## 1. The Impact of Fiscal Expansion in Germany

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### Context and pandemic evolution
- Repeated COVID-19 waves with a strong—albeit partial—Q3 2020 recovery; larger second wave in Q4 2020 and a complete lockdown ordered through 2021 Q1. Mobility fell well below normal levels.
- Vaccination rollout slower than in the U.S. and U.K.; picked up markedly since spring 2021; authorities’ goal to cover the entire adult population by the end of summer 2021.
- Vaccine supply/distribution risks and more transmissible variants leave the path of the pandemic uncertain.

### Recent economic developments and fiscal response
- Growth and demand:
  - Annual GDP contracted by 4.8 percent in 2020.
  - Private consumption contracted by over 6 percent in 2020.
  - GDP contracted by 1.8 percent in 2021 Q1.
  - Sectoral divergence between manufacturing and services began narrowing as restrictions lift; exports remained relatively strong.
- Labor market and prices:
  - Unemployment rate: 2019 = 3.2 percent; 2020 = 4.2 percent.
  - Wage growth: 2019 = 3 percent; 2020 = 0.6 percent.
  - Headline inflation averaged 0.4 percent in 2020; annual core inflation was 0.9 percent in 2020. Producer price pressures rose sharply recently.
- Fiscal outcomes and measures:
  - Two fiscal packages in 2020: increased public health spending, grants to firms, subsidies for Kurzarbeit, transfers to subnational governments, and public investment.
  - Structural balance moved to a deficit of 2.9 percent of GDP, an easing of 4.2 percent of GDP (escape clause activated).
  - Public debt rose from under 60 percent of GDP at end-2019 to 70 percent of GDP in 2020.
- External and financial:
  - Current account surplus: 7 percent of GDP in 2020 (decline of 0.5 percent of GDP from 2019); peak was 8.6 percent in 2015.
  - External position assessed between 2.4 and 4.4 percentage points of GDP stronger than estimated norm.
  - Credit to firms initially rose to boost liquidity; credit growth eased thereafter though robust in historical context. Non-financial corporate indebtedness rose relative to GDP; leverage (debt to assets) remained relatively low.

### Outlook and key IMF projections
- Baseline: robust recovery expected in H2 2021 as vaccination accelerates and lockdowns are phased out.
- Short-term drivers: rebound in private consumption from H2 2021, continued export momentum, investment in machinery and equipment, and strong housing demand.
- IMF staff projections (selected):
  - Growth projected to reach 3.6 percent in 2021.
  - Headline inflation projected at 2.6 percent in 2021.
  - Current account forecast to reach 7.4 percent in 2021.
  - Output gap expected to remain negative until 2023.
  - Output in 2025 projected to be almost 1 percent below the level envisaged before the pandemic.
  - Headline and core inflation projected to moderate in 2022, then pick up gradually to about 2 percent by 2026.
- Medium-term risks: scarring on human and physical capital, slowing productivity growth, demographic pressures tightening labor supply and lifting wages.

### Risks and scenarios
- Downside risks:
  - Vaccine rollout failing to outpace infections, forcing prolonged/renewed lockdowns.
  - Persistent supply shortages of intermediate inputs, dampening exports and investment—especially in the automobile sector.
- Upside possibilities:
  - Faster rebound in domestic demand from drawdown of pent-up savings.
  - Stronger external demand if trading partners enact sharper rebounds and additional policy support.
- Longer-term risk: failure to adapt to post-COVID economy and lagging progress on structural challenges (digitalization, demographic transition) could weigh on potential growth.

### Fiscal policy — stance, measures, and key numbers
- 2021 stance: projected to remain appropriately expansionary; supplementary budget announced in March; escape clause to debt brake rule remaining in effect.
- New measures (selected):
  - Increased corporate tax loss carry-back: maximum raised from €5 million in 2020 to €10 million in February 2021.
  - Support for firms, self-employed, basic income recipients, cultural sector.
  - One-off child benefits: €150/child.
  - Extension of VAT cut on restaurant services through end-2022.
  - Increased apprenticeship subsidy (from June 1, 2021 through end of 2021/2022 academic year).
  - Frontloading some investment projects.
- These policies imply a more than 3 percent of GDP increase in the structural primary deficit in 2021.
- Selected fiscal numbers (Percent of GDP):
  - Headline Balance: 2019 = 1.5; 2020 = -4.2; 2/2021 = -7.2; 2022 = -1.8; 2023 = -0.4; 2024 = 0.0; 2025 = 0.5; 2026 = 0.5.
  - Primary Structural Balance: 2019 = 2.1; 2020 = -2.3; 2/2021 = -5.7; 2022 = -1.1; 2023 = 0.1; 2024 = 0.5; 2025 = 0.9; 2026 = 0.9.
  - Structural Balance: 2019 = 1.3; 2020 = -2.9; 2/2021 = -6.2; 2022 = -1.6; 2023 = -0.4; 2024 = 0.0; 2025 = 0.5; 2026 = 0.5.
  - Public Gross Debt (Maastricht): 2019 = 59.7; 2020 = 69.7; 2/2021 = 73.0; 2022 = 70.9; 2023 = 69.3; 2024 = 67.3; 2025 = 64.7; 2026 = 62.3.
- COVID-19 fiscal packages (Percent of GDP, selected):
  - Direct budget support: 2020 = 3.4; 2021 = 6.3; 2022 = 1.6; Total 1/ = 13.9.
  - Total revenue: 2020 = 0.8; 2021 = 0.9; 2022 = 0.6; Total 1/ = 3.3.
  - Total expenditure: 2020 = 2.6; 2021 = 5.4; 2022 = 1.0; Total 1/ = 10.5.
  - Subsidies: 2020 = 0.6; 2021 = 2.9; 2022 = 0.2.
  - Public investment: 2020 = 0.1; 2021 = 0.2; 2022 = 0.1.
  - 1/ Including amounts expected to be disbursed beyond 2022.

### Pace of withdrawal and targeting of support — recommendations
- Withdrawal should be carefully calibrated to pandemic and recovery progress; adequate support should remain in place while the economy is still weak to minimize scarring.
- Prefer erring on the side of doing too much rather than too little given uncertainty.
- If recovery falters, additional measures should be implemented as fiscal space remains ample.
- Specific recommendations:
  - Continue support for households and firms; keep social safety net flexible and generous, protecting marginal workers, the self-employed and women.
  - Further frontloading public investment in 2022-23 to help close digital and infrastructure gaps and help rebalance the external position.
  - Once recovery firms up, make policies more targeted to facilitate resource re-allocation: extend apprenticeship subsidies, consider hiring subsidies and job training, maintain solvency support for viable firms through a variety of instruments.

### Medium-term fiscal strategy and public investment role
- Structural deficit expected to shrink to about 1.6 percent of GDP in 2022 as COVID-19 measures phase out; escape clause expected to remain activated.
- Over the medium term, structural balance expected to return to a surplus of about 0.5 percent.
- Public debt projected to resume downward trajectory from 2022.
- Staff analysis: a permanent 1 percent of GDP expansion of public investment from 2022 onwards would increase real GDP by more than 2 percent relative to the baseline in the long run and would more than compensate for expected pandemic scarring while Germany’s debt-to-GDP ratio would still trend down over time.

### Box 1 — GIMF simulations: impact of 1% of GDP fiscal expansion
- Model: Fund’s Global Integrated Monetary and Fiscal model (GIMF). Scenarios: three-year temporary expansion (2022–24) and permanent expansion from 2022 onwards.
- Fiscal instruments: public investment; targeted transfers to liquidity-constrained households; reduction in corporate tax; reduction in labor tax.
- Main results (Real GDP impact — percentage points deviations from baseline, 1% of GDP fiscal expansion):
  - Germany (Year 1 / Peak / Cumulative 1/ / Year 1 / Cumulative 2/):
    - Labor tax: 0.2 / 0.3 / 1.5 / 0.3 / 6.3
    - Corporate tax: 0.1 / 0.1 / 0.6 / 0.3 / 2.3
    - Public investment: 0.9 / 1.1 / 8.2 / 1.0 / 15.0
    - Targeted transfers: 0.3 / 0.3 / 0.5 / 0.3 / 1.9
  - Euro area exc. Germany (Year 1 / Peak / Cumulative 1/ / Year 1 / Cumulative 2/):
    - Labor tax: 0.04 / 0.05 / 0.03 / 0.04 / 0.22
    - Corporate tax: 0.00 / 0.01 / 0.02 / -0.07 / 0.06
    - Public investment: 0.18 / 0.19 / 0.39 / 0.04 / 0.53
    - Targeted transfers: 0.02 / 0.03 / 0.05 / -0.02 / 0.09
  - 1/ 10-year cumulative impact of a 1% of GDP fiscal expansion for three years.
  - 2/ 10-year cumulative impact of a 1% of GDP permanent increase in fiscal expansion.
- Key takeaways:
  - Public investment has the largest and longest-lasting impact on GDP.
  - Temporary tax reductions and targeted transfers have limited impact if agents view them as temporary.
  - For permanent expansion, the current account falls sharply; for temporary expansions, external rebalancing is short-lived.
  - For all scenarios, debt-to-GDP ratio trends down.
  - Spillovers to the rest of the euro area are positive but small; strongest for public investment.

### Infrastructure governance and public investment implementation
- Municipal revenues hit hard; federal financial support sizable but may be inadequate to clear municipal investment backlog in transport infrastructure and schools.
- Recommendations: additional federal financing support, streamline planning processes, enhance inter-agency cooperation, and allow more attractive employment conditions for public sector planners.
- Mandatory e-procurement use (started in 2020) for federal contracts welcomed; streamlining decentralized public procurement law would yield further efficiency gains.

### Climate mitigation — emissions, targets, and CAP2030 design
- Progress and targets:
  - GHGs fallen by 41 percent from 1990 levels.
  - Transport sector has barely reduced emissions since 1990.
  - Germany’s share of renewable energy in electricity generation is the highest among G20 countries.
  - Climate Change Act (CCA) 2019: at least a 55 percent reduction in GHGs below 1990 levels by 2030 and net zero emissions by 2050.
  - Cabinet-approved amendments after May 2021 constitutional ruling: 65 percent reduction by 2030 and net zero by 2045 (subject to parliamentary approval).
- CAP 2030 components (Box 2):
  - National ETS operational on January 1, 2021 covering CO2 from transportation and heating fuels with price of €25/tonne of CO2; scheduled to increase to €55 by 2025; from 2026 an emissions cap declining over time with initial price range €55–€65 per tonne.
  - Measures across buildings, transportation, energy, agriculture, and industry: tax incentives for energy-efficient building modernization, EVs and charging points expansion, renewables expansion, coal phase-out, climate-friendly agriculture, carbon storage exploration.
  - Compensation: reductions in renewable energy surcharge and electricity prices; tax relief for long-distance commuters; higher housing allowances.
  - Monitoring and correction: annual government assessment; non-complying ministries present remedial action plans to the climate cabinet.
- Policy recommendations to enhance cost-effectiveness:
  - Specify longer-term schedule of carbon prices; consider an automatically escalating price floor.
  - Reduce gaps in marginal cost of abatement across sectors; push for robust EU ETS price floor or apply domestic carbon surcharge to EU ETS-covered emissions.
  - Introduce feebates: revenue-neutral fees for above-average emission products and rebates for below-average emission products.
  - Frontload public investment in green infrastructure and support green technologies; use public sector to co-fund high upfront projects and share risks.

### Distributional measures for climate policy
- Higher carbon prices: direct effect on fuel prices is regressive; indirect effect via other goods and services expected to be progressive; overall distributional impact estimated broadly neutral.
- CAP 2030 contains cushion measures; additional options include reducing high social security contributions for lower-income earners.
- Authorities’ actions:
  - “Future Package (Zukunftspaket)” allocates €26.2 bn to the Energy and Climate Fund; additional €8 bn for immediate action program.
  - Government committed to re-distributing revenues from selling emission rights.
  - Current action plan lacks income-based climate protection measures; government notes specific measures (commuter relief, lower renewable energy surcharge, higher housing allowances) benefit lower-income households more.
  - Government not considering altering social security contributions as a climate distributional measure at this juncture.

### Labor market policies — Kurzarbeit (KA): crisis response, effectiveness, normalization
- Pandemic adjustments:
  - Kurzarbeit made more flexible and generous: waiver on work-time accounts, employers’ social security contributions on reduced hours waived, threshold for participation lowered, higher replacement rates.
  - Take-up accelerated to a record 6 million in May.
- Effectiveness (staff analysis and Box 3):
  - Without KA, unemployment would have been almost 3 percentage points higher on average during Q2 2020; up to 4 percentage points higher in most affected states.
  - Retail trade turnover would have declined by over 20 percentage points instead of only 1.1 percentage points on average in April-May 2020.
  - Instrumental-variable analysis finds KA reduced unemployment and stabilized domestic demand: unemployment in 2020Q2 would have been 2.9 percentage points higher on average; retail trade turnover would have been on average 15 percent lower in 2020Q2.
- Normalization:
  - Expanded KA parameters apply to workers starting KA before end-September 2021.
  - Workers receive benefits under expanded parameters until end-2021.
  - Full reimbursement of employers’ social security contributions on reduced hours until end-September 2021, decreasing to half thereafter.
  - Pace of normalization viewed as appropriate under baseline but extension should be considered if downside risks materialize.
- Risks and trade-offs:
  - Prolonged KA expansion could cause labor misallocation across industries if reallocation needs are high.
  - Normalization important to avoid inhibiting labor reallocation to growing firms.

### Support for marginal workers and self-employed
- Marginally employed workers (60 percent of whom are women) are 18 percent of total employment but account for almost 74 percent of the jobs lost through Q3 2020.
- Marginal workers and self-employed lacked access to Kurzarbeit and suffered largest income losses despite aggregate household disposable income not declining.
- Expanded basic income access (waived asset tests, lifted rent/utility limits) and “Neustarthilfe” for self-employed provide essential safety nets and should be maintained until labor market recovery is sustainable.
- Recommendations: maintain expanded basic income access, provide training and job search assistance, consider reduced labor tax wedge and reduced social security contributions for low-income workers.

### Digitization, innovation, and productivity challenges
- Germany: world leader in technology and engineering but trails peers on ICT metrics.
  - Share of high-speed (>100 Mbps) subscriptions low compared to peers, especially rural areas.
  - Mobile broadband subscriptions low due to higher prices for faster 4G plans and limited 4G coverage.
  - May 2020 example price comparison: 10 GB data plan PPP prices — Germany ≈ PPP USD 34; Spain = PPP USD 22; France = PPP USD 24; Italy = PPP USD 27; Sweden = PPP USD 29.
  - German firms lag in adopting key ICT tools to create value with data.
- Policy recommendations:
  - Improve access to high-speed broadband, shorten administrative approval times, improve coordination to accelerate disbursement of public funds.
  - Monitor competitive dynamics in fixed broadband market; foster competition in mobile market by facilitating new entrants.
  - Increase ICT training for teachers; introduce computers and programming earlier in school curriculum.
- Authorities’ actions:
  - €10 bn via KfW for “Future Fund (Zukunftsfonds)” expected to facilitate at least €30 bn in venture capital.
  - Second Open Data Act and Data Use Act expected in 2021 to improve machine-readable public-sector data.
  - “Mobile Infrastructure mbH” to close remaining “white spots”; a fourth mobile market player to enter.
  - 315 out of 575 proposed eGovernment services already available online; additional €3 bn allocated to integrate Länder ICT systems.
  - Digitalization of schools earmarked €1.5 bn in the RRP.

### Financial sector resilience, vulnerabilities, and policy guidance
- Banks and capital:
  - German banks weathered COVID relatively well; aggregate CET1 capital ratio of large banks could decline as insolvencies pick up.
  - Capital conservation buffer of 2.5 percent of risk-weighted assets made available; CCyB reduced to zero; deposits with central banks excluded from leverage ratio; restrictions on profit distributions.
- Insolvencies and supervisory priorities:
  - Bankruptcies limited through end-2020 due to support and moratoria; began picking up early 2021 and expected to rise after insolvency moratorium expiry.
  - Supervisors should monitor asset quality, challenge credit risk assessments as support expires.
  - Lifting insolvency moratoria necessary for reallocation, accompanied by liquidity and solvency support targeted at viable firms.
  - Transposition of EU Directive on Preventive Restructuring Frameworks provides a mechanism for distressed yet viable firms to avoid insolvency.
- Design of solvency support:
  - Micro firms: grants may be feasible option; viability assessments should rely on backward-looking indicators reflecting pre-pandemic health.
  - Larger SMEs: hybrid equity with incentives for private investor participation; mixed forward/backward-looking viability assessments.
  - Large publicly-listed/strategic firms: government equity injections could be warranted.
  - EU allows conversion of publicly guaranteed loans into grants; State Aid temporary framework prolonged to end-2021.
- Profitability and business models:
  - Profitability compressed by low interest rates and flat yield curves; saving and co-operative banks exposed via SME lending and retail deposits; commercial banks and Landesbanken exposed to rising funding costs.
  - Need for operational streamlining, consolidation, and enhanced non-interest revenues.
  - Completing EU financial architecture (EDIS, CMU) would facilitate cross-border flows and consolidation.
- Insurance sector: profitability compressed; limited scope for asset-side reallocation; shift toward ‘hybrid’ and ‘unit-linked’ products.
- Real estate vulnerabilities:
  - CRE susceptible to lower demand post-pandemic; German banks among Europe’s most exposed to CRE.
  - Residential prices rose rapidly over past decade, especially major cities; pandemic did not reverse trend.
  - Household indebtedness relatively low but continued build-up of vulnerabilities in real estate lending warrants monitoring.
  - Authorities provided legal framework for Bundesbank to collect more comprehensive residential real estate loan data.
  - Recommendation: expand macroprudential toolkit for real estate lending, including income-based instruments (debt-to-income or debt-service-to-income caps), while recognizing CRE heterogeneity.

### Stress tests, debt outlook, and fiscal sustainability
- Stress test summary:
  - Under considered macro-fiscal stress tests, debt-to-GDP and public gross financing needs either continue to drop or resume downward path after shocks.
  - Debt dynamics most sensitive to growth shocks given historical growth variability.
- Selected stress test parameters:
  - Growth shock: real output growth lower by one standard deviation over 2022–23 (2.4 percentage points); debt peaks at 78 percent of GDP in 2023, then declines to 70 percent by 2026.
  - Primary balance shock: cumulative 3.8 percent deterioration in primary balance over 2022–26 (half planned adjustment assumed).
  - Interest rate shock: increase of 314 basis points in debt servicing costs throughout forecast horizon.
  - Combined macro-fiscal shock: combines growth, interest rate, and primary balance shocks.
  - Contingent fiscal shock: cumulative 3 percent of GDP (≈ €100 billion) additional fiscal cost for public guarantees called over 2022–23.
- Selected baseline and stress outcomes (preserving presented values):
  - Baseline public gross debt (percent): 2019 = 74.1; 2020 = 59.7; 2021 = 69.7; 2022 = 73.0; 2023 = 70.9; 2024 = 69.3; 2025 = 67.3; 2026 = 64.7.
  - Public gross financing needs (percent): 2019 = 15.0; 2020 = 10.7; 2021 = 18.4; 2022 = 25.1; 2023 = 15.7; 2024 = 11.0; 2025 = 8.7; 2026 = 6.4.
  - Growth shock debt path: debt peaks at 78 percent of GDP in 2023; declines to 70 percent by 2026.
- Key decomposition highlights (selected):
  - Cumulative change in gross public sector debt: 2019 = -1.3; 2020 = -2.1; 2021 = 10.0; 2022 = 3.3; 2023 = -2.0; 2024 = -1.7; 2025 = -2.0; 2026 = -2.6.
  - Identified debt-creating flows — primary deficit (percent of GDP): 2019 = -1.4; 2020 = -2.1; 2021 = 3.7; 2022 = 6.9; 2023 = 1.4; 2024 = 0.1; 2025 = -0.3; 2026 = -0.8.
  - Automatic debt dynamics — 2019 = -0.9; 2020 = -0.9; 2021 = 2.7; 2022 = -3.4; 2023 = -3.3; 2024 = -1.6; 2025 = -1.5; 2026 = -1.6.

### External sector assessment (Annex I) — key findings
- Overall assessment: external position in 2020 stronger than level implied by medium-term fundamentals and desirable policies; staff CA gap assessed in range 2.4 to 4.4 percent of GDP with midpoint 3.4 percent of GDP.
- Current account and NIIP:
  - Actual CA: 2020 = 7.0 percent of GDP; Cycl. Adj. CA = 6.9 percent of GDP; EBA Norm = 2.6 percent of GDP; Staff CA Gap = 3.4 percent of GDP.
  - NIIP: 76.2 percent of GDP at 2020Q4; Gross Assets = 308.3 percent of GDP; Gross Liab. = 232.0 percent of GDP.
  - NIIP expected to exceed 80 percent of GDP by 2022.
  - TARGET2 claims exceeded €1.1 trillion at end-2020 (32 percent of GDP).
- Real exchange rate:
  - CPI-based REER appreciated by 1.3 percent in 2020 relative to 2019.
  - Staff assesses REER undervaluation in range 4.2 to 14.2 percent with midpoint 9.2 percent (staff CA gap implies REER gap of -9.2 percent using elasticity ≈ 0.4; other models diverge).
- Policy responses to support rebalancing:
  - Promote investment and diminish excess saving to reduce CA surplus.
  - Use fiscal space for growth-oriented public investment in digitization, infrastructure, and climate mitigation to crowd in private investment and promote potential growth.
  - Structural reforms to foster entrepreneurship and expand access to venture capital; additional tax relief for lower-income households and pension reforms to prolong working lives.

### Governance, AML/CFT, and data adequacy
- AML/CFT reforms:
  - Revised Anti-Money Laundering Law effective June 26, 2017; Transparency Register introduced June 2017.
  - Germany transposed EU’s fifth Money Laundering Directive (5AMLD).
  - Anti-Financial Crime Alliance (AFCA) established September 2019.
  - On-site inspections largely conducted as remote audits since 2020.
  - Bundesbank and BaFin task forces created to analyze money laundering anomalies (e.g., Wirecard).
  - FATF mutual evaluation due to be adopted June 2022.
- Statistical issues and data adequacy (as of June 3, 2021):
  - Economic database generally comprehensive and high quality; data provision adequate for surveillance.
  - National Accounts: ESA2010 adopted September 2014; direct source for quarterly changes in inventories lacking; some derogations scheduled to be addressed by 2020.
  - Government Finance Statistics: data based on cash accounting; quarterly noncash/accrual data published via Eurostat with delays.
  - Monetary and financial statistics: ECB reporting framework used; data reported to IMF via gateway arrangement with ECB.
  - Financial sector surveillance: participates in CDIS, CPIS, and FSI databases; reports 39 of 40 FSIs.
  - External statistics: Bundesbank compiles balance of payments and IIP per BPM6 and ECB/Eurostat legal requirements.
  - Adherent to SDDS Plus since February 2015; residential and commercial property price indices disseminated.

### Staff appraisal — macroeconomic guidance (selected)
- 2020 GDP fell by just under 5 percent; rebound expected in H2 2021 but outlook highly uncertain and risks tilted to the downside.
- Fiscal guidance:
  - Pace of withdrawing fiscal support should be dictated by pandemic containment and economic revitalization.
  - Prefer erring on the side of doing more to minimize scarring; continue support until clear evidence of sustained recovery; frontload public investment.
  - Public debt sustainable and fiscal space ample.
  - As recovery firms up, withdraw support carefully and accompany with measures facilitating resource re-allocation.
- Structural and labor market guidance:
  - Use fiscal space to lift potential growth: physical and human capital investment; incentivize innovation; bolster labor supply; increase disposable income for low-income households.
  - Maintain labor market protection (Kurzarbeit) until sustained recovery evidence; normalize to avoid inhibiting labor reallocation.
  - Job search assistance and training programs to facilitate transitions; maintain expanded basic income access for workers not covered by Kurzarbeit.
  - Consider reducing social security contributions on lower incomes to spur hiring and labor supply.
- Climate and innovation:
  - Specify longer-term schedule of carbon prices; consider higher carbon pricing in sectors with low abatement costs; introduce feebates; complement price-based measures with public investment in green infrastructure and technologies.
  - Mitigate adverse impacts of higher carbon prices on households with additional relief targeted at lower-income earners.
  - Accelerate digital transformation: improve connectivity and diffusion of ICT tools, including in schools; monitor market competition and facilitate new entrants.
  - Consider raising cap for R&D tax incentives and promote venture capital.
- Financial stability:
  - Maintain targeted liquidity and solvency support for viable firms; specify timetable for banks to rebuild capital buffers; improve bank cost structures and non-interest revenues.
  - Monitor CRE vulnerabilities; close data gaps on residential real estate loans and consider expanding macroprudential toolkit.

*Italic: Source — IMF staff report excerpt: "1. The Impact of Fiscal Expansion in Germany" (content unit 1deuea2021002).*

### 1. The Impact of Fiscal Expansion in Germany ___________________________________________________ 13

### 1. The Impact of Fiscal Expansion in Germany

### Context
- Germany experienced repeated COVID-19 waves with a strong—albeit partial—Q3 2020 recovery followed by a larger second wave in Q4 2020 and a complete lockdown ordered through 2021 Q1. Mobility fell well below normal levels.
- Vaccination rollout was slower than in the U.S. and U.K., picked up markedly since spring 2021, and the authorities’ goal is to cover the entire adult population by the end of summer 2021. Vaccine supply/distribution risks and more transmissible variants leave the path of the pandemic uncertain.

### Recent economic developments and fiscal response
- Annual GDP contracted by 4.8 percent in 2020 after an unprecedented Q2 fall and a Q3 rebound; private consumption contracted by over 6 percent in 2020.
- GDP contracted by 1.8 percent in 2021 Q1 as anemic consumption more than offset robust exports.
- Sectoral pattern: divergence between manufacturing and services began narrowing as restrictions lift; exports remained relatively strong.
- Labor market and prices:
  - Unemployment rate rose from 3.2 percent in 2019 to 4.2 percent in 2020.
  - Wage growth slowed from 3 percent in 2019 to 0.6 percent in 2020.
  - Headline inflation averaged 0.4 percent in 2020 and entered negative territory in H2 2020; annual core inflation was 0.9 percent in 2020.
  - Producer price pressures rose sharply in recent months driven by supply constraints and strong global demand for commodities and intermediate inputs.
- Fiscal outcomes and policy measures:
  - Two fiscal packages in 2020 increased public health spending, grants to firms, subsidies for Kurzarbeit, transfers to subnational governments, and public investment.
  - Structural balance moved to a deficit of 2.9 percent of GDP, an easing of 4.2 percent of GDP, enabled by activation of the escape clause of the constitutional debt-brake rule.
  - Public debt rose from under 60 percent of GDP at end-2019 to 70 percent of GDP in 2020.
- External sector and financial conditions:
  - Current account surplus recorded 7 percent of GDP in 2020, a decline of 0.5 percent of GDP from 2019; peak was 8.6 percent in 2015.
  - External position assessed between 2.4 and 4.4 percentage points of GDP stronger than estimated norm.
  - Credit developments: initial rise in credit to firms used to boost liquidity; credit growth eased thereafter though robust in historical context. Non-financial corporate indebtedness rose relative to GDP but leverage (debt to assets) remained relatively low in historical terms.
  - Regulatory/financial adjustments: capital conservation buffer amounting to 2.5 percent of risk-weighted assets made available for use; countercyclical capital buffer (CCyB) reduced to zero; deposits with central banks excluded from leverage ratio; restrictions on profit distributions (dividends/share buybacks).

### Outlook and key projections
- Baseline: robust recovery expected in H2 2021 as vaccination accelerates and lockdowns are phased out.
- Short-term drivers: rebound in private consumption from H2 2021, continued export momentum supported by recovery in the US and Asia, investment in machinery and equipment, and strong housing demand.
- IMF staff projections:
  - Growth projected to reach 3.6 percent in 2021.
  - Headline inflation projected at 2.6 percent in 2021 (driven by one-off factors and strengthening demand).
  - Current account forecast to reach 7.4 percent in 2021.
  - Output gap expected to remain negative until 2023.
  - Over the medium term, output in 2025 projected to be almost 1 percent below the level envisaged before the pandemic.
  - Headline and core inflation projected to moderate in 2022, then pick up gradually to about 2 percent by 2026.
- Medium-term risks include scarring on human and physical capital and slowing productivity growth; demographic pressures expected to tighten labor supply and lift wages over time.

### Risks and scenarios
- Short-term downside risks:
  - Vaccine rollout failing to get ahead of infection dynamics, forcing prolonged or renewed lockdowns and delaying recovery.
  - Ongoing supply shortages of intermediate inputs persisting, dampening exports and investment—particularly in the automobile sector.
- Short-term upside possibilities:
  - Domestic demand could rebound more swiftly from a drawdown of pent-up savings.
  - External demand, exports, and the trade balance could recover more strongly if trading partners enact sharper rebounds and additional policy support.
- Longer-term risks:
  - Failure to adapt to post-COVID economy (changed work patterns and consumption) and lagging progress on structural challenges (digitalization, demographic transition) could weigh on potential growth.
  - Heavy reliance on exports amplifies risk of eroding global market share if firms do not adapt to new technologies and consumer preferences.

*Source: IMF staff report excerpt — "1. The Impact of Fiscal Expansion in Germany."*

### 13. The authorities shared staff’s general assessment of the macroeconomic outlook but

### 13. The authorities shared staff’s general assessment of the macroeconomic outlook but

### Macroeconomic outlook and risks
- Authorities project a strong economic rebound in 2021H2, driven by continued robust external demand and rebounding domestic demand.
- As lockdown measures are lifted and vaccination becomes widespread, private consumption and investment are expected to recover, supported by stable household incomes and pent-up savings.
- The pre-crisis GDP level is expected to be attained by the end of 2021.
- Authorities estimate economic scarring would be small, at around 1 percent of GDP in the medium term.
- Authorities view near-term risks as broadly balanced and highlight the abnormally large amount of household savings accumulated so far as a major upside risk to domestic demand.
- Authorities view epidemiological risk as increasingly contained thanks to accelerating vaccinations.
- The authorities acknowledged that the current account surplus remains high, but emphasized that it is affected by many non-policy variables.

### Policies for a strong and sustainable recovery (overview)
- Multi-pronged policy support has been crucial to cushion the shock and should be maintained until the recovery is well underway.
- If the recovery falters, additional measures should be implemented as fiscal space remains ample.
- Phasing out of supportive policies should be carefully calibrated to the progress of the pandemic and the economic recovery, and accompanied by targeted measures to encourage post-crisis resource reallocation.
- Over the medium term, Germany should focus on promoting a greener, smarter, and more inclusive economy to lift potential growth and reduce external imbalances.

### A. Fiscal policy — current stance and measures
- Fiscal policy is projected to remain appropriately expansionary in 2021, with a supplementary budget announced in March, and the escape clause to the debt brake rule remaining in effect.
- Government extended several COVID-19 measures and reallocated unused grants to firms from the 2020 budget to 2021.
- New measures announced include:
  - increased corporate tax loss carry-back (maximum raised from €5 million in 2020 to €10 million in February 2021);
  - additional support for firms, the self-employed, basic income recipients, and the cultural sector;
  - another round of one-off child benefits (€150/child);
  - an extension of the VAT cut on restaurant services through end-2022;
  - increases in the apprenticeship subsidy (from June 1, 2021 through the end of the 2021/2022 academic year);
  - frontloading some investment projects.
- These policies imply a more than 3 percent of GDP increase in the structural primary deficit in 2021 (Text Table 2).
- Continued expansionary fiscal stance is appropriate given the still sizable negative output gap and considerable uncertainties.

### Key fiscal numbers (from Text Table 2 and Text Table 1)
- Headline Balance: 2019 1.5; 2020 -4.2; 2/2021 -7.2; 2022 -1.8; 2023 -0.4; 2024 0.0; 2025 0.5; 2026 0.5 (Percent of GDP).
- Change from the previous year: 2019 -5.7; 2020 -3.0; 2/2021 5.5; 2022 1.3; 2023 0.4; 2024 0.5; 2025 0.0 (Percent of GDP).
- Primary Structural Balance: 2019 2.1; 2020 -2.3; 2/2021 -5.7; 2022 -1.1; 2023 0.1; 2024 0.5; 2025 0.9; 2026 0.9 (Percent of GDP).
- Implied fiscal impulse 1/: 2019 4.3; 2020 3.4; 2/2021 -4.6; 2022 -1.2; 2023 -0.3; 2024 -0.5; 2025 0.0 (Percent of GDP).
- Structural Balance: 2019 1.3; 2020 -2.9; 2/2021 -6.2; 2022 -1.6; 2023 -0.4; 2024 0.0; 2025 0.5; 2026 0.5 (Percent of GDP).
- Public Gross Debt (Maastricht definition): 2019 59.7; 2020 69.7; 2/2021 73.0; 2022 70.9; 2023 69.3; 2024 67.3; 2025 64.7; 2026 62.3 (Percent of GDP).
- Text Table 1. Germany: COVID-19 Fiscal Packages (Percent of GDP) — selected figures:
  - Direct budget support: 2020 3.4; 2021 6.3; 2022 1.6; Total 1/ 13.9.
  - Total revenue: 2020 0.8; 2021 0.9; 2022 0.6; Total 1/ 3.3.
  - Total expenditure: 2020 2.6; 2021 5.4; 2022 1.0; Total 1/ 10.5.
  - Subsidies (e.g., grants to firms): 2020 0.6; 2021 2.9; 2022 0.2.
  - Public investment: 2020 0.1; 2021 0.2; 2022 0.1.
  - 1/ Including the amount that is expected to be disbursed beyond 2022.

### Pace of withdrawal and targeting of support
- Withdrawal should be carefully calibrated to pandemic and recovery progress; adequate support should remain in place while the economy is still weak to minimize scarring.
- Given uncertainty, it is preferable to err on the side of doing too much rather than too little.
- If recovery falters, additional measures should be implemented as fiscal space remains ample.
- Specific recommendations:
  - Continue support for households and firms; keep social safety net flexible and generous, protecting marginal workers, the self-employed and women.
  - Further frontloading public investment in 2022-23 to help close digital and infrastructure gaps and help rebalance the external position.
  - Once recovery firms up, make policies more targeted to facilitate resource re-allocation: extend apprenticeships subsidies, consider hiring subsidies and job training, maintain solvency support for viable firms through a variety of instruments.

### Medium-term fiscal strategy and role of public investment
- Fiscal policy should be deployed to address structural challenges: boost potential growth through physical and human capital investment (including life-long learning), incentivize innovation, bolster labor supply, increase disposable income for low-income households.
- Structural deficit expected to shrink to about 1.6 percent of GDP in 2022 as COVID-19 measures phase out; escape clause to the constitutional debt brake expected to remain activated.
- Over the medium term, structural balance expected to return to a surplus of about 0.5 percent.
- Public debt projected to resume downward trajectory from 2022.
- Staff analysis: a permanent 1 percent of GDP expansion of public investment from 2022 onwards would increase real GDP by more than 2 percent relative to the baseline in the long run and would more than compensate for expected pandemic scarring while Germany’s debt-to-GDP ratio would still trend down over time.

### Box 1 — The Impact of Fiscal Expansion in Germany (GIMF simulations)
- Model: Fund’s Global Integrated Monetary and Fiscal model (GIMF); simulations consider a three-year temporary fiscal expansion over 2022-24, and a permanent expansion from 2022 onwards.
- Fiscal instruments simulated: increase in public investment and targeted transfers to liquidity-constrained households on the spending side; reduction in corporate tax and labor tax on the revenue side.
- Main results:
  - Public investment has the largest and longest-lasting impact on GDP.
  - Temporary reductions in labor or corporate taxes, and temporary targeted transfers do not have a large impact because agents realize measures are temporary.
  - The current account falls sharply for a permanent fiscal expansion—with impact on domestic demand dominating the impact on export competitiveness provided by greater productivity—helping with external rebalancing. However, external rebalancing is short-lived if the fiscal expansion is temporary.
  - For all scenarios, the debt-to-GDP ratio trends down.
  - Spillover effect on the rest of the euro area is generally positive but small; strongest for public investment.
- Text Table 1.1 Real GDP Impact of 1% of GDP Fiscal Expansion in Germany (Percentage points deviations from the baseline):
  - Germany — Year 1 / Peak / Cumulative 1/ / Year 1 / Cumulative 2/:
    - Labor tax: 0.2 / 0.3 / 1.5 / 0.3 / 6.3
    - Corporate tax: 0.1 / 0.1 / 0.6 / 0.3 / 2.3
    - Public investment: 0.9 / 1.1 / 8.2 / 1.0 / 15.0
    - Targeted transfers: 0.3 / 0.3 / 0.5 / 0.3 / 1.9
  - Euro area exc. Germany — Year 1 / Peak / Cumulative 1/ / Year 1 / Cumulative 2/:
    - Labor tax: 0.04 / 0.05 / 0.03 / 0.04 / 0.22
    - Corporate tax: 0.00 / 0.01 / 0.02 / -0.07 / 0.06
    - Public investment: 0.18 / 0.19 / 0.39 / 0.04 / 0.53
    - Targeted transfers: 0.02 / 0.03 / 0.05 / -0.02 / 0.09
  - 1/ 10-year cumulative impact of a 1% of GDP fiscal expansion for three years.
  - 2/ 10-year cumulative impact of a 1% of GDP permanent increase in fiscal expansion.

### Infrastructure governance and implementation of public investment
- Municipalities’ revenues have been hit hard by the COVID-19 crisis; federal government providing sizable financial support to compensate for shortfalls but it may be inadequate to make up the backlog of municipal investment in transport infrastructure and schools.
- Federal government should consider providing additional financing support, while streamlining planning processes, enhancing cooperation between agencies, and allowing for more attractive employment conditions for public sector planners.
- Mandatory use of the e-procurement system, started in 2020, for all public supply and service contracts awarded by federal authorities and increasingly at the state (Länder) level is welcomed; expected to result in cost reductions to bidders and improvements in project quality.
- Streamlining Germany’s decentralized, complex legal system for public procurement would facilitate further efficiency gains.

### Authorities’ views on fiscal policy and investment
- Authorities broadly agreed with staff’s assessment and recommendations.
- Emphasized COVID measures were timely, targeted, and transformative, aiming to save jobs and lives while facilitating economic recovery.
- Combined fiscal packages characterized as among the largest in the world.
- Authorities agreed public debt is sustainable and fiscal space remains available for additional support if needed.
- Government committed to returning to the debt brake rule over the medium term.
- Government is ramping up public investment to support a green and digital transformation, while continuing efforts to alleviate execution bottlenecks.
- COVID measures provide sizable financial relief for municipalities; efforts to speed up planning and procurement (Partnerschaft Deutschland and the Bund/Länder Commission) have helped municipal governments continue to execute public investment during the pandemic.
- Within Germany’s Recovery and Resilience Plan (RRP), government assessing remaining bottlenecks with key findings to be published in 2022; new nation-wide procurement statistics launched in October 2020 with initial evaluation scheduled for the second half of 2021.

### B. Mitigating climate change — emissions and targets
- Germany has made significant progress in reducing greenhouse gas (GHG) emissions: GHGs have fallen by 41 percent from 1990 levels.
- Reduction driven largely by the energy and industry sectors; transport sector has barely reduced emissions from 1990 levels.
- Germany’s share of renewable energy in electricity generation is the highest among G20 countries (Text Figure 10, left panel).
- In a business-as-usual scenario, Germany is expected to remain among the top ten global emitters in 2030, both in absolute and per capita CO2 emissions.
- Germany’s Climate Change Act (CCA) 2019 stipulates legally binding targets in line with EU targets: at least a 55 percent reduction in GHGs below 1990 levels by 2030 and net zero emissions by 2050.
- Following a constitutional court ruling in May 2021, the cabinet approved amendments to the CCA with stricter targets: a 65 percent reduction in GHGs below 1990 levels by 2030 and net zero emissions by 2045.
- The revised CCA, if approved by the parliament, will set an annual path for aggregate emissions through 2040 and revised annual sectoral targets through 2030.
- The draft bill indicates that by 2032 the government must present a legislative proposal to set the annual reduction targets for the years 2041 to 2045.

*International Monetary Fund — Germany: selected chapter content (as provided).*

### 23. A number of additional measures could enhance the cost-effectiveness and

### 1deuea2021002 - 23. A number of additional measures could enhance the cost-effectiveness and

### Climate mitigation: overall assessment
- Elasticity of carbon emissions to carbon pricing differs greatly across sectors; sectors covered by the EU ETS are more elastic than those covered by the national ETS, implying that meeting emissions targets solely with carbon pricing would require very high carbon prices in some sectors.
- Price-based measures should be complemented with sectoral instruments and stepped-up public investment in green infrastructure and technologies.

### Box 2 — Climate Action Program (CAP) 2030: components and design
- Four major components:
  - Introduction of a national Emission Trading System (ETS):
    - Operational on January 1, 2021, covering CO2 emissions from transportation and heating fuels with a price of €25/tonne of CO2.
    - Carbon pricing scheduled to increase to €55 by 2025 in a step-wise manner.
    - From 2026 onwards, an emissions cap will be set, declining over time in line with 2030 emissions targets, with an initial price range of €55 to €65 per tonne.
    - Path of carbon prices can be amended once parliament has approved the revised CCA.
    - National ETS supplements the EU ETS (which covers energy and industries).
    - Revenue from carbon pricing will be re-invested in climate measures or returned to taxpayers.
  - Measures to encourage GHG reductions in buildings, transportation, energy, agriculture, and industry:
    - Tax incentives for energy-efficient modernization of buildings; increasing the number of electric vehicles (EVs) and public charging points; expanding renewable energy generation and increasing its use in industry; phasing out coal; encouraging climate-friendly agriculture; exploring options for carbon storage.
  - Compensation for households and firms for the expected price increase:
    - Renewable energy surcharge and electricity prices have been reduced; tax relief for long-distance commuters and higher housing allowances provided.
  - Monitoring and correction mechanism:
    - Annual government assessment of progress towards 2030 climate targets in individual sectors; non-complying ministries present remedial action plans to the climate cabinet.
- Climate cabinet established in April 2019 to review annually the effectiveness, efficiency, and targeting of climate measures.

### Policy recommendations to enhance CAP2030 cost-effectiveness
- Further strengthen carbon pricing:
  - Specify a longer-term schedule of carbon prices to signal efficient allocation to clean technologies.
  - Domestic ETS could incorporate an automatically escalating price floor after the expiration of the price collar.
- Reduce gaps in marginal cost of abatement across sectors:
  - Higher carbon pricing in sectors with relatively low cost of abatement, such as power and industry, could improve economic efficiency.
  - At the EU level, Germany should push for a robust price floor under the EU ETS through reform of the Market Stability Reserve and extension of the ETS to transportation and buildings.
  - Alternatively, apply a domestic carbon surcharge to emissions covered by the EU ETS.
- Introduce feebates:
  - Revenue-neutral sliding scale of fees on products/activities with above-average emission rates and rebates for below-average emission rates to complement sectoral policies.
- Frontload public investment in green infrastructure and support green technologies:
  - Public sector role in catalytic infrastructure investment, co-funding high upfront projects, sharing risks through insurance and guarantees (examples: electricity grid system upgrades, charging stations for electric vehicles).

### Distributional and household cushioning measures
- Higher carbon prices affect households directly via fuel and energy prices and indirectly through higher input prices for other consumption goods and services.
- Overall distributional impact of carbon price increases is estimated to be broadly neutral in Germany: direct effect on fuel prices is regressive, indirect effect via other goods and services is expected to be progressive.
- CAP 2030 contains several mitigation measures (see Box 2); additional options include reducing high social security contributions for lower-income earners to compensate the neediest and encourage labor supply.
- Authorities’ actions and views:
  - The “Future Package (Zukunftspaket)” from the June 2020 stimulus program allocates €26.2 bn to the Energy and Climate Fund; an additional €8 bn from the Energy and Climate Fund has been allocated for an immediate action program to meet the stricter emissions targets.
  - Government indicates achieving climate targets solely with carbon pricing would be difficult and advocates supporting sectoral measures (e.g., stricter regulations) and green infrastructure/technology support.
  - Government committed to re-distributing revenues raised through selling emission rights.
  - Current action plan does not contain income-based climate protection measures; government notes that reducing costs for long-distance commuters, lowering the renewable energy surcharge, and increasing housing allowances would tend to benefit lower-income households more.
  - Government is not considering altering social security contributions as a distributional measure for the purpose of climate policy at this juncture.

### Labor market policies — Kurzarbeit (KA): crisis response and normalization
- Crisis response adjustments (pandemic):
  - Kurzarbeit made more flexible and generous: waiver of requirement to exhaust work-time accounts; employers’ social security contributions on reduced hours waived; threshold for participation lowered; higher replacement rates for workers.
  - Take-up accelerated to a record 6 million in May.
- Effectiveness (staff analysis and Box 3):
  - Absent the increase in KA take-up, the unemployment rate would have been almost 3 percentage point higher on average during Q2 2020; up to 4 percentage points higher in the most affected states.
  - Without KA, retail trade turnover would have declined by over 20 percentage points instead of only 1.1 percentage points on average in April-May 2020 (proxy for private consumption).
  - Staff instrumental-variable analysis finds KA reduced unemployment and stabilized domestic demand: unemployment during 2020Q2 would have been on average 2.9 percentage points higher, and as much as 4 percentage points higher in most affected states; retail trade turnover would have been on average 15 percent lower in 2020Q2 and over three times as large a contraction in April 2020.
- Normalization strategy:
  - Expanded KA parameters apply to workers starting Kurzarbeit before end-September 2021.
  - Workers receive benefits under expanded parameters until end-2021.
  - Full reimbursement of employers’ social security contributions on reduced hours granted until end-September 2021, decreasing to half thereafter.
  - Pace of normalization viewed as appropriate under baseline of robust recovery starting in Q2 and strengthening through remainder of 2021, but policymakers should be ready to extend expanded KA if downside risks materialize.
- Risks and trade-offs:
  - Prolonged expansion of short-time work could be associated with larger misallocation of labor across industries if underlying need for reallocation is high.
  - Normalization will be important to avoid inhibiting labor reallocation from shrinking to growing firms.
- Support for marginal workers and self-employed:
  - Marginally employed workers (60 percent of whom are women) are 18 percent of total employment but account for almost 74 percent of the jobs lost through Q3 2020.
  - Marginal workers and the self-employed do not have access to Kurzarbeit and suffered the largest income losses even as aggregate household disposable income did not decline.
  - Expanded access to the basic income (made more flexible by waiving asset means testing and lifting limits to eligible rent and utility costs) and special program for the self-employed (“Neustarthilfe”) provide essential safety nets and should be maintained until labor market recovery is sustainable.
  - Recommendations include maintaining expanded basic income access, providing training and job search assistance to facilitate re-integration, and considering a reduced labor tax wedge on lower incomes and reduced social security contributions for low-income workers to ameliorate income inequality and spur hiring.

### Authorities’ views on labor measures
- Authorities credit expanded Kurzarbeit with stabilizing the labor market and domestic demand; note lower increases in unemployment and short-time work during subsequent waves compared to the first wave.
- Authorities acknowledge potential adverse side-effects of prolonged Kurzarbeit but view the envisaged pace of normalization as appropriate.
- Authorities recognize disproportionate losses for groups not covered by Kurzarbeit and highlight expanded basic income access and “Neustarthilfe” for the self-employed.
- Authorities view young graduates, students and apprentices as in need of re-integration support; expect hiring to pick up as economy recovers and consider hiring subsidies only if downside risks materialize.
- Authorities see merit in staff recommendation to lower the labor tax wedge on low income earners as a structural policy beyond the crisis response.

### Digitization and innovation: gaps and recommended actions
- Germany is a world leader in technology and engineering but trails peers on ICT metrics:
  - Share of high-speed (>100 Mbps) subscriptions is low compared to peers, especially in rural areas.
  - Mobile broadband subscriptions are low due to higher prices for faster 4G data packages and limited 4G coverage.
  - Example price comparison (May 2020): German consumers paid around PPP USD 34 for a 10 GB data plan, while consumers paid PPP USD 22 in Spain, PPP USD 24 in France, PPP USD 27 in Italy, and PPP USD 29 in Sweden.
  - German firms lag in adopting key ICT tools required to create value with data.
- Policy recommendations:
  - Improve access to high-speed broadband networks, particularly in rural areas, by shortening administrative approval times for network deployment and improving coordination among public authorities to accelerate disbursement of public funds.
  - Monitor competitive dynamics in the fixed broadband market, foster competition and investment in connectivity of multi-dwelling buildings; for mobile market, promote competition by facilitating new entrants to a market dominated by three players.
  - Increase ICT training for teachers and introduce computers and programming earlier in the school curriculum to enhance students’ digital skills and engagement (OECD 2020).

*Source: IMF staff report content (chapter/section provided).*

### 34. Germany’s declining productivity growth calls for policy measures to promote

### 34. Germany’s declining productivity growth calls for policy measures to promote innovation

### Innovation, firm dynamism, and digital government
- Policies should facilitate reallocation and technology diffusion, improve access to finance (especially for young firms and for investment in intangible assets), expedite restructuring of established firms and exit of nonviable firms, and use digital government to reduce administrative costs and facilitate firm creation.
- Raise the cap for R&D tax incentives:
  - Germany introduced R&D tax incentives in 2020, subsidizing 25 percent of up to €2 million R&D expenditure per year, limited to €15 million in total (direct and tax) support per firm.
  - As part of the COVID-19 recovery package, the cap has been increased to €4 million per firm through end-2025.
  - Further raising the cap could help incentivize R&D at larger “Mittelstand” firms.
- Fiscal and tax measures to spur digital investment:
  - The government introduced a faster depreciation schedule for digital goods to spur private investment.
- Promote venture capital (VC):
  - VC investment in Germany grew by 19 percent per year between 2014 and 2019.
  - Germany trails many peers, especially for later stage funding.
  - Recommendations include encouraging later stage (scale-up) capital and promoting institutional investor participation in venture capital markets.
  - Creation of an EU-wide Capital Market Union would enhance arm’s-length cross-border finance using tradable instruments, expanding firms’ investor base and improving young firms’ access to venture capital.
- Reduce administrative red tape and compliance costs:
  - Cumbersome procedures to start businesses and high compliance costs hamper entrepreneurship.
  - Completing the roll-out of e-Government for the center and states by end-2022, as planned, would reduce businesses’ administrative burden.
  - Germany ranks 24th in the EU for digital public services, well below the EU average.
  - Under the Online Access Act in 2017, the digitization of 575 services at the federal and Laender levels should be completed by end-2022.

### Authorities’ views on innovation and digitalization
- The authorities agree support for innovation and facilitating private investment are essential; appropriateness of the ceiling for R&D tax incentives to be assessed within a broad evaluation in 2025.
- The government will provide €10 bn through KfW for an investment fund for technologies of the future (“Future Fund (Zukunftsfonds)”).
  - Together with private and public partners, this fund is expected to facilitate at least €30 bn in venture capital for start-ups in Germany.
- Data policy and digitalization measures:
  - The second Open Data Act and Data Use Act, expected to come in force in 2021, will improve availability of public-sector data in machine-readable formats to support Machine Learning and Artificial Intelligence.
  - Fixed broadband and high-speed mobile networks are expanding.
  - A newly-created state-owned company, “Mobile Infrastructure mbH,” is expected to facilitate closure of remaining “white spots” by administering existing funding programs, accelerating approval processes, and supporting municipalities.
  - A fourth player is set to enter the mobile market and will be allowed to use infrastructure platforms developed by incumbents.
  - Implementation of eGovernment is proceeding; 315 out of 575 proposed services are already available online.
  - An additional €3 bn has been allocated to accelerate integration of existing ICT systems developed at the Länder level.
  - Digitalization of schools is a key priority; the government has earmarked €1.5 bn in the RRP.

### Financial sector policies and stability
- Capital and lending capacity risks:
  - German banks have weathered the COVID shock relatively well, but aggregate CET1 capital ratio of large German banks could decline as insolvencies pick up.
  - Capital erosion could curb new lending just when it is most needed.
  - Capital relief measures (e.g., reduction of the counter-cyclical capital buffer and permission to use the capital conservation buffer) have been extended through at least year-end.
- Recommended policy approach to safeguard financial stability:
  - Maintain borrower support (e.g., grants to firms, loan guarantees, Kurzarbeit, tax deferrals) until there is good evidence of a sustained recovery.
  - Issue clear supervisory guidance allowing banks to build back capital buffers gradually to preserve lending capacity.
  - Couple buffer rebuild guidance with restrictions on dividend payouts and share buybacks until the recovery is well underway.
- Profitability and business model challenges:
  - The crisis has exacerbated long-standing profitability problems in the financial sector, highlighting the need for innovation in business models.
  - Saving and co-operative banks are most exposed to a weak economic environment and low interest rates due to exposure to domestic SMEs and reliance on retail deposits, though they entered the pandemic with higher capital buffers than commercial banks.
  - Commercial banks and Landesbanken are more exposed to rising funding costs due to reliance on hybrid capital and wholesale funding.
  - All banks need to streamline operations (including consolidation and greater use of digital technologies) and enhance non-interest revenues (e.g., fees and commissions).
  - Completing the financial architecture of the EU—including finalizing the European Deposit Insurance Scheme (EDIS) and the Capital Market Union (CMU)—would facilitate cross-border financial flows and remove impediments to cross-border bank consolidation.
- Insurance sector:
  - Profitability compressed by low interest rates and relatively flat yield curves.
  - Limited scope for reallocation on the asset side given relatively low home bias; insurers have shifted toward ‘hybrid’ and ‘unit-linked’ products.

### Insolvencies, solvency support, and restructuring
- Insolvency developments:
  - Bankruptcies and financial losses were limited through end-2020 due to borrower support measures and insolvency moratoria; insolvencies remained near record lows at end-2020.
  - Bankruptcies, concentrated in hard-hit sectors, began to pick up visibly since early 2021 and are expected to rise further after the insolvency moratorium’s expiry.
- Supervisory priorities:
  - Supervisors should closely monitor asset quality and challenge banks’ credit risk assessments as support measures expire.
  - Lifting the insolvency moratorium is necessary to facilitate post-crisis reallocation, but should be accompanied by adequate liquidity and solvency support targeted at viable firms.
  - Insolvency procedures should facilitate efficient restructuring or liquidation where appropriate.
  - The transposition into national law of the EU Directive on Preventive Restructuring Frameworks provides a mechanism to allow distressed but viable companies to avoid insolvency.
- Design of solvency support going forward:
  - Short-term liquidity support, e.g., loan guarantees, should remain available while the recovery is fragile.
  - As capital depletion increases, solvency support will need to be tailored to firm size and type and to minimize taxpayer risk:
    - Micro firms: grants may be the only feasible option to strengthen equity; viability assessments should rely on backward-looking indicators that reflect pre-pandemic financial health.
    - Larger SMEs: solvency support could include hybrid equity coupled with government incentives for private investor participation; viability assessment should rely on a mix of forward and backward-looking indicators.
    - Large publicly-listed firms, especially of strategic importance: government equity injections could be warranted; viability assessments should incorporate market views of long-term profitability prospects.
  - The EU allows conversion of publicly guaranteed loans into grants and has prolonged the State Aid temporary framework to end-2021.

### Real estate market vulnerabilities and data gaps
- Real estate dynamics:
  - CRE remains susceptible to lower demand following pandemic-induced behavioral changes; German banks are among Europe’s most exposed to CRE.
  - Residential real estate prices have been rising rapidly over the past decade, especially in major cities; little evidence the pandemic has exacerbated or reversed this trend.
  - Household indebtedness remains relatively low, but continued build-up of vulnerabilities in real estate lending warrants close monitoring.
- Data and policy recommendations:
  - Lack of granular data hinders full assessment of potential risks to financial stability and should be quickly remedied.
  - Authorities provided a legal framework for the Bundesbank for more comprehensive data collection on residential real estate loans.
  - An assessment of supervisory data adequacy should be conducted following initial data collection, and remaining gaps promptly closed.
  - Germany should expand its macroprudential toolkit for real estate lending, including income-based instruments such as debt-to-income or debt-service-to-income caps, while recognizing CRE heterogeneity in financing structures.

### Oversight of nonbank operations and auditing reforms
- Weaknesses highlighted by Wirecard:
  - The Wirecard scandal underscored the need for reforms to Germany’s auditing framework and accounting enforcement.
- Legislative and regulatory responses:
  - In December 2020, the cabinet approved a draft law to combat accounting fraud by strengthening BaFin’s investigative powers over financial statements and outsourced financial activities and by discontinuing the “two-stage” framework to reduce procedural delays.
  - The law tightens audit regulation to strengthen auditor independence relative to corporate clients and increases auditors’ maximum civil liabilities for breaching fiduciary duties.
  - Mandatory information exchanges between BaFin and the Auditor Oversight Body will be required.
  - A range of measures has been taken to enhance AML/CFT enforcement.
  - Better demarcation of the regulatory perimeter of nonbank operators—particularly regarding financial reporting and AML/CFT activities—remains needed.

### Ongoing and upcoming assessments
- The 2022 FSAP for Germany is underway and will carry out a comprehensive analysis of the financial sector; findings and recommendations will be presented with the 2022 Article IV for Germany.
- Authorities’ additional points:
  - They consider the banking sector resilient but acknowledge rising loan impairments from a potential surge in insolvencies as a key risk.
  - They view existing facilities for solvency support (Wirtschaftsstabilisierungsfonds, state-level equity participation funds, grants, short-time work allowance, federal and state-level guarantees for bank loans) as likely sufficient, with take-up comparatively low.
  - The February 2021 statutory order providing the legal framework for the Bundesbank to collect data on residential real estate loans is seen as a key step in closing data gaps; authorities judge the resulting data sufficiently granular for fuller assessment despite no loan-by-loan collection.
  - The German parliament passed the Finanzmarktintegritätsstärkungsgesetz (FISG) to strengthen financial reporting enforcement, reinforce auditor independence, and strengthen BaFin supervisory activities and powers.
  - The Ministry of Finance (BMF) is preparing a Parliamentary report evaluating the legal basis for use of existing instruments (e.g., LTV cap and amortization requirement) and the question of expanding the toolbox to income-based instruments.
  - Measures to enhance AML/CFT supervision include initiatives at the European level, such as creation of a Europe-wide AML/CFT database.

*International Monetary Fund. Excerpt from Germany: 2021 Article IV Staff Report chapter on innovation, financial sector policies, and governance.*

### 47. Germany has maintained a leading role in detecting, investigating, and prosecuting

### 47. Germany has maintained a leading role in detecting, investigating, and prosecuting

### Enforcement of foreign bribery and OECD WGB findings
- Germany remained one of the highest enforcers of the OECD’s Anti-Bribery Convention, having sanctioned 378 individuals and 21 companies in 78 foreign bribery cases since 1999.
- The OECD Working Group on Bribery in International Business Transactions (WGB) recognized that Germany has developed tools to improve the authorities’ internal collection of case information.
- The WGB encouraged continued efforts to strengthen enforcement against legal persons involved in foreign bribe cases, noting that Germany’s enforcement of its corporate liability regime remained low.
- Factors contributing to low enforcement of corporate liability:
  - Discrepancies in the prosecutorial approach to holding natural, as opposed to legal, persons liable across Länder.
  - A fragmented investigative approach.
  - Heterogenous use of forfeiture orders.
- The WGB encouraged Germany to adopt the draft Corporate Liability Act, which would improve the investigation and prosecution of legal persons.
- The WGB recommended enhanced experience and knowledge sharing across the Länder to ensure a consistent approach in foreign bribery cases, notably concerning corporate liability and the use of non-trial resolutions.
- The WGB noted that Germany has yet to amend its legislation to provide clear and comprehensive protection for public- and private-sector whistleblowers.
- The WGB recommended ensuring regional courts’ specialized economic chambers have the same jurisdiction over foreign bribery cases as for commercial bribery cases, as proposed by a government bill in January 2021.
- Fund staff agrees with these recommendations and urges the authorities to move forward with implementation.

### Authorities’ views and recent actions
- Frauds related to COVID measures were concentrated in the Länder’s grant programs, especially during the first lockdown period.
- Authorities have tightened requirements to confirm identity of recipients and expanded audits as a lesson from the fraud experience.
- Germany welcomes the WGB recommendations and has taken concrete steps to address them.
- The German Government submitted a comprehensive draft Corporate Liability Act to parliament (Bundestag) in September 2020.

### Staff appraisal — macroeconomic context and policy guidance
- 2020 GDP fell by just under 5 percent, a smaller contraction than in most European peers.
- A new wave of infections, together with a global shortage of intermediate inputs, held back economic activity in the first half of the year.
- Authorities maintained appropriately accommodative fiscal and financial policies; most measures supporting households and firms were extended through 2021.
- The expanded Kurzarbeit program helped contain the pandemic’s impact on unemployment and support aggregate demand.
- The current account surplus narrowed slightly in 2020 but the external position is assessed as stronger than the level implied by medium-term fundamentals and desirable policies.
- Outlook and risks:
  - A rebound is expected in the second half of the year, but the outlook remains highly uncertain, with the balance of risks tilted to the downside.
  - Growth is expected to gather strength as vaccinations become widely available and lockdowns are phased out.
  - Downside risk: if the vaccine rollout fails to durably outpace new infections—including mutant variants—lockdowns may need to be prolonged or reimposed, delaying the recovery and amplifying economic scarring.
  - Upside possibility: domestic demand could rebound more swiftly due to the release of pent-up savings, and exports may grow more strongly driven by a sharper rebound in key trading partners.
- Fiscal policy guidance:
  - The pace of withdrawing fiscal support should be dictated by progress on containing the pandemic and revitalizing the economy.
  - Given considerable uncertainty, it is preferable to err on the side of doing too much to minimize scarring effects.
  - Support for households and firms should be continued until there is clear evidence of a sustained recovery, while frontloading public investment to the extent possible.
  - Additional measures should be implemented if the recovery falters.
  - Public debt remains sustainable and fiscal space is ample.
  - As the recovery firms up, a carefully calibrated withdrawal of support should be accompanied by targeted measures to facilitate post-crisis resource re-allocation.
- Structural and labor market recommendations:
  - Use fiscal space to lift potential growth and facilitate structural transformation: greater physical and human capital investment; incentivizing innovation; bolstering labor supply; increasing disposable income for low-income households.
  - Labor market policies—underpinned by Kurzarbeit—should remain protective until there is evidence of a sustained recovery.
  - Normalization of Kurzarbeit parameters will be important as the recovery takes hold so as not to inhibit labor reallocation to growing firms and industries.
  - Job search assistance and appropriate training programs should be made available to facilitate worker transitions.
  - Expanded access to the basic income program should be maintained until the job market has recovered sustainably for workers not covered by Kurzarbeit.
  - To arrest widening inequality, the government could consider reducing social security contributions on lower incomes to spur hiring and labor supply.
- Climate and innovation policies:
  - Consider a more well-specified schedule of carbon prices over a longer time horizon to signal efficient allocation of investment to clean technologies.
  - Higher carbon pricing in sectors with relatively low cost of abatement could reduce aggregate emissions efficiently.
  - Introducing feebates could reinforce mitigation incentives at the sectoral level.
  - Price-based measures should be complemented with government investment in green infrastructure and technologies.
  - To mitigate adverse impacts of higher carbon prices on households, complement existing measures with additional relief targeted at lower-income earners.
  - Accelerate digital transformation and innovation: improve connectivity and diffusion of ICT tools, including in schools.
  - Carefully monitor competitive dynamics in internet and mobile markets and facilitate new entrants if warranted to accelerate high-speed broadband rollout.
  - Consider further raising the cap for R&D tax incentives to complement the recently introduced faster depreciation schedule for digital goods.
  - Promote venture capital, reduce administrative red tape, and lower compliance costs to raise investment in promising new technologies.
- Financial stability and banking sector:
  - Bankruptcies and financial losses were contained through early 2021, aided by borrower support measures and insolvency moratoria; bankruptcies have started rising as some measures are phased out.
  - Insolvency procedures should facilitate efficient restructuring or liquidation where appropriate.
  - Targeted liquidity and solvency support for viable firms (grants, loan guarantees, equity support) should remain available.
  - Authorities should specify an appropriate timetable for banks that find their capital reduced as a result of the crisis to rebuild buffers.
  - Banks need to improve cost structures (greater use of digital technologies and consolidation) and enhance non-interest revenues (e.g., fees and commissions).
  - Supporting reforms to the financial architecture at the European level—including the creation of a common deposit insurance scheme—would spur greater cross-border financial flows and remove impediments to cross-border bank consolidation.
- Real estate and macroprudential recommendations:
  - Monitor vulnerabilities in Commercial Real Estate (CRE) given susceptibility to lower demand following pandemic-induced behavioral changes.
  - Rapid increase in residential real estate prices warrants vigilance, though risk is mitigated by relatively low household indebtedness.
  - Authorities should complete the ongoing process of closing data gaps as soon as possible to allow a full assessment of potential risks to financial stability.
  - Consider expanding the macroprudential toolkit for real estate lending, including income-based instruments such as debt-to-income or debt-service-to-income caps.

*International Monetary Fund staff appraisal from the Germany country report excerpt provided.*

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

### 1deuea2021002 - 60. 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, followed by a strong rebound in Q3 which then stalled again in Q4.
- While both external and domestic demand rebounded in 2020 Q3, only external demand continued growing in Q4 while domestic demand contracted again.
- Hours worked remain far below pre-pandemic level.
- Economic activities started recovering in mid-2020, with lingering divergence between manufacturing and services.
- Selected numeric developments (from tables and figures):
  - GDP: 2018 = 1.3; 2019 = 0.6; 2020 = -5.1; 2021 (projection) = 3.6; 2022 (projection) = 4.2.
  - Private consumption: 2018 = 1.5; 2019 = 1.6; 2020 = -6.2; 2021 = 1.0; 2022 = 7.0.
  - Final domestic demand: 2018 = 1.9; 2019 = 2.0; 2020 = -3.1; 2021 = 2.3; 2022 = 4.6.
  - Output gap (percent of potential GDP): 2018 = 1.2; 2019 = 0.4; 2020 = -2.9; 2021 = -2.1; 2022 = -0.3.

### Prices and Labor Market
- Headline and core inflation declined into negative territory through H2 2020 (temporary VAT cuts) and rebounded sharply early 2021.
- The pandemic reduced the tightness of labor market conditions; unemployment impact was limited thanks to Kurzarbeit, but unemployment has yet to return to pre-pandemic level.
- Kurzarbeit:
  - Number of workers on Kurzarbeit (NSA, in million): series depicted reaching multi-million levels in 2020–2021 (figure).
- Wage and cost indicators:
  - Compensation per employee (Y-o-y growth): 2018 = 2.9; 2019 = 3.0; 2020 = 0.6; 2021 = 1.5; 2022 = 2.4.
  - Unit labor cost (total economy): 2018 = 3.0; 2019 = 3.3; 2020 = 4.6; 2021 = -1.1; 2022 = -0.8.
- Inflation and prices:
  - GDP deflator: 2018 = 1.7; 2019 = 2.2; 2020 = 1.6; 2021 = 2.3; 2022 = 1.4.
  - Consumer price index (harmonized): 2018 = 1.9; 2019 = 1.4; 2020 = 0.4; 2021 = 2.6; 2022 = 1.2.
  - Consumer price index (harmonized), core: 2018 = 1.5; 2019 = 1.4; 2020 = 0.9; 2021 = 2.1; 2022 = 1.5.

### Fiscal Developments and Outlook
- Germany recorded its first fiscal deficit in eight years in 2020, combined with a surge in pandemic-related spending.
- As crisis measures are phased out, the public debt ratio is projected to fall back to pre-crisis level over the medium term.
- Fiscal stance projected to be appropriately expansionary in 2021 due to renewed infection waves and lockdowns.
- Key fiscal figures (percent of GDP):
  - General government overall balance: 2018 = 1.8; 2019 = 1.5; 2020 = -4.2; 2021 = -7.2; 2022 = -1.8.
  - Structural balance: 2018 = 1.3; 2019 = 1.3; 2020 = -2.9; 2021 = -6.2; 2022 = -1.6.
  - General government debt: 2018 = 61.8; 2019 = 59.7; 2020 = 69.7; 2021 = 73.0; 2022 = 70.9.
- Revenue and expense composition (2020):
  - Revenue (percent of GDP): 2020 = 46.8.
  - Taxes (percent of GDP): 2020 = 23.2 (Indirect taxes = 10.8; Direct taxes = 12.3).
  - Social contributions: 2020 = 18.2.
  - Expense (percent of GDP): 2020 = 51.1.
  - Social benefits: 2020 = 27.1.
  - Subsidies: 2020 = 2.1.
  - Gross public investment: 2020 = 2.8.
  - Net lending/borrowing: 2020 = -4.2.

### Balance of Payments and External Sector
- Current account (CA) continued to edge down in 2020 to 7.0 percent of GDP.
- Net International Investment Position exceeded 75 percent of GDP by end-2020.
- The increase in private sector savings was largely offset by a widening government deficit.
- Balance of payments key numbers (percent of GDP):
  - Current account: 2018 = 7.9; 2019 = 7.5; 2020 = 7.0; 2021 = 7.4; 2022 = 7.3.
  - Trade balance (goods and services): 2018 = 6.2; 2019 = 5.7; 2020 = 5.7; 2021 = 6.0; 2022 = 5.9.
  - Exports (percent of GDP): 2020 = 35.7; 2021 = 37.9; 2022 = 37.5.
  - Imports (percent of GDP): 2020 = 30.0; 2021 = 31.5; 2022 = 31.1.
  - Net international investment position (percent of GDP): 2018 = 63.1; 2019 = 71.9; 2020 = 76.2.

### Credit Conditions, Asset Prices, and Monetary Indicators
- Since the pandemic onset, lending standards tightened moderately, slowing credit growth in 2020 H2.
- Lending rates remained at very low levels with only modest changes.
- Demand for corporate credit surged in Q2 2020 but eased thereafter.
- Key indicators:
  - Money and quasi-money (M3) growth (period average): 2018 = 4.5; 2019 = 4.6; 2020 = 8.2.
  - Credit to private sector (percent change): 2018 = 4.9; 2019 = 5.4; 2020 = 4.9.
  - Yield on ten-year government bonds (period average): 2018 = 0.4; 2019 = -0.2; 2020 = -0.5.
  - Euro per US$: 2018 = 0.85; 2019 = 0.89; 2020 = 0.88.
- Asset prices:
  - German equities: after losing a quarter of value in March (from December 2019), German equities have exceeded pre-pandemic levels (DAX and EURO STOXX 50 indices referenced).

### Banking Sector Developments and Financial Soundness
- Credit spreads narrowed across the board as financial conditions remain favorable.
- The two largest banks trade at a discount to European peers, reflecting low profitability.
- Despite the contraction, German banks maintained generally comfortable risk-weighted capital buffers in H1 2020; some banks' leverage remains higher than European peers.
- Core financial soundness indicators (selected):
  - Regulatory capital to risk-weighted assets (percent): 2018 = 18.9; 2019 = 18.6; 2020 = 19.2.
  - NPLs to gross loans (percent): 2018 = 1.2; 2019 = 1.1; 2020 = 1.7.
  - Return on average assets (after-tax): 2018 = 0.2; 2019 = 0.0; 2020 = ... (data omitted in source for 2020).
  - (Phase in) Common Equity Tier 1 Ratio (percent) by bank group provided in figure.
  - Leverage ratio (common equity net of intangibles as percent of total assets net of intangibles) shows some German banks with higher ratios than peers (series provided in table).

### Housing Market and Real Estate
- Residential real estate prices have risen rapidly in the past decade, especially in major cities.
- The pandemic did not exacerbate or reverse the upward trend in residential prices; supply shortages and extraordinary income support during the pandemic contributed.
- Residential investment recovered in late-2020 after a temporary dip in mid-2020.
- Office vacancy rates edged up in 2020 after several years of decline; office prices broadly flat throughout 2020.
- Key indicators:
  - Real residential investment (index, 2015Q1=100): series depicted with recovery by 2021Q1.
  - New Residential Housing Units (thousands): time series shown (2000–2020).
  - Residential property price index (yearly average, 2016 = 100): 2015 = 92.3; 2016 = 100.0; 2017 = 109.7; 2018 = 118.9; 2019 = 127.4; 2020 = 134.3.
  - Residential real estate loans to total loans: 2015 = 19.2; 2016 = 18.5; 2017 = 18.6; 2018 = 19.4; 2019 = 20.4; 2020 = 19.9.

### Structural Reforms and Productivity
- Germany's labor productivity growth has declined since the early 1990s and remains low.
- Population aging will start weighing on Germany's growth potential (population projection series for age 15-69 provided).
- Germany has relatively high R&D spending and is a global innovation leader, but trails peers in use of digital government and ICT tools in schools.
- Reforms with estimated productivity impact include:
  - Easier financing for young innovative firms.
  - Reducing regulatory barriers.
  - Higher use of e-government.
- Labor productivity growth (selected): long-run series shown with declining trend since 1990s.
- R&D spending and innovation: scatter and indices in figures (relative positions shown; numeric R&D spending and Global Innovation Index plotted in figures).

### Key Projections and Medium-Term Outlook
- Medium-term projections (selected):
  - Real GDP: 2021 = 3.6; 2022 = 4.2; 2023 = 1.7; 2024 = 1.4; 2025 = 1.1; 2026 = 1.1.
  - Consumer prices: 2021 = 2.6; 2022 = 1.2; 2023 = 1.4; 2024 = 1.6; 2025 = 1.8; 2026 = 2.0.
  - Compensation per employee: 2021 = 1.5; 2022 = 2.4; 2023 = 2.9; 2024 = 3.2; 2025 = 3.5; 2026 = 3.7.
  - Current account balance (percent of GDP): 2021 = 7.4; 2022 = 7.3; 2023 = 7.2; 2024 = 7.1; 2025 = 6.9; 2026 = 6.7.
  - General government overall balance (percent of GDP): 2021 = -7.2; 2022 = -1.8; 2023 = -0.4; 2024 = 0.0; 2025 = 0.5; 2026 = 0.5.
  - General government gross debt (Maastricht definition, percent of GDP): 2021 = 73.0; 2022 = 70.9; 2023 = 69.3; 2024 = 67.3; 2025 = 64.7; 2026 = 62.3.
- Household saving ratio (percent): 2018 = 10.6; 2019 = 10.9; 2020 = 16.2; 2021 = 14.8; 2022 = 11.3 (medium-term series shows 11.3 persistently).

*Source: IMF staff report (Germany country chapter, figures and tables as provided).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- The external position in 2020 was stronger than the level implied by medium-term fundamentals and desirable policies.
- Assessment accounts for certain transitory factors owing to the COVID-19 crisis impact on global trade flows.
- The current account surplus is projected to return to pre-pandemic levels as the current shock recedes―with the recovery in the goods trade surplus more than offsetting the lower services balance―and to resume its modest gradual narrowing over the medium term, 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, but 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
- Policies aimed at promoting investment and diminishing excess saving would support external rebalancing and a further reduction of the current account balance towards its norm.
- The sizeable fiscal stimulus in response to the COVID crisis is described as a welcome use of Germany’s ample fiscal space.
- Near-term: continue mitigating the outbreak, while supporting households and businesses in a way that minimizes economic scarring effects and facilitates a swift recovery.
- Medium-term: if pre-COVID imbalances and policy distortions persist, adopt growth-oriented fiscal policy with greater public sector investment in digitization, infrastructure and climate mitigation to:
  - crowd in private investment,
  - promote potential growth,
  - make the economy more resilient.
- Structural reforms to foster entrepreneurship (for example, by expanding access to venture capital, and stronger tax incentives for research and development) would stimulate investment and reduce external imbalances.
- Additional tax relief for lower-income households to boost purchasing power, and pension reforms prolonging working lives, would help reduce excess saving and ameliorate external imbalances.

### Foreign Asset and Liability Position and Trajectory
Background:
- Germany’s positive NIIP reached 76 percent of GDP by end-2020, more than doubling its level over the last five years.
- The net rise in foreign assets over this period has fallen short of the accumulation of CA surpluses.
- NIIP of financial corporations other than monetary financial institutions is large and positive: 65 percent of GDP.
- NIIP of the general government is large and negative: 26 percent of GDP, partly reflecting Germany’s safe-haven status.
- 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 ECB QE operations, exceeding €1.1 trillion at the end of 2020 (32 percent of GDP).

Assessment:
- With continued implementation of QE measures by the ECB, Germany’s exposure to the Eurosystem remains large.

Key 2020Q4 (% GDP) figures:
- NIIP: 76.2
- Gross Assets: 308.3
- Debt Assets: 183.4
- Gross Liab.: 232.0
- Debt Liab.: 165.2

### 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.
- At 7.0 percent of GDP in 2020, the CA surplus narrowed slightly from 2019, despite an improved balance on oil and gas as well as services (driven by a sharp fall in global oil prices and in 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 unprecedented fiscal stimulus, while the NFC balance is also projected to be negative due to lower profits.

Assessment and adjustments:
- The cyclically adjusted CA balance is estimated by the EBA model to reach 6.9 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 2.6 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 0.6 percent of GDP lower than estimated by the model to account for:
  - temporary sharp drop in outbound travel (-0.7 percent of GDP),
  - drop in the volume of oil trade associated with the pandemic (-0.1 percent of GDP),
  - partially offset by larger net imports of medical goods (0.2 percent of GDP).
- Taking these factors into account, staff assesses the 2020 CA gap to be in the range of 2.4 to 4.4 percent of GDP with a midpoint of 3.4 percent of GDP.

Key 2020 (% GDP) figures:
- Actual CA: 7.0
- Cycl. Adj. CA: 6.9
- EBA Norm: 2.6
- EBA Gap: 4.4
- COVID-19 Adj.: –0.6
- Other Adj.: -0.35
- Staff CA Gap: 3.4

### Real Exchange Rate
Background:
- The yearly average CPI-based REER appreciated by 1.3 percent in 2020 relative to 2019, reflecting primarily the appreciation of the euro against the currencies of key trading partners—notably the US dollar.

Assessment:
- The staff CA gap implies a REER gap of -9.2 percent in 2020 (applying an estimated elasticity of about 0.4).
- The EBA REER Level and Index models suggest an undervaluation of 15.5 percent and an overvaluation of 5.5 percent, respectively.
- Consistent with the staff CA gap, staff assesses the REER to be undervalued in the range of 4.2 to 14.2 percent, with a midpoint of 9.2 percent.

Notes:
- The EBA REER Index model has an unusually poor fit for Germany.

### Capital and Financial Accounts: Flows and Policy Measures
Background:
- In 2020, 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 shrank 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.

*International Monetary Fund — Annex I. External Sector Assessment (extracted content)*

### 5. Germany’s government debt should remain below the elevated level of 2021 over the

### 5. Germany’s government debt should remain below the elevated level of 2021 over the 

### Summary findings
- Under all considered macro-fiscal stress tests, both the debt-to-GDP ratio and public gross financing needs either continue to drop or return to a downward path after the shock.
- Temporary shocks to real GDP growth or a combined macro-fiscal shock would drive a temporary increase in debt.
- Gross financing needs would continue to decrease throughout the projection period under all tested scenarios and additional stress tests.
- Given the historical variability of growth, Germany's debt dynamics are most sensitive to growth shocks.

### List of shocks and stress tests (design and key parameters)
- Growth shock:
  - Real output growth rates are lower than in the baseline by one standard deviation over 2022–23 (i.e., by 2.4 percentage points).
  - Decline in growth leads to lower inflation: 0.25 percentage points per 1 percentage point decrease in GDP growth.
  - Interest rate on new debt assumed to increase 25 basis points for every 1 percent of GDP worsening of the primary balance.
  - Debt would peak at 78 percent of GDP in 2023, then decline to 70 percent of GDP by 2026.
- Primary balance shock:
  - Dual shock of lower revenues and a rise in the interest rate, leading to a cumulative 3.8 percent deterioration in the primary balance over 2022–26 (half of the planned fiscal adjustment is assumed to materialize).
  - Results in a modest deterioration of debt dynamics.
- Interest rate shock:
  - Assumes an increase of 314 basis points in debt servicing costs throughout the forecast horizon, mimicking the historical maximum interest rate experienced since 2010.
  - Effect on public debt and gross financing needs is relatively modest.
- Additional stress test — Combined macro-fiscal shock:
  - Combines shocks to growth, the interest rate, and the primary balance while avoiding double-counting effects of individual shocks.
  - Impact on debt dynamics is slightly worse than that of a growth shock.
- Additional stress test — Contingent fiscal shock:
  - Assumes a cumulative 3 percent of GDP (about 100 billion euros) additional fiscal cost for public guarantees called over 2022–23.
  - Assumes contracted guarantees will double from the level of end-2020, and about one-third of the guarantees contracted will be called.
  - Impact on debt ratio is relatively limited, with debt-to-GDP continuing to fall rapidly.
- Real exchange rate shock:
  - Not discussed because virtually all outstanding sovereign debt is denominated in euros and a real exchange rate shock would not have a relevant effect on debt.

### Stress test outcomes — selected baseline and shock trajectories (years and levels preserved)
- Baseline projections (selected series, in percent unless otherwise indicated):
  - Nominal gross public debt: 2019: 74.1; 2020: 59.7; 2021: 69.7; 2022: 73.0; 2023: 70.9; 2024: 69.3; 2025: 67.3; 2026: 64.7; (figure also shows 62.3 in one line).
  - Public gross financing needs: 2019: 15.0; 2020: 10.7; 2021: 18.4; 2022: 25.1; 2023: 15.7; 2024: 11.0; 2025: 8.7; 2026: 6.4; 2026 another entry 6.6.
  - Real GDP growth (in percent): 2019: 2.1; 2020: 0.6; 2021: -4.8; 2022: 3.6; 2023: 4.1; 2024: 1.6; 2025: 1.4; 2026: 1.1; 2026 repeated 1.1.
  - Inflation (GDP deflator, in percent): 2019: 1.5; 2020: 2.2; 2021: 1.6; 2022: 2.3; 2023: 1.4; 2024: 1.5; 2025: 1.6; 2026: 2.1; additional 2.1 entries.
  - Effective interest rate (in percent): 2019: 2.3; 2020: 1.3; 2021: 1.1; 2022: 0.8; 2023: 0.7; 2024: 0.7; 2025: 0.7; 2026: 0.7; projection shows 0.8 in some lines.
- Growth shock outcome (selected path shown):
  - Real GDP growth: 2021: 3.6; 2022: 1.7; 2023: -0.8; 2024: 1.4; 2025: 1.1; 2026: 1.1.
  - Inflation (GDP deflator): 2021: 2.3; 2022: 0.8; 2023: 0.9; 2024: 1.6; 2025: 2.1; 2026: 2.1.
  - Primary balance: 2021: -6.9; 2022: -2.9; 2023: -2.9; 2024: 0.3; 2025: 0.8; 2026: 0.8.
  - Effective interest rate: 2021: 0.8; 2022: 0.7; 2023: 0.8; 2024: 0.9; 2025: 0.9; 2026: 0.9.
  - Debt would peak at 78 percent of GDP in 2023 and decline to 70 percent of GDP by 2026.
- Primary balance shock outcome (selected path shown):
  - Real GDP growth: 2021: 3.6; 2022: 4.1; 2023: 1.6; 2024: 1.4; 2025: 1.1; 2026: 1.1.
  - Inflation: 2021: 2.3; 2022: 1.4; 2023: 1.5; 2024: 1.6; 2025: 2.1; 2026: 2.1.
  - Primary balance: 2021: -6.9; 2022: -4.2; 2023: -0.8; 2024: 0.1; 2025: 0.5; 2026: 0.8.
  - Effective interest rate: 2021: 0.8; 2022: 0.7; 2023: 0.8; 2024: 0.8; 2025: 0.8; 2026: 0.9.
- Real interest rate shock outcome (selected path shown):
  - Effective interest rate: 2021: 0.8; 2022: 0.7; 2023: 1.4; 2024: 1.8; 2025: 2.1; 2026: 2.4.
  - Other variables follow baseline real GDP growth, inflation, and primary balance paths in the figure.
- Combined macro-fiscal shock outcome (selected path shown):
  - Real GDP growth: 2021: 3.6; 2022: 1.7; 2023: -0.8; 2024: 1.4; 2025: 1.1; 2026: 1.1.
  - Inflation: 2021: 2.3; 2022: 0.8; 2023: 0.9; 2024: 1.6; 2025: 2.1; 2026: 2.1.
  - Primary balance: 2021: -6.9; 2022: -4.2; 2023: -2.9; 2024: 0.1; 2025: 0.5; 2026: 0.8.
  - Effective interest rate: 2021: 0.8; 2022: 0.7; 2023: 1.4; 2024: 1.9; 2025: 2.2; 2026: 2.4.

### Key statistics and decomposition highlights (preserving values as presented)
- Cumulative change in gross public sector debt:
  - 2019: -1.3; 2020: -2.1; 2021: 10.0; 2022: 3.3; 2023: -2.0; 2024: -1.7; 2025: -2.0; 2026: -2.6; cumulative projection: -2.4; cumulative over projection horizon: -7.4.
- Identified debt-creating flows (selected entries):
  - Primary deficit (percent of GDP): 2019: -1.4; 2020: -2.1; 2021: 3.7; 2022: 6.9; 2023: 1.4; 2024: 0.1; 2025: -0.3; 2026: -0.8; cumulative 6.6.
  - Primary (noninterest) revenue and grants (percent of GDP): 2019: 44.7; 2020: 46.5; 2021: 46.6; 2022: 46.0; 2023: 46.2; 2024: 46.4; 2025: 46.2; 2026: 46.3; cumulative 277.3.
  - Primary (noninterest) expenditure (percent of GDP): 2019: 43.3; 2020: 44.4; 2021: 50.4; 2022: 52.9; 2023: 47.6; 2024: 46.5; 2025: 45.9; 2026: 45.5; cumulative 283.9.
- Automatic debt dynamics (percent of GDP contributions):
  - 2019: -0.9; 2020: -0.9; 2021: 2.7; 2022: -3.4; 2023: -3.3; 2024: -1.6; 2025: -1.5; 2026: -1.6; cumulative -1.5; longer-run sum -13.0.
  - Real interest rate contribution (selected): 2019: 0.6; 2020: -0.5; 2021: -0.3; 2022: -1.1; 2023: -0.5; 2024: -0.5; 2025: -0.6; 2026: -0.9; cumulative -0.8; total -4.5.
  - Real GDP growth contribution (selected): 2019: -1.5; 2020: -0.3; 2021: 2.9; 2022: -2.3; 2023: -2.8; 2024: -1.1; 2025: -0.9; 2026: -0.7; cumulative -0.7; total -8.6.
- Debt composition and financing:
  - Figures show gross nominal public debt and public gross financing needs declining through 2026 across baseline and stress tests; composition by maturity and by currency is reported with the projection showing predominance of medium and long-term and local currency-denominated debt.

### Risk assessment signals (qualitative and benchmark references)
- Heat map assessment:
  - Debt burden benchmark of 85 percent is used to highlight cells (green if not exceeded under shock or baseline, yellow if exceeded under shock but not baseline, red if exceeded under baseline).
  - Gross financing needs benchmark of 20 percent is used similarly.
- Benchmarks cited for related indicators:
  - Bond spread thresholds: 400 and 600 basis points.
  - External financing requirement thresholds: 17 and 25 percent of GDP.
  - Change in the share of short-term debt thresholds: 1 and 1.5 percent.
  - Public debt held by non-residents thresholds: 30 and 45 percent.
- Market perception and distributional projections show percentile bands (10th-25th, 25th-75th, 75th-90th) for gross nominal public debt projections.

### Policy implications (as reflected in the text)
- Germany’s government debt is projected to remain below the elevated level of 2021 over the medium term under plausible macro-fiscal shocks.
- Gross financing needs should fall below 10 percent of GDP over the projection period.
- Debt dynamics are particularly sensitive to real GDP growth shocks, suggesting that policies supporting growth and mitigating downside growth shocks can materially improve debt outcomes.
- Contingent liabilities from guarantees, even if sizable (3 percent of GDP assumed in the contingent fiscal shock), have a relatively limited impact on the path of debt-to-GDP if managed and if other conditions hold.

*Source: IMF staff report, Staff Report for the 2021 Article IV Consultation — informational annex (as of May 26, 2021). *

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

### 1deuea2021002 - 2014. Since then, the legal and organizational framework for AML/CFT has been comprehensively

### AML/CFT legal and organizational reforms
- 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 ultimate beneficial owners of legal persons and arrangements (trusts); the register is accessible to competent authorities and more broadly to the general public provided that a legitimate interest can be stated.
- Germany transposed the EU’s fifth Money Laundering Directive (5AMLD).
- 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).
- In response to COVID-19, on-site inspections since 2020 have largely been conducted as "remote audits," reflecting increased emphasis on digital communication and digital data exchange.
- AML/CFT strategy for the nonfinancial sector emphasizes better prioritization, improved risk orientation, and enhanced cooperation between key players.
- Laender governments have been tasked to create “coordination offices” to enhance coordination between Laender and the federal government for AML/CFT supervision of the nonfinancial sector.
- A new regular expert-group meeting on AML/CFT (“Expertenkreis”) meets twice a month to exchange information between BaFin and the FIU at the working level.
- BaFin and the FIU established a task force to conduct in-depth analysis on money laundering anomalies in the Wirecard case.
- Ongoing FATF mutual evaluations focus on the effectiveness of AML/CFT systems and adjustments to the framework (e.g., improving accessibility to beneficial ownership information); Germany’s next FATF assessment is due to be adopted in June 2022.

### Statistical issues and data adequacy for surveillance (As of June 3, 2021)
- General assessment: 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.
  - GDP calculated annually and quarterly on a current and chained volume basis.
  - Germany received multiple derogations from ESA2010 requirements, most scheduled to be addressed by 2020.
  - A direct source for quarterly changes in inventories is lacking; extrapolations are based on the difference between the monthly production index and turnover index in manufacturing.
- Government Finance Statistics:
  - Data are based on cash accounting systems; documentation exists explaining differences between ESA2010 (noncash) and administrative cash data.
  - Germany publishes general government revenue, expenditure, and balances on a noncash/accrual basis on a quarterly basis (ESA2010) through Eurostat and presents these data in 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 and data are reported to the IMF through a “gateway” arrangement with the ECB.
  - Monetary statistics published in the IFS cover central bank and other depository corporations using euro area-wide residency criterion; national residency criterion data published as memorandum items.
  - Germany reports on some Financial Access Survey (FAS) series, including the two indicators adopted by the UN to monitor Target 8.10 of the SDGs.
- Financial Sector Surveillance:
  - Germany participates in CDIS, CPIS and FSI databases.
  - Of the 40 FSIs, Germany reports all except net foreign exchange exposure to equity (I31).
  - Former FSI ratios on nonperforming loans switched from annual to quarterly periodicity.
  - Quarterly data stemming from harmonized FINREP reporting is due to the EBA ITS on reporting.
- External Sector Statistics:
  - The Bundesbank compiles the balance of payments in cooperation with the Federal Statistical Office.
  - Balance of payments, IIP, and related cross-border statistics compiled according to BPM6 and legal requirements of the ECB and Eurostat.
- Data standards and quality:
  - Adherent to the Special Data Dissemination Standard Plus (SDDS Plus) since February 2015.
  - Currently disseminates a residential property price index and a commercial property price index.
  - Data ROSC from 2006 is available.

### Crisis response to COVID-19 and fiscal support (Statement dated July 14, 2021)
- Overall approach:
  - Unprecedented policy support stabilized household income and limited economic scarring by safeguarding viable jobs and companies.
  - Fiscal measures included higher public health spending, grants, easier access to loans, tax relief measures like deferrals to firms, subsidies for extended Kurzarbeitergeld, transfers from Federal to subnational governments, a temporary VAT rate cut, and additional public investment.
  - Draft 2022 federal budget sets aside EUR 10 billion in precautionary funding for unanticipated pandemic-induced costs and EUR 7 billion in 2022 to ensure full financing for business assistance programs and a special fund for cultural events.
- Short-time work allowance (Kurzarbeitergeld):
  - Confirmed as an effective tool that substantially contained unemployment and stabilized disposable income and domestic demand.
  - Complemented existing automatic stabilizers in Germany’s tax and social security system.
- Support for marginal and self-employed workers:
  - Access to basic income support for jobseekers and a special program for the self-employed (“Neustarthilfe”) was expanded.
- International support:
  - Germany contributed EUR 2.2 billion to the ACT Accelerator and the COVAX initiative; Team Europe has contributed USD 4.8 billion so far.
  - Draft 2022 budget includes roughly EUR 2.4 billion in additional funding for development cooperation, humanitarian aid and international climate action.

### Policies for a strong and sustainable recovery
- Investment and fiscal plans:
  - Federal draft 2022 budget provides for EUR 51.8 billion in investment spending.
  - Medium-term fiscal plan envisages government investment levels to remain at about EUR 51 billion per year until 2025.
- Climate and green transformation:
  - Amendments to Germany’s Climate Change Act (CCA) set the goal of reaching greenhouse gas neutrality by 2045.
  - Germany earmarked over EUR 80 billion for climate policy measures in the past two years.
  - A new immediate action program for 2022 will add roughly another EUR 8 billion.
  - Targeted areas: decarbonizing the housing sector, charging infrastructure for electric vehicles, extension of (local) public transport, promotion of hydrogen research and development as part of the National Hydrogen Strategy.
  - A market-based mechanism for pricing CO2 emissions from fuels is being introduced; revenues from selling emission rights will be redistributed to citizens and companies directly or indirectly to avoid hardships and incentivize climate-friendly investments.
  - Authorities note potential complementarity of a carbon price path with stricter regulations, targeted funding measures, and public investments; staff recommendation to introduce feebates is noted but viewed as potentially difficult to implement.
- Social and distributional measures:
  - Marginally employed workers disproportionately affected; government expanded access to basic income support for jobseekers.
  - The rate of social security contributions will be capped at 40 percent in 2021; the government’s draft budget 2022 encompasses an additional cap in 2022.
  - Near-complete lifting of the solidarity surcharge, increase of child benefits and increase in individual tax allowances represent significant tax relief for low- and middle-income households.
- Digital transformation and innovation:
  - Measures include R&D tax incentives, additional financial support for start-ups at the growth stage, and legislative measures to support development of technologies such as Machine Learning and Artificial Intelligence.
  - Measures to expand fixed-broadband and high-speed mobile networks and accelerate digitalization of schools and public services (“eGovernment”).

### Financial sector resilience and vulnerabilities
- Overall resilience:
  - German financial sector benefited from strong capital and liquidity buffers built before the crisis.
  - Macroprudential, regulatory and supervisory measures have helped prevent contagion to the banking sector.
- Banks and profitability:
  - Profitability of German banks remained relatively low, partly due to prolonged very low interest rates and a highly competitive banking market.
  - Staff view: smaller banks likely to suffer more losses than large banks owing to higher exposures to SMEs; authorities note uncertainty about pandemic effects on banks and bank groups.
  - Supervisors called on banks to refrain from—or at least limit—dividends and share buy-backs; measures, alongside full release of the countercyclical capital buffer, have helped.
  - At the time of the report, most banks’ capital and liquidity buffers remain ample and NPL ratios are still among the lowest in Europe.
- Real estate and macroprudential monitoring:
  - Pandemic elevated vulnerabilities in the real estate market, but authorities do not see pronounced risks to financial stability from the housing market.
  - Households do not appear to be overly indebted by historical standards; no indication of substantially deteriorating lending standards.
  - Authorities initiated a data collection process on residential real estate loans to close existing data gaps.
  - Upcoming FSAP will provide opportunity to discuss potential real estate-specific extensions of the macroprudential toolkit.
- Governance and market integrity:
  - The Wirecard scandal highlighted a need for reforms to Germany’s auditing framework and accounting enforcement.
  - German parliament passed a bill to strengthen financial market integrity: reforms to accounting enforcement, reinforced independence of auditors in relation to audited companies, and strengthened supervisory activities and powers of the Federal Financial Supervisory Authority (BaFin).

*Source: IMF staff report and German authorities’ statement (as of June 3, 2021; Statement dated July 14, 2021).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1deuea2021002.pdf_