerge during the next downturn. Capital market activity is increasing but there is still substantial untapped potential. The discussions focused on structural reforms to improve the efficiency of the banking system and further deepen capital markets with the aim of improving the allocation of capital and enhancing financial sector stability.

24. The cyclical upswing and abundant liquidity have improved earnings for banks and insurance companies (Figure 10). Cost cutting, which is likely to become increasingly difficult, and lower provisioning, which probably cannot be repeated, have also aided bank earnings. 3 Revenue growth and return measures, however, continue to compare unfavorably to the EU average. The ratio of unprovisioned nonperforming loans (NPLs) over capital has declined since 2003 but is still high, which the authorities explained is in part due to Germany’s tighter definition for NPLs making international comparability difficult. The staff stressed that without restructuring of the banking sector and innovative new products to boost revenue, profitability will remain subdued (Tables 35).

Figure 10.
Figure 10.

Germany: Relative Market Valuation and Distance to Default 1/

Citation: IMF Staff Country Reports 2006, 438; 10.5089/9781451810530.002.A001

Source: DataStream and IMF staff calculations.1/ Market valuation relative to the aggregate stock market index. Distance to default approximates financial soundness and is calculated as the sum of the ratio of the estimated current value of assets to debt and the return on the market value assets. The calculations cover the four largest banks and fifteen largest insurance companies (January 3, 2000 = 100).
Table 3.

Germany: The Core Set of Financial Soundness Indicators for Banks, 1998–2005

(In percent)

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Source: Deutsche Bundesbank.

According to Capital Adequacy Regulation, Principle I.

The 2005 number follows the IMF’s Compilation Guide on FSIs. Namely, it is the ratio (in percent) of assets and liabilities with a remaining maturity of three months or less. Given that this indicator is not available for earlier periods, the “liquidity ratio” used by prudential supervision is shown instead for 2000–04.

Table 4.

Germany: Encouraged and Other Financial Soundness Indicators, 1998–2005

(In percent, unless otherwise indicated)

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Source: Deutsche Bundesbank

As defined in the IMF’s Compilation Guide on FSIs.

Total debt to corporate gross value added, as corporate GDP is not available.

Return is defined as “net operating income less taxes”, where “net operating income” and “taxes” are defined in the IMF’s Compilation Guide on FSIs.

Invested capital is defined as “balance sheet total less other accounts payable (AF.7 according to ESA 1995).”

Does not include principal expenses.

Resident enterprises that filed for bankruptcy.

Spread between highest and lowest three month money market rates as reported by Frankfurt banks (basis points).

Spread in basis points, calculated on the base of the German MIR statistics for outstanding amounts.

Taken from balance sheet data. Profits after tax devided by equity.

Residential property (index, yearly average, 2000 = 100). An aggregation of the data for new dwellings and resale is not available.