Statement by Hubert Temmeyer, Executive Director for Germany

Germany’s economic growth and recovery from the global crisis are explained in this study. Tax, education, and innovation policies are specific measures supported by the authorities. External and financial shocks received by Germany and other outward spillovers are outlined. Germany has a high current account and international assets. From a long-term perspective, rebalancing of public finances to promote growth is desirable. Stress tests are conducted to confirm the capital buffers. Finally, the banking system of Germany reflects significant policy measures and economic recovery.


Germany’s economic growth and recovery from the global crisis are explained in this study. Tax, education, and innovation policies are specific measures supported by the authorities. External and financial shocks received by Germany and other outward spillovers are outlined. Germany has a high current account and international assets. From a long-term perspective, rebalancing of public finances to promote growth is desirable. Stress tests are conducted to confirm the capital buffers. Finally, the banking system of Germany reflects significant policy measures and economic recovery.

I thank the staff for well-balanced reports and convey my authorities’ appreciation of an open and constructive exchange of views during the Article IV and FSAP missions. My authorities broadly share the staff’s assessment of the current macroeconomic situation and the prospects of the German economy for 2011 and 2012. Furthermore, the staff convincingly outlines the future policy challenges for continued and sustainable economic growth which largely coincide with my authorities’ policy agenda. The following comments are meant to emphasize the main thrust of the latter and the more nuanced perspective my authorities would like to add to the staff’s assessment in a few areas, in particular with regard to Germany’s contribution to global growth. In this context, my authorities believe that stability and sustainability considerations should be better acknowledged.

The FSAP findings underline the strengthening of financial sector stability in Germany. The banking system has enhanced its resilience and capitalization, and solvency of insurers remains adequate. At the same time, the staff rightly points to persisting risks for financial stability. Going forward, further progress in strengthening the German financial system will be achieved on the back of a strong economic recovery which has evolved into a broad-based upturn.

Public finances

As is laid down in the staff paper, fiscal consolidation is clearly of overarching importance to my authorities. In the past two decades, the level of public debt has seen two major expansions each following extraordinary events – the German reunification and the global financial crisis – and there is a clear commitment and understanding across the main political parties and, importantly, the German public to significantly lower public debt at all levels of the German federal state. This is a demanding process which has gained momentum with the agreement on the inclusion of the widely and openly discussed “debt brake” (Schuldenbremse) into the German constitution now being implemented starting with FY 2011. My authorities are well aware of the positive spill-over effects that strict budget consolidation in Germany entails for the credibility of EU fiscal rules and budget consolidation in Europe in general.

Germany’s international role

This year’s staff report has put special emphasis on Germany’s role in the world economy. My authorities entirely share the staff’s analysis that Germany can best contribute to global economic growth and financial stability by safeguarding internal stability through sound public finances, a fiscal and economic framework conducive to growth, and a stable and sound financial system.

Since Germany’s current account surplus has been subject to some international attention, it is noteworthy that it saw a significant reduction since 2008. This trend might continue as projected in the staff report and the recent WEO update. The development of Germany’s external account is largely explained by a multitude of private business decisions in Germany and abroad and is not the result of targeted policy measures. In fact, attempts to single out certain areas for policy action may even turn out to be counterproductive with regard to the actual outcome. For instance, I fully agree with the staff that raising wages in Germany as a means to reduce German competitiveness would neither be an analytically nor a pragmatically sound approach. Even the staff’s suggestions for policy measures aimed at raising domestic investment, with which I broadly agree, might turn out to be ambivalent with regard to their impact on the external account. To be sure, increasing investment will generate additional demand in the first round. However, a strengthening in Germany’s potential output might also foster international competitiveness and increase exports which then could hardly be considered as being an undesirable outcome.

The staff’s assessment of spillovers to and from Germany somewhat appears to play down the country’s contribution to growth in other countries. In this regard, the international debate tends to focus on Germany’s domestic demand and private consumption. However, unlike some of its comparators, Germany has not experienced any major asset bubble or rather skewed consumption-savings proportions of private households in recent years. Private consumption in Germany proved to be very resilient during the global crisis with a reduction of only 0.2 percent in 2009 against the background of subdued negative wealth effects and household indebtedness. The staff’s analysis should be more sensitive to such sustainability considerations and its positive effects. Furthermore, important automatic stabilizers inherent to the German social and economic model and significant and targeted labor market measures have stabilized household incomes. All this has helped to sustain domestic demand throughout the global crisis to the benefit of the European and global economy.

Since there are no major imbalances in the real economy and in view of very buoyant labor market developments, domestic demand and private consumption are making major contributions to growth in the current upswing. Indeed, the contribution to growth from domestic demand was twice that from net exports in the first quarter of 2011. Moreover, taking into account the size of its economy and its high degree of trade integration, Germany’s relative contribution to sustainable growth may actually be much larger than indicated by its “autonomous” impulses as calculated by staff. This holds not only true for trade linkages, but also with regard to positive spill-over and second round effects arising from German FDI not least in CEE countries. That said my authorities share the staff’s view that domestic demand could be further strengthened through the implementation of continued growth-enhancing structural reforms.

A fiscal and economic framework conducive to growth

The staff provides for a fair account of the German labor market by emphasizing the declining structural unemployment rate following significant labor market reforms earlier in the last decade while outlining that higher labor market participation should be a policy priority. In this regard, my authorities will consider lowering personal income tax rates as a transparent measure to narrowing the tax wedge, in particular for lower and medium incomes, as soon as this can be achieved with due regard to fiscal consolidation needs. Tax policy, however, is only one element amongst others and labor market participation also crucially depends on the overall infrastructure, including the availability of child care facilities. Important steps have already been taken in this regard, also with a view to improving the educational system.

As regards corporate taxes, Germany has already implemented a comprehensive set of measures over the past decade which significantly decreased the rates of those taxes considered the most damaging for growth. This includes the lowering of personal income tax rates and, as part of the comprehensive corporate tax reform in 2008 which resulted in major tax cuts for the corporate sector, the lowering of the corporate income tax (Körperschaftsteuer). My authorities agree in principle with the staff’s recommendation to reform the financing of the municipal level by replacing the – locally set – trade tax with other means of financing. However, a respective reform proposal did not find the majority across municipalities. In a different vein, the staff’s views on the usefulness of introducing a tax allowance for tax equity could not convince my authorities since evidence suggests a 25 percent decrease of corporate income tax revenues in the event of the introduction of such measure. This would obviously be too costly and run counter to the overarching objective of fiscal consolidation.

Furthermore, my authorities fully agree with the importance of further implementing structural measures with a view to improve productivity growth, in particular in the service sector. With regard to the stated productive gap in the German services sector, due regard should be paid to the limitation in comparing measures of productivity across countries which are often subject to specific classification and sometimes ad-hoc assumptions which differ across countries.

Financial sector

FSAPs are an excellent tool to promote the soundness of the financial systems in member countries and to contribute to improving supervisory practices around the world. My authorities broadly agree with the staff’s thorough analysis of the German financial sector and will use the recommendations to critically reflect on current structures and practices and make adjustments to the existing framework where appropriate and possible.

The assessment shows Germany’s generally high level of compliance with the supervisory core principles. Most of the remaining deficiencies found in the banking sector will be dealt with in preparations for and the implementation of Basel III/European Capital Requirement Directive IV. With regard to the insurance sector and in the light of the introduction of Solvency II in 2013, there is the need to continue to further enhance supervisory capacity for being able to cope with the challenges ahead. This is particularly true for the supervisory resources of the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), especially for on-site supervision. The BaFin continues to strengthen its group-wide supervision in the insurance and reinsurance sector.

Achieving continued financial stability requires a constant upgrading of the regulatory and supervisory framework. To give only a few examples, the new bank restructuring law significantly strengthens the crisis management framework in Germany. My authorities share the staff’s recommendation with regard to strengthening macroprudential supervision; a 10-point plan to reform the financial markets supervision structure envisages expanding the Bundesbank’s mandate in macroprudential supervision, and respective legislation is under preparation.

The deposit insurance system in Germany will continue to be a credible and efficient pillar of financial stability. As the structure of the deposit guarantee schemes is adapted to fit the structure of the German banking system, unifying the schemes will not per se increase the credibility and resilience in this area. It should be also kept in mind that neither BCBS/IADI core principles nor the current EU Directive require a unified deposit guarantee system. For the statutory deposit guarantee scheme a legally binding deposit guarantee of EUR 100,000 as well as significant prefunding is in place. Any further reforms of the deposit guarantee schemes regime, including harmonized funding requirements, will be in line with the respective EU directive, which is currently under discussion.

Stress tests have significantly underpinned the assessment of financial stability. My authorities share most of the conclusions of the stress testing results. In the process of continuously enhancing this exercise, most of the Fund’s suggestions on improving the Bundesbank stress tests have already been implemented. As assumptions for such stress tests are always debatable, my authorities would like to put into perspective some of these elements. Firstly, while the FSSA gives a rather pessimistic estimation of future profitability of the cooperative sector (2 percent in 2015), in my authorities’ view such a decline in profitability seems unlikely, considering that 2008, when the crisis hit and the term structure was nearly flat, the return on equity (after tax) was 4 percent, in 2007 and 2009 above 5 percent for this sector. Secondly, the capital shortfall appears at least partly to be the result of rising capital requirements of Basel III rather than of the stress scenarios. In addition, the Fund’s estimate of core Tier 1 capital seems significantly lower by around 2 percentage points than my authorities’ estimates.

Savings and cooperative banks in Germany have proven to be resilient during the financial crisis and thereafter. Due to their retail orientation they benefit from a large share of stable deposits and their domestic orientation was a stable factor during the financial crisis. Regarding the admissibility of private capital for savings banks, one needs to take into account that savings banks aim at public goods, in particular in delivering banking services to a wide range of customers.

Existing weaknesses in the Landesbanken sector are being addressed. As a result of ongoing consolidation efforts, progress has been made with respect to lowering risk-taking and de-leveraging. However, profitability remains rather low and the capital structure has to be adjusted to the upcoming Basel III regulation. While the Landesbanken need to adjust their business model in some respects, it should be also kept in mind that they provide important services as central institutions for the savings banks.

Germany: 2011 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Germany
Author: International Monetary Fund