KEY ISSUES Context: Growth is benefiting from lower energy prices and euro depreciation, and the labor market is strong. The external position remains substantially stronger than implied by medium-term fundamentals as the current account surplus reached another historical high. The fiscal position is healthy, corporate and household balance sheets are sound. Low interest rates are compounding chronically weak bank profitability and hurting life insurers’ solvency. The population is aging fast despite record immigration, which will increasingly harm growth prospects after 2020. Policy priorities: Further progress is urgently needed to raise potential growth while generating beneficial spillovers to the rest of the euro area and lowering the large current account surplus: Step up investment addressing weaknesses in public infrastructure to strengthen potential output and domestic demand. To facilitate this process, put in place new institutions that enable better planning and coordination of public investment at the local level. Enhance competition to foster a more productive services sector. Reduce disincentives for women to work full time as a way to mitigate the adverse effects of an aging population on labor supply. Expand the macroprudential toolkit to better address potential future excesses in the housing sector. Ensure that life insurance companies maintain sufficient capital buffers to withstand a prolonged period of low interest rates.

Abstract

KEY ISSUES Context: Growth is benefiting from lower energy prices and euro depreciation, and the labor market is strong. The external position remains substantially stronger than implied by medium-term fundamentals as the current account surplus reached another historical high. The fiscal position is healthy, corporate and household balance sheets are sound. Low interest rates are compounding chronically weak bank profitability and hurting life insurers’ solvency. The population is aging fast despite record immigration, which will increasingly harm growth prospects after 2020. Policy priorities: Further progress is urgently needed to raise potential growth while generating beneficial spillovers to the rest of the euro area and lowering the large current account surplus: Step up investment addressing weaknesses in public infrastructure to strengthen potential output and domestic demand. To facilitate this process, put in place new institutions that enable better planning and coordination of public investment at the local level. Enhance competition to foster a more productive services sector. Reduce disincentives for women to work full time as a way to mitigate the adverse effects of an aging population on labor supply. Expand the macroprudential toolkit to better address potential future excesses in the housing sector. Ensure that life insurance companies maintain sufficient capital buffers to withstand a prolonged period of low interest rates.

Fund Relations

(As of May 31, 2015; unless specified otherwise)

Mission: April 29– May 11, 2015 in Berlin, Bonn, and Frankfurt. The concluding statement of the mission is available at http://www.imf.org/external/np/ms/2015/051115.htm.

Staff team: Ms. Detragiache (Head), Ms. Pereira, Mr. Vandenbussche (both EUR), and Ms. Boz (RES).

Country interlocutors: Bundesbank President Weidmann, senior representatives at the Chancellery, the Ministry of Finance, the Ministry of Economic Affairs and Energy, the Ministry of Labor, the Bundesbank, BaFin, and the European Central Bank. Mr. Meyer, Alternate Executive Director, also participated in the discussions. Additional meetings took place with industry, think tanks, trade unions, and financial market participants.

Fund relations: The previous Article IV consultation discussions took place during May 2014 and the staff report was discussed by the Executive Board on July 14, 2014. The Executive Board’s assessment and staff report are available at http://www.imf.org/external/pubs/cat/longres.aspx?sk=41766.0.

Membership Status: Joined August 14, 1952; Article VIII.

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs, as of May 31, 2015):

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1/ When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Exchange Rate Arrangement

Germany’s currency is the euro, which floats freely and independently against other currencies.

Germany is an Article VIII member and maintains an exchange system free of restrictions on payments and transfers for current international transactions. It maintains measures adopted for security reasons, which have been notified to the Fund for approval in accordance with the procedures of Decision 144 and does so solely for the preservation of national or international security.

Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)

Germany was last assessed against the AML/CFT standard in 2009. While generally comprehensive, Germany’s AML/CFT framework suffered from some shortcomings inter alia with respect to the money laundering and terrorist financing offenses, and AML/CFT preventive measures (including the reporting of suspicious transaction requirements, and customer due diligence, CDD, requirements). The authorities have taken a number of steps to remedy most of the main technical deficiencies identified, and in June 2014, the FATF recognized that Germany had made sufficient progress to exit the regular follow-up process. Notable progress includes the broadening of the scope of the money laundering offense amending the reporting requirement (e.g., threshold for reporting and terminology), and strengthening of some CDD requirements (including with respect to the identification of beneficial owners), as well as of sanctions for noncompliance with AML/CFT preventive measures. Further guidance for the banking sector on the implementation of AML/CFT requirements was issued and, in 2012, BaFin ordered sixteen financial institutions to undergo a special audit focused on the application of AML/CFT measures to their foreign branches and subsidiaries. The audits revealed occasional problems in the identification of the beneficial owners, and some difficulties in group-wide sharing of relevant information due to some countries’ strict data protection rules. Despite the important progress made, some technical deficiencies remain (e.g., with respect to the criminalization of self-laundering and of terrorist financing, and the tracing and freezing of terrorist funds). The next assessment of Germany’s AML/CFT framework is tentatively scheduled to take place in 2020.

Statistical Issues

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Germany: Table of Common Indicators Required for Surveillance

(As of June 1, 2015)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Pertains to contribution to EMU aggregate.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition

Includes external gross financial asset and liability positions vis-a-vis nonresidents.

8 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA)

Reflects the assessment provided in the data ROSC (published on January 18, 2006, and based on the findings of the mission that took place during July 5–20, 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning methodological soundness, namely, (i) concepts and definitions, (ii) scope, (iii) classification/sectorization, and (iv) basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 9, except referring to international standards concerning accuracy and reliability, namely, (i) source data, (ii) assessment of source data, (iii) statistical techniques, (iv) assessment and validation of intermediate data and statistical outputs, and (v) revision studies.