This paper discusses the economic performance of Germany. The economy of Germany is projected to slowly rebalance, with domestic demand supported by tight labor market, accommodative monetary conditions, and, in 2016, a fiscal expansion. Declining medium-term growth prospects, however, continue to hold back domestic investment and push up savings, preventing faster rebalancing. Progress has been slow on addressing needs in public infrastructure and stimulating competition in services sector, while mounting aging costs and a successful labor market integration of women and refugees require further policy action. Full use of the room available under fiscal rules to finance additional public investment and growth-friendly structural reforms would be appropriate.


This paper discusses the economic performance of Germany. The economy of Germany is projected to slowly rebalance, with domestic demand supported by tight labor market, accommodative monetary conditions, and, in 2016, a fiscal expansion. Declining medium-term growth prospects, however, continue to hold back domestic investment and push up savings, preventing faster rebalancing. Progress has been slow on addressing needs in public infrastructure and stimulating competition in services sector, while mounting aging costs and a successful labor market integration of women and refugees require further policy action. Full use of the room available under fiscal rules to finance additional public investment and growth-friendly structural reforms would be appropriate.

1. I would like to convey my authorities’ gratitude for comprehensive, detailed and insightful discussions during this Article IV and Financial Sector Assessment cycle. My authorities find their views well-documented in the set of reports. They found the staff assessment candid and balanced. With regard to the FSAP they will use the findings to critically reflect current structures and practices in Germany’s financial sector.


2. The German economy is performing well with steady growth supported by solid private consumption based on a strong labor market and higher wages and a recovery of investment. The rebalancing of the German economy is underway (net exports do not contribute to growth) despite a current account surplus that has increased because of temporary developments (commodity prices). Public and private balance sheets are and remain healthy.

3. As indicated in recent years, the German government plans to prudently build on these favorable developments, emphasizing the medium- and long-term orientation of its policies. This will ensure a reliable economic policy framework as a central precondition for stronger private investment and consumption. In addition, and very importantly, this will support the sustainability of public finances in the face of known and predictable challenges (demographics) on the one hand and provide resilience to unknown and unforeseen developments on the other hand. One example for such unforeseen developments is increased refugee-related expenditures. The approach of fostering confidence and resilience has served the German economy well and contributed to stability in Europe and globally. Looking ahead, my authorities fully agree with staff that the key task will be to strengthen the growth potential of the German economy.

Outlook and Risks

4. The projection of real GDP growth of 1.7% this year and 1.5% next year is in line with the assessment of my authorities. They share the view that strong domestic demand is offsetting currently weak exports especially in 2016. Domestic demand is expected to remain strong also in the following years on the back of large employment gains and will additionally be boosted by an expansionary fiscal and monetary policy as well as lower oil prices. Emerging bottlenecks on the labor market are expected to be dampened by high immigration. In this context it seems important to distinguish between refugees and labormarket oriented migrants with the latter typically integrating faster and easier into the labor market.

5. While my authorities largely agree with the expected path of headline inflation, the decisive role of import prices could have been emphasized more clearly compared to the impact of the output gap and monetary policy measures.

6. Concerning risks, my authorities largely agree with staff assessment. However, investment could turn out stronger than anticipated by staff contributing to a more balanced view on risks to GDP growth. Concerning the nominal side downside risks to wages seem to outweigh upside risks in the near future. An additional risk relates to the development of refugee influx.

External Assessment

7. My authorities appreciate the in-depth analysis on Germany’s external balance and agree with staff that the assessment of the German current account surplus cannot be reduced to mono-causal explanations. Temporary factors as the favorable exchange rate and commodity prices are responsible for a significant part of the recent surplus. Moreover, my authorities share the view that a large proportion of the surplus can be attributed to fundamental factors with demographics and the associated high savings rate being the most prominent drivers. These fundamental factors are slowly ceasing by nature. Therefore, it is likely that the current account will decrease only gradually. However, this should be a market driven process as the surplus reflects mainly the international competitiveness of German firms and individual decisions by consumers and companies rather than economic policy. Even sizeable increases in public capital spending would only have modest effects on the external balance and spill-over effects on partner countries would be fairly limited—this even more as final demand in Germany is not the main determinant of exports to Germany for many European neighbors as staff analysis has shown in the past (supply chain nature of trade integration).

8. As mentioned in the staff report, the Deutsche Bundesbank assesses the undervaluation of Germany’s real effective exchange rate (REER) to be far smaller than staff. The corresponding differences between staff and the Deutsche Bundesbank are partly related to the uncertainty surrounding the determination of a fundamental equilibrium value of the REER.

Fiscal Policy and Public Investment

9. Despite the favorable fiscal outcome and cautious planning for the coming years, German fiscal policy faces important challenges. First, authorities at all government levels are currently tackling the urgent task of providing humanitarian assistance to refugees and engage in efforts to support integration into the society and the labor market. Second, as in other countries, public budgets benefit from windfall savings resulting from exceptional circumstances on financial markets. A normalization in interest rates over the medium term needs to be factored in today’s budget planning. Third, population ageing will put pressure on public finances through the pension, health and long-term care system.

10. Given these challenges, the German government aims to maintain a balanced-budget target over the entire projection period until 2020. It will avoid pushing the fiscal deficit to the numerical limits allowed by national and European fiscal rules, and rather strives for safety margins to ensure that fiscal rules are observed at all times.

11. My authorities agree with staff that fiscal policy is expansionary in particular due to refugee-related spending as well as tax relief notably for families, single parents and low-income earners. At the same time, public investment continues to expand faster than total public spending; a special focus is put on infrastructure, education, research and development. Against this background, my authorities do not agree with staff that “a more ambitious investment program is needed”. While “increasing public investment” is high on the government’s agenda the overall quality of public infrastructure in Germany is considered to be very good also in international comparisons. The challenge is to preserve infrastructure quality in an efficient manner.

12. For this reason, my authorities intend to establish a federal transportation entity with the aim to unbundle the mixed responsibilities of the federal level and the German states, the “Länder”, to increase overall efficiency. This entity will be organized on the basis of private-sector principles. It will be responsible for planning, construction, operation, maintenance and financing of the federal highway infrastructure based on the life cycle model. To ensure sustainable and predictable financial resources for the transport infrastructure the federal transportation entity will be financed mainly by user fees. Private investors will be given the opportunity to finance projects related to transport infrastructure depending on economic viability.

13. In addition, my government intends to remove administrative and regulatory constraints to public investment by municipalities and thereby follows up on recommendations of the IMF. Germany’s PPP advisory agency Partnership Deutschland will be transformed into a public agency. This new center of excellence provides advisory service to municipalities in Germany throughout all project phases and irrespective of the selected procurement method.

Structural Reforms and Potential Output

14. In view of unfavorable demographics, my authorities agree that reforms need to be implemented to strengthen potential output and to increase productivity. Prioritizing investment, boosting labor supply, and more competition in the services sector are certainly key reform areas as pointed out by staff. A further target of the federal government is to attract qualified workers from abroad.

Private Investment

15. Next to the initiatives to promote efficient private and public investment at all levels of government mentioned above (para 12 and 13) my authorities are undertaking several measures to create a more attractive environment for private investment. Thus, they press vigorously ahead with the energy transition and combine it with an intelligent innovation policy. They also firmly support the expansion of digital infrastructure and provide targeted incentives for small and medium-sized enterprises to invest in the digital transformation. They are improving the environment for “young” companies and venture capital.

Boosting Labor Supply in an Ageing Society

16. Staff suggestions to boost labor supply will be an important input for ongoing discussions in Germany. I would highlight the following points with regard to the three areas emphasized by staff:

  • − My authorities agree that extending working lives would improve fiscal sustainability and increase old-age income. Initiatives to create incentives to work beyond the statutory retirement age, e.g. by implementing actuarially neutral schemes, are important to increase retirement age effectively. Indexing the statutory retirement age to life expectancy, as proposed by staff, is one option. To improve the resilience of the social system against adverse demographic developments, it is important to strengthen the second pillar as well, in particular by substantially broadening the coverage of occupational schemes.

  • − The refugee influx in Germany represents a tremendous challenge to all levels of government, to business and society as a whole. My authorities agree with staff that the long term task is to help refugees integrate into the labor market and obtain the necessary qualifications. The German government has taken extensive measures such as accelerating asylum procedures, providing language skills, and improving skill recognition. Further measures are planned by the upcoming integration law. My authorities agree that continuing adjustments are necessary. With regard to the staff’s recommendation to vigorously use active labor market policies such as temporary wage subsidies, I would like to point out that in 2016 extensive funds of additional €575 million are provided for active labor market programs for recognized refugees including job search assistance, on the job training, subsidized public sector employment as well as wage subsidies. In addition, for asylum seekers the budget for active labor market policies has been raised by €350 million in 2016. However, measures such as wage subsidies can only be effective, if necessary requirements for employment (e.g. language skills) are met.

  • − In the past ten years the female employment rate in Germany has significantly increased from 65.0 percent in 2006 to 73.6 percent in 2015. Still, my authorities broadly agree with staff on the importance to further incentivize female labor market participation, especially to increase hours worked. My authorities’ efforts in this regard are primarily focused on improving the reconciliation of work and family life (while they do not exclude discussions of the tax and social security system). Accordingly, high priority is given to the expansion of child care facilities in terms of quantity and quality. From 2008 until 2019 Germany will have invested €12.4 billion in child care facilities.

Stimulating Competition in the Service Sector

17. My authorities recognize that there is low productivity growth in some parts of the services sector in Germany and that less regulation could stimulate competition and growth. Against this background, regulations must be clearly justified on grounds of consumer protection, for security reasons, or to preserve the quality of vocational training. My authorities highlight that some progress was achieved with regard to professional regulations and services (veterinarians, tax advisors). However, going forward they agree to carefully examine which regulation is necessary for consumer protection, health or quality of services and weigh it against positive economic effects.

18. Although the market share of competitors to the incumbent operator in the long-distance rail passenger market segment has remained below 1 percent, the competition in the area of regional rail passenger transport and rail freight transport has increased steadily in recent years. The German government is convinced that the new “Act to Strengthen Competition in the Railway Sector” will have a positive impact on the competition in the railway market.

Housing: Relieving Price Pressure by Stimulating Supply

19. My authorities broadly agree with staff’s assessment of house price developments in Germany. While there are currently no signs of a substantial broad-based house price misalignment, residential property might be overvalued to some extent in a number of cities. They also concur that the expansion of housing supply is currently not sufficient to dampen house price inflation, and that the constrained supply of building land is an important factor for the scarcity of affordable housing. However, my authorities acknowledge that the scope for boosting building land supply in the metropolitan areas might be limited. As noted by staff, they have developed a comprehensive 10-point-plan to address supply constraints and will monitor the success of this program closely.

FSAP and Financial Sector

20. My authorities agree that the German financial sector is overall stable and robust to shocks. They agree that the persistently low interest rate environment is significantly putting pressure on the profitability of banks including Less Significant Institutions (LSIs). Because LSIs constitute the majority of German banks, German authorities will continue to carry out surveys on the low interest rate environment in order to better monitor interest rate risks. My authorities agree that banks would broadly be able to withstand market and funding liquidity shocks.

21. My authorities share most of the conclusions of the stress testing results. As they have emphasized during the FSAP in 2011, solvency of insurers still remains adequate. With transitional measures, insurers’ capital levels appear generally sufficient. My authorities know that without the transitional measures, a significant number of life insurers would have difficulties in meeting the Solvency II Capital Requirement.

22. With regard to the Insurances Solvency Stress Testing, my authorities are aware that “low profitability of life insurers hampers their ability to pay guaranteed yields to policyholders.” As Germany’s insurance sector is dominated by guaranteed return life products my authorities know that they need to be cautious when insurers adopt risky search-for-yield strategies against the backdrop of low profitability and persistent structural weakness.

23. My authorities agree that systemic risks and spillovers are important issues that should be monitored by authorities. However, they note that only limited conclusions can be drawn from the IMF staff’s analysis regarding “domestic interconnectedness among publicly traded German banks and insurers”. Although it is true that the German financial system is interconnected, the degree of interconnectedness is hard to be assessed because a comparison to other countries and industries is missing.

24. My authorities concur with staff on the key messages with respect to the German macro-prudential policy framework: while broadly appropriate, some scope for improvement is highlighted. They agree that macro-prudential analysis is highly data-dependent. An appropriate set of readily available, comprehensive, and reliable data is a precondition to monitor developments, to identify possible risks to financial stability, to choose and calibrate the adequate instruments and assess their effects afterwards. This argument is of particular relevance for the real estate sector. My authorities are currently working on a legal act implementing a recommendation of the German Financial Stability Committee (FSC). The German FSC has recommended to create additional macro-prudential tools as regards residential real estate as well as a sufficient and proportionate legal basis for the collection of data to the extent and at all the level of detail necessary for the calibration and application of the macro-prudential tools.

25. The assessment shows Germany’s high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) in general and in particular as Germany has been assessed not only against the essential but the additional criteria. Furthermore, the BCPs have been revised substantially in 2012. In addition, Germany is the first country that has been assessed under the new European banking supervision regime—Single Supervisory Mechanism (SSM)—which conferred specific tasks relating to the prudential supervision of credit institutions upon the ECB. Regarding the assessment of the core principles my authorities think that the compliance with a number of principles is assessed somewhat too negative and that the current regime effectively fulfils the IMF’s requirements. In most cases the results are driven by the fact that assessors are not satisfied with the role of the supervisory board within the context of the rules of the German company law. In my authorities’ view this critical assessment of the supervisory board and its role within the corporate governance framework in Germany are contradictory to the statement of the Basel Committee of Banking Supervision, which states that both concepts—one-tier and two-tier systems—are both equivalent although the role of the board in its supervisory function in a one-tier-system is broader than in a two-tier-system.

26. My authorities share the assessment that the transposition of the EU Bank Recovery and Resolution Directive (BRRD) into German law has significantly strengthened the bank recovery and resolution regime as well as crisis management in Germany. Germany has made significant progress in recovery and resolution planning. Resolution of Significant Institutions (SIs) and transnationally active LSIs is taken to a European level and my authorities agree that decision-making processes are complex. Identified operational challenges are being addressed and my authorities are working on making arrangements to ensure that resolution instruments can be timely implemented in order to avoid potential negative market sentiments.

27. In addition, the harmonized EU directive on deposit guarantee schemes, which entered into force in 2014, establishes a legally binding deposit guarantee for Europe of up to €100.000 per depositor and therefore addresses prior concerns by the IMF. In certain circumstances this limit can be extended. The German Act transposing the Deposit Guarantee Scheme Directive (DGSD) entered into force in July 2015. Since then also mutual protection schemes introduced a legal claim for reimbursement of €100.000.

The assessment with regard to Eurex Clearing AG shows Germany’s high level of compliance with the CPSS /IOSCO Principles for Financial Market Infrastructures (PFMI). The German authorities are convinced that Eurex Clearing AG’s arrangements fully observe the regulatory requirements laid down in the PFMI including those on operational risk management.