## 1deuea2021001

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### Context and pandemic timeline
- First wave (March–April): widespread testing and contact tracing capacity; ample hospital capacity; border restrictions; closure of schools and non-essential businesses; social distancing and ban on public gatherings.
- Long-term care facility deaths: 37 percent of reported COVID-19 deaths (per ECDC), lower than several European peers where the share was around ½-⅔.
- Late-April: physical distancing relaxed after steady decline in new infections.
- Fall wave: daily new cases exceeded spring peak by late October; initial concentration among less vulnerable age groups with a recently increasing share of elderly cases.
- October measures: “lockdown light” (restaurants, bars, cultural and entertainment venues closed; schools and daycares remained open).
- Mid-December: tightened lockdowns—all non-essential stores, schools and daycares closed; gatherings greatly restricted; some states introduced nightly curfews.

### Pre-COVID-19 economic landscape (selected exact figures)
- Headline fiscal balance: 1.5 percent of GDP (2019), versus 1.8 percent of GDP (2018).
- Public debt ratio: decreased below 60 percent of GDP by end-2019.
- Current account surplus: 7.1 percent of GDP in 2019 (down from 7.4 percent in 2018).
- External position assessed: 3.3 to 5.3 percent of GDP higher than estimated norm (IMF External Sector Report 2020).
- Corporate sector: corporate savings declined and prior deleveraging trend reversed in 2019.
- Labor market: unemployment reached a historical low; labor force participation rose.
- Banking sector: capital adequacy strengthened since the Global Financial Crisis; profitability remained low, many large banks’ leverage ratios lower than European peers.

### Economic impact of COVID-19 (H1 2020 and sectoral effects)
- H1 2020 contraction:
  - GDP contracted by 11.5 percent in H1 2020.
  - Private consumption shrank by 13.2 percent in H1 2020.
  - Investment in machinery and equipment fell by 25.5 percent in H1 2020.
  - Exports declined by 22.9 percent and imports declined by 17.6 percent in H1 2020.
- Sectoral: contact-intensive sectors (personal services, retail trade, hospitality) and manufacturing production curtailed substantially; construction held up in H1 2020 due to Q1 activity largely undone in Q2.
- Inflation:
  - Core inflation declined steeply from around mid-2020.
  - Headline inflation entered negative territory from August 2020; drivers included falling food inflation, slump in global energy prices, and a temporary VAT tax cut.
- Health and mobility: April containment measures were less stringent than many European peers and produced less impact on mobility, but still caused substantial business activity curtailment.
- Balance sheet risks: impairments could delay recovery and magnify permanent output losses; severity unclear while insolvency moratoria remain in place.
- External vulnerability: Germany’s export dependency increases susceptibility to weaker external demand.

### Multi-pronged policy response — fiscal measures and financing
- Aggregate measures and scale:
  - Sum of announced measures: about 7.5 percent of GDP in 2020.
  - Staff estimate of fiscal stimulus: 6.1 percent of GDP in 2020 (more than double the stimulus during the GFC).
  - Fiscal expansion expected to reduce headline fiscal balance by about 7.8 percentage points of GDP in 2020.
  - Fiscal package including full nominal envelope of loan guarantees: over 30 percent of GDP.
  - Contracted guarantees about €154 billion, or 19 percent of the total allocated envelope as of end-September.
  - Total guarantee amount increased by about €826 billion, about 25 percent of GDP.
  - WSF includes €100 billion for government equity investments and €100 billion for refinancing the KfW special program.
- Staff baseline assumption for fiscal cost of guarantees:
  - Annual fiscal cost of 0.2 percent of GDP for guarantees called in 2020.
  - 0.4 percent of GDP for guarantees called in 2021 (about 13 percent of guarantees contracted).
- Financing and fiscal framework:
  - Public debt expected to increase to about 71 percent of GDP by end-2020.
  - Authorities used the escape clause of the constitutional debt brake and suspended the “black zero” commitment.

### Box 1 — Mitigation and recovery measures (selected items and exact values)
- Health services: budget support of about 1.2 percent of GDP for health and support services, procurement, hospital compensation, ICU capacity bonuses, vaccine/treatment support.
- Direct budget support for businesses: federal aid programs totalling €80 billion in grants.
- Recovery (June) measures:
  - Temporary VAT reduction from July 1 until end-2020: standard VAT from 19 percent to 16 percent; reduced rate from 7 percent to 5 percent.
  - “Future package” of about €50 billion focusing on green investment, digital infrastructure, and health care.
- Kurzarbeit pandemic adjustments:
  - Eligibility threshold changed to 10 percent of workforce subject to reduced hours (was one-third).
  - For workers with >50 percent hours reduction: replacement rate increased from 60 percent (67 percent for employees with children) to 70 percent (77 percent for employees with children) starting from the fourth month, and to 80 percent (87 percent for employees with children) starting from the seventh month.
  - Employers’ social security contributions on reduced hours waived; duration extended up to 24 months.
  - From March to end-May: employers pre-notified KA for about 12 million workers (about a quarter of the labor force); peak confirmed KA workers reached 6 million in April.
  - Unemployment increased by about 0.6 million in the same period.
  - Sectoral distribution of KA workers: 32 percent trade and hospitality, 29 percent manufacturing, 16 percent business service sector.

### Outlook, baseline projections, and key macro forecasts (staff baseline)
- GDP: grew 8.5 percent in Q3 2020 (SWDA).
- 2020 projection: GDP projected to fall by -5.4 percent in 2020.
- Output path:
  - Output not expected to return to pre-crisis level until 2022.
  - 2021: weak Q1 followed by three quarters of positive growth as vaccinations become widespread.
  - Potential output in 2025 projected to be around 2½ ppt below the level envisaged before the pandemic.
- Inflation and wages:
  - Headline inflation expected to increase to 1.2 percent in 2021, from 0.4 percent in 2020.
  - Minimum wage to be raised in four stages starting in January 2021, from €9.35 per hour to €10.45 per hour by mid-2022 (an increase of almost 12 percent).
- External sector:
  - Current account surplus projected at 6.6 percent of GDP in 2020.
  - Absent further policies, current account surplus expected to remain large in the medium term (above 6.5 percent by 2026).

### Insolvency and corporate sector risks — staff analysis and policy effects
- Without policy measures:
  - About 11 percent of German firms would have become illiquid and insolvent under baseline growth projections.
  - Insolvencies concentrated among smaller firms, impairing about 2½ percent of firm debt (about half the euro area average).
  - Sector example: almost 30 percent of the debt held by firms in the accommodation and food sector would have become impaired.
- With policy measures:
  - Support measures reduce share of economy-wide impaired debt by one percentage point (to 1½ percent of economy-wide firm debt).
  - Impaired debt reduction estimated at 85–90 percent for accommodation and food, trade, and professional services sectors.
- Insolvency moratorium: temporary change to defer legal action against insolvent debtors; scheduled to be fully phased out at the end of January 2021.

### Labor market policy: Kurzarbeit and anti-scarring measures
- Role:
  - Kurzarbeit central to supporting labor market while activity weak; contributed to resilience during GFC.
  - Should remain central in 2021 but parameters to be gradually tightened (employer social security contribution waiver to expire end-June 2021; July–December 2021 replaced by 50 percent waiver).
  - Workers applying by end-March 2021 receive increased benefits through end-2021.
- Limitations:
  - Kurzarbeit inadequate alone; marginal employees (largely women) disproportionately not covered.
  - Women comprise 64 percent of marginal employees; cumulative increase in unemployment since beginning of 2020 for women roughly double that of men.
- Policy recommendations to reduce scarring:
  - Sustain expanded Kurzarbeit benefits through end-2021 as planned.
  - Strengthen incentives for job search while reducing hiring costs (e.g., hiring subsidy, subsidies for apprenticeships).
  - Target measures to facilitate re-entry for women, youth, and elderly workers.
  - Maintain flexible and generous basic social safety net; access relaxed and processing time shortened through March 2021.
  - As recovery gains momentum: normalize Kurzarbeit parameters, promote training and life-long learning, step-up investment in full-time quality care in kindergartens and schools, use digitalization to create opportunities for old-age workers.

### Financial sector: banking, insurers, real estate, and macroprudential policy
- Banks:
  - Staff estimate aggregate CET1 of large German banks could decline by 2 ppt by end-2021 under the baseline; mitigating policies could reduce the capital impact by roughly 1 ppt.
  - Exercise covered 15 large banks representing 43 percent of total banking sector assets.
  - Smaller savings/co-operative banks likely to suffer more losses; ROA for savings and co-operative banks could decline by around 1 ppt more than commercial banks under baseline.
  - Recommendations: continue regulatory capital relief; rebuild bank capital and liquidity buffers gradually; maintain restrictions on discretionary dividend distributions and share buybacks; accelerate consolidation among saving and co-operative banks; improve profitability via cost reductions and higher non-interest revenues.
- Preventing credit misallocation:
  - Risks of moral hazard and loan evergreening from state-shifted credit risk and streamlined screening.
  - Recommendations: phase out 100 percent loan guarantee program by mid-2021; tighten eligibility criteria; normalize prudential standards and communicate them; expedite EU Directive on Preventive Restructuring Frameworks transposition.
- Life insurers:
  - Entered pandemic with solvency ratios above 100 percent threshold but profitability squeezed; supervisors should monitor and insurers adopt prudent approach, including temporary suspension of discretionary dividends and share buy backs.
- Real estate and data gaps:
  - Housing prices maintained rapid growth through Q3 2020; risks if household income declines.
  - Recommendations: close data gaps speedily; expand macroprudential toolkit to include income-based instruments (e.g., debt-to-income or debt-service-to-income caps) for residential and commercial real estate.

### Audit, AML/CFT, and governance reforms
- Wirecard case: at least €1.9 billion in fictitious cash balances; scandal revealed audit and enforcement deficiencies.
- Reform plan (cabinet-approved early October): strengthen BaFin’s powers and capacity; tighten mandatory audit rotation rules by eliminating extension beyond 10 years; strengthen corporate governance; allow BaFin to supervise a company group as a whole.
- AML/CFT:
  - 5AMLD transposed; Transparency Register introduced June 2017.
  - AFCA established September 2019 as public-private partnership.
  - Ongoing FATF mutual evaluations; next FATF assessment due to be adopted in October 2021.

### Fiscal stance, projections, and DSA highlights (selected exact series)
- Fiscal stance and projections (figure highlights preserved):
  - Headline Balance: 1.5 -6.3 -3.4 0.1 0.4 0.6 0.6
  - Change from previous year: -0.3 -7.8 2.9 3.5 0.4 0.2 0.0
  - Primary Structural Balance: 2.1 -4.1 -1.4 1.0 1.1 1.1 1.1
  - Implied Fiscal impulse 1/: 0.1 6.1 -2.7 -2.3 -0.1 -0.1 0.1
  - Public gross debt (Maastricht): 60 71 71 68 65 63 60
- Key macro projections (selected tables):
  - GDP (percent change): 2017: 2.9; 2018: 1.3; 2019: 0.6; 2020: -5.7; 2021: 3.5.
  - Private consumption (percent change): 2017: 1.8; 2018: 1.5; 2019: 1.6; 2020: -6.2; 2021: 3.8.
  - Unemployment rate (ILO): 2017: 3.8; 2018: 3.4; 2019: 3.2; 2020: 4.2; 2021: 4.3.
  - CPI (harmonized): 2017: 1.7; 2018: 1.9; 2019: 1.4; 2020: 0.4; 2021: 1.2.
  - Household saving ratio (percent): 2017: 10.6; 2018: 10.9; 2019: 10.9; 2020: 16.1; 2021: 13.2.
- Public debt DSA baseline:
  - Government debt expected to rise to about 71 percent of GDP by end-2020, then fall back to 60 percent of GDP over the medium term.
  - Baseline macro assumptions: real GDP growth shrink by 5.4 percent in 2020, rebound of 3.5 percent in 2021; potential growth converge to 1.2 percent per year; inflation (GDP deflator) reach 2.1 percent.
  - Gross financing needs: decline from 20 percent of GDP in 2020 to below 7 percent of GDP in 2025.
- Contingent fiscal shock stress test:
  - Assumes cumulative 3 percent of GDP (about 100 billion euros) additional fiscal cost for public guarantees called over 2021–22.
  - Assumes contracted guarantees double from end-September levels and about one-third called.
  - Impact: “the impact on debt ratio is relatively limited, with debt-to-GDP continuing to fall rapidly.”

### External sector assessment (Annex I) — key figures and assessment
- 2020 assessment: external position stronger than level implied by medium-term fundamentals and desirable policies (preliminary).
- Current account 2020 projection: 6.6 percent of GDP (from 7.1 percent in 2019).
- Staff CA norm assessment: 2 to 4 percent of GDP; staff CA gap for 2020 assessed in range 1.6 to 3.6 percent of GDP.
- Key 2020Q2 (% GDP) NIIP figures:
  - NIIP: 73.1
  - Gross Assets: 302.7
  - Debt Assets: 181.7
  - Gross Liab.: 229.6
  - Debt Liab.: 162.4
- TARGET2 claims: stock standing at over €1 trillion as of October 2020 (32 percent of GDP).
- REER and valuation:
  - CPI-based REER appreciated by 2.4 percent through October 2020 relative to 2019 average.
  - EBA REER Level model undervaluation: 15.5 percent.
  - Staff assesses 2020 REER undervaluation in range 2 to 12 percent, midpoint 7 percent.

### Risk Assessment Matrix — selected high-likelihood/high-impact risks and policy responses
- I. Unexpected shifts in COVID-19 pandemic: Likelihood H; Impact H.
  - Policy: maintain/intensify public health measures; use fiscal space to support households and businesses.
- II. Accelerating de-globalization: Likelihood H; Impact H.
  - Policy: support multilateral rules-based trade, consider discretionary fiscal expansion if output gap widens, sustain invocation of escape clause under national debt brake.
- III. Intensified geopolitical tensions and security risks: Likelihood H; Impact H.
  - Policy: extend temporary support for vulnerable groups; targeted labor market measures.
- IV. Disorderly Brexit: Likelihood H; Impact H.
  - Policy: contingency planning and UK-EU collaboration.
- Domestic risk VI. Deeper scarring of corporate balance sheets and labor markets: Likelihood M/L; Impact H.
  - Policy: stand ready for further support; maintain flow of credit via targeted financial policies.

### Staff appraisal and policy guidance (summary)
- Pandemic management: early testing, contact tracing, efficient hospital capacity led to one of lowest mortality rates in Europe.
- Fiscal support: unprecedented packages (over 30 percent of GDP envelope) provided critical income and liquidity support.
- Outlook: highly uncertain with risks tilted to downside; output not expected to return to pre-crisis level before 2022.
- Near-term fiscal guidance:
  - Fiscal policy should remain sufficiently accommodative; debt brake suspension supported until sustained recovery evidence.
  - Be ready to deploy additional measures if recovery falters (additional grants, reduced social security contributions for low-income earners, expedited public investment, climate spending).
- Medium-term guidance:
  - Once crisis abates, “build better for the future”: invest in digital infrastructure, innovation, labor supply, climate investment; make growth more inclusive.
- Labor market:
  - Maintain protective policies short term; shift to facilitate reallocation as recovery gains traction (hiring subsidies, apprenticeships, childcare investment, lifelong learning).
- Financial sector:
  - Manage unwinding of support carefully; continue some direct support for temporarily impaired firms while facilitating exit of unviable firms; implement EU preventive restructuring directive.

*Source: IMF staff report excerpt (1deuea2021001).*

### 2020. The staff team comprised Mr. Aiyar (head), Mses. Chen, Dao,

### 1deuea2021001 - 2020. The staff team comprised Mr. Aiyar (head), Mses. Chen, Dao,

### CONTEXT
- Germany established widespread testing and contact tracing capacity and utilized ample hospital capacity during the first wave (March–April).
- Early measures in the first wave included border restrictions, closure of schools and non-essential businesses, social distancing requirements, and a ban on public gatherings.
- The government better protected the elderly population relative to several European peers; long-term care facility deaths accounted for 37 percent of reported COVID-19 deaths (per ECDC), lower than other European countries where the share was around ½-⅔.
- After a steady decline in new infections, physical distancing measures were relaxed in late-April.
- A new wave in the fall led daily new cases to exceed the spring peak by late October, concentrated initially among less vulnerable age groups but with a recently increasing share of elderly cases.
- Government responses in October included a “lockdown light” (restaurants, bars, cultural and entertainment venues closed; schools and daycares remained open). Mid-December measures significantly tightened lockdowns: all non-essential stores, schools and daycares closed; gatherings greatly restricted; some states introduced nightly curfews.

### PRE-COVID-19 LANDSCAPE
- 2019 economic conditions:
  - Headline fiscal balance: 1.5 percent of GDP (2019), versus 1.8 percent of GDP (2018).
  - Public debt ratio decreased below 60 percent of GDP by end-2019.
  - Current account surplus: 7.1 percent of GDP in 2019 (down from 7.4 percent in 2018).
  - External position assessed to be 3.3 to 5.3 percent of GDP higher than the estimated norm (IMF External Sector Report 2020).
- Corporate sector:
  - Corporate savings declined and the prior deleveraging trend reversed in 2019, though corporate balance sheets remained generally strong (see Figure 3).
- Labor market and inflation:
  - Private consumption buoyed by strong labor market conditions; unemployment reached a historical low and labor force participation rose.
  - Inflation subdued despite accelerating unit labor costs.
- Banking sector:
  - Capital adequacy strengthened appreciably since the Global Financial Crisis (see Figure 4).
  - Profitability remained low—especially for big banks and Landesbanken—due to long-standing excess capacity and compressed interest margins in a low-for-long interest rate environment.
  - Many large German banks’ leverage ratios remained lower than European peers.

### THE ECONOMIC IMPACT OF THE COVID-19 PANDEMIC
- H1 2020 contraction:
  - GDP contracted by 11.5 percent in H1 2020.
  - Private consumption shrank by 13.2 percent in H1 2020.
  - Investment in machinery and equipment fell by 25.5 percent in H1 2020.
  - Exports declined by 22.9 percent and imports declined by 17.6 percent in H1 2020.
- Sectoral effects:
  - Contact-intensive sectors (personal services, retail trade, hospitality) and manufacturing production experienced substantial curtailment (see Figure 5).
  - Construction held up in H1 2020 due to increased activity in Q1, largely undone in Q2.
- Inflation developments:
  - Core inflation declined steeply from around mid-2020.
  - Headline inflation entered negative territory from August 2020, driven by falling food inflation and a slump in global energy prices; a temporary VAT tax cut also contributed.
- Health and mobility:
  - Containment measures in April were less stringent than many European peers and produced less impact on mobility, but still caused substantial business activity curtailment.
- Balance sheets and risks:
  - Impairment of corporate and financial balance sheets could delay recovery and magnify permanent output losses; the true severity remains unclear while measures such as a moratorium on insolvencies remain in place.
  - Germany’s export dependency increases susceptibility to weaker external demand.

### A MULTI-PRONGED POLICY RESPONSE
- Fiscal measures and scale:
  - The sum of all announced measures amounts to about 7.5 percent of GDP in 2020.
  - Staff estimate a significant fiscal stimulus of 6.1 percent of GDP in 2020, more than double the stimulus during the GFC.
  - Fiscal expansion expected to reduce the headline fiscal balance by about 7.8 percentage points of GDP in 2020.
  - Including the full nominal envelope of loan guarantees, the fiscal package amounts to over 30 percent of GDP.
  - Contracted guarantees about €154 billion, or 19 percent of the total allocated envelope as of end-September.
  - Staff baseline assumption for fiscal cost of guarantees: annual fiscal cost of 0.2 percent of GDP for guarantees called in 2020 and 0.4 percent of GDP for guarantees called in 2021 (about 13 percent of guarantees contracted).
- Financing and fiscal framework:
  - Public debt expected to increase to about 71 percent of GDP by end-2020, reflecting deficit financing and off-budget borrowing by the newly created economic stabilization fund (WSF).
  - Authorities used the escape clause of the constitutional debt brake rule and suspended the political commitment to no new net borrowing by the federal government (the “black zero”).
- Timing and focus of measures:
  - March–April: measures focused on supporting households and businesses and enhancing public health infrastructure.
  - Early June: a stimulus package approved to boost economic recovery as the economy partially reopened.
  - November–December: additional measures to support businesses affected by the renewed lockdown; existing grants and public guarantees extended through mid-2021.
- Additional policy actions:
  - Changes to foreign direct investment (FDI) screening mechanisms to expand government review of foreign takeover bids for companies deemed important to national security and public health.

### OUTLOOK, RISKS, AND POLICY IMPLICATIONS (from provided text)
- Outlook uncertainties:
  - Significant uncertainties remain about vaccine distribution speed, degree of take-up, and pace at which economic activity will resume given voluntary changes to social behavior.
- Risk channels:
  - Corporate and financial sector balance sheet impairments, the extent of which is unclear while insolvency moratoria remain in place, could delay recovery and amplify permanent output losses.
  - Weaker external demand poses a risk due to Germany’s export dependency.
- Spillovers:
  - Fiscal expansion expected to generate some positive regional spillovers, especially with accommodative monetary policy, but prior IMF and other studies suggest such spillovers are likely limited in scope.

*Source: IMF staff report excerpt (Germany, 2020).*

### Box 1. Germany’s COVID-19 Mitigation and Recovery Measures

### Box 1. Germany’s COVID-19 Mitigation and Recovery Measures

### Mitigation Measures (March/April/November/December)
- Scaling up health services:
  - Budget support of about 1.2 percent of GDP allocated to increase health and support services, including procurement of protective equipment, compensation to hospitals, bonuses for increasing intensive care capacity, and support for the development of vaccines and treatments.
- Protecting households:
  - Kurzarbeit significantly expanded.
  - Increased child benefits, relaxed rules governing childcare benefits for low-income parents and access to basic social security benefits, and temporary relief to tenants affected by the outbreak.
- Direct budget support for businesses:
  - Several federal aid programs totalling €80 billion provided grants to businesses and self-employed persons.
  - Some state governments (North Rhine-Westphalia and Bavaria) complemented federal programs by increasing support and expanding coverage.
  - Options provided for deferring tax payments and reducing prepayments; tax penalties will not be levied until the end of the year.
- Credit support for businesses:
  - Rapid expansion of public loan guarantees through KfW, other state-level guarantee banks, the WSF, and other arrangements.
  - Total guarantee amount increased by about €826 billion, about 25 percent of GDP.
  - The WSF includes €100 billion for government equity investments and €100 billion for refinancing the KfW special program.

### Recovery Measures (June)
- Boosting consumption:
  - Temporary VAT reduction from July 1 until the end of 2020: standard VAT rate from 19 percent to 16 percent; reduced rate from 7 percent to 5 percent.
  - Reduction in the original schedule of the renewable electricity (EEG) surcharge in 2021 and 2022 to stimulate demand.
- Investing in the future:
  - “Future package” of about €50 billion focusing on green investment, digital infrastructure, and health care.
  - Includes investment in green technology and 5G expansion, further outlays on public health, and subsidies for purchasing electric vehicles.
- Fiscal framework note:
  - The constitutional debt brake imposes a structural borrowing ceiling of 0.35 percent of GDP for the federal government; Länder constrained from new structural borrowing.
  - An escape clause—limited to emergencies outside government control—has been invoked.

### Kurzarbeit (Germany’s Short-Time Work Program)
- Design and rationale:
  - Replacement rate: 60 percent of net pay (67 percent for employees with children) under normal parameters.
  - Employers pay 80 percent of social security contributions owed on reduced working hours (effective cost-sharing).
  - Complement to private work-sharing arrangements (working-time accounts); firms usually required to run down working-time accounts before applying for KA.
- Pandemic adjustments (access made easier and more generous):
  - Firms eligible if only 10 percent (used to be one-third) of workforce subject to reduced work hours of 10 percent or more; coverage extended to temporary workers.
  - For workers with >50 percent reduction in hours, replacement rate increased from 60 percent (67 percent for parents) to 70 percent (77 percent for parents) starting from the fourth month, and to 80 percent (87 percent for parents) starting from the seventh month.
  - Social security contributions to be paid by employers have been waived.
  - Duration of KA extended to a maximum of 24 months.
  - Requirement to draw down working time account balances and exhaust leave balances before using KA suspended.
  - Workers on KA can draw income from an additional job without reduction in KA benefits provided combined income does not exceed previous net income.
- Usage and impact:
  - From beginning of March to end of May, employers pre-notified KA for about 12 million workers (about a quarter of the labor force).
  - Peak confirmed KA workers reached 6 million in April.
  - Unemployment increased by about 0.6 million in the same period.
  - Sectoral distribution of KA workers: 32 percent trade and hospitality, 29 percent manufacturing, 16 percent business service sector.
  - Contrast with GFC: peak pre-notified and confirmed numbers far exceeded GFC peaks (less than 2 million pre-notified from February to April 2009).

### Financial and Credit Support, and Banking Sector Measures
- Banking and financial stress:
  - ECB’s market-based composite index indicates financial stress peaked early in the crisis but remained well below the GFC.
  - Net new bank lending to nonfinancial corporations grew significantly in March on a precautionary cash demand surge.
- ECB and supervisory responses:
  - Expanded asset purchase programs including PEPP and provision of sizable liquidity to banks.
  - German authorities released the countercyclical capital buffer and extended ECB-issued regulatory and operational relief to banks under national supervision.
  - Restrictions on dividend distribution and share buybacks imposed.
  - Banks allowed to use capital conservation buffer and operate temporarily below Pillar 2 levels and liquidity coverage ratio requirements; temporary flexibility in loan classification and provisioning.
- Measures to mitigate borrower liquidity and credit risk:
  - Kurzarbeit and cash grants provided liquidity support for firms.
  - Rapid expansion of loan guarantees mainly through KfW and the WSF.
  - So far, a modest 20 percent of the large federal guarantee envelope contracted (excluding WSF); excluding WSF guarantees, take-up rate exceeds 40 percent as of end-September 2020.
  - Debt service moratorium legislated through end-June 2020 for households financially affected; banks negotiated voluntary moratoria with customers.

### Outlook and Risks
- Near-term recovery pattern:
  - High-frequency data: economy bottomed out in April-May, recovery underway by June; manufacturing and service PMIs recovered in May and were expansionary by July.
  - Second wave and renewed lockdown caused mobility decline starting in October; service PMI weakened again while manufacturing PMI remained robust.
- Staff baseline projections:
  - Vaccine production may begin relatively soon; widespread distribution not assumed until the second quarter of 2021.
  - Some mandated mobility restrictions and voluntary social distancing expected to persist until a large fraction vaccinated, dragging demand for contact-intensive sectors.
  - Baseline does not assume widespread financial distress but assumes some scarring from bankruptcies and erosion of human capital.
  - GDP grew 8.5 percent in Q3 2020 (SWDA).
  - For the year as a whole, GDP is projected to fall by -5.4 percent in 2020.
  - Output not expected to return to pre-crisis level until 2022; 2021 to have a weak Q1 followed by three quarters of positive growth as vaccinations become widespread.
  - Aggregate demand likely to trail supply-side recovery, leaving a sizeable albeit narrowing output gap in 2021.
  - Potential output in 2025 projected to be around 2½ ppt below the level envisaged before the pandemic.
- Inflation and wages:
  - Headline inflation expected to increase to 1.2 percent in 2021, from 0.4 percent in 2020 (driven by VAT cut expiration and rebound in energy price inflation).
  - Underlying inflationary pressures expected to remain subdued due to sizable negative output gap.
  - Minimum wage will be raised in four stages starting in January 2021, from €9.35 per hour to €10.45 per hour by mid-2022 (an increase of almost 12 percent); overall wage growth likely contained.
- External sector:
  - Current account surplus projected at 6.6 percent of GDP in 2020.
  - Current account surplus expected to dip temporarily below trend in near term due to sharp export decline; projected to recover and then gradually narrow over the medium term.
  - Absent further policies, current account surplus expected to remain large in the medium term (above 6.5 percent by 2026).

### Insolvency and Corporate Sector Risks
- Without policy measures:
  - Staff analysis suggests about 11 percent of German firms would have become illiquid and insolvent under baseline growth projections had no policy measures been taken.
  - In that scenario, insolvencies would be concentrated among smaller firms, impairing about 2½ percent of firm debt in Germany (about half the euro area average).
  - Sectoral severity example: almost 30 percent of the debt held by firms in the accommodation and food sector would have become impaired.
- With policy measures:
  - Measures deployed include temporary insolvency law changes, wage subsidies (including Kurzarbeit), tax deferrals, cash grants, and debt moratoria.
  - With measures, the share of economy-wide impaired debt estimated to decline by one percentage point (to 1½ percent of economy-wide firm debt).
  - Impaired debt reduction estimated at 85–90 percent for accommodation and food, trade, and professional services sectors.
- Insolvency moratorium:
  - Temporary change to insolvency law to defer legal action against insolvent debtors, scheduled to be fully phased out at the end of January 2021.

*Box 1. Germany’s COVID-19 Mitigation and Recovery Measures*

### 21.      There is unprecedented uncertainty around the baseline forecast, and risks to the

### 21.      There is unprecedented uncertainty around the baseline forecast, and risks to the

### Downside and upside risks to the outlook
- Downside risks:
  - Continued surges or intensification of new infections could make longer-lasting national lockdowns necessary, with adverse economic consequences.
  - Delays in vaccine distribution, and/or low vaccine take-up could require stricter containment measures or lead to persistent behavioral changes prompting costly reallocation of resources.
  - Financial markets could reassess real economy risks, leading to a repricing of risk assets and reduced credit supply.
  - A wide cross-section of firms experiencing deep liquidity shortfalls and bankruptcies could compound job and income losses and adversely affect banks’ capital adequacy.
  - Failure to address the pandemic’s labor market impact, especially on the youth, the elderly, and women, could reduce Germany’s long-term growth potential.
  - As an export-dependent economy, Germany is vulnerable to shocks to external demand (e.g., a no-deal Brexit).
  - Intensified geopolitical tensions and security risks could cause socio-economic and political disruption, disorderly migration, higher commodity prices (if supply is disrupted), and lower confidence.
  - Geopolitical competition and fraying consensus about the benefits of globalization could accelerate de-globalization, leading to reshoring and reduced trade, lowering potential growth.
- Upside risks:
  - Faster progress with vaccines and therapeutics, and changes to the workplace and consumer behavior to reduce transmission, could allow activity to return more rapidly to pre-pandemic levels than currently projected.
  - Improvement in global trade relations following the US elections and faster-than-expected mass vaccinations noted by the authorities.

### Authorities’ views on the outlook and risks
- Authorities broadly shared staff’s assessment of the macroeconomic outlook and risks.
- They estimate that the “lockdown light” will have a more muted impact than the earlier spring lockdown, since initially only a limited number of sectors were affected and schools, daycares, and borders remained open.
- They warned partial lockdowns might need to recur in the first quarter of 2021 as cold weather facilitates indoor virus transmission.
- Authorities attributed Germany’s relative success so far to timely deployment of sizable and multi-pronged support measures and favorable initial conditions such as strong balance sheets of firms and households.
- They expect insolvencies to rise in the coming quarters.
- Government’s most recent projection estimates a reduction in medium term GDP (i.e., for 2024) compared to pre-crisis projections of around €100 billion (around 3 percent of 2019 GDP).
- Authorities agreed public debt is sustainable under all reasonable stress scenarios and fiscal space remains available for additional support.
- Authorities highlighted transformational elements of recent measures:
  - The “future package” allocated €26.2 billion to the Energy and Climate Fund; €1 billion to support digital learning in schools; and €5 billion on 5G infrastructure.

### Policies to support a strong and sustainable recovery (overview)
- Objective: support a strong and sustainable recovery, minimize scarring from the COVID-19 recession, and limit risks to financial stability.
- Germany’s recovery package: temporary broad-based demand stimulus plus measures to build a greener and smarter economy.
- Additional fiscal efforts should be guided by the future path of the epidemic and the pace of economic recovery.
- Labor market policies: avoid hysteresis while allowing structural reallocation of resources once recovery is entrenched.
- Financial policies: avert systemic risks while supporting credit supply.
- Emphasis on “building better for the future”: strengthen digital infrastructure, boost physical and human capital, incentivize innovation, bolster labor supply, increase disposable income for low-income households, and step up climate-related investment.

### A. Fiscal Policy — key points and recommended options
- Fiscal stance:
  - Fiscal policy should remain sufficiently accommodative, and the debt brake rule suspended, until there is evidence of a sustained recovery.
  - Budget plan for 2021 maintains considerable demand support while interest rates remain at the zero lower bound.
  - Staff project the headline balance will improve by about 2.9 percent of GDP in 2021, reflecting the economic rebound and phasing out of measures such as the temporary VAT tax cut and extraordinary public health expenditures.
  - Several new measures will support the recovery: increased depreciation allowance, further extension of the Kurzarbeit program, ramping up public investment in green energy and digitalization.
  - Headline fiscal balance and primary structural balance are projected to remain, respectively, 4.9 percentage points and 3.5 percentage points lower than their pre-COVID 2019 levels.
  - Staff support continued suspension of the debt brake rule to enable this fiscal path.
- Be ready to deploy additional measures if recovery falters:
  - Provide further liquidity support to firms in contact-intensive sectors; relaunch or extend existing aid packages; deploy unused funds from existing grant programs.
  - Lower the labor tax wedge to increase disposable income for low- and middle-income households and incentivize labor supply (examples: reducing marginal tax rate on incomes below the median; reducing social security contributions for low-income workers). (Footnote reference to Selected Issues Paper noted in source.)
  - Increase R&D tax incentives: original tax credit up to €500,000 per year for 25 percent of R&D costs up to €2 million; limit raised to €4 million in the June stimulus package; consider further raising the ceiling to let larger firms utilize credit.
  - Expedite public investment and step up climate expenditure: maintain and prioritize a pipeline of projects that can be implemented quickly and yield productivity gains post-pandemic.
- Governance and monitoring:
  - High governance standards and careful monitoring are essential given extraordinary policy measures and public resources deployed.
  - Most support schemes rely on institutions with long-standing track records (Kurzarbeit by the Federal Employment Agency; loan guarantees by KfW and state-level guarantee banks).
  - KfW loan guarantee programs require minimum bank credit screening standards and involve risk-sharing elements such as syndicated lending.
  - Large-volume loan guarantees and equity injections through the WSF are subject to approval by a committee with representatives of various ministries and the chancellery.
  - State-level grants guided by principle that eligible firms must not have been loss-making prior to COVID crisis, though implementation faced operational challenges; early “Soforthilfe” grants had user fraud and eligibility/screening were tightened in response.
  - All support schemes should be buttressed by rigorous monitoring.

### Fiscal stance and projections (table highlights preserved as figures)
- Headline Balance: 1.5 -6.3 -3.4 0.1 0.4 0.6 0.6
- Change from the previous year: -0.3 -7.8 2.9 3.5 0.4 0.2 0.0
- Primary Structural Balance: 2.1 -4.1 -1.4 1.0 1.1 1.1 1.1
- Implied Fiscal impulse 1/: 0.1 6.1 -2.7 -2.3 -0.1 -0.1 0.1
- Structural Balance: 1.3 -4.8 -2.0 0.4 0.6 0.6 0.6
- Public gross debt (Maastricht definition): 60 71 71 68 65 63 60
- Sources: Ministry of Finance, Bundesbank, Federal Statistical Office, and IMF staff estimates and projections.
- Note 1/: Negative of the difference between the projected primary structural balance in each year and that of the year before.

### B. Preventing labor market scarring and growing inequality
- Kurzarbeit:
  - Should remain central in supporting the labor market while economic activity remains weak.
  - Kurzarbeit contributed to labor market resilience during the GFC; among G7 countries only Germany experienced no fall in employment in 2009.
  - Kurzarbeit helped stabilize labor income, support private consumption, and reduce precautionary savings.
  - Kurzarbeit will remain supportive in 2021, but some parameters will be gradually tightened:
    - Full exemption of employer's social security contributions on reduced hours will expire by end-June 2021; from July to December 2021 it will be replaced with a 50 percent waiver of the contributions.
    - Workers who apply for Kurzarbeit by end-March 2021 will receive increased benefits through end-2021.
- Limitations and targeted measures:
  - Kurzarbeit alone is inadequate given the wide range of sectors affected; marginal employees (largely women) are disproportionately not covered.
  - Crises tend to have large lingering effects on young and old-age workers, potentially reducing growth potential.
- Specific concerns and evidence:
  - Women:
    - Women make up the majority of employment in contact-intensive services.
    - Women comprise 64 percent of marginal employees.
    - The cumulative increase in unemployment since the beginning of 2020 for women has been roughly double that of men.
    - Risks include rollback in female labor market participation, widening of gender wage gap, and increased income inequality.
  - Youth and elderly workers:
    - Poor labor market conditions can disrupt early careers causing lingering wage and productivity impacts.
    - Workers eligible for early retirement who become unemployed may exit the labor force permanently.
    - Unemployment rates may increase over a six-month to one-year period if recovery is delayed, with implications for potential growth (Annex IV).
- Policy recommendations to reduce scarring:
  - Sustain expanded Kurzarbeit benefits through end-2021 as planned.
  - Strengthen incentives for job search while reducing hiring costs for viable firms (e.g., hiring subsidy or subsidies for firm-sponsored apprenticeships).
  - Target measures to facilitate re-entry for women, youth, and elderly workers.
  - Maintain a flexible and generous basic social safety net; access to basic social security has been relaxed and processing time shortened through March 2021.
  - As recovery gains momentum, shift from protecting jobs to supporting workers and facilitating efficient resource reallocation:
    - Normalize Kurzarbeit parameters once recovery is firmly established.
    - Promote training and life-long learning to upgrade skills and increase employability.
    - Step-up investment in full-time quality care in kindergartens and schools to help re-integrate women.
    - Use digitalization to create opportunities for old-age workers, supported by training.
    - Promote creation of new businesses and jobs by reducing administrative burdens and fully implementing the National e-Government Strategy.

*IMF staff and authorities analysis as presented in the source content.*

### 34.      The authorities agreed that Kurzarbeit should remain the main labor market

### 34.      The authorities agreed that Kurzarbeit should remain the main labor market stabilization tool in the near term

### Labor market support and distributional effects
- Kurzarbeit and its enhancements limited job losses while supporting firms’ liquidity and workers’ incomes during the first wave of the pandemic, reprising the instrument’s success during the GFC.
- Authorities view it as too early to normalize Kurzarbeit’s parameters given the new surge in infections; enhancements are set to be pared back by end-2021 and Kurzarbeit is considered a bridge into 2021.
- On differential impacts:
  - Women, young people, and elderly workers have borne a larger burden, but authorities cautioned it is still too early to identify any long-lasting scarring effect.
  - Women have a high employment share in contact-intensive service sectors and comprise the majority of vulnerable marginal workers; however, the rise in the female unemployment rate is less pronounced in national unemployment statistics than in survey-based ILO unemployment data.
  - Authorities are closely monitoring young graduates’ labor market prospects and have put in place bonuses for SMEs to maintain or expand apprenticeships, complementing long-standing programs addressing the structural shortage of skilled labor.
  - Active labor market instruments—wage subsidies for workers with placement difficulties (e.g., the elderly and/or low-skilled unemployed), and continuous education and training—are expected to aid re-integration once the crisis abates.
  - Promotion and possibilities of continuous training for workers on Kurzarbeit have been improved; employers receive financial incentives to further the professional qualifications of staff who are on Kurzarbeit.

### Banks’ solvency and pandemic vulnerability
- Staff analysis shows major German banks’ sizable loan exposure to sectors highly affected by the pandemic, exposing them to lower profits, rising default risk, and higher charge-offs for un-provisioned loan losses.
- Strong corporate equity buffers and borrower liquidity support have so far limited credit defaults.
- Staff estimate that the asset-weighted average Common Equity Tier 1 (CET1) capital ratio of large German banks could decline by 2 ppt by end-2021 under the baseline macroeconomic projection of a rebound in economic activity in 2021.
- Mitigating policies could reduce the capital impact by half (Box 3); however, capital erosion could be substantially larger if downside growth risks materialize.

### Box 3 — Channels and quantitative assumptions for banks’ CET1 impact
- Three transmission channels to CET1 ratios:
  - Lower GDP growth and higher unemployment depress bank profitability (ROA), largely via larger loan loss provisioning.
  - Rises in bankruptcies and poor distressed-asset recovery rates lead to write-offs of impaired loans; write-offs are lower when borrower measures reduce bankruptcies.
  - Higher default risk increases credit risk weights; government loan guarantees mitigate the rise in risk weights.
- Coverage and timing assumptions:
  - Exercise includes 15 of the largest banks in Germany, covering 43 percent of total banking sector assets.
  - Assumed that 15 percent of envisaged bankruptcies occur in 2020 and 85 percent in 2021, in line with the insolvency moratorium in place for illiquid and insolvent firms until end-September 2020.
- Results:
  - With no mitigating policies, aggregate CET1 of large German banks is estimated to decline by about 2 percentage points by end-2021.
  - Policies provide a cushion of roughly 1 ppt (difference in the weighted average CET1 ratio with and without policies by end-2021).

### Smaller savings/co-operative banks and longer-term bank-sector challenges
- Smaller saving banks likely to suffer more losses than large banks owing to high exposure to SMEs.
- Under baseline projections, average return on assets (ROA) for savings and co-operative banks could decline by around 1 ppt more than commercial banks in the near term, absent further policy interventions, and recover only slowly in the medium term.
- Saving and co-operative banks entered the crisis with higher capital buffers, making them better positioned to absorb losses.
- Recommendation: accelerate long-standing banking-sector consolidation among saving and co-operative banks to improve sector resilience.

### Managing the unwinding of borrower support and capital relief
- Phasing out borrower support measures and unwinding capital relief requires careful balancing:
  - Insolvency moratorium for illiquid and insolvent firms expired at end-September 2020 (with a note that the moratorium for indebted yet liquid firms remains in place through end-January 2021).
  - Bankruptcies could start rising, posing significant financial stability risks.
  - Lending conditions could tighten as exceptional borrower support measures expire and default risk increases.
- Policy guidance:
  - Continue some direct support for firms, targeting those temporarily impaired by health risks or social distancing and firms crucial for the economy, while facilitating exit of unviable companies.
  - Maintain temporary relaxation of regulatory capital requirements (Paragraph 12) until the recovery has firmed up.
  - Rebuild bank capital and liquidity buffers gradually to minimize disruptions to new loan supply.
  - Bank supervisors should maintain restrictions on discretionary dividend distributions and share buy backs during the recapitalization period.
  - To improve profitability, banks should reduce administrative costs, enhance governance, and increase non-interest revenues (fees and commissions), given continued pressure on interest margins.

### Preventing credit misallocation and “zombie” firms
- Risks:
  - With most credit risk of guaranteed loans shifted to the state and streamlined creditworthiness screening, moral hazard and loan evergreening are likely.
  - Insolvency moratorium has complicated monitoring of firms’ solvency.
- Recommendations:
  - Carefully monitor build-up of credit risks.
  - Phasing out the 100 percent loan guarantee program by mid-2021 is appropriate; remaining guarantee coverage should be adjusted to prevent credit misallocation.
  - Tighten eligibility criteria to better target illiquid but solvent firms.
  - Normalize prudential standards and clearly communicate them to incentivize timely recognition of problem assets.
  - Expedite transposition of the EU Directive on Preventive Restructuring Frameworks to allow viable but distressed companies to avoid insolvency via preventive restructuring plans.

### Life insurers
- German life insurers entered the pandemic with solvency ratios well above the 100 percent threshold set by supervisors, but profitability has been squeezed by the low-for-long interest rate environment due to a large share of guaranteed products.
- To boost profitability, life insurers have been increasing asset maturities and taking larger credit risks.
- Pandemic effects:
  - Further flattening of the yield curve and drops in equity prices adversely affected insurers’ profitability.
  - Downgrades of corporate credit ratings and declines in commercial real estate prices could further weigh on profitability.
- Recommendation: supervisors should continue monitoring risks and life insurers should adopt a prudent approach, including temporarily suspending discretionary dividend distributions and share buy backs to preserve capital.

### Real estate market, data gaps, and macroprudential tools
- Housing prices maintained rapid growth through Q3 2020, supported by supply shortages and a strong mortgage market; office prices have softened since the pandemic onset.
- Risks:
  - Demand for housing could subside if the pandemic leads to a persistent decline in household income.
  - Banks’ exposure to commercial real estate (CRE) makes them susceptible to drops in CRE prices.
  - Lack of granular loan information hinders full assessment of financial stability risks in specific market segments.
- Recommendations:
  - Close data gaps speedily.
  - Expand macroprudential toolkit to include income-based instruments (e.g., debt-to-income or debt-service-to-income caps) for residential and commercial real estate lending.
  - Consider other CRE instruments, recognizing heterogeneity in financing structures.

### Auditing, accounting enforcement, and the Wirecard case
- Wirecard AG acknowledged accounting fraud involving at least €1.9 billion in fictitious cash balances and filed for insolvency on June 25.
- The scandal revealed deficiencies in audit regulation and accounting enforcement, exacerbated by:
  - Classification of Wirecard as a fintech firm, not a financial holding, creating a regulatory blind spot for financial reporting and AML/CFT activities.
  - Germany’s complex two-stage accounting enforcement and relatively long mandatory audit rotation time of 10 years—with a possible extension for another 10 years for nonfinancial corporations—tended to shield the firm.
- Reform plan approved by the cabinet in early October aims to:
  - Strengthen BaFin’s supervisory powers and capacity.
  - Tighten mandatory audit rotation rules by eliminating the possibility to extend beyond 10 years.
  - Strengthen corporate governance.
  - Allow BaFin to supervise a company group as a whole, even if only selected subsidiaries are currently subject to its supervision.

### AML/CFT and beneficial ownership transparency
- According to FATF’s latest mutual evaluation for Germany, preventive measures against laundering proceeds of foreign corruption are generally sound but need strengthening in some areas.
- Preventive frameworks for financial institutions and nonfinancial businesses are sound, including customer due diligence and suspicious reporting, though concerns remain about effective implementation in all institutions.
- Frameworks for investigating, prosecuting money laundering, and international cooperation are relatively robust; effectiveness to be assessed during the next FATF assessment.
- A previously noted weakness—lack of readily accessible beneficial ownership information—has been addressed through the introduction of a Transparency Register.

*Source: IMF staff report excerpt (1deuea2021001).*

### 44.      The authorities agreed that German banks’ profits and capital are likely to decline, but

### 1deuea2021001 - 44.      The authorities agreed that German banks’ profits and capital are likely to decline, but

### Banking sector outlook and risks
- Authorities expect a significant increase in bankruptcies in the nonfinancial corporate sector based on their models.
- Banks’ profits and capital are likely to decline, but:
  - Exceptional borrower support and ample pre-pandemic buffers provide an important cushioning effect.
  - The banking sector is likely to withstand expected losses across a wide range of scenarios, though uncertainty about bankruptcies and their impact on financial stability remains high.
- Savings and co-operative banks:
  - May face a large drop in profits.
  - Entered the crisis with generally higher capital buffers, making it easier for them to absorb losses.
- Recommended near-term regulatory stance:
  - Regulatory capital relief should remain in place, acting as an important signal for banks to use buffers in support of lending to the economy.
  - Credit risks need close monitoring given persistent uncertainty and extraordinary support measures.
  - Banks and insurers should pursue a prudent dividend policy and limit or refrain from dividend distributions or share buybacks until uncertainties abate.

### Real estate data and macroprudential toolkit
- Data collection:
  - A statutory order for regular data collection by the Bundesbank on residential real estate loans is scheduled to enter into force at the beginning of 2021, with the first set of data expected in 2022.
- Macroprudential instruments:
  - The Finance Ministry is preparing a report for the Bundestag evaluating existing instruments for residential properties (i.e., a loan-to-value cap and an amortization requirement that can be applied to residential real estate loans and housing-related commercial real estate loans).
  - The evaluation also covers the question of expanding the toolbox to income-based instruments.
  - Appropriate borrower-based instruments for CRE loans would need to reflect diverse CRE financing structures; adding such instruments is beyond the scope of the current evaluation program.

### Audit, accounting enforcement, and AML/CFT enhancements
- Authorities agree with staff assessment of issues in audit procedures and accounting enforcement and plan a comprehensive reform to close regulatory loopholes.
- Payment transactions regulatory deficiencies will be addressed at the EU level (area fully harmonized under EU law).
- AML/CFT progress since 2019 Article IV consultations:
  - BaFin has implemented legislative amendments, risk analysis and supervisory measures, organizational adjustments, and enhanced administrative cooperation.
  - Anti-Financial Crime Alliance (AFCA) established in September 2019 as the German AML public-private partnership; BaFin is a public-sector representative on the Board.
  - The latest EU AML-Directive (5AMLD) came into force in Germany on January 1, 2020.
  - Germany published the National Risk Assessment in 2019 and finalized several sectoral risk assessments.
  - Ongoing FATF mutual evaluations focus on the effectiveness of AML/CFT systems and adjustments to the framework (e.g., measures to improve accessibility to beneficial ownership information).

### Staff appraisal — pandemic management and macro outlook
- Pandemic response and fiscal support:
  - Early testing, contact tracing, and efficient hospital capacity use resulted in one of the lowest mortality rates in Europe.
  - Authorities launched unprecedented support measures, taking advantage of substantial fiscal space.
  - Multi-pronged fiscal and guarantee packages announced in March and June had a total envelope of over 30 percent of GDP; actual spending has been well below the initial envelope but provided critical income and liquidity support.
- Outlook and risks:
  - The outlook is highly uncertain with risks tilted to the downside.
  - An unprecedented economic contraction in Q2 was followed by a stronger-than-expected rebound in Q3, aided by policies.
  - Output is not expected to return to its pre-crisis level before 2022.
  - Germany’s external position in 2020 is expected to be stronger than implied by medium-term fundamentals and desirable policies despite temporary current account reduction.
  - Downside risks include uncontrolled infection waves, stricter/longer lockdowns, a no-deal Brexit, re-escalation of trade tensions, and other global shocks.
  - Upside: quicker progress on a vaccine may allow a speedier resumption of economic activity.

### Fiscal policy recommendations — near term and medium term
- Near term:
  - Fiscal policy should remain sufficiently accommodative until evidence of a sustained recovery.
  - 2021 budget maintains considerable demand support; the escape clause of the debt brake rule remains activated.
  - Authorities should remain vigilant for balance-sheet distress and labor market scarring and be ready to deploy additional measures if needed, including:
    - Additional grants to viable firms.
    - Reduced social security contributions from low-income earners.
    - Expedited public investment and spending on climate change mitigation policies.
  - Public debt will increase in the near term but remains sustainable across multiple stress scenarios.
  - Strong governance and transparent monitoring of measures are crucial.
- Medium term:
  - Fiscal policy should “build better for the future” once the crisis abates by addressing structural transformation:
    - Invest in digital infrastructure, encourage innovation, and bolster labor supply to boost potential growth.
    - Make medium-term growth greener via the government’s climate investment plan.
    - Make growth more inclusive by raising disposable income of low-income households.
  - Structural fiscal balance is expected to improve significantly from 2022 onwards as the economy recovers and support measures expire, leaving resources for structural transformation and demographic challenges.

### Labor market policy recommendations
- Short term:
  - Maintain protective labor market policies to prevent scarring and widening inequalities.
  - Keep crisis-induced changes to Kurzarbeit in place until a sustained recovery is underway to preserve job matches.
  - Maintain the extended basic income for marginal workers and the self-employed who are not eligible for Kurzarbeit until their prospects improve.
- As recovery gains momentum:
  - Shift policies to facilitate reallocation while protecting the vulnerable:
    - Strengthen incentives for job search and reduce hiring costs for viable firms (e.g., bolster hiring subsidies and subsidies for apprenticeships).
    - Step up investment in full-time quality care in kindergartens and schools to help re-integrate women into the labor market.
    - Invest in digitalization and lifelong learning to enhance labor mobility.

### Financial sector policy recommendations
- Manage unwinding of extraordinary support measures while ensuring banks’ lending capacity:
  - With the insolvency moratorium being phased out, corporate bankruptcies are likely to rise and lending conditions could tighten as support measures expire and default risk increases.
  - Government should ensure a smooth transition by continuing some direct support for firms that are temporarily impaired by health risks or social distancing restrictions and firms crucial for the economy, while facilitating the exit of unviable companies.
  - Implementing the EU Directive on Preventive Restructuring is recommended to help distressed but viable firms avoid disruptive insolvencies.
- Bank-specific guidance:
  - Existing capital buffers, temporary relaxation of regulatory capital requirements, and measures to mitigate borrowers’ liquidity concerns and reduce credit risk will help cushion bank solvency impacts.
  - Bank capital buffers should be rebuilt gradually to minimize disruptions to new loan supply.
  - Bank supervisors should maintain restrictions on discretionary dividend distributions and share buy-backs until the full impact of the pandemic becomes clearer.
  - Supervisors should encourage banks to tackle low profitability via restructuring to boost non-interest revenues and reduce administrative costs.

*Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1deuea2021001.pdf*

### 55.      It is recommended that the next Article IV consultation take place on the regular

### It is recommended that the next Article IV consultation take place on the regular 12-month cycle.

### Growth developments
- The COVID-19 pandemic caused an unprecedented economic contraction in H1 2020 by disrupting global supply chains, reducing external demand, and compressing domestic demand via mobility restrictions, income losses, and tighter financial conditions.
- Economic activities started recovering in mid-2020, but a renewed lockdown is weighing on the service sector.
- Capacity utilization plummeted in H1 2020, especially in the industrial sector.
- Hours worked declined substantially; however, the impact on the unemployment rate was relatively limited thanks to Kurzarbeit.

### Prices and labor market
- Inflation weakened in March-April 2020 as energy prices fell, then declined further into negative territory in H1 2020 on the back of temporary VAT cuts.
- The pandemic reduced the tightness of labor market conditions and shaved the share of firms with labor shortages across the sector, lowering wages.
- Unit labor costs rose sharply in H1 2020 due to job retentions through Kurzarbeit.
- Sentiment for employment improved since mid-2020, but momentum for manufacturing remains relatively weak.
- Job vacancy rate, contributions to headline inflation, nominal and real compensation per employee, unit labor costs, PMI employment, and firms with labor shortages are tracked across 2008–2020 series (figures provided).

### Balance of payments and external sector
- The current account (CA) continued to edge down in 2019 to 7.1% of GDP.
- Net International Investment Position exceeded 70 percent of GDP by end-2019.
- The CA decline mirrored a reduction in the surplus of portfolio and other investment, while direct investment edged up.
- The ULC-based REER appreciated in 2019 with faster wage growth, while the CPI-based REER depreciated with a weakening Euro.
- Sectoral saving-investment balances: household net lending remained high; nonfinancial corporations' saving-investment were balanced.
- Financial account composition (percent of GDP) and CA breakdown by component and region are shown for 2000–2019.

### Fiscal developments and outlook
- Before the pandemic, the general government had maintained record-high surpluses for several years and saw declining interest payments.
- To combat the pandemic, sizable fiscal measures were deployed; as crisis measures phase out, public debt ratio is projected to fall back to pre-crisis level over the medium term.
- General government overall balance (percent of GDP): 2017: 1.4; 2018: 1.8; 2019: 1.5; 2020: -6.3; 2021: -3.4.
- Structural balance (percent of GDP): 2017: 1.1; 2018: 1.3; 2019: 1.3; 2020: -4.8; 2021: -2.0.
- General government debt (percent of GDP): 2017: 65.0; 2018: 61.6; 2019: 59.5; 2020: 71.1; 2021: 70.9.
- Tax revenue and social security contributions, and general government spending shares are depicted for 2005–2019; public investment increased substantially in recent years.

### Credit conditions and asset prices
- Since the onset of the pandemic, lending standards tightened moderately, while credit growth remained high in 2020.
- Lending rates on new loans to non-financial corporations remained barely changed at very low levels.
- Demand for corporate credit surged in Q2 2020 on precautionary cash needs.
- German government bond yields: after losing a quarter of value in March to -80 bps, yields hovered around -40 to -60 bps with fluctuations.
- German equities: after losing a quarter of value in March, from December 2019 German equities restored pre-pandemic values (DAX and EURO STOXX 50 indices shown, 2007M1=100).
- Bank lending standards, lending growth, credit demand surveys, and 10-year bond yield dynamics are presented (time series).

### Recent developments in the German banking sector
- Investor sentiment toward the two largest banks deteriorated at the onset of the pandemic but has largely been corrected; the two largest banks trade at a discount to European peers.
- Low profitability driven by low interest rate margins and high costs relative to European peers.
- German banks maintained generally comfortable risk-weighted capital buffers in H1 2020, though some banks' leverage remains higher than European peers.
- Key indicators (selected): German Banks 5-Year CDS spreads, price-to-book ratios (December 7, 2020), return on assets, Common Equity Tier 1 ratios (2019 and 2020H1, phase-in), leverage ratios, and net interest margins are reported in the figures and tables.

### Housing market developments
- Despite the pandemic and declines in household income, residential housing prices continued to rise through Q3 2020.
- Contributing factor: supply shortages owing to persistent under-supply of new housing since the refugee surge in 2015.
- Residential investment has picked up since 2018; unfilled orders continued to rise in 2019 amid further increases in new orders.
- Supply-demand conditions for offices tightened through 2019, supporting office price rises until the pandemic interrupted the upward trend.
- Key series: housing permits, residential construction orders, real residential investment (index 2015Q1=100), new residential housing units (thousands), vacancy rates for offices by town category, commercial real estate prices (2015Q1=100).

### Key indicators and projections (selected exact values)
- Table 3 highlights selected economic indicators, 2017–21 (percent change unless noted):
  - GDP: 2017: 2.9; 2018: 1.3; 2019: 0.6; 2020: -5.7; 2021: 3.5.
  - Private consumption: 2017: 1.8; 2018: 1.5; 2019: 1.6; 2020: -6.2; 2021: 3.8.
  - Unemployment rate (ILO definition): 2017: 3.8; 2018: 3.4; 2019: 3.2; 2020: 4.2; 2021: 4.3.
  - Consumer price index (harmonized): 2017: 1.7; 2018: 1.9; 2019: 1.4; 2020: 0.4; 2021: 1.2.
  - Household saving ratio (percent): 2017: 10.6; 2018: 10.9; 2019: 10.9; 2020: 16.1; 2021: 13.2.
- Table 4: General government operations (percent of GDP), selected rows:
  - Revenue: 2017: 45.6; 2018: 46.3; 2019: 46.7; 2020: 46.5; 2021: 46.0.
  - Expense: 2017: 44.2; 2018: 44.5; 2019: 45.2; 2020: 52.9; 2021: 49.5.
  - Net lending/borrowing: 2017: 1.4; 2018: 1.8; 2019: 1.5; 2020: -6.3; 2021: -3.4.
  - Public gross debt (Maastricht definition): 2017: 65.0; 2018: 61.6; 2019: 59.5; 2020: 71.1; 2021: 70.9.
- Table 5: Medium-term projections, selected:
  - Real GDP (percent change): 2022: 3.1; 2023: 1.7; 2024: 1.4; 2025: 1.2; 2026: 1.1.
  - Current account balance (percent of GDP): steady around 6.8–7.1 across 2021–2026.
  - General government overall balance (percent of GDP): 2022 onward projected at 0.1–0.6, with net lending/borrowing at 0.1 in 2022 and 0.4 in 2023.
- Table 6: Balance of payments, selected (percent of GDP):
  - Current account: 2017: 7.8; 2018: 7.4; 2019: 7.1; 2020: 6.6; 2021: 7.0; projected 2026: 6.8.
  - Exports (percent of GDP): 2017: 38.5; 2018: 38.5; 2019: 37.9; 2020: 35.2; 2021: 36.4.
  - Imports (percent of GDP): 2017: 30.8; 2018: 31.8; 2019: 31.5; 2020: 29.9; 2021: 30.2.
- Table 7: Net International Investment Position (percent of GDP): 2017: 56.4; 2018: 63.4; 2019: 71.7; 2026 projection in Table 5: 99.6 (Memorandum: Net international investment position trends reported).
- Banking sector FSIs (Tables 8–9): capital adequacy, asset quality, profitability, liquidity, and additional indicators reported for 2014–2019. Selected exact series:
  - Regulatory capital to risk-weighted assets: 2019: 18.6.
  - NPLs to gross loans: 2019: 1.1.
  - Return on average assets (after-tax) 2019: 0.0.
  - Liquid assets to total short-term liabilities 2019: 161.2.
  - Household debt to GDP 2019: 53.4.
  - Real estate prices indices: new dwellings 2019: 127.1; resale 2019: 125.2; long time series 2019: 150.8; commercial property 2019: 171.5.

*International Monetary Fund staff compilation and analysis from figures, tables, and text in the provided content unit.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment
- On a preliminary basis, and adjusting for transitory factors, the external position in 2020 was stronger than the level implied by medium-term fundamentals and desirable policies.
- Assessment is highly uncertain given the lack of full-year data for 2020 and the COVID-19 crisis; a complete analysis will be provided in the 2021 External Sector Report.
- Staff project the fall in the current account surplus to be temporary as the COVID crisis leads to a severe disruption in world trade.
- Over the medium-term—after the impact of the pandemic has receded—the current account surplus is projected to:
  - recover to higher levels and then resume its modest gradual narrowing,
  - be supported by a gradual realignment of price competitiveness and solid domestic demand.
- As Germany is part of the euro area, the nominal exchange rate does not flexibly adjust to the country’s external position; stronger wage growth relative to euro area trading partners is expected to contribute to realigning price competitiveness within the monetary union.
- The projected adjustment is partial, and additional policy actions will be necessary for external rebalancing.

### Potential policy responses
- Near-term:
  - Continue mitigating the outbreak while supporting households and businesses in a way that minimizes economic scarring and facilitates a swift recovery.
- Medium-term, if pre-COVID imbalances persist:
  - Adopt a growth-oriented fiscal policy with greater public sector investment in digitization, infrastructure and climate mitigation to crowd in private investment, promote potential growth, and increase resilience.
  - Structural reforms to foster entrepreneurship (for example, by expanding access to venture capital, and stronger tax incentives for research and development).
  - Additional tax relief for lower-income households to boost purchasing power.
  - Pension reforms prolonging working lives to help reduce excess saving and ameliorate external imbalances.

### Foreign asset and liability position and trajectory
- Background and recent developments:
  - Germany’s positive NIIP surpassed 70 percent of GDP in 2019, more than doubling its level over the last five years.
  - The net rise in foreign assets over this period has still fallen short of the accumulation of CA surpluses.
  - NIIP composition:
    - The NIIP of financial corporations other than monetary financial institutions is large and positive (65 percent of GDP).
    - The NIIP of the general government is large and negative (26 percent of GDP), partly reflecting Germany’s safe-haven status.
  - The NIIP is expected to exceed 80 percent of German GDP by 2022, as the projected CA surplus remains large through the medium term but is expected to be partly offset by valuation changes.
  - Foreign assets are well diversified by instrument.
  - The stock of Germany’s TARGET2 claims on the Eurosystem increased during the pandemic and associated QE operations of the ECB, standing at over €1 trillion as of October 2020 (32 percent of GDP).
- Assessment:
  - With continued implementation of QE measures by the ECB, Germany’s exposure to the Eurosystem remains large.
- Key figures (2020Q2 (% GDP)):
  - NIIP: 73.1
  - Gross Assets: 302.7
  - Debt Assets: 181.7
  - Gross Liab.: 229.6
  - Debt Liab.: 162.4

### Current account
- Background:
  - The CA surplus has widened significantly since 2001, peaking at 8.6 percent of GDP in 2015 and falling gradually since then.
  - In 2020, the CA surplus is projected to temporarily decline to 6.6 percent of GDP (from 7.1 percent of GDP in 2019), despite an improved balance on oil and gas as well as services (driven by a sharp fall in global oil prices and outbound tourism).
  - The bulk of the CA surplus reflects the large saving-investment surplus of households.
  - The saving-investment balance of the government is expected to turn strongly negative due to the unprecedented fiscal stimulus, while the NFC balance is also projected to decline due to lower profits.
- Assessment and model results:
  - The cyclically adjusted CA balance from the EBA model is estimated to reach 6.5 percent of GDP.
  - Staff assesses the CA norm at 2 to 4 percent of GDP, with a midpoint 0.35 percent of GDP above the 2.7 percent CA norm implied by the EBA model. This upward adjustment reflects uncertainty over the demographic outlook and the impact of recent large-scale immigration on national savings.
  - Staff also assesses the cyclically adjusted CA balance to be 0.9 percent of GDP lower than estimated by the model to account for the temporary sharp drop in international oil prices and outbound travel associated with the pandemic.
  - Taking these factors into account, staff assesses the 2020 CA gap to be in the range of 1.6 to 3.6 percent of GDP.
- Key figures (2020, % GDP):
  - Actual CA: 6.6
  - Cycl. Adj. CA: 6.5
  - EBA CA Norm: 2.7
  - EBA CA Gap: 3.8
  - Staff Adj.: –1.25
  - Staff CA Gap: 2.6

### Real exchange rate
- Background:
  - The CPI-based REER appreciated by 2.4 percent through October 2020 relative to the 2019 average, reflecting primarily the appreciation of the euro against the currencies of key trading partners—notably the US dollar.
- Assessment:
  - The EBA REER Level model yields an undervaluation of 15.5 percent.
  - The undervaluation implied by the assessed CA gap is in the range of 4 to 9 percent (using an estimated elasticity of about 0.4).
  - Taking these estimates together with the 2020 real appreciation, staff assesses the 2020 REER to have been undervalued in the range of 2 to 12 percent, with a midpoint of 7 percent.

### Capital and financial accounts: flows and policy measures
- Background (2020H1):
  - Net derivatives and other investment outflows comprised the bulk of the capital and financial accounts balance.
  - Reversing a long-standing trend, net portfolio investment outflows turned negative due to increased foreign purchases of domestic debt.
  - Net FDI outflows remained positive but declined due to higher inflows.
- Assessment:
  - Safe-haven status and the strength of Germany’s current external position limit risks.

### FX intervention and reserves level
- Background:
  - The euro has the status of global reserve currency.
- Assessment:
  - Reserves held by euro area countries are typically low relative to standard metrics. The currency floats freely.

*Source: Annex I. External Sector Assessment (content unit 1deuea2021001)*

### Annex II. Risk Assessment Matrix — selected risks and policy responses

### Global risks to the economic outlook
- I. Unexpected shifts in COVID-19 pandemic
  - Likelihood: H
  - Impact: H
  - Downside: Disease proves harder to eradicate, requiring more containment and persistent behavioral changes; costly reallocations of resources.
  - Upside: Faster recovery due to faster vaccine/therapeutic distribution or quicker behavioral adjustment.
  - Key near-term risk manifestation: Demand in contact-intensive services remains low for longer amid dwindling support for continued large fiscal measures.
  - Policy responses:
    - Maintain and intensify public health measures, large-scale testing and contact tracing, invest in medical infrastructure and research.
    - Fully use available fiscal space to support households and businesses while encouraging necessary resource reallocation.

- II. Accelerating de-globalization
  - Likelihood: H
  - Impact: H
  - Vulnerability: Germany’s high degree of trade openness.
  - Policy responses:
    - Continue support for multilateral rules-based trading system, trade liberalization, and free trade agreements.
    - Let automatic stabilizers fully operate.
    - Consider discretionary fiscal expansion if the output gap widens significantly; sustain invocation of the escape clause under the national debt brake rule if needed.

- III. Intensified geopolitical tensions and security risks
  - Likelihood: H
  - Impact: H
  - Consequences: Socio-economic and political disruption, disorderly migration, higher commodity prices, lower confidence, loss of social cohesion.
  - Policy responses:
    - Extend temporary support for the most vulnerable groups (strengthened social safety net).
    - Deploy targeted labor market measures to re-integrate hard-hit workers.

### Regional risks
- IV. A disorderly Brexit
  - Likelihood: H
  - Impact: H
  - Potential effects: Significant disruptions, border delays, sudden increase in tariff and non-tariff costs, long-term efficiency losses.
  - Policy response: Contingency planning and collaboration between the U.K. and EU authorities to reduce cliff-edge effects and disruptions.

- V. A shift in market sentiment against some high-debt euro area countries
  - Likelihood: H
  - Impact: M
  - Consequences: Rise in sovereign yields may have knock-on effects on financial sector and affect German banks.
  - Policy responses:
    - Ensure banks’ liquidity and capital buffers are adequate.
    - Engage in contingency planning and coordination among relevant authorities.

### Domestic risks
- VI. Deeper scarring of corporate balance sheets and labor markets
  - Likelihood: M/L
  - Impact: H
  - Consequences: Permanent job losses, loss of firm-specific human capital, adverse spillovers, pressure on bank capital adequacy.
  - Policy responses:
    - Stand ready to implement further policy support measures for firms and workers.
    - Maintain flow of credit via adequately targeted financial policies (e.g., loan guarantees).

- VII. Key sectors fail to adjust to technological change and digitalization
  - Likelihood: M
  - Impact: H
  - Consequences: Loss of competitiveness and market share for automobiles and machinery, increased structural unemployment, lower potential growth.
  - Policy responses:
    - Public investment in digitalization to crowd-in private investment and boost digital infrastructure.
    - Ensure energy transition proceeds as planned.
    - Provide incentives for electric vehicle ownership, including public upgrades to e-mobility.

- VIII. Increase in the share of “zombie” firms
  - Likelihood: M/L
  - Impact: M/H
  - Consequences: Distortion of competition, lower productivity, slower technological adjustment.
  - Policy responses:
    - Phase out policy support as recovery gains hold.
    - Shift to targeted support to encourage resource reallocation toward growing sectors.

*Source: Annex II. Risk Assessment Matrix (content unit 1deuea2021001)*

### Annex III. Public Debt Sustainability Analysis

### Baseline scenario — key findings and assumptions
- Historical context:
  - Before the COVID-19 pandemic, Germany's public debt had declined rapidly, falling below the 60 percent mark by end-2019.
- 2020 developments:
  - The government's multi-pronged fiscal measures to combat the crisis are expected to push debt up to about 71 percent of GDP by end-2020, an increase of 12 percentage points.
- Medium-term outlook:
  - Due to the temporary nature of policy measures and the expected economic recovery, public debt sustainability will not be jeopardized.
  - The debt ratio is projected to fall back to 60 percent of GDP over the medium term.
  - A negative growth shock and a combined macro-fiscal shock represent the largest risks to the debt outlook; in both cases, debt would return to a downward trajectory after the shock.
- Macroeconomic assumptions (baseline):
  - Real GDP growth: shrink by 5.4 percent in 2020, rebound of 3.5 percent in 2021.
  - Potential growth: converge to 1.2 percent per year over the medium run.
  - Inflation (GDP deflator): will reach 2.1 percent.
  - Sovereign interest rates remain low and are currently negative up to a 30-year maturity.
  - Average interest rates of public debt: expected to fall from 1.3 percent in 2019 to 0.8 percent in 2025.
- Scrutiny and financing needs:
  - Germany’s temporarily high level of government debt calls for using the higher scrutiny framework.
  - Public gross debt in 2020 expected to be above the indicative DSA threshold (60 percent of GDP) for high scrutiny.
  - Estimated gross financing needs decline from 20 percent of GDP in 2020 to below 7 percent of GDP in 2025.
- Realism and feasibility:
  - Previous forecasts have been conservative: median forecast error for real GDP growth during 2011–19 is close to zero; median forecast error for inflation (GDP deflator) is 0.33 percent; median forecast bias for the primary balance is 0.53 percent of GDP.
  - The projected fiscal adjustment is feasible: the maximum 3-year adjustment of the CAPB lies in the top quartile of historical and cross-country experience, mainly reflecting withdrawal of sizable temporary fiscal measures. Germany delivered larger consolidations in the past (notably 2011 and 2012).

### Shocks and stress tests through the medium term
- Overall conclusion:
  - Under plausible macro-fiscal shocks, government debt should remain below the elevated level of 2020 over the medium term while gross financing needs should fall below 10 percent of GDP.
  - Under all considered macro-fiscal stress tests, both the debt-to-GDP ratio and gross financing needs either continue to drop or return to a downward path after the shock.
  - Debt dynamics are most sensitive to growth shocks given historical variability of growth.
- List of shocks and stress tests (summary):
  1. Growth shock:
     - Assumption: real output growth rates are lower than baseline by one standard deviation over 2021–22, i.e., by 2.6 percentage points.
     - Secondary assumptions: lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth); interest rate increases 25 basis points for every 1 percent of GDP worsening of the primary balance.
     - Impact: Debt would peak at 77 percent of GDP but converge to 69 percent of GDP by 2025.
  2. Primary balance shock:
     - Assumption: dual shock of lower revenues and a rise in the interest rate, leading to a cumulative 1.4 percent deterioration in the primary balance over 2021–22 (a one standard deviation shock to the primary balance).
     - Impact: modest deterioration of debt dynamics.
  3. Interest rate shock:
     - Assumption: increase of 370 basis points in debt servicing costs throughout the forecast horizon, mimicking the historical maximum interest rate experienced since 2010.
     - Impact: relatively modest effect on public debt and gross financing needs.
  4. Combined macro-fiscal shock:
     - Assumption: combines shocks to growth, the interest rate, and the primary balance while avoiding double-counting effects.
     - Impact: slightly worse impact on debt dynamics than that of the growth shock.

*Source: Annex III. Public Debt Sustainability Analysis (content unit 1deuea2021001)*

### 10. Additional stress test: Contingent fiscal shock. This scenario assumes a cumulative

### 10. Additional stress test: Contingent fiscal shock. This scenario assumes a cumulative

### Contingent fiscal shock — scenario description and immediate implications
- Assumes a cumulative 3 percent of GDP (about 100 billion euros) additional fiscal cost for public guarantees called over 2021–22.
- Assumes that contracted guarantees will double from the level of end-September, and about one-third of the guarantees contracted will be called.
- While a sizable shock, "the impact on debt ratio is relatively limited, with debt-to-GDP continuing to fall rapidly."
- "Given that virtually all outstanding sovereign debt is denominated in euros, the scenario of a real exchange rate shock would not have a relevant effect on debt and is therefore not discussed."

### Debt sustainability analysis (selected reported lines from the DSA)
- Raw reported rows (values as presented):
  - Nominal gross public debt75.261.659.571.170.967.665.262.760.1
  - Public gross financing needs15.810.710.620.212.48.16.96.26.85
  - Real GDP growth (in percent)1.31.30.6-5.43.53.11.61.41.2
  - Inflation (GDP deflator, in percent)1.51.72.21.91.71.71.31.72.1
  - Nominal GDP growth (in percent)2.83.02.8-3.65.34.83.03.13.3
  - Effective interest rate (in percent)4/2.61.51.31.40.90.90.90.80.8
  - 10-year bond yield1.60.4-0.2-0.4-0.4-0.20.10.40.8
  - cumulative Change in gross public sector debt-0.1-3.4-2.111.5-0.1-3.3-2.4-2.5-2.60.6
  - Identified debt-creating flows-1.3-3.5-2.912.00.1-3.1-2.1-2.4-2.42.0
  - Primary deficit-1.1-2.5-2.15.93.0-0.4-0.8-0.9-0.95.8
  - Primary (noninterest) revenue and grants44.646.146.546.345.846.546.746.646.7278.7
  - Primary (noninterest) expenditure43.543.544.452.248.846.145.945.745.8284.5
  - Automatic debt dynamics5/-0.2-0.9-0.93.1-2.9-2.7-1.4-1.4-1.5-6.8
  - Of which: real interest rate0.8-0.1-0.5-0.2-0.6-0.6-0.3-0.6-0.8-3.0
  - Of which: real GDP growth-1.0-0.8-0.33.3-2.3-2.1-1.1-0.9-0.7-3.8
  - Exchange rate depreciation7/0.0 0.00.0.....................
  - Other identified debt-creating flows0.00.00.03.00.00.00.00.00.03.0
  - Privatization/Drawdown of Deposits (negative)0.00.00.00.00.00.00.00.00.00.0
  - Contingent liabilities0.00.00.00.00.00.00.00.00.00.0
  - Please specify (2) (e.g., ESM and Euroarea loans)0.00.00.03.00.00.00.00.00.03.0
  - Residual, including asset changes8/1.20.10.8-0.4-0.2-0.2-0.2-0.2-0.2-1.4
- Source line: "Source: IMF staff."
- Footnotes and definitions included in the DSA provide the methodological links for automatic debt dynamics, real interest/growth contributions, exchange rate effects, and residuals.

### Stress tests and alternative scenarios (selected assumptions and labels)
- Stress test scenarios reported in figures include:
  - Primary Balance Shock
  - Real GDP Growth Shock
  - Real Interest Rate Shock
  - Real Exchange Rate Shock (not relevant for debt given euro denomination)
  - Combined Macro-Fiscal Shock
  - Additional Stress Tests: Contingent fiscal shock (as described above)
- Selected scenario assumptions (as reported for specific tests):
  - Baseline Real GDP growth: -5.4, 3.5, 3.1, 1.6, 1.4, 1.2 (for years shown)
  - Baseline Inflation: 1.9, 1.7, 1.7, 1.3, 1.7, 2.1
  - Baseline Primary Balance: -5.9, -3.0, 0.4, 0.8, 0.9, 0.9
  - Real Interest Rate Shock effective interest rate path (example): 1.4, 0.9, 1.5, 1.9, 2.1, 2.4
- The DSA includes charts for Composition of Public Debt, Public Gross Financing Needs, and scenario fan charts showing debt evolution under baseline and shocks.

### Risk assessment highlights (from DSA figures and heat map)
- Heat-map framework uses benchmarks for debt burden (85 percent), gross financing needs (20 percent), bond spreads (400 and 600 basis points), external financing requirement (17 and 25 percent of GDP), change in share of short-term debt (1 and 1.5 percent), and public debt held by non-residents (30 and 45 percent).
- For Germany, several indicators are marked "Not applicable for Germany" in the risk-assessment figure; the DSA presents percentiles, predictive densities, and scenario percentiles for projected debt distributions.

### Annex IV — COVID-19’s long-term impact on the labor market (key findings, assumptions, and policy implications)
- Key risk: "The COVID-19 pandemic could disproportionately affect young and old-age cohorts and lead to a long-term impact on the labor market."
- Baseline assumptions:
  - "Germany's potential growth is projected to converge to 1 percent in five years and further down to 0.75 percent by 2030."
  - Decline in growth of labor supply from "a negative 0.05 percent in 2025 to a negative 0.3 percent in 2030."
  - TFP growth assumed "to stay at about 0.7 percent per year."
  - Unemployment rate projected to decline "from the peak of 4.3 percent in 2020 to about 3.5 percent of natural rate in five years."
- Shock scenario assumptions for young cohorts:
  - "The labor force participation rate for the age group 15–19 years is assumed to remain below the baseline by 2.5 percentage points in 2021, ... and converge back to trend in 2023."
  - "A half of this impact is assumed for the age group 20–24 years."
  - Employment rates for age group 25–29 years assumed "to be 1 percentage point below the baseline in 2021 and a half percentage point below in 2022."
  - Wages and labor productivity for young cohorts assumed to "decline by 10 percentage points from the baseline in 2020 and remain below the baseline by 5 percentage points through 2030."
- Shock scenario assumptions for old-age cohorts:
  - Declines in employment rates for age groups 60–64 years and 65–69 years in 2020 are "transited to the decline in their labor force participation in 2021."
  - Impact described as a one-time shock with gradual labor market effects as these groups age into retirement.
- Combined impact:
  - "The combined impact on both young and old-age cohorts reduce labor input by 0.7 percentage points in 2025 and by 0.4 percentage points in 2030 relative to the baseline."
  - "TFP would be below the baseline by about 0.8 percentage point lower in 2025 and about 1 percentage point lower in 2030."
- Policy implications and recommendations (as stated):
  - "The disproportional impact on the vulnerable groups calls for policy measures to support young workers' career development and expand the working lives of the elderly."
  - Suggested measures include fostering further educational attainment and enhancing the training-to-work transition (e.g., "wage subsidies").
  - Encourage lifelong learning to "prolong working lives and enhance the elderly's employability."
  - Note on labor market structure: "flexible labor markets could improve job mobility and reduce long-term income losses."
  - Digitalization cited as bringing "more job opportunities to old-age workers."

*Source: IMF staff.*

### 2014. Since then, the legal and organizational framework for AML/CFT has been comprehensively

### 1deuea2021001 - 2014. Since then, the legal and organizational framework for AML/CFT has been comprehensively

### AML/CFT legal and organizational reforms
- The legal and organizational framework for AML/CFT has been comprehensively restructured since 2014, including to transpose the EU’s fifth Money Laundering Directive (5AMLD).
- A revised and restructured Anti-Money Laundering Law (Geldwäschegesetz) came into effect on June 26, 2017.
- A Transparency Register was introduced in June 2017 to hold information on the ultimate beneficial owners of legal persons (e.g., companies, partnerships) and arrangements (trusts).
  - The register is accessible to competent authorities.
  - The register is accessible more broadly to the general public provided that a legitimate interest can be stated on a case-by-case basis.

### Public-private cooperation and risk assessment
- The Anti-Financial Crime Alliance (AFCA) was established in September 2019 as the German AML public-private partnership.
  - BaFin is a public-sector representative on the Board alongside the Financial Intelligence Unit (FIU) and the Federal Criminal Police Office (BKA).
- Germany has made significant progress on the risk-based approach, including:
  - Publication of the National Risk Assessment in 2019.
  - Finalization of several sectoral risk assessments.

### International assessment and outstanding adjustments
- The ongoing FATF mutual evaluations focus on:
  - The effectiveness of AML/CFT systems (i.e., preventive measures, investigation and prosecution).
  - Adjustments to the framework (e.g., measures to improve accessibility to beneficial ownership information).
- Germany’s next FATF assessment is due to be adopted in October 2021.

### Statistical issues (As of December 17, 2020) — Assessment of data adequacy for surveillance
- General:
  - The economic database is generally comprehensive and of high quality, and data provision is adequate for surveillance.

### National Accounts
- Germany adopted the European System of Accounts 2010 (ESA2010) in September 2014, with GDP calculated both annually and quarterly on a current and chained volume basis.
- Germany has received multiple derogations from ESA2010 requirements, most of which are scheduled to be addressed by 2020.
- A direct source for quarterly changes in inventories is lacking.
  - Extrapolations of changes in inventories are based on the difference between the monthly production index and turnover index in manufacturing.

### Government Finance Statistics
- Comprehensive data reporting systems support the accuracy and reliability of the government finance statistics.
- These data are based on cash accounting systems, although documentation exists to explain the differences between the general government data in the ESA2010 (noncash) classification and the general cash data on an administrative basis.
- Germany publishes—through Eurostat—general government revenue, expenditure, and balances on a noncash/accrual basis on a quarterly basis (ESA2010).
- These data are presented in a GFSM 2014 format in International Financial Statistics, albeit with delay.
- Germany submits annual data for publication in the Government Financial Statistics Yearbook, in GFSM 2014 format.
- Monthly data are disseminated on a cash-basis.

### Monetary and Financial Statistics
- The ECB reporting framework is used for monetary statistics and data are reported to the IMF through a “gateway” arrangement with the ECB.
  - The arrangement provides an efficient transmission of monetary statistics to the IMF and for publication in the IFS.
- Monetary statistics for Germany published in the IFS cover data on central bank and other depository corporations (ODCs) using Euro Area wide residency criterion.
- Data based on national residency criterion is also published as memorandum items.
- Germany reports data on some series and indicators of the Financial Access Survey (FAS), including the two indicators adopted by the UN to monitor Target

*Source: Content unit 1deuea2021001 (excerpt).*

### 8.10 of the Sustainable Development Goals (SDGs).

### 8.10 of the Sustainable Development Goals (SDGs)

### Financial sector surveillance and data weaknesses
- Germany participates in the IMF’s Coordinated Direct Investment Survey (CDIS), Coordinated Portfolio Investment Survey (CPIS) and financial soundness indicators (FSIs) databases.
- Of the 40 FSIs, Germany reports all except net foreign exchange exposure to equity (I31).
- Germany reports all of the 12 core FSIs, but six FSIs are reported on an annual basis only:
  - NPL Net of Provisions to Capital
  - NPL to Total Gross Loans
  - Return on Assets
  - Return on Equity
  - Interest Margin to Gross Income
  - Non-Interest Expense to Gross Income
- Plans are underway to change the legal basis for the periodicity of deposit taking institutions’ reporting requirements.
- The quality of data on bank exposures submitted to the BIS needs to be improved, including provision of the data on ultimate risk basis for advanced countries.
- Housing market monitoring: housing prices have continued to rise further, but authorities do not see pronounced risks to financial stability given households do not appear overly indebted by historical standards and no indication of substantially deteriorating lending standards. Steps are being undertaken to improve authorities’ capacity to analyze potential risks by establishing the legal basis for a regular collection of data.
- Authorities agree with staff recommendations on reforms to Germany’s auditing framework and accounting enforcement and have proposed legislative measures including:
  - tightening rules governing external audit rotation
  - stricter rules for civil liability of auditors
  - enhanced enforcement powers for the supervisory authority (BaFin)

### External sector statistics and data standards
- The Bundesbank compiles the balance of payments in close cooperation with the Federal Statistical Office.
- Balance of payments, International Investment Position statistics, and related cross-border statistics are compiled according to the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6), and the legal requirements of the ECB and Eurostat.
- Adherent to the Special Data Dissemination Standards Plus (SDDS Plus) since February 2015.
- Implementing G-20 DGI recommendations: currently disseminates a residential property price index and a commercial property price index.
- Data ROSC from 2006 is available.

### Key data publication frequencies and recent observations (as of December 2, 2020)
- Exchange Rates: Date of latest observation Dec 17, 2020; Date received Dec 17, 2019; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Oct 2020; Date received Nov 2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Reserve/Base Money: Oct 2020; Nov 2020; M; M; M
- Broad Money: Oct 2020; Nov 2020; M; M; M
- Central Bank Balance Sheet: Oct 2020; Nov 2020; M; M; M
- Consolidated Balance Sheet of the Banking System: Oct 2020; Nov 2020; M; M; M
- Interest Rates: Nov 2020; Nov 2020; M; M; M
- Consumer Price Index: Nov 2020; Nov 2020; M; M; M
- Revenue, Expenditure, Balance and Composition of Financing — General Government: Q3:2020; Nov 2020; Q; Q; Q
- Stocks of General Government and Government-Guaranteed Debt: Dec 2019; April 2020; A; A; A
- External Current Account Balance: Oct 2020; Dec 2020; M; M; M
- Exports and Imports of Goods and Services: Oct 2020; Dec 2020; M; M; M
- GDP/GNP: Q3:2020; Oct 2020; Q; Q; Q
- Gross External Debt: Q2:2020; Sep 2020; Q; Q; Q
- International Investment Position: Q2:2020; Sep 2020; Q; Q; Q

### Crisis response, fiscal stance, and social measures
- Staff estimates the overall fiscal impulse of around 6 percent of GDP, twice as high as in response to the global financial crisis (GFC).
- Authorities emphasize continued support while the recovery takes hold, guided by principles of timely, temporary, and targeted support for supply and demand.
- Major policy measures include wide-ranging public guarantees, grants, tax deferrals, a temporary VAT reduction, a one-off increase in childcare benefits, and enhancement of Kurzarbeitergeld (short-time work allowance).
- Kurzarbeitergeld has helped contain economic scarring by preventing large-scale layoffs and insolvencies while supporting household incomes.
- Unemployment rate rose from 3.3 to 4.4 percent from January to November 2020.
- Authorities stress phasing out support measures in a gradual and well-sequenced manner as the recovery takes hold and note that Germany’s insolvency frameworks should facilitate restructuring of unviable firms and repair of bank balance sheets comparatively quickly after the crisis.
- Targeted measures for renewed restrictions: an extraordinary economic assistance package for November and December, and expansion and extension of the grant program (Überbrückungshilfen) until the end of June 2021 with special provisions for businesses affected directly or indirectly by shutdowns and future restrictions in 2021.

### International contributions, multilateralism, and global cooperation
- Additional health financing and vaccine support:
  - more than US$ 600 million to the WHO in 2020
  - US$ 600 million to the GAVI vaccine alliance until 2020 and another US$ 600 million for the period from 2021 to 2025
  - COVAX Advance Market Commitment mechanism received funding of € 100 million
  - US$ 424 million to the comprehensive Global Humanitarian Response Plan coordinated by UN-OCHA in 2020
- Fiscal starting position: entered the crisis with a debt-to-GDP ratio of below 60 percent and ample fiscal space; escape clause of the constitutional debt brake was triggered.
- Support for EU-level initiatives: Next Generation EU Recovery Package (NGEU) and immediate European Pandemic Support (SURE, ESM, EIB).
- Support for international corporate taxation reform including establishment of a minimum taxation framework and addressing digital taxation to ensure a fair global tax architecture.
- IMF-related financial contributions:
  - loan of € 3 billion to the Poverty Reduction and Growth Trust (PRGT)
  - grant contribution of € 80 million to the IMF’s Catastrophe Containment and Relief Trust (CCRT)
  - additional grants to the Fund’s capacity development activities (€ 6 million each planned for the Covid-19 Crisis Capacity Development Initiative and the AML/CFT Topical Trust Fund)

### Growth, green transition, and distributional policies
- “Building better for the future”: targeted investments in research and infrastructure to accelerate green and digital transformation are a significant part of the stimulus package and long-term public investment plans.
- Examples of investments and policy orientation:
  - comprehensive charging infrastructure for electric vehicles
  - promotion of hydrogen research and development as part of the National Hydrogen Strategy
  - phasing out coal-fired power plants to reach 2030 climate goals and achieve carbon neutrality by 2050
  - nuclear energy is not considered a viable alternative to renewable energies in Germany
- Carbon pricing mechanism for CO2 emissions from fuels:
  - certificates sold at fixed prices starting at € 25 per ton of CO2 in 2021, gradually increasing to € 55 in 2025
  - subsequent auction phase beginning 2026 will start with a one-year transition period and a price corridor (€ 55-65 per ton of CO2)
  - revenues will be returned to citizens and companies to avoid hardships and increase incentives for investments in climate-friendly technologies
  - appropriateness and potential adjustments will be reevaluated in the future with a view to reaching climate targets
- Distributional impacts and labor market policy:
  - authorities broadly share staff’s assessment that women have been particularly affected due to concentration in contact-intensive service jobs and marginal jobs, and additional burdens from school and childcare closures
  - authorities will continue monitoring labor market prospects for women, young, and elderly workers
  - policies to raise disposable income of low- and middle-income households: abolition of the solidarity surcharge for the lower 90 percent of all households and introduction of a basic pension to benefit many low-pension earners
  - recognition of demographic challenges and the need for policies to raise productivity growth and pension system reforms with inter- and intragenerational equity considerations
  - publicly funded higher education and strong vocational training programs are highlighted as strengths for workforce quality

*Statement by Mr. von Kleist, Executive Director for Germany, Mr. Merk, Alternate Executive Director and Mr. Buetzer, Senior Advisor — January 13, 2021*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1deuea2021001.pdf_