5473 515rev2 en - european parliament · inflation decreased from 2.4% in 2001 to 1.4% in 2002,...
TRANSCRIPT
DIRECTORATE-GENERAL FOR RESEARCH
Directorate A: Medium and Long-Term Research
Division for Economic, Monetary and Budgetary Affairs
BRIEFING
ECON 515 EN/Rev.2
THE GERMAN ECONOMY
The opinions expressed are those of the author
and do not necessarily reflect the European Parliament's position.
Luxembourg, September 2003 PE 302.203/rev.2
GERMANY
PE 302.203/rev.2 2
This document is published in English (original), French and German.
You will find the full list of the "Economic Series" briefings at the end of this publication.
Summary
The aim of this briefing is to give a general overview of the German economy and its
prospects in the medium term. It is based on the list of criteria of the Stability and Growth
Pact and on the fourth update of the German Stability Programme, presented on 18 December
2002. Subsequent changes in the economic outlook were taken into account where new data
and forecasts have become available.
Publisher: European Parliament
L - 2929 Luxembourg
Author: Hanna Dahlberg, Agnieszka Ruminska
Responsible Official: Aila Asikainen
Directorate General for Research - Directorate A
Division for Economic, Monetary and Budgetary Affairs
Tel: (352) 4300 24114
Fax: (352) 4300 27721
E-mail: [email protected]
Reproduction and translation of this publication is authorised, except for commercial purposes,
provided that the source is acknowledged and that the publisher is informed in advance and
supplied with a copy.
Manuscript completed on 22 September 2003
GERMANY
PE 302.203/rev.2 3
Contents
GENERAL INTRODUCTION...............................................................................................................................5
BACKGROUND TO THE GERMAN STABILITY PROGRAMME ..............................................................6
EXCESSIVE DEFICIT PROCEDURE ............................................................................................................................6
RESULTS 2001–MID-2003.....................................................................................................................................7
ANALYSIS AND FUTURE PROSPECTS ...........................................................................................................8
ECONOMIC GROWTH ..............................................................................................................................................8
EXTERNAL BALANCE..............................................................................................................................................9
INFLATION............................................................................................................................................................10
EMPLOYMENT ......................................................................................................................................................11
PUBLIC DEFICIT ....................................................................................................................................................12
GOVERNMENT DEBT.............................................................................................................................................14
STRUCTURAL REFORMS.................................................................................................................................14
LABOUR MARKET .................................................................................................................................................15
PENSION SYSTEM REFORMS..................................................................................................................................16
TAX SYSTEM.........................................................................................................................................................17
HEALTHCARE REFORMS .......................................................................................................................................17
FURTHER REFORMS ..............................................................................................................................................18
POLITICAL BACKGROUND.............................................................................................................................19
THE POLITICAL SYSTEM .......................................................................................................................................19
PUBLIC OPINION ...................................................................................................................................................19
ECONOMIC AFFAIRS SERIES BRIEFINGS .................................................................................................21
Charts and tables
TABLE 1: KEY INDICATORS FOR 2001 - 2003............................................................................................................ 7
CHART 1: GROSS DOMESTIC PRODUCT 1990-2006.................................................................................................. 9
CHART 2: GERMANY'S BALANCE OF TRADE AND CURRENT ACCOUNT 1990-2002................................................... 9
CHART 3: GERMAN INFLATION 1996-2006............................................................................................................. 10
CHART 4: MONTHLY INFLATION 2001–2003.......................................................................................................... 10
CHART 5: UNEMPLOYMENT 1992-2002.................................................................................................................. 11
CHART 6: MONTHLY UNEMPLOYMENT 2001-2003 ................................................................................................ 12
CHART 7: GENERAL GOVERNMENT DEFICIT, 1993-2006....................................................................................... 13
CHART 8: GENERAL GOVERNMENT CONSOLIDATED GROSS DEBT 1993-2006........................................................ 14
TABLE 2: BUNDESTAG ELECTIONS 22 SEPTEMBER 2002 ....................................................................................... 19
* * *
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General Introduction
Under Article 99 of the Treaty, all EU Member States – whether they fully participate in the
Single Currency or not – are required to regard their economic policies as a matter of
common concern, and to co-ordinate them within the Council. Co-ordination is carried out
within the framework of recommended "broad guidelines" for the economic policies of
Member States.
In addition, under the pre-Single-Currency transitional provisions outlined in Treaty Article
116, Member States wishing to join the € area were asked to adopt multi-annual programmes
intended to ensure the lasting convergence necessary for the achievement of economic and
monetary union. These formed the basis of the May 1998 decisions on € area membership.
The requirement to submit such "convergence programmes" remains for those countries
still outside the euro area. In the case of countries which have already adopted the €, the
Stability and Growth Pact and Article 4 of the EU Council regulation 1466/97 on tighter
surveillance of budgetary implementation calls for similar "stability programmes" to be
submitted. These are three-year rolling programmes, and focus on progress in meeting the
Pact’s two major objectives:
• a budget deficit below 3% of GDP in any one year; and
• an overall budgetary balance over the economic cycle.
The credibility of the Stability and Growth Pact has come under strain during the current
economic downturn as doubts have arisen concerning the commitment of some Member
States. As a response, the Commission proposed slight modifications to the interpretation of
the Pact 1. It emphasised that budgetary objectives should be set and outcomes analysed in
structural terms, i.e. after adjusting the nominal position to the economic cycle. A softer
interpretation of the balanced budget requirement would apply to Member States with a
relatively low debt burden (less than 60% of GDP) and sustainable public finances.
While adopting a common method of cyclical adjustment, the Council did not endorse this
proposal but emphasised the need to assess the Programmes case by case, putting weight on
the long-term sustainability of public finances and securing a sufficient safety margin,
including an allowance for automatic stabilisers to operate fully, without breaching the 3%
reference value. Further, the planned evolution and quality of public finances should be
coherent with the close-to-balance requirement. Finally, a rule by which structural deficit
should be reduced annually by 0.5% of GDP in Member States not having yet reached a
structurally balanced position received backing from the Council.
Each Stability/Convergence programme is the subject of a Commission assessment and a
Council opinion, and forms part of the input to the broad guidelines (BEPGs), together with
the overall annual implementation report published by the Commission in January.
While the BEPGs indicate the medium-term orientation for the Member States' policies, the
annual updates of the Stability/Convergence Programmes set out the measures decided by the
national governments for the achievement of the medium-term goals. They should reflect the
budget proposals for the following year. The annual updates should be submitted between
mid-October and the beginning of December.
The initial Convergence and Stability programmes were published in late 1998. They have
been updated four times. The fourth updates became available towards the end of 2002.
1 "Communication on strengthening the co-ordination of budgetary policies", COM(2002) 668 final.
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Background to the German Stability programme
The update of the German Stability Programme covering the period from 2002 to 2006 was
published in December 20022. It is based on data available at the end of November as the
legislative elections in September resulted in the introduction of a completely new federal
budget at the beginning of December 2002.
In its opinion of 8 January 2003 the Commission came to the conclusion that the scenario of
1.5% economic growth annually for the period 2002-2006, underlying the German stability
programme, was very optimistic and subject to some risks3. The programme forecasts that,
from 2006 onwards, German government finances would meet the requirements of the
Stability and Growth Pact and that the budget would be close to balance or in surplus.
The Commission demanded commitment and urged German government to make progress in
adjusting the underlying budgetary position by achieving an annual improvement of 0.5 % of
GDP on average.
Moreover, in view of the extra burden on Germany's finances due to its ageing population, the
Commission urged Germany to make far-reaching structural reforms and to strengthen the
sustainability of general government finances.
The Council gave its opinion on the updated Stability Programme on 21 January 20034. It
observed that there was a major risk that the general government deficit would again exceed
the 3% reference value again in 2003. The growth forecast of 1.5% also appeared too
optimistic to the Council, which went on to note the commitment of the German government
to reduce the structural deficit in line with the Commission recommendation. In order to
achieve this improvement, structural reforms would be needed.
Excessive deficit procedure
After the Commission autumn forecast 2002 had indicated that the German deficit might
reach 3.8% of GDP in 2002, the Commission prepared a report on Germany in November
2002 and recommended that the Council take a decision on the existence of an excessive
deficit. The Council took such a decision on 21 January 20035. In its recommendation to
Germany, the Council requested the German Government to implement all measures
announced for 2003 by the deadline of 21 May 2003. The Council further emphasised that
structural reforms and better co-ordination of budgetary policy in different government levels
would be needed.
Germany's budgetary woes have continued and aggravated in 2003. First, the Government
was forced to admit that, contrary to what was announced in the 2002 Stability Programme
update, the budget deficit would exceed the 3% limit in 2003. By summer 2003, an excessive
deficit had also become very likely also for 2004, which brought the question of pecuniary
sanctions into the agenda.
2 German Stability Programme updated December 2002.
(http://www.bundesfinanzministerium.de/Anlage16208/Deutsches-Stabilitaetsprogramm-Aktualisierung-
Dezember-2002.pdf). 3 Commission assesses the German Stability Programme Update (2002-2006), Commission press release
IP/03/14. 4 Council opinion of 21 January 2003 on the updated stability programme for Germany, 2002 to 2006.
(http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=3200
3A0204(01)&model=guichett). 5 2480th Council meeting, Economic and financial affairs - Brussels, 21 January 2003, 5506/03 (Presse 15).
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Results 2001–mid-2003
In 2002, the development of the German economy was considerably less favourable than
expected. The rate of growth declined further from the low rate registered in 2001 and
reached its lowest figure since the post-reunification recession in 1993. GDP growth was
0.2% in 2002. In the Budget Bill for 2004 the growth forecast for 2003 was 0.7%6.
Stagnant domestic demand, a weak global economy, and the financial burden of
reunification, as well as the "straitjacket" of EMU, are generally cited as reasons explaining
the disappointing performance. Furthermore flooding hit Germany hard in autumn 2002,
which put an extra burden on public expenditure. The Federal Government contributed
€ 3.5 million to the Flood Relief Fund.
Table 1: Key indicators for 2001 - 2003
Germany
2001
EU Average
2001
Germany
2002
EU Average
2002
Germany
2003
forecast*
Real GDP
growth (%) 0.6 1.6 0.2 1.0 0.7**
Inflation rate -
HICP (%) 2.4 2.2 1.3 2.1 1.5
Unemployment
(%) 7.7 7.7 8.2 7.6 9.4***
Budget balance
(% of GDP) -2.8 -0.9 -3.5 -1.9 -3.8
Government debt
(% of GDP) 59.5 63.0 60.8 62.3 60.5
* German government forecast of July/August 2003.
** Major German research institutes forecasts are considerably lower, at 0% or even negative.
*** Level in August 2003.
Source: Eurostat
The year 2002 was characterised by decreasing investment in equipment, continued
downsizing in the construction sector together with the lowest business expectations since
19937. Imbalances in the labour market and structural rigidities weakened the ability of the
economy to adjust to the unfavourable external environment. Therefore, highly influenced by
the uncertainty about a possible military conflict between USA and Iraq and the fall in the
stock market, the German economy could not overcome the downturn. Only an increase in
exports contributed to GDP growth in 2002. Domestic demand strengthened towards the
end of 2002. Inflation decreased from 2.4% in 2001 to 1.4% in 2002, which is below the
European average, fuelling fears of deflation.
The German labour market has been strongly affected by the economic slowdown. In
December 2002 the number of registered unemployed persons had reached an annual average
of 4.16 million, an increase of 197 000 from the previous year. The rise was greater in West
than in East. In the latest forecasts, the Government expects unemployment to reach an
annual average at 4.5 million in 2003.
6 Entwurf des Bundeshaushalts 2004 und Finanzplan des Bundes 2003 bis 2007, Bundesministerium der
Finanzen, 02 July 2003. (http://www.bundesfinanzministerium.de/Aktuelles/Pressemitteilungen-
.395.19220/Pressemitteilung/Entwurf-des-Bundeshaushalts-20...htm). 7 Survey results - Fall 2002, DIHK - Association of German Chambers of Industry and Commerce, 2002.
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PE 302.203/rev.2 8
Analysis and future prospects
Despite the uncertainty caused by prospects of a conflict in Iraq in late 2002, as the Stability
Programme update was being prepared, the assessment for 2003–2006 contains improved
growth, which was expected to arise partly as a result of increased export and domestic
demand. GDP growth was expected to be 1.5% in 2003 and 2.25% in average for the period
2004 to 2006. This macro-economic forecast was based on assumptions that world growth
would pick up during 2003 to 3.5% from a level of 2.5% in 2002 and that world trade would
grow by approximately 5.5% to 6% in 2003. The Iraq conflict was not assumed to have any
lasting negative effect on international financial markets, oil prices, and consumer or investor
confidence. Furthermore, it was assumed that capital markets would stabilise.
As it has turned out since then, the long-awaited recovery of the world and the euro area
economy had not materialised by mid-2003. Growth has stalled in the German economy. As
business and household confidence indicators were plummeting in early 2003, the German
government initiated a programme of reforms, with the aim of restoring confidence through a
series of structural reforms.
Economic growth
Growth in the German economy almost stalled in 2002. Relying on an optimistic outlook
with regard to the developments in the world economy, the Stability Programme update
foresaw a growth rate of 1.5% for 2003. Moderate wage trends, stable prices, increasing
corporate and asset income and low capital market interest rates were other factors assumed
to lift the German economy from the doldrums. Announced labour market reforms would
provide a further contribution to growth as the number of gainfully employed persons was
assumed to increase 0.5% per year over the programme period. The strongest input to higher
growth was to come from exports.
Since the beginning of 2003, growth forecasts have been scaled down more than once both
for the German and the world economies. The German Ministry of Finance8 now expects the
GDP to grow by 0.7% in 2003, while the major research institutes' forecasts range from 0%
to slightly negative numbers. For instance, the German Institute for Economic Research
(Deutsches Institut für Wirtschaftsforschung - DIW)9 expects a decline of 0.1%. Even if
growth were to resume in the second half of the year, as some expect, the pick-up in
Germany would have to be quite strong to bring the economy above the growth rate of 0.2%
registered in 2002.
8 Entwurf des Bundeshaushalts 2004 und Finanzplan des Bundes 2003 bis 2007, Bundesministerium der
Finanzen, 2 July 2003. (http://www.bundesfinanzministerium.de/Aktuelles/Pressemitteilungen-
.395.19220/Pressemitteilung/Entwurf-des-Bundeshaushalts-20...htm). 9 Deutschland: Stagnation schürt Deflationsgefahr. DIW Berlin stellt Sommer-Grundlinien 2003/2004 vor,
Deutsches Institut für Wirtschaftsforschung, 1 July 2003.
(http://www.diw.de/programme/jsp/presse.jsp?pcode=215&language=de).
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PE 302.203/rev.2 9
Chart 1: Gross Domestic Product 1990-2006
(annual change in volume, %)
5
2,2 2,3
-1 ,1
5,7
1,7
0,81,4
2 2
2,9
0,20,6
1,5
2 ,25
0 ,5
2 ,252,25
-2-101234567
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
G ermany S tability programme 2001
S tability programme 2002 EU -15
Source: Eurostat and Stability Programme
External balance
Germany is the world's second largest exporter and importer (after the US), with a high
degree of economic openness. In the 90s there was a particularly marked expansion in
German exports. Germany's most important trading partners are the other EU countries, the
US, Japan and, increasingly, countries in Central and Eastern Europe.
In 2002 relatively high exports contributed largely to the modest overall GDP growth. At the
same time, a drop in domestic demand for imports resulted in a favourable trade balance that
reached its record level of €136 billion. Investment goods remained the main export category,
and transition economies were the destination that accounted for the biggest increase in trade
in terms of absolute value.
For the second time since the beginning of the 90s, the current account closed in 2002 with a
credit balance. At 1.9% of GDP and €40.8 million, it reached its record level since the
German reunification.
Chart 2: Germany's balance of trade and current account 1990-2002
(% of GDP)
1 ,1 1 ,42 2 ,3 2 ,6 3 3 ,4 3 ,6 3 ,4 3 ,1
4 ,8
- 0 ,5 - 0 ,8- 0 , 3 - 0 , 3
5 ,9 6 ,3
- 0 , 1
3 ,5
- 1 - 0 ,7 - 1 ,2 - 1- 0 , 8
0 ,5
1 ,9
- 2
0
2
4
6
8
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
B a la n c e o f T r a d e C u r r e n t a c c o u n t
Source: Eurostat
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Inflation
Consumer prices remained stable in 2002. German prices registered an increase of barely
1.4% the lowest inflation rate in the euro area, where the average rate was 2.1%. This was in
particular due to falling import prices and subdued growth. The European Commission
expects the German inflation to remain at low levels and prices to increase in 2003 and 2004
by 1.3% and 1.2% respectively.
Chart 3: German inflation 1996-2006
(HICP, annual change, %)
1 ,2
1 ,9
1 ,5 1 ,5 1 ,5 1 ,51 ,5
0 ,6 0 ,6
1 ,4
1 ,31 ,5
0
0 ,5
1
1 ,5
2
2 ,5
3
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
G erm an y S tab ility P rog ram m e 2 0 02 E U -1 5
Source: Eurostat and Stability Programme
The low inflation figures have not been universally welcome. There have been warnings
about the risks of a vicious deflation cycle, which would be about to hit Germany. The
common monetary policy, leading to higher real short-term interest rates in Member States
with low inflation, is deemed by some to be too tight for Germany. Some even consider
deflation to be such a risk that it should be given priority over short-term fiscal consolidation.
Others warn, on the contrary, that the mere fact that the prices of some goods fall, as has
happened in Germany, is no evidence of a general fall in price level. The most recent price
developments indicate a slight increase in the German inflation rate.
Chart 4: Monthly inflation 2001–2003
(HICP, month-to-month change over 12 months, %)
0
1
2
3
4
Jan-01
Mar-01
May-01
Jul-01
Sep-01
Nov-01
Jan-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03
EU-15 Germany
Source: Eurostat
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PE 302.203/rev.2 11
Employment
At the end of the 80s the German economy had the lowest unemployment rates in the EU.
After re-unification in 1990, the situation gradually changed. Particularly in the new Länder
there were many cutbacks in jobs due to restructuring. In mid-90s, an economic downturn led
to still higher unemployment, the unemployment rate rising from 4.8% in 1990 to 8.2% in
1994 and peaking at 9.7% in 1997. Over the following years, the number of the unemployed
declined somewhat but less than hoped for. The trend is currently in the rise again, and will
exceed the 9% mark in 2003.
Chart 5: Unemployment 1992-2002
8,27,77,88,49,19,78,7
88,27,76,4
0
2
4
6
8
10
12
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
G ermany EU-15
Source: Eurostat
In December 2002 there were 4.2 million people (8.2% of civilian labour force) without jobs,
the highest rate for the last three years10. The increase of 197 000 since the end of 2001
reflects persisting adverse conditions in the German labour market. The number of gainfully
employed persons fell by 0.5%, which is significantly less than the increase in the number of
unemployed persons. Unemployment is increasing more rapidly in West than in the new
Länder. Nevertheless, the unemployment rate is still around 10 percentage points higher in
the East than in the West.
Nor is the situation improving in 2003 despite the gradual implementation of labour market
reforms (Hartz scheme), as the effect of these reforms will only be seen later (see also section
on Structural reforms). The Commission expects an increase of 350 000 unemployed in 2003.
In its September outlook, the German government expected unemployment to reach 4.5
million on average in 2003. In August 2003, the German unemployment was stable at the
same level as in the previous months (9.4%)11.
10 European Economy; Economic forecast Spring 2003, European Commission, No. 2/2003. However, the
German Council of Economic Experts states in "Annual Report 2002/03" the figure of 9.8% for
unemployment according to the definition of the Federal Labour Office. 11 The Federal Labour Office (www.arbeitsamt.de/hst/services/ statistik/english/s001e.pdf ).
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PE 302.203/rev.2 12
Chart 6: Monthly unemployment 2001-2003
77,58
8,59
9,510
Jan-01
Mar-01
May-01
Jul-01
Sep-01
Nov-01
Jan-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03
EU-15 Germany
Source: Eurostat
The monthly unemployment rate started to deviate from the EU-average during 2001. It is
expected in the draft budget for 2004 (Entwurf des Bundeshaushalts 2004), however, that
unemployment will stop rising in 200412.
Public deficit
The ratio of public deficit to GDP reached 3.5% in 2002 and was thereby considerably higher
than planned the year before. This was primarily due to weaker growth and, as a
consequence, lower revenue than expected.
With this perspective, important consolidation and savings measures were agreed on in the
coalition agreement, after the legislative elections in autumn 2002, and submitted in the first
budget proposal in October 2002. Nevertheless, as subsequent projections indicated higher
expenditure and lower revenue, the budget proposal had to be revised no later than one month
after it had been put forward. The Bundestag approved the final version of the federal budget
2003 on 3 December 2002. It includes an additional savings programme (around €14 billion
or approximately 0.7% of GDP) for all government bodies.
An emergency package with respect to pensions, environmental taxes and health care,
foreseeing reductions in tax allowances and reforms in the labour market, was designed to
improve public finances. Based on this programme and the 1.5% of GDP growth forecast, an
aggregate deficit of 2.75% was expected for 2003 (€18.9 billion)13.
As growth forecasts were being scaled down starting from January 2003, the expected deficit
rose. While the impact of lower growth was believed or at the very least, declared to be
"marginal" on the deficit in late January, the Government had to admit by mid-year that the
3% limit would certainly be breached for the second year in 2003. In July 2003 the Ministry
of Finance revised the forecast budget deficit to 3.5% of GDP in 2003. The latest indications
from the German Government point to a worse outcome still for 2003: gross deficit reaching
almost 3.8% of GDP. This forecast is due to a combination of worse-than-expected growth
and the Government's plans to cut income taxes without an offsetting revenue increase from
elsewhere. While the Government maintains that it aims at bringing the deficit below the 3%
12 Entwurf des Bundeshaushalts 2004 und Finanzplan des Bundes 2003 bis 2007, Bundesministerium der
Finanzen, 2 July 2003. (http://www.bundesfinanzministerium.de/Aktuelles/Pressemitteilungen-
.395.19220/Pressemitteilung/Entwurf-des-Bundeshaushalts-20...htm). 13 The situation of the world economy and the German economy in Autumn 2001, Working Community of
German Economic Research Institutes, Berlin; 2001.
GERMANY
PE 302.203/rev.2 13
limit in 2004, the risk of the limit being breached for the third year in a row seems to be
growing14.
Chart 7: General Government Deficit, 1993-2006
(net borrowing -/net lending + as a % of GDP)
-3,1-2,4 -2,7 -2,2
-1,5
1,3
-3,5-2,8
-3,5-3,4
-1-1,5-2,75
-3,75
0
-6
-4
-2
0
21993
1994
1995
1996
1997
1998
1999
2000*
2001
2002
2003
2004
2005
2006
Germany Stability Programme 2001
Stability Programme 2002 EU-15
* Including the proceeds from the sales of the UMTS licences. Germany without these proceeds -1.2%.
Source: Eurostat and Stability Programme 2002
Already in 2002, the need to ensure that budgetary discipline be maintained at all levels of
government was recognised. Therefore, the Financial Planning Council agreed on a National
Stability Pact, imposing financial discipline on regional and local authorities15 and amending
the Haushaltsgrundsätzegesetz (Budgetary Principles Act). On 27 November 2002, Federal
Government and the Länder on the basis of the amended §51a of the Act Maintenance of
budgetary discipline within the framework of European Economic and Monetary Union
approved the timetable and a plan of six joint actions for attaining balanced general
government budget in the year 2006. In its Opinion of 21 January 2003, the Council "noted
with satisfaction the approval and implementation of the new §51a".
In the 2003 BEPGs16 Germany was asked to reduce its gross deficit by 1 percentage point of
GDP in 2003 and to put an end to the excessive deficit no later than 2004. Furthermore it was
considered unlikely that Germany would be able to reach the target of a budgetary position
"close to balance" in 2006, if no additional structural reforms were effected. Germany was
advised to implement urgent reforms in the labour market as well as in the social security and
benefit systems in general, and to reduce the regulatory burden on the economy. Moreover,
the cyclically-adjusted deficit should be reduced by at least 1 percentage point of GDP
between the end of 2003 and 2005.
14 Finanzpolitik stützt Konjunktur! Ministry of Finance, Press release of 29 August 2003
(http://www.bundesfinanzministerium.de/BMF-.336.20042/Pressemitteilung/.htm) 15 National Stability Pact, The Federal Government.
(http://text.bundesregierung.de/frameset/ixnavitext.jsp?nodeID=8547). 16 The 2003 Broad Economic Policy Guidelines, ECOFIN, 3 June 2003.
GERMANY
PE 302.203/rev.2 14
Government debt
Gross government debt rose from 46.9% of GDP in 1993 to some 61% in 1997. Ever since
the German government debt has fluctuated around 60% of GDP, on both sides of the
Maastricht criterion of 60%.
Chart 8: General government consolidated gross debt 1993-2006
(% of GDP)
59,5 60,8
46,9 49,357 59,8 61
60,9 61,2 60,2
0
20
40
60
80
1993 1995 1997 1999 2001 2003 2005
Germ any Stability Programme 2001
Stability Programme 2002 EU-15
Source: Eurostat and Stability Programme
The 2002 update of the Stability Programme foresaw an increase to 61.5% in the debt ratio in
2003, although a smaller deficit and an economic recovery were assumed. In the following
years the debt ratio was expected to decline slowly, reaching 57% of GDP in 2006. The
Commission was more pessimistic about the developments already in its 2003 spring
forecast, expecting it to rise to 62.7% in 2003 and further to 63% in 2004. In its most recent
previsions, the German Government has indicated that it expects the outcome for 2003 to be
around 63% of GDP, higher than the previous peak of 61.2% registered in 1999.
Structural Reforms
The German economy has suffered from low growth for the last decade. Only in two years
did the German GDP growth exceed 2%. Structural rigidities have been identified as a major
cause for this disappointing performance. Some attempts to remove such rigidities and to
raise the potential growth rate of the German economy have been made. The first phase of a
tax reduction scheme has been implemented and a pension reform has been undertaken,
lowering compulsory contributions to the public scheme and providing incentives to save in
individual pension plans as well as measures to stimulate employment.
Since the election in September 2002, as the economy was coming close to a standstill, the
Government became more ambitious in planning measures to reduce structural rigidities. On
14 March 2003 Chancellor Schröder launched a reform package named Agenda 2010 that
should help boost the German economy, in particular by reducing rigidities. Agenda 2010,
together with the final phase of the tax reform, which has been brought forward to 2004, are
hoped to boost economic growth, safeguard the social security systems in the long term, and
strengthen Germany as a business location17. In the 2003 BEPGs these reforms are expressed
to "constitute important steps towards solving Germany's structural problems"18.
17 The most frequently asked questions on Agenda 2010, Bundesregierung.
(http://eng.bundesregierung.de/dokumente/Artikel/ix_500463_4317.htm). 18 The 2003 Broad Economic Policy Guidelines, ECOFIN, 3 June 2003.
GERMANY
PE 302.203/rev.2 15
Labour market
The year 2002 was marked by series of reforms aiming to improve the conditions for growth
and employment. The Job-AQTIV Act was implemented to promote the provision of job
placement and counselling, actions reducing unemployment among severely handicapped and
among young people, measures facilitating women’s insertion to active life were taken
through the new legislation on active labour market policies (ALMPs). These reforms were in
line with the 2002 BEPGs but they were not sufficient to reduce chronic unemployment.
In August 2002 the Hartz Commission presented a comprehensive plan on creating jobs.
Based on these recommendations, two acts on Modern Services in the Labour Market (Hartz
Acts I and II) were implemented in January 2003. The acts focus mainly on "improving the
basic conditions for rapid and lasting job placement and on building more bridges to
employment and creating new areas of employment"19.
The Harz reform introduced in November 2002, included the so-called "Capital for Work"
(Kapital für Arbeit) programme. The aim of the programme is to encourage companies to
hiring unemployed people by offering them a loan facility of up to €100 000 for each
appointment. After five months, 2 600 unemployed had got a new job. The programme also
aims to improve training opportunities for young people by extending the same loan offer
for training places created.
From January 2003 self-employed people receive a subsidy during the first three years after
founding a so-called Ich AG ("I-plc") and, since April 2003, people in mini jobs, earning up
to €400, do not have to pay taxes and social welfare contributions. The Government expects
that another 320 000 jobs will be created by this measure.
On 13 August 2003 the German cabinet approved two new bills aiming to further improve
the functioning of the labour market. The Third Bill on Modern Service in the Labour Market
(Hartz III) will change Germany's national employment administration to be more active
in helping the unemployed to find work. Subsequently the Fourth Bill on Modern Services in
the Labour Market (Hartz IV) consists of various measures, such as reforming the local
government finances and providing basic security for job seekers. It also important changed
to unemployment benefits. The entitlement period for the assistance to the unemployed
(Arbeitslosengeld) is to be restricted to a maximum 12 months from the current 32 months (to
18 months for those over 55 years old) and the income of the unemployed person's partner is
to be taken into account 20. Sanctions on unemployed persons refusing to take up work are to
be tightened. Furthermore, the level of the new unemployment benefit for the long-term
unemployed (Arbeitslosengeld II) is to decrease to the level of the social assistance
(Sozialhilfe). These two types of benefits are to be merged21. The law is planned to come into
force on 1 January 200422.
The Hartz proposals have so far primarily been seen as leading to greater wage flexibility for
low-skilled workers and helping to create jobs in the low-income sector.
In the 2003 BEPGs Germany is encouraged to promote job creation and adaptability and
mobilise the unutilised employment potential. Further recommendations to Germany are to
continue the tax cuts in order to ensure sufficient incentives to take up work or to move into a
higher income bracket. Germany is moreover asked to ensure that wages reflect better
19 Labour Market, Bundesregierung, 1 August 2003. (http://eng.bundesregierung.de/frameset/index.jsp). 20 Public Finances in EMU 2003, European Commission, 2003. 21 German cabinet approves bills aimed at bringing far-reaching reforms, Bundersregierung, 14 August 2003. 22 Germany's national employment agency to undergo modernization, Bundersregierung, 14 August 2003.
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PE 302.203/rev.2 16
productivity differences across skills and regions and carry forward the reforms to improves
the efficiency of ALMPs.
Pension system reforms
The social security system in Germany is one of the most generous in the world. The need for
fundamental reform has long been recognised, in view of Germany’s ageing and declining
population. Demographic changes increase the uncertainty about the level of future
contributions and expected benefits.
In order to secure future pensions without creating excessive burden to public finances,
Chancellor Schröder's first cabinet introduced a pensions reform in 2001. The following are
some of the key element.
• Gradual lowering of the statutory contribution rates and keeping them at the level of
maximum 20% of gross pay. (The rate was reduced from 20.3% in 1998 to 19.1% in
2002, before the budget gap forced the Government to raise it to 19.5% in 2003.)
• Return to the principle of wage-related pensions.
• Creation of voluntary additional pension schemes with capital coverage and government
support.
• Gradual lowering of the statutory pension levels from the present 69% of average net
income to not less than 67% in 2030.
Future reductions in the state pension scheme, functioning on a pay-as-you-go (PAYG) basis,
will be compensated for through the second and third pillars of the pensions system:
funded occupational and private pensions. In the Pension Reform Act of 2001 employers are
required to provide employees with access to an occupational pension. Employers are free to
choose from different types of insurance arrangements. Some among these qualify for tax
advantages. As a private pension scheme, the so-called Riester Pension (Riester-Rente) was
introduced on 1 January 2002 as voluntary contributions. The contribution will increase
gradually from 1% of gross salary in 2002 to 4% in 2008. Among other measures introduced
was a phase-out of early retirement programmes23. Moreover, amendments to the Civil
Servants' Pension Act and the Military Pension Act were introduced in 2002 aiming to slow
the rise in pensions burden in the future.
In view of the difficulties in limiting the budget deficit for 2003, the Government raised
compulsory pensions contributions in the 2003 budget from 19.1% to 19.5% of gross salary,
expecting to raise an additional €5.7 billion in revenue. Despite this emergency measure, the
core of the new concept – moving toward capital-funded pension schemes – has not been
abandoned. The Government has set itself a target level of 40%, to which it intends to reduce
the compulsory pension, health, unemployment and disability insurance payments, which
currently amount to 41.7% of the gross wage.
The discussion about further reforms continues, especially after the Rürup Commission
presented its report on the financing of the social security on 28 August 2003. Among the
recommendations with regard to pensions system, the Commission advocated raising the
statutory retirement age from 65 to 67 years. However, the two major political parties, CDU
and SPD, have so far seemed to prefer concentrating their efforts on raising the effective
retirement age from the current 60 years.
23 OECD Economic Survey: Germany, OECD, December 2002.
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PE 302.203/rev.2 17
Tax system
Since the beginning of 2000, the German government has introduced several tax reform
measures aiming to reduce the tax burden borne by individuals and businesses and thereby to
support economic activity.
The rate of the corporate tax for the joint stock companies was reduced to 25% in 2001 from
45% in 1998. The system of shareholders' income tax was simplified, guaranteeing equal
treatment to national and international investors. Comparable conditions were created for
partnerships. New measures were expected to reinforce Germany's status as an investment
location.
Income tax reform was originally planned to be implemented in three steps, the second step
being scheduled to enter into force in 2003 and the third in 2005. The implementation of the
second step was postponed in the context of the flooding that occurred in 2002, as public
finances were already about to breach the deficit limit of 3% of GDP. With the further
declining economic activity in the course of 2003, the Government decided not only to
implement the second step in 2004, but also to bring forward the third step and implement it
together with the second step in 200424. The reform scheduled to take effect as of 1 January
2004 includes the following measures:
• The basic rate of the taxation is to be lowered from the current 19% to 15%.
• The basic tax free allowance per person is to be raised from the current €7 235 to €7 664.
• The top rate of income tax is to be lowered to 42% and will only be applied to taxable in
excess of €52 152.
• Tax progression will be less steep for taxpayers in middle income brackets.
All in all, the cuts would amount to €21.8 billion in lower taxes to individuals and firms. The
overall impact would, however, be smaller due to the planned reduction of various subsidies.
The Government expects a decrease of €15.6 billion in tax revenue for 200425. According to
the Government, the Federal level would lose €7.1 billion and the Länder and municipalities
together €8.5 billion. Apart from reducing subsidies, the Government intends to finance the
reform by widening the base for VAT and by selling government assets. Further privatisation
should contribute at least €2 billion in 2004 to the federal budget. The rest would be financed
by increased government borrowing26.
Healthcare reforms
Reforming the expensive health care system, which provides Germans with generous
benefits, is necessary to support the Government’s long-term goal of sustainable public
finances. To this end, the Government has already taken steps to modify the System of
Statutory Health Insurance. On 1 January 2000 the Statutory Health Insurance Reform Bill
became law. This was not, however, sufficient to put the system on sustainable footing.
Faced with the rising cost and the overall deterioration of public finances, the Government
adopted in November 2002 an emergency bill with new measures expected to provide
24 Federal Ministry of Finance website, press releases of July and August 2003
(http://www.bundesfinanzministerium.de/). 25 Entwurf des Bundeshaushalts 2004 und Finanzplan des Bundes 2003 bis 2007, Bundesministerium der
Finanzen, 2 July 2003. (http://www.bundesfinanzministerium.de/Aktuelles/Pressemitteilungen-
.395.19220/Pressemitteilung/Entwurf-des-Bundeshaushalts-20...htm). 26 Early tax cut to be financed by reducing subsidies, privatization, and additional borrowing,
Bundesregierung, 17 July 2003.
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PE 302.203/rev.2 18
savings of €3.5 billion. They include the freeze of doctors' fees, a price cut on refunded
pharmaceuticals and a rise in the rebate paid by pharmacies to the public health insurance
system. On the other hand, the healthcare contributions remained unchanged by the Act on
Securing the Rate of Contribution (Beitragssatzsicherungsgesetz), which came into force in
January 2003.
More far-reaching reforms were proposed in the bill on the modernisation of the health
service, which is a part of the Agenda 2010 reform package. After negotiations with the
opposition (CDU/FDP), a package was presented to the Bundestag for the first reading in
September 2003. Among other aims, it seeks to improve the efficiency of medical care by
cutting bureaucracy and developing competition. The measures include
• removing some benefits from the public health system and financing them by taxation,
• limiting the level of subsidy available from the system,
• abolishing some benefits altogether,
• requiring patients to take additional insurance for certain services,
• liberalising the supply of medicines by permitting a pharmacist to have up to three
pharmacies (business locations) and by allowing the ordering of medicines via Internet,
• increasing attention to preventive health care.
These measures are expected to bring down the average health insurance contribution rate
from around 14.4% of gross income to 13% in the long-term, cut add-on costs, and provide
more employment. In 2004 the average health insurance contribution rate should decline to
13.6% and in 2005 below 13%27. Furthermore, it permits insurers to negotiate costs directly
with doctors. Cost sharing should raise the patient's cost awareness. However, some of these
measures, such as the tax financing of the versicherungsfremde Leistungen28, may pose a risk
to the consolidation programme announced in the 2002 Stability Programme update. Parts of
the programme were prepared by the respective ministries, while the Rürup Commission
outlined the financing in its first report, presented in May 2003.
These reform initiatives seem to be in line with the recommendations of the 2003 BEPGs,
according to which the health care sector should increase its efficiency by introducing
economic incentives for health care providers and recipients. However, some observers fear
that the reductions in health care benefits in the context of the reforms may undermine the
hoped impact of tax cuts, as consumers may decide to save the extra amount of money they
get from the tax cuts instead of spending them29.
Further reforms
To relieve further the structural rigidities, Chancellor Schröder has also made changes within
other areas. Measures that liberalise regulations for crafts and reduce bureaucracy, especially
for small and medium sized companies, are to be introduced. The easing of the craft
regulations means that the prerequisite of a master craftsman's diploma to entering a
profession is abolished as long as the craft businesses are not subject to registration, i.e. they
are not among the around 30 crafts out of 90 considered to be dangerous.
27 Health, Bundesregierung, 1 August 2003. 28 Benefits currently paid by health insurance system, deemed not to be covered by contributions. 29 German Health-Care Cuts May Offset Boost From Tax Reductions, Bloomberg.com, 22 July 2003.
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PE 302.203/rev.2 19
Political background
The political system
Germany is a parliamentary, democratic and federal republic, whose constitution (the
Grundgesetz), enacted on 23 May 1949, became the constitution of a united Germany in
1990.
At the head of the executive but with a primarily representative role is the Federal president,
Johannes Rau (SPD), elected for a five-year period by the Federal Assembly in May 1999.
The legislature consists of the Bundestag (the lower house of the German Parliament) – of the
656 deputies, half are elected by simple majority in the constituencies and half are elected
from Land lists - and the Bundesrat (the upper house), representing the 16 Länder (Baden-
Württemberg, Bavaria, Berlin, Brandenburg, Bremen, Hamburg, Hessen, Mecklenburg-
Vorpommern, Niedersachsen, Nordrhein-Westfalen, Rheinland-Pfalz, Saarland, Sachsen,
Sachsen-Anhalt, Schleswig-Holstein and Thüringen).
The highest body of the judiciary is the Federal Constitutional Court in Karlsruhe
(Bundesverfassungsgericht).
Table 2: Legislative elections of 22 September 2002
Second vote Party
% Change from
1998 (%)
Seats in Parliament
SPD 39.0 -1.9 251
CDU 29.5 +1.1 190
CSU 9.0 +2.3 58
Bündnis 90/DieGrünen 8.6 +1.9 54
F.D.P. 7.4 +1.2 47
PDS 4.0 -1.1 2
Source: The Federal Returning Officer, Press Release, http://www.bundeswahlleiter.de
The 15th Bundestag elections took place in 22 September 2002. The turnout was 79.1%
compared with 82.2% in 1998. After 4 years in office the coalition consisting of the SPD and
the Greens and led by Chancellor Gerhard Schröder, was able to renew its majority in the
Bundestag. However, the majority narrowed to 9 seats from 21 in 1998. Since then, a number
of State elections have indicated a sharp swing away from the Government.
Public opinion
The latest Eurobarometer survey analysing public opinion on various issues related to the
European Union was carried out in all Member States in spring 200330. In overall, EU citizens
have a confidence in the European Union institutions, are worried about the thread of the
armed conflict and about prospects for the national economy and for employment.
The majority of the EU citizens share the support for the EU's political initiatives. Germany
is, among all Member States, one of their strongest advocates. 77% of respondents is in
favour of the Common Foreign policy (67% EU average) and 81% approves of the Common
Security and Defence policy (73% in the EU).
30 Eurobarometer: Public opinion in the European Union, European Commission, Report No. 59, Edition, July
2003.
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PE 302.203/rev.2 20
Approval of EU membership is higher in Germany than the EU average and according to
the survey, 59% of respondents considers EU membership to be a good thing, while only 8%
hold the opposite view. Germans are more likely to support membership than the European
citizen on average (54% in favour, and 11% against). The majority of German respondents
have a confidence in the European Commission: 44% are in favour and 26% against.
However, this figure is lower than the EU average of 50%.
Regarding the level of support for the enlargement of the EU, the results show that public
opinion varies considerably in the Member States. While in Greece 71% are in favour of
enlargement, in France only 31% have a positive opinion. A majority of Europeans (46%)
expressed opinions in favour and 35% against in the latest survey. In Germany, a scant
majority supports the enlargement, with 42% in favour, 39% against. The number of those in
favour has decreased by 4 percentage points since the previous survey in autumn 2002.
67% of EU citizens strongly support the euro, compared to 27% who are against it. This is a
slight increase of 3% from the last survey. In the euro area, 75% are in favour of the euro.
The support for the euro has increased in Germany from 62% to 70%. At the same time,
however, 88% of Germans think that prices rose when they changed the currency31.
The euro banknotes and coins are generally well accepted. 77% of EU citizens were against
the issuing of a new €1 bill, the highest rejection score was registered in Germany by 93%.
The support for a European constitution has declined slightly in EU, from 65% to 63%. In
Germany 62% of the population is in favour, while 12% are against. Still only 33% of the
population in EU-15 know that the Convention had elaborated a draft constitutional treaty.
36% of the Germans are aware of the work of the Convention32.
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31 The Euro one year later, European Commission, Flash EB N°139. 32 Convention of the Future of Europe, European Commission, Flash EB N° 142.
GERMANY
PE 302.203/rev.2 21
Economic Affairs Series Briefings
The following publications are available on line on the Intranet at: http://www.europarl.ep.ec/studies. To obtain
paper copies please contact the responsible official (see page 2) or Fax (352) 43 00 27721.
Number Date Title Languages
ECON 543 Sept. 2003 The Taxation of parent and subsidiary companies EN, FR, DE
ECON 542 June 2003 VAT on services EN, FR, DE
ECON 541 July 2003 VAT on postal services EN, FR, DE
ECON 540 July 2003 The Rates of VAT: including recent proposals (rev1) EN, FR, DE
ECON 540 May 2003 The Rates of VAT EN, FR, DE
ECON 539 forthcoming Stability and convergence programmes 2002/2003 updates EN, FR, DE
ECON 538 June 2003 The Public Debt EN, FR
ECON 537 February 2003 Consequences of Rating & Accountancy Industries Oligopoly on
competition EN, FR, DE
ECON 536 February 2003 State aid and the European Union EN, FR, DE
ECON 535 March 2003 Financial Services and the application of Competition Policy EN, FR, DE
ECON 534 July 2002 Corporate Governance EN, FR, DE
ECON 533 Nov. 2002 Potential Ouput & the output gap (provisional version) EN
ECON 532 June 2002 The Luxembourg Economy EN, FR, DE
ECON 531 March 2003 The Taxation of Energy EN, FR
ECON 530 July 2002 The Irish Economy EN, FR
ECON 529 June 2002 The Austrian Economy EN, FR, DE
ECON 528 July 2002 The taxation of income from personal savings EN, FR, DE
ECON 527 May 2002 VAT on Electronic Commerce EN, FR, DE
ECON 526 May 2002 VAT and Travel Agents EN, FR, DE
ECON 525 May 2002 Currency Boards in Bulgaria, Estonia and Lithuania EN, FR, DE
ECON 524 May 2002 The Greek Economy (rev) EN, FR, EL
ECON 523 April 2002 Stability and Convergence Programmes: the 2001/2002
updates EN, FR, DE
ECON 522 May 2003 The Italian Economy (rev.2 ) EN, FR, IT
ECON 521 Sept. 2001 Competition Rules in the EEA EN, FR
ECON 520 Sept. 2001 Background to the € EN, FR, DE
ECON 519 July 2002 The Belgian Economy (rev) EN, FR, NL
ECON 518 Dec. 2002 Enlargement and Monetary Union (rev7) EN, FR, DE
ECON 517 July 2001 The Taxation of Pensions EN, FR, DE
ECON 516 July 2002 The Finnish Economy (rev) EN, FI, FR
ECON 515 Sept. 2003 Die deutsche Wirtschaft (rev2) DE, EN, FR
ECON 514 April 2001 The Euro and the Blind EN, FR, DE
ECON 513 May 2001 Tobacco Tax EN, FR, DE
ECON 512 May 2001 The Euro: Counterfeiting and Fraud EN, FR, DE
ECON 511 May 2002 The Consequences of EMU for the EEA/EFTA countries EN, FR, DE
ECON 510 April 2001 Margine di Solvibilità IT, EN
ECON 509 March 2001 Stability and Convergence Programmes: the 2000/2001 Updates EN, FR, DE
ECON 508 Sept. 2003 The Swedish Economy (rev. 2) EN, FR, SV
ECON 507 March 2002 The Economy of the Netherlands (rev) EN, FR, NL
ECON 505 forthcoming The Portuguese Economy (rev) EN
ECON 504 July 2000 The French Economy EN, FR
ECON 503 July 2002 The Spanish Economy (rev. 2) EN, FR,ES
ECON 502 June 2000 Le "Troisième système" FR
ECON 501 April 2002 The Danish Economy (rev) EN, FR, DA
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