Public Information Notice: IMF Concludes Article IV Consultation with Germany

November 2, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 23, 2000, the Executive Board concluded the Article IV consultation with Germany.1


Germany’s economy has entered a healthy expansion phase underpinned by strong external demand, a highly competitive euro, and markedly improved business and consumer sentiments. Following the Asian and Russian crisis, real GDP growth picked up to an annual pace of close to 3 percent, mainly on the strength of strong revival in exports and in investment in machinery and equipment. In the export-oriented manufacturing sector, capacity utilization and business confidence have reached the highest levels since the cyclical peak during the unification boom in the early 1990s. At the same time, private consumption has, until recently, remained subdued while construction activity is still weighted down by the overcapacities accumulated during the unification boom.

The string of anemic growth cycles in recent decades—particularly the post-unification slump of the 1990s—has left behind a labor market legacy of high unemployment and sluggish employment growth. With the labor force roughly constant, the pickup in activity led to modest employment gains, reflected in a gradual decline in the unemployment rate (on a standardized basis), from a peak of 10 percent in late 1997 to presently about 8 percent.

Headline CPI inflation has risen to over 2 percent, owing mainly to sharp increases in oil prices and the one-time effects of ecotax increases. By contrast, underlying CPI inflation (CPI excluding energy and food) has remained around 1 percent, reflecting moderate wage settlements and ongoing deregulation in the utilities sectors.

Executive Board Assessment

Executive Directors were pleased to note that the near-term outlook for the German economy was more favorable than it had been for many years, reflecting a markedly improved external environment, supportive monetary conditions, moderate wage settlements, and a clearer direction in domestic policies. While Directors pointed to downside risks to the near-term outlook, mainly the persistence of high oil prices and a possible sharp appreciation of the euro, they felt that these shocks were unlikely to derail the expansion. Directors welcomed the authorities’ structural reform initiatives, notably on income taxes, pensions, and product markets, noting their contribution to the present strong economic situation, but cautioned that a strong reform agenda to address rigidities in the labor market is also necessary to assure favorable medium-term growth and permanently lower unemployment. Directors were of the view that the favorable economic climate provides an important window of opportunity to address remaining challenges.

Directors noted that the medium-term orientation of fiscal policy is anchored in the authorities’ multi-year program of spending cuts, tax reforms, and deficit reduction. Directors emphasized that the overall limits on spending growth in the authorities’ Stability Program will need to be firmly respected to achieve medium-term budget balance. Moreover, Directors noted that room will need to be made for the fiscal costs of pension and labor market reforms, and that further structural spending cuts for the period beyond 2001 should be targeted mainly on subsidies and social transfer programs. In this context, Directors commended the authorities’ commitment to earmark the full amount of the substantial windfall from sales of mobile telephone licenses for repaying public debt. Some Directors felt that—on present growth projections, and with steadfast implementation of the Stability Program’s spending targets—achievement of overall budget balance would be feasible already by 2002.

Directors welcomed the recent adoption of a significant package of business and personal income tax reforms. In their view, these reforms would reduce investment distortions, improve labor supply incentives, and increase Germany’s attractiveness to foreign investors. Directors observed that attention should shift to reform of the complicated local trading tax, broadening the personal income tax base, and other simplifying measures. Directors observed that there would be some fiscal stimulus in 2001 associated with income tax reform in the context of strong projected growth. Concern about such a procyclical fiscal stance is tempered, however, by the heightened downside risks to near-term growth prospects and by the likely supply-side benefits of the tax reform in the longer term.

More generally, Directors noted that Germany’s longstanding focus on actual, rather than cyclically adjusted, fiscal goals and outcomes could constrain the operation of automatic fiscal stabilizers. Noting that monetary union called for an enhanced role for fiscal stabilizers, Directors welcomed and strongly encouraged the authorities’ interest in medium-term fiscal frameworks based on spending norms that would allow revenues and the fiscal balance to fluctuate with the cycle.

Directors welcomed the authorities’ pension reform proposal, which would constitute a major and much needed change in the German pension system, and could set an example for other European countries. Directors noted that the planned diversification of the pension system would reduce the burden of population aging on the public pension pillar, diminish the need for further increases in social contribution rates that could harm labor market performance, and possibly further increase national savings, particularly if participation in the funded pillar were made mandatory. At the same time, some Directors took the view that to reap the full benefits of diversification, cuts in the size of the public pension pillar beyond levels currently envisaged could well be needed in the longer run.

Directors took note of Germany’s impressive recent record of product market reforms, notably in the telecommunications and energy sectors. Nevertheless, they urged further actions, including liberalization of shop opening hours, elimination of existing restrictive regulations on retail discounting, and privatization of financial institutions and of the remaining state holdings in public utility companies, especially at lower levels of government. Directors also welcomed initiatives in line with European commitments to embrace information technology in the areas of education and training, Internet use, and e-commerce. More generally, they observed that continued efforts to reduce structural rigidities offered the best scope for such opportunities.

Directors expressed concern that the potential benefits of these diverse reforms would not be fully realized without a more proactive approach to labor market reform. Several Directors, however, while acknowledging the need for additional labor market reforms, underscored that workable solutions would have to take into account Germany’s own circumstances and institutions, and the need for careful sequencing. Although Directors were encouraged by signs of greater flexibility in working conditions and wages, especially in eastern Germany’s depressed labor market, they observed that these more spontaneous changes need to be supplemented with legal changes to allow employers and workers to reach wage agreements more in line with firm-level conditions. Better training opportunities could also play a role in tackling labor market issues. Directors also attached importance to the need to tackle the mismatch between reservation wages and take-home pay, particularly by limiting the duration of unemployment assistance.

Directors were encouraged that short-term financial sector vulnerabilities have lessened over the last year. At the same time, they urged continued vigilance on exposures associated with the early 1990s building boom and with lending to emerging markets. Several Directors observed that the organizational structures of the publicly- and mutually-owned banks impede efficient consolidation and could hamper responses to the rapid technological change now affecting the financial services industry.

Directors welcomed the closing of gaps in national accounts data that had arisen in the context of the adoption of new European accounting standards, but they also commented that further changes would likely be needed as statistical standards evolve in response to new challenges, notably measurement issues associated with the economy’s increased production and use of information technology. In this regard, they were interested in the possibility of comparing international growth performance on a consistent statistical basis.

Directors welcomed Germany’s prominent role in strengthening the Initiative for Heavily Indebted Poor Countries and its significant support for transition economies, and—while noting that Germany’s official development assistance (ODA) is above the OECD average—urged the authorities to avoid the projected declines for the coming years.

Germany: Selected Economic Indicators

  1996 1997 1998 1999 2000 1/ 2001 1/

Economic activity and prices Change in percent, unless otherwise noted
Real GDP 0.8 1.4 2.1 1.6 2.9 3.1
Net exports 2/ 0.5 0.8 -0.3 -0.8 0.8 0.1
Domestic demand 0.3 0.6 2.4 2.4 2.2 3.0
Private consumption 1.0 0.7 2.0 2.6 2.2 2.9
Gross fixed investment -0.8 0.6 3.0 3.3 2.7 4.0
Construction investment -2.8 -1.5 -1.0 0.5 -2.1 0.7
Gross national saving (percent of GDP) 21.3 21.4 21.6 21.3 21.9 22.4
Gross domestic investment (percent of GDP) 21.6 21.6 21.8 22.2 22.1 22.4
Labor force 3/ 0.4 0.8 0.4 0.3 0.6 0.4
Employment 3/ -0.3 -0.2 0.9 1.1 1.0 0.7
Standardized unemployment rate (in percent) 8.6 9.5 9.0 8.3 7.9 7.6
Unit labor costs (whole economy) 4/ 0.2 -0.8 0.0 0.6 0.2 0.3
GDP deflator 1.0 0.8 1.1 0.9 0.4 1.5
Harmonized CPI index 1.2 1.5 0.6 0.7 2.0 1.9
Public finance In percent of GDP
General government balance 4/ 5/ -3.4 -2.7 -2.1 -1.4 1.6 -1.2
Structural government balance -2.7 -1.6 -1.2 -0.5 -0.4 -1.2
General government gross debt 5/ 59.8 60.9 60.7 61.0 59.6 57.0
Money and credit            
Domestic credit 7.6 6.0 6.4 5.6 ... ...
M3 6/ 5.8 4.7 8.3 8.4 ... ...
Interest rates Percent
Three-month money market rate 7/ 3.3 3.3 3.5 2.9 4.9 ...
Ten-year government bond yield 7/ 6.2 5.7 4.6 4.5 5.3 ...
Balance of payments In billions of DM, unless otherwise noted
Exports 8/ 917.8 1,033.4 1,104.2 1,153.5 1,314.4 1,442.6
Imports 8/ 879.8 983.0 1,047.4 1,115.3 1,278.2 1,399.2
Trade balance (percent of GDP) 2.6 3.0 3.3 3.0 3.0 3.2
Current account balance -12.0 -4.8 -8.0 -35.3 -7.7 0.0
Current account (percent of GDP) -0.3 -0.1 -0.2 -0.9 -0.2 0.0
Exchange rate            
Deutsche mark per US dollar 9/ 1.50 1.73 1.76 1.84 2.24 ...
Euro per US dollar 9/ 0.78 0.88 0.89 0.94 1.15 ...
Nominal effective rate (1990=100) 10/ 108.9 103.9 104.1 102.1 97.4 ...
Real effective rate (1990=100) 10/ 11/ 119.5 111.4 108.4 104.4 98.1 ...

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

1/ Staff projections, if not otherwise indicated.
2/ Contribution to GDP growth.
3/ Domestic definition on a national accounts basis; according to new integrated system of economic accounts (ESA95).
4/ On a national accounts basis; according to new integrated system of economic accounts (ESA95).
5/ For 2000 includes the proceeds from the sale of mobile phone licenses (UMTS) of DM 99.4 billion (2.5 percent of GDP). The proceeds are used to buy back public debt; the buy-back is phased over 2000 and 2001.
6/ Data reflect Germany’s contribution to M3 in the euro area.
7/ Data for 2000 refer to September 12, 2000.
8/ Includes supplementary trade items and services.
9/ Data for 2000 refer to September 9, 2000.
10/ Data for 2000 refer to August.
11/ Based on relative normalized unit labor cost in manufacturing.

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.


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