## 1. Digitalization of the German Economy—Status Quo ## Source details **Canonical URL:** [1. Digitalization of the German Economy—Status Quo](https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1deuea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1deuea2022001.pdf.json) --- ### Context and recent developments - Activity and supply - By end-2021 and early 2022, easing semiconductor shortages allowed auto production to pick up; output remained 1.1 percent below its pre-pandemic level in the last quarter of 2021. - Weekly activity and mobility indicators show recovery trends through early 2022. - Policy and political context - December 2021: new coalition government (Social Democrats, Greens, Free Democrats) with agenda to enhance green investments and digitalization, introduce a higher minimum wage, and promote skilled immigration. - Following Russia’s invasion of Ukraine: suspension of Nord Stream 2 approval; intent to wean off energy imports from Russia by 2024; increase defense spending to exceed NATO benchmark; sanctions on Russia including central bank and selected banks; restricted imports of Russian coal and oil. - Energy dependence and shortfalls - Russia pipeline share of natural gas: 55 percent in 2021; 35 percent at end-April 2022. - Mid-June 2022: Russian supplies through Nord Stream 1 and the Czech Republic cut by about two-thirds (a decline of about a quarter to a third of Germany’s natural gas imports). - Natural gas share of economy-wide energy consumption: 9 percent. - Authorities and staff expect that in the event of a complete stoppage, imports from Russia cannot be fully replaced until 2024. - Labor market and inflation - Unemployment rate (April 2022, ILO/European): 3.0 percent. - Vacancies-to-unemployed ratio: 60 percent (10 percentage points higher than in 2019). - Kurzarbeit (March 2022): about 1¼ percent of the workforce—four times larger than the maximum level in 2019. - HICP inflation (May 2022): 8.7 percent. - Contribution to HICP increase relative to 2017–19: energy goods ~3/5; non-energy goods ~1/4; services remainder. - Wages per hour (2020Q1–2022Q1): about 6.5 percent; GDP deflator: 5.8 percent; CPI: 7.7 percent (same period). - Negotiated wages growth (2022Q1 y/y): 1.6 percent (compared with 2.5 percent in 2019). - Medium-term inflation expectations: around 2 percent. - Fiscal and financial sector - Headline deficit: 3.7 percent of GDP in 2021 (4.3 percent in 2020). - Additional borrowing of about 1.7 percent of GDP used to boost the “Energy and Climate Fund.” - Public debt-to-GDP ratio increased by 1.5 percentage points in 2021. - Government announced additional borrowing of around €100 billion (2.6 percent of GDP) for a Special Defense Fund. - Projected public debt in 2022: 70.4 percent of GDP (broadly unchanged from 2021). - Financial sector metrics (2021): regulatory capital 18.8 percent of risk-weighted assets; liquidity coverage ratio about 160 percent; non-performing loans 1.5 percent of gross loans. - German banks' cross-border claims and liabilities towards Russia: each about 1.5 percent of their capital; Germany's portfolio investment claims on Russia: 0.12 percent of GDP. - Financial conditions tightened in 2022: 10-year Bund yields rose 180 basis points; DAX fell 18 percent. - External position and emissions - Current account surplus: 7.4 percent of GDP in 2021 (7.1 percent in 2020; 7.8 percent average 2017–19). - 2021 current account assessed between 3.1 and 4.1 percent of GDP above norm implied by fundamentals and desirable policies. - Germany reduced GHG emissions significantly over the last decade; per capita emissions remain higher than European peers in residences, electricity generation, and agriculture. - June 2021: targeted reduction in GHG emissions between 1990 and 2030 raised to 65 percent; net zero advanced to 2045. Climate Change Act (2021) sets annual aggregate emissions targets through 2040 and sectoral targets through 2030. ### Outlook and risks - Baseline projections and war impact - GDP growth projected at 1.5 percent in 2022 and 1.9 percent in 2023 (alternative entries: 1.6 percent for 2022 and 2.2 percent for 2023 appear elsewhere in tables). - The war is estimated to have lowered GDP by about 2.5 percent in 2022; about 0.5 percentage points expected to be offset by fiscal measures announced since February. - Overall downward growth revision for 2022 relative to pre-war forecasts: over 2 percentage points (revised from 3.8 percent pre-war to 1.5 percent). - Key channels and assumptions - Energy prices increases since January reduced 2022 growth projections by about 1¼ percentage points. - Sanctions and weaker activity in Russia, Ukraine, and key trading partners lower net exports. - Supply bottlenecks (nickel, palladium, inert gases, wire harnesses) from Russia and Ukraine expected to hinder manufacturing into 2023. - ECB assumed to reduce net asset purchases to zero in 2022Q3 and raise policy rate by at least 1 percentage point by end-2022, followed by another 1 percentage point in 2023. - Fiscal measures since February estimated to add about 1 percent of GDP to the fiscal deficit and lift output by around 0.5 percentage point. - Growth drivers and medium-term context - Production expected to gain steam as bottlenecks ease and consumption strengthens with energy inflation abating and infection rates falling. - Projected medium-term output loss close to 1.5 percent by 2027, of which 1/3 from the pandemic and 2/3 from the war in Ukraine. - Output gap projected at about 1 percent in 2022 and to close in 2025 (2024 in pre-war forecasts). - Risks skew and scenarios - Growth risks skewed downward; inflation risks skewed upward. - Major downside scenarios include persistent/full shut-off of Russia’s gas exports; prolonged war with deglobalization and higher commodity prices; COVID-19 resurgences. - Medium-term structural risks: delays in securing renewable energy or in enhancing digitalization; permanent fragmentation of the world economy. ### Energy security, gas shutoff scenarios, and policy response - Government measures to cushion energy shock (households and firms) - Households: income support for vulnerable households; one-time payment to the employed; cut in the “renewable energy surcharge”; temporary cut in fixed excise taxes for gasoline and diesel (taking effect between June and August). - Recommendation: prefer one-off income support targeted to vulnerable groups; phase out fuel tax cut after three months; develop comprehensive household information system for better targeting. - Firms: liquidity support via KfW loans on favorable terms, extension of loan guarantee programs, loans to energy producers to post margins on hedging contracts. - Staff view: prepare contingent plans and make facilities available for firms if severe downside risks materialize; caution against untargeted energy subsidies. - Government announced temporary and targeted subsidies for firms’ increased energy costs over the summer; staff recommend dropping these subsidies to reduce consumption and accumulate gas reserves. - Energy security and diversification actions - Plans to stop imports of Russian coal by fall 2022 and oil by end-2022; reduce Russian gas imports by half in 2022 and terminate by 2024. - Securing additional LNG supplies; establishing re-gasification facilities; requiring storage tanks to be filled before winter; reactivating coal-fired plants; encouraging voluntary demand reductions. - Legal amendments to allow government control of critical energy infrastructure and order retail price adjustments. - Cooperation with EU and REPowerEU; solidarity agreements signed with Denmark and Austria and a Memorandum of Understanding with other neighbors. - Considered measures: exchange program for gas heaters for heat pumps; financial incentives for voluntary gas-saving behavior (rebates or block tariffs, subject to technical feasibility). - Following mid-June curtailment: second phase of emergency gas plan; accelerated storage filling; reduced gas use for power generation (raising reliance on coal-fired plants); intention to develop auction mechanism to encourage gas savings by firms. - Costs and safeguards in a shutoff scenario - Staff estimated GDP impact of a shutoff: reduce GDP by about 1.5 percent in 2022, 2.7 percent in 2023 and 0.4 percent in 2024, converging to baseline thereafter. - Literature estimates: most studies put output loss at up to 6 percent of yearly GDP, spread over one to two years. - Inflation impact: depending on European wholesale gas price increases, German headline inflation could be 2 percentage points higher on average in 2022 and 2023. - Recommended safeguards: rely on automatic stabilizers first; allow energy companies to pass on cost increases to end-users on fixed-price contracts with targeted support for vulnerable households; scale up firms’ use of government liquidity support; plan for rationing implications if necessary. ### Fiscal policy stance, contingency planning, and extra‑budgetary funds - Fiscal stance and near-term measures - Headline deficit: 3.7 percent of GDP in 2021 (4.3 percent in 2020). - New spending in 2022: 1.2 percent of GDP (to cushion energy prices, increase defense spending, and support refugees). - Draft federal budget for 2023 assumes return to debt brake rule limiting new borrowing to 0.35 percent of GDP, but spending financed by general reserves and special funds (€240 bn or 6.7 percent of GDP) is not bound by the debt rule. - Government plans to reduce general government deficit by 1¾ percentage points of GDP to 2 percent of GDP in 2023 by letting relief measures expire. - Recommendation: remain flexible in 2023; allow automatic stabilizers to operate; continue targeted support; consider activating escape clause of the debt-brake rule in severe downside scenarios. - Use and risks of extra‑budgetary funds - Special funds listed: Special Fund for Defense (€100 billion); Energy and Climate Fund (€60 billion); Refugee Fund from 2015 (€40 billion); other miscellaneous funds (€40 billion). - Recommendation: minimize further use of extrabudgetary funds to preserve fiscal framework credibility. - Recommendation: Ministry of Finance to provide a consolidated report of fiscal risks and quantify expected cost and maximum probable loss of contingent liabilities associated with quasi-fiscal activities by state-owned banks and public corporations. - Fiscal projections and key balances (selected) - Headline balance (Percent of GDP): 2019: 1.5; 2020: -4.3; 2021: -3.7; 2022: -3.0; 2023: -1.5; 2024: -1.0; 2025: -0.8; 2026: -0.6; 2027: -0.5. - Government debt (Percent of GDP): 2019: 58.9; 2020: 68.7; 2021: 70.2; 2022: 70.4; 2023: 67.5; 2024: 64.6; 2025: 62.4; 2026: 60.6; 2027: 59.3. - Drawdown of Energy and Climate Fund, Special Defense Fund, and Reserves (Percent of GDP): 2022: 0.6; 2023: 1.1; 2024: 1.0; 2025: 0.7; 2026: 0.5; 2027: 0.0. ### Public investment, climate measures, and financing - Investment needs and funding vehicles - Several experts estimate additional investment spending of €72 bn (1.3 percent of GDP) per year over a decade needed to achieve emissions targets. - Energy and Climate Fund expected to provide €157 bn (3.8 percent of GDP) during 2022–25. - Government plans to transform KfW into a major co-risk capital provider and leverage public corporations’ balance sheets. - Constraints and recommended actions to scale public investment - Constraints: lack of multi-year public plan; lack of institutional framework for implementation; cumbersome administration; legal hurdles; lack of planning capacity; labor and material shortages; coordination difficulties across government levels. - Recommendations: simplify administration; enhance planning capacity; improve financing and coordination across government levels; integrate structural increases in spending for strategic priorities into the core budget over time. - Carbon pricing and complementary measures - National carbon price cited: (€30/tonne) (national carbon price scheduled to rise stepwise from €30 in 2022 to €55 in 2025; auctions and price collar €55-65 per tonne CO2 planned in 2026). - EU ETS carbon prices: around €80–90/tonne in May. - Policy implications: national carbon price (€30/tonne) considerably lower than EU ETS prices and levels needed to decarbonize buildings and transport. Raising national carbon price toward EU ETS levels would accelerate decarbonization and allocate abatement to lowest marginal cost. - Additional tools: feebates; enhanced support for energy efficiency in buildings; boost venture capital market; reduce administrative red tape to promote green innovation. - Authorities’ initiatives - Working group in the Chancellery to address investment obstacles. - Expansion of Partnerschaft Deutschland consultancy to supplement planning and procurement capacity. - Legislative packages: “Easter package” to accelerate renewable energy expansion; “summer package” to contain decarbonization measures in transport, building, and agriculture. - As part of the €10 billion Future Fund, KfW Capital to implement a growth fund to broaden venture capital investor base. ### Labor market, participation, skills, and digitalization - Demographics and participation challenges - Labor force participation rate in 2021Q4 was 0.5 to 1 percentage point smaller than two years earlier (data-source dependent); much of drop explained by demography—decline in prime-age share and increase in share older than 60. - Federal Employment Agency estimates 400 thousand immigrants needed each year to replace retirees. - Policy recommendations to boost participation and skills - Expand high-quality childcare. - Strengthen incentives to work for secondary earners—reduce high effective marginal tax rate for secondary earners within couples. - Provide training to reskill/upskill workers, especially older workers amid accelerated digitalization. - Resume integration programs paused during the pandemic (language and vocational training). - Reduce labor tax for lower-skilled workers to boost disposable income and labor supply, ideally accompanied by a permanent increase in revenue. - Digitalization status and initiatives - Pandemic accelerated expansion of high-speed internet, but availability outside large cities and towns remains limited. - Firms lag in adopting key ICT tools required to create value with data. - Government actions to expand broadband and 5G: streamline application and approval procedures; standardize alternative laying techniques; establish nationwide gigabit land register. - At least €43 billion available for commercial expansion of fiber optic networks over the next five years (BMWK 2022). - Government considering development of a 6G mobile network. - National Skills Strategy and “Hubs for Tomorrow” program launched; working on national one-stop CET platform. ### Financial sector, housing, and macroprudential policy - Banking sector resilience - Core financial soundness indicators (selected, 2016–21): regulatory capital (Total) 2016: 18.8; 2017: 19.4; 2018: 18.9; 2019: 18.6; 2020: 19.2; 2021: 18.8. - Liquidity—liquid assets to total short-term liabilities: 2016: 146.6; 2017: 151.3; 2018: 151.7; 2019: 161.2; 2020: 169.6; 2021: 170.9. - NPLs to gross loans: 2016: 1.7; 2017: 1.5; 2018: 1.2; 2019: 1.1; 2020: 1.7; 2021: 1.5. - Housing market and credit conditions - Pandemic did not alter decade-long upward trend in real estate prices. - New housing construction increases inadequate to meet demand; unfilled orders continued to accumulate. - Housing loans continue to grow at record levels while CRE loans decelerated marginally from peak of 8.3 percent in early 2019. - Macroprudential and supervisory recommendations - Continue to closely monitor prudential ratios for large SIFIs; establish additional bank-specific buffers for less capitalized banks as needed. - Strengthen data collection at less systemically-important institutions. - Review fragmented deposit insurance system and consolidate mandatory schemes into a single scheme to facilitate greater risk pooling and diversification. - Precautionary use of borrower-based measures recommended given house prices above fundamentals; modify law on borrower-based measures and strengthen guidance on lending standards in interim. - Close data gaps and add income-based measures into macroprudential toolkit. - FSAP and authorities’ actions - FSAP stress tests find overall bank capital generally sufficient; pockets of vulnerability warrant monitoring and additional action. - Authorities raised counter-cyclical capital buffer to 0.75 percent in February 2022 and introduced a sectoral systemic risk buffer of 2 percent on loans secured by domestic residential real estate to apply from February 1, 2023. ### External sector assessment (Annex I highlights) - Overall assessment - External position in 2021 stronger than level implied by medium-term fundamentals and desirable policies. - 2021 current account surplus: 7.4 percent of GDP; staff assesses cyclically adjusted CA at 7.5 percent; staff CA balance assessed at 6.9 percent of GDP after adjustments. - Staff CA norm assessed between 2.8 and 3.8 percent of GDP with midpoint 3.3 percent; 2021 CA gap in range 3.1–4.1 percent of GDP with midpoint 3.6 percent. - Foreign asset and liability position (2021, % GDP) - NIIP: 65; Gross Assets: 302; Debt Assets: 170; Gross Liabilities: 237; Debt Liabilities: 163. - TARGET2 claims on the Eurosystem: increased to €1.3 trillion by end-2021 (from €1.1 trillion end-2020). - REER and adjustment - REER (CPI basis) depreciated by 2 percent in 2021; further depreciated 0.3 percent Dec 2021–Feb 2022. - Staff CA gap implies REER gap of 10.6 percent in 2021 (elasticity 0.34); EBA REER models show undervaluation of 7.8 percent and overvaluation of 8 percent; staff midpoint undervaluation 10.6 percent with +/-1.5 percent range. - Policy responses to rebalance external position - Promote investment and diminish excess saving: expand renewable electricity generation and distribution; broaden EV charging network; widen fiber optic and 5G coverage. - Structural reforms: foster innovation (venture capital market development; reduce administrative steps to start a business). - Consider additional tax relief for lower-income households to reduce excess saving. ### Stress tests, debt dynamics, and risks - Baseline nominal gross public debt (selected series, percent of GDP) - 2020: 71.0; 2021: 68.7; 2022: 70.2; 2023: 70.4; 2024: 67.5; 2025: 64.6; 2026: 62.4; 2027: 60.6 (figure heading shows 59.3 elsewhere). - Public gross financing needs (percent of GDP) - 2020: 13.8; 2021: 8.3; 2022: 18.0; 2023: 19.3; 2024: 13.9; 2025: 12.2; 2026: 9.7; 2027: 9.7 (and 9.3 in another line). - Stress scenarios and outcomes - Contingent fiscal shock: cumulative 3 percent of GDP (~€120 billion) additional fiscal cost from public guarantees called over 2023–24; assumes contracted guarantees double from end-2021 and one-third called; higher funding cost of 25 bps per year for 2023–27; outcome: debt rises to 80 percent of GDP in 2023, then declines but remains above pre-shock level. - Combined macro-fiscal shock: impact on debt dynamics slightly worse than growth shock alone. - Real exchange rate shock: not materially relevant given euro-denominated sovereign debt. - Contributions to change in gross public debt (selected) - Change in gross public sector debt (annual): 2020: -2.6; 2021: 9.8; 2022: 1.4; 2023: 0.2; 2024: -2.9; 2025: -2.9; 2026: -2.2; 2027: -1.8; cumulative (2020–2027): -10.9. - Primary deficit (percent of GDP): 2020: -1.9; 2021: 3.9; 2022: 3.2; 2023: 2.6; 2024: 1.1; 2025: 0.6; 2026: 0.4; 2027: 0.2. - Benchmarks and heat map - Debt burden benchmark: 85 percent of GDP. - Gross financing needs benchmark: 20 percent of GDP. - Stress tests compare baseline and adverse scenarios against these benchmarks. ### Authorities’ views and response - Broad alignment with staff on outlook and risks; expect recovery to regain momentum by mid-2022 as supply bottlenecks and energy prices ease. - Fiscal consolidation in 2023 driven by automatic phasing out of temporary measures; expected limited impact on growth. - Core inflation expected to remain higher than 2 percent in 2023 due to lagged transmission from international energy and raw material prices. - Labor market viewed as resilient; expect wage growth to pick up in second half of 2022 when major negotiations start, but real wage gains unlikely given downside risks. - Authorities justify temporary support to firms and defend short-term less-targeted measures (fuel tax cuts, lump-sum transfers, abolition of renewable surcharge) as quick-deploying and progressive in practice while developing systems for more targeted future relief. - Authorities emphasize priority to cushion spillovers from the war, limit scarring on potential growth, ensure energy security, and maintain high investment levels for green and digital transition. *Source: IMF staff report excerpt — “Context and Recent Developments”, “Outlook and Risks”, and related chapters and annexes from the provided content unit.* ### 1. Digitalization of the German Economy—Status Quo __________________________________________ 22 ### 1. Digitalization of the German Economy—Status Quo ### Context and Recent Developments - Activity and supply: - By end-2021 and early 2022, easing semiconductor shortages allowed auto production to pick up; output remained 1.1 percent below its pre-pandemic level in the last quarter of 2021. - Weekly activity and mobility indicators show recovery trends through early 2022 (Text Figure 1). - Policy changes and political context: - In December 2021, a new coalition government (Social Democrats, Greens, Free Democrats) took office with an agenda that seeks to enhance green investments and digitalization, introduce a higher minimum wage, and promote skilled immigration. - Following Russia’s invasion of Ukraine, Germany suspended approval of Nord Stream 2, announced intent to wean off energy imports from Russia by 2024, and to increase defense spending to exceed NATO’s benchmark. - Germany has imposed sanctions on Russia, including on Russia’s central bank and selected banks, and restricted imports of Russian coal and oil. - Energy dependence and shortfalls: - At end-April 2022, 35 percent of Germany’s natural gas was pipelined from Russia, down from 55 percent in 2021. - In mid-June, Russian supplies through Nord Stream 1 and the Czech Republic were cut by about two-thirds (a decline of about a quarter to a third of Germany’s natural gas imports). - Natural gas accounts for 9 percent of economy-wide energy consumption. - Authorities and staff expect that in the event of a complete stoppage, imports from Russia cannot be fully replaced until 2024. - Fiscal measures and public debt: - Headline deficit shrank to 3.7 percent of GDP in 2021 (from 4.3 percent in 2020). - Additional borrowing of about 1.7 percent of GDP was used to boost the “Energy and Climate Fund.” - Public debt-to-GDP ratio increased by a modest 1.5 percentage points in 2021. - A broadly neutral fiscal stance is expected in 2022, with 1.2 percent of GDP in new spending to cushion higher energy prices, increase defense spending, and support refugees, together with higher climate-related spending, broadly offsetting the phase-out of most COVID-19 relief measures. - Government announced additional borrowing of around €100 billion (2.6 percent of GDP) to be injected into a newly created Special Defense Fund. - Public debt in 2022 is projected at 70.4 percent of GDP, broadly unchanged from 2021. - Financial sector resilience: - Regulatory capital of 18.8 percent of risk-weighted assets in 2021. - Liquidity coverage ratio of about 160 percent in 2021. - Non-performing loans of 1.5 percent of gross loans in 2021. - German banks' cross-border claims and liabilities towards Russia are each about 1.5 percent of their capital; Germany's portfolio investment claims on Russia are 0.12 percent of GDP. - Financial conditions tightened in 2022 with 10-year Bund yields rising 180 basis points and DAX stock prices falling 18 percent. - War-related risks: potential rise in non-performing loans, property price declines, higher operating costs and insurance claims, and increased malicious cyber activity (recent attacks affected German wind turbines and oil pipelines). - Labor market: - As of April 2022, unemployment rate was 3.0 percent (ILO/European definition), below pre-pandemic lows. - Ratio of vacancies to the unemployed reached 60 percent—10 percentage points higher than in 2019. - Number of workers on Kurzarbeit in March 2022 was about 1¼ percent of the workforce—four times larger than the maximum level in 2019. - Inflation: - Harmonized consumer price (HICP) inflation reached 8.7 percent in May 2022. - Energy goods contributed about 3/5 of the increase in HICP inflation this year relative to 2017–19; non-energy goods accounted for 1/4 of the increase; services accounted for the rest. - Wage developments: wages per hour (with and without one-off payments) increased about 6.5 percent between 2020Q1 and 2022Q1; GDP deflator rose by 5.8 percent and CPI rose by 7.7 percent over the same period. - Negotiated wages (excluding one-off payments) rose by 1.6 percent in 2022Q1 relative to same quarter last year, compared with 2.5 percent growth in 2019. - Medium-term inflation expectations remain around 2 percent (Text Figure 3). - External position and emissions: - Current account surplus was 7.4 percent of GDP in 2021 (7.1 percent in 2020; 7.8 percent average over 2017–19). - The 2021 current account is assessed to be between 3.1 and 4.1 percent of GDP above the norm implied by fundamentals and desirable policies (Annex I). - Germany reduced GHG emissions significantly over the last decade; per capita carbon emissions remain higher than European peers because of relatively higher emissions by residences, electricity generation, and agriculture. - In June 2021, the government raised targeted reduction in GHG emissions between 1990 and 2030 to 65 percent and advanced net zero emissions target to 2045. The Climate Change Act (2021) sets annual aggregate emissions targets through 2040 and sectoral targets through 2030. ### Outlook and Risks - Baseline macro projections and impact of the war: - GDP growth projected at 1.5 percent in 2022 and 1.9 percent in 2023. - The war is estimated to have lowered GDP by about 2.5 percent in 2022; about 0.5 percentage points of this are expected to be offset by fiscal measures announced since February. - The overall downward growth revision for 2022 relative to pre-war forecasts is over 2 percentage points (revised from 3.8 percent expected before the war to 1.5 percent now). - Key channels and assumptions driving projections: - Energy prices: increases in international energy prices since January have alone reduced projections for growth in 2022 by about 1¼ percentage points. - Sanctions and reduced trade: sanctions introduced against Russia and Belarus are assumed to remain unchanged (Annex II); weaker activity in Russia, Ukraine, and Germany’s key trading partners is expected to lower net exports and reduce growth. - Supply bottlenecks: disruption of supplies (nickel, palladium, inert gases, wire harnesses) from Russia and Ukraine is expected to hinder manufacturing activity and extend supply bottlenecks into 2023. - Monetary and financial conditions: ECB is assumed to reduce net asset purchases to zero in 2022Q3 and raise the policy interest rate by at least 1 percentage point by end-2022, followed by another 1 percentage point increase in 2023; financial market indicators are expected to tighten further to a moderate degree, leaving conditions still accommodative. - Sentiment: uncertainty, impaired confidence, and slightly tighter financial conditions are assumed to depress consumption and investment. - Fiscal support: measures introduced since February to alleviate higher energy prices and increase defense spending are estimated to add about 1 percent of GDP to the fiscal deficit and to lift output by around 0.5 percentage point. - Growth drivers and projections context: - Economic activity in 2022Q1 was stronger than expected pre-war, contributing to part of the base effects in the 2022 outlook. - With sanctions expected to persist and only a partial reversal projected for energy prices and supply disruptions, growth is expected to firm up modestly in 2023. ### Select Quantitative Indicators and Statistics (as reported) - Output and activity: - Output was 1.1 percent below pre-pandemic level in 2021Q4. - Energy and trade: - Russia pipeline share of natural gas: 55 percent in 2021; 35 percent at end-April 2022. - Natural gas share of economy-wide energy consumption: 9 percent. - Fiscal: - Headline deficit: 3.7 percent of GDP in 2021 (4.3 percent in 2020). - Additional borrowing for Energy and Climate Fund: about 1.7 percent of GDP. - Public debt-to-GDP ratio increase in 2021: 1.5 percentage points. - New spending in 2022: 1.2 percent of GDP. - Special Defense Fund borrowing: around €100 billion (2.6 percent of GDP). - Projected public debt in 2022: 70.4 percent of GDP. - Financial sector metrics (2021): - Regulatory capital: 18.8 percent of risk-weighted assets. - Liquidity coverage ratio: about 160 percent. - Non-performing loans: 1.5 percent of gross loans. - Labor market: - Unemployment rate (April 2022): 3.0 percent. - Vacancies-to-unemployed ratio: 60 percent. - Kurzarbeit in March 2022: about 1¼ percent of workforce. - Inflation and wages: - HICP inflation (May 2022): 8.7 percent. - Contribution to HICP increase relative to 2017–19: energy goods ~3/5; non-energy goods ~1/4; services remainder. - Wages per hour increase (2020Q1–2022Q1): about 6.5 percent. - GDP deflator increase (same period): 5.8 percent. - CPI increase (same period): 7.7 percent. - Negotiated wages growth (2022Q1 y/y): 1.6 percent (compared with 2.5 percent in 2019). - External sector: - Current account surplus: 7.4 percent of GDP in 2021 (7.1 percent in 2020; 7.8 percent average 2017–19). - Assessment: 2021 current account between 3.1 and 4.1 percent of GDP above norm implied by fundamentals and desirable policies. *Source: IMF staff report excerpt — “Context and Recent Developments” and “Outlook and Risks” sections from the chapter.* ### 1.9 percent in 2023. Production is expected to gain steam on the back of easing bottlenecks to ### GERMANY ### Outlook and Growth Projections - Real GDP: production expected to gain steam as bottlenecks ease and consumption strengthens with energy inflation abating and infection rates falling. - Projected medium-term output loss: close to 1.5 percent by 2027, of which 1/3 is from the pandemic and 2/3 from the war in Ukraine. - Output gap: projected at about 1 percent in 2022 and to close in 2025 (2024 in pre-war forecasts). - Celasun et al. (2022) estimate that post-pandemic supply constraints reduced 2021 real GDP growth by 2.5 percentage points. ### Inflation, Wages, and Prices - Inflation projections: - About 7½ percent in 2022. - About 4½ percent in 2023. - Core inflation: about 4 percent in 2022 and 2023 (end-year projections are 4.2 and 3.7 percent, respectively). - Headline inflation projected to peak in 2022Q2. - Inflation expected to moderate in 2023 as energy prices and supply disruptions subside, and to fall back to the ECB’s target of 2 percent in the medium run. - Wage developments: - Minimum wage increase in October: from €10.45/hour to €12/hour (15 percent increase). - Expected aggregate wage impact: push up aggregate wages by 0.6–0.8 percent in 2023, mostly due to direct impacts. - Risk noted: possibility that wage growth significantly outstrips inflation is a risk; but tendency of trade unions to negotiate using the ECB’s inflation target and downside risks to activity limit wage-price spiral risks. ### External Sector and Current Account - Prior to the war: value added exports to Russia were 0.7 percent of total exports. - Current account: - Expected to narrow in 2022 by 1.3 percentage points, to 6.1 percent of GDP, given the surge in energy prices and higher volumes of natural gas imports to raise storage levels to 90 percent by end-November. - Projected to rebound in 2023 and 2024 as energy prices and supply bottlenecks ease, before declining over the medium term on reduced competitiveness and revived domestic demand. ### Key Risks and Uncertainty - Risks skewed: - Growth risks skewed downward. - Inflation risks skewed upward. - Major downside scenarios: - Persistent and full shut-off of Russia’s gas exports to Germany and Europe more broadly, potentially forcing rationing to industry and leading to sizable losses in output and employment. - Prolonged war with escalation of sanctions causing deglobalization, higher commodity prices, extended supply disruptions, and persistently lower external demand. - COVID-19 resurgences that could weaken consumer confidence and spending and intensify supply bottlenecks. - Upside external risk to inflation if global commodity prices shoot up further or if gas shortages and other global supply bottlenecks intensify. - Medium-term structural risks: - Delays in securing renewable energy supply or in enhancing digitalization could weigh on potential growth. - More permanent fragmentation of the world economy would entail high adjustment costs and efficiency losses. ### Policy Response: Cushioning Energy Price Shock and Enhancing Energy Security - Government measures (timely and generally well-designed): - Households: - Income support for vulnerable households; one-time payment to the employed. - Cut in the “renewable energy surcharge”. - Temporary cut in fixed excise taxes for gasoline and diesel (taking effect between June and August). - Recommendation: prefer one-off income support to targeted vulnerable groups while allowing high energy import prices to pass through; phase out fuel tax cut after three months as planned; rely on income support for lower income groups if additional relief needed. - Development of a comprehensive information system on households to enable broader targeted relief in future. - Firms: - Liquidity support plan including loans through KfW on favorable terms, extension of loan guarantee programs, and loans to energy producers to post margins on hedging contracts. - Staff view: prepare contingent plans and make facilities available for firms if severe downside risks materialize; caution against untargeted energy subsidies. - Government announced temporary and targeted subsidies for firms’ increased energy costs over the summer; staff recommend these energy subsidies should be dropped given need to reduce consumption and accumulate gas reserves. - Energy security and diversification actions: - Plans to stop imports of Russian coal by fall of 2022 and oil by end-2022; reduce imports of Russian gas by half this year and terminate them by 2024. - Securing additional LNG supplies, establishing re-gasification facilities, requiring operators to fill storage tanks before winter, reactivating previously shuttered coal-fired power stations, encouraging voluntary demand reductions. - Legal amendments to allow government control of critical energy infrastructure and order retail price adjustments. - Cooperation with other EU countries and REPowerEU; signed solidarity agreements with Denmark and Austria and a Memorandum of Understanding with other neighboring countries. - Considered measures: exchange program for gas heaters for heat pumps; financial incentives to encourage voluntary gas-saving behavior (rebates or block tariffs, subject to technical feasibility). - Following mid-June curtailment of gas supplies: declared second phase of emergency gas plan, accelerated storage filling, reduced gas use for power generation (raising reliance on coal-fired plants), intention to develop auction mechanism to encourage gas savings by firms. ### Costs of a Russian Gas Shutoff and Recommended Safeguards - Estimated GDP impact (staff assessment of production constraints, downstream amplification, and elevated uncertainty): - Reduce GDP by about 1.5 percent in 2022, 2.7 percent in 2023 and 0.4 percent in 2024, with output converging to baseline thereafter. - Literature estimates: most studies put output loss at up to 6 percent of yearly GDP, spread over one to two years. - Inflation impact: depending on European wholesale gas price increases, German headline inflation could be 2 percentage points higher on average in 2022 and 2023. - Policy recommendations in a shutoff scenario: - Rely first on automatic stabilizers to protect vulnerable households and workers. - Allow energy companies to pass on cost increases to end-users on otherwise fixed-price contracts to ensure solvency, accompanied by further targeted support for vulnerable households. - Scale up firms’ demand for government liquidity support facilities and consider further discretionary financial support to firms if necessary. - If rationing becomes necessary, consider macroeconomic implications alongside technical, legal, and social dimensions; continue planning distribution of gas in a potential emergency. ### Authorities’ Views (summary) - Broad alignment with staff on outlook and risks: expect recovery to regain momentum by mid-2022 as supply bottlenecks and energy prices ease. - Fiscal consolidation in 2023 driven by automatic phasing out of temporary measures; expected limited impact on growth. - Expect core inflation to remain higher than 2 percent in 2023 due to lagged transmission from international energy and raw material prices. - View labor market as resilient and expect wage growth to pick up significantly in the second half of 2022 when major wage negotiations start, but noted real wage gains unlikely given downside risks. - Concern over potential wage-price spiral if inflation surprises feed into persistently high inflation expectations. - Justify temporary support to firms to cushion immediate impacts; defend short-term, less-targeted measures (fuel tax cuts, lump-sum transfers, abolition of renewable surcharge) as quick-deploying and progressive in practice, while developing information systems to enable more targeted future relief. *Source: International Monetary Fund staff report.* ### 21. The government is putting significant efforts into enhancing energy security, ### 21. The government is putting significant efforts into enhancing energy security, ### Energy security and gas shutoff scenario - The government is analyzing the economic impact of a potential Russian gas shutoff and developing contingency plans. - Authorities agreed the economic impact of a shut-off of Russian gas would be sizable but emphasized that difficulties in substituting gas and energy-intensive intermediate inputs could lead to even larger impacts than estimated by staff. - To build resilience against a gas shutoff scenario: - The government is in discussions with neighboring countries about concluding further solidarity agreements. - Financial incentives could be offered to encourage gas saving behavior, which would allow gas inventories to build faster ahead of next winter. - The energy regulator is actively working on such plans, including by surveying and interviewing firms on how they use gas. - Implementation constraints noted by the government: - Lack of smart meters for households to monitor consumption in real time. - Technical constraints on the ability to vary supply to different users. - The authorities agreed that additional fiscal support would be needed in the event of a Russian gas shutoff. - The government aims to spare households from rationing and intends to use market mechanisms as much as possible to distribute gas in a way that minimizes the economic effects of rationing. ### Mitigating Climate Change — investment needs and financing - A green investment push is a key priority to achieve Germany’s climate and energy-security goals and boost its potential growth, which requires an improved public investment management system. - Several experts estimate that additional investment spending of €72 bn (1.3 percent of GDP) per year over a decade is needed to achieve Germany’s emissions targets. - The Energy and Climate Fund is the federal government’s key vehicle for financing green projects and is currently expected to provide €157 bn (3.8 percent of GDP) during the period 2022–25. - The government plans to: - Transform the state-owned development bank KfW to a major co-risk capital provider for the private sector. - Leverage the balance sheet of public corporations, such as the state-owned railway company. - Constraints to scaling up public investment: - Lack of a multi-year public plan to set out a clear national vision for priority public investments. - Lack of an institutional framework to ensure implementation. - Recommended government actions to boost public investment in energy security and decarbonization, digitization, and transportation infrastructure: - Simplify administration. - Enhance planning capacity. - Improve financing and coordination across different levels of governments. - Note: This investment would also help reduce Germany’s large external imbalances. ### Mitigating Climate Change — carbon pricing and additional measures - The introduction of a national Emission Trading System (ETS) in 2021 for the transportation and building sectors is an important step, ahead of the introduction of EU ETS2 under the “Fit for 55” initiative. - Current carbon pricing and comparisons: - National carbon price: (€30/tonne). - EU ETS carbon prices: (fluctuating around €80–90/tonne in May). - Policy implications: - National carbon price (€30/tonne) is considerably lower than EU ETS carbon prices and also lower than the levels needed to decarbonize these sectors. - Measures to raise the carbon prices for buildings and transportation to equalize them with the levels of the EU ETS carbon prices would: - Help decarbonize these sectors faster. - Help ensure that abatement occurs where marginal costs are lowest. - If international fossil fuel prices decline (as implied by futures markets), it would become possible to raise the level of national carbon pricing without increasing retail energy prices relative to previous levels. - Additional tools: introducing feebates and enhancing support for improving the energy efficiency of buildings. - Other supportive measures: - Further enhancing the venture capital market and reducing administrative red tape can promote green innovation and private investment. - Germany is boosting international cooperation on climate (e.g., Chancellor Scholz’s proposal of an “international climate club” to seek agreement with large emitters on minimum standards for emissions-measurement and carbon pricing). ### Authorities’ views on investment and climate policy - Authorities agreed that removing obstacles to investment is key to a green investment push and emphasized commitment to addressing the issue. - Government-identified obstacles to faster ramp-up of investment: - Cumbersome administrative procedures. - Legal hurdles related to environmental regulations. - Lack of planning capacity. - Labor and material shortages. - Difficulties in coordination across different levels of government. - Government actions and institutions: - A working group has been set up in the Chancellery to address or reduce these obstacles. - Expansion of the publicly-owned consultancy firm Partnerschaft Deutschland to supplement planning and procurement capacity at federal, state, and local levels. - Legislative packages: - The “Easter package” contains an omnibus of legislative changes to accelerate expansion of renewable energy. - The “summer package” will contain another bundle of decarbonization measures in transport, building, and agriculture. - Finance ministry position: - Carbon pricing is viewed as the most efficient and effective instrument to reduce emissions. - Sees merit in having a single carbon price in the EU. - Emphasized the importance of predictability of carbon pricing and is reluctant to alter the already-planned path of national carbon pricing (for transportation and buildings) through 2026. - Venture capital and start-up support: - As part of the 10 billion Euro Future Fund, the government has commissioned KfW Capital, a 100 percent subsidiary of KfW Group, to implement a growth fund as a market-conforming, non-aid venture capital fund of funds, aiming to broaden the investor base in the venture capital market. ### Labor market — participation challenges and policy recommendations - Demographics and participation: - Germany’s labor force will continue to shrink amidst population aging unless labor force participation rises meaningfully or immigration rebounds. - In the last quarter of 2021, the labor force participation rate was 0.5 to 1 percentage point smaller than two years ago (depending on the data source used). - Much of the drop can be explained by demography: decline in the share of the population in the prime-age group and increase in the share older than 60 years. - Policy recommendations to boost participation: - Expand high-quality childcare. - Strengthen incentives to work for secondary earners — e.g., reduce the high effective marginal tax rate for secondary earners within couples. - Provide training to reskill/upskill workers, especially for older workers amid accelerated digitalization. - Immigration: - The Federal Employment Agency estimates that 400 thousand immigrants are needed each year to replace those retiring from the workforce. - The new government’s plan to ease immigration rules to address shortage of skilled workers is welcome. - Resume integration programs paused during the pandemic (e.g., language training and vocational training) to support job-seeking refugees, including Ukrainians. - Reduce the labor tax for lower-skilled workers to boost disposable income and stimulate labor supply, ideally accompanied by a permanent increase in revenue. ### Authorities’ views on labor policy and reforms - Authorities agreed that tax and structural reforms should provide incentives for labor force participation. - Government measures and plans: - Expand needs-based and high-quality childcare facilities; new measures include an investment program “Childcare Financing” and planned programs such as the Act on Providing All-Day Care and Education for Primary School Children. - To address high effective marginal tax rates for secondary earners, the government plans to promote the use of the tax class IV/IV with improved factor procedure for married couples. - Planned increase in the social security contribution threshold for mini and midi jobs in October would partly reduce the labor tax wedge for low-income earners. - Rather than increasing statutory retirement age, emphasize prolonging working years within the current statutory retirement age via life-long learning and disincentivizing early retirement. - Commitment to further enhancing integration programs for migrants. ### Skills, human capital, and digitalization - Skills challenges and policy actions: - Long-standing skill mismatches and the green transition call for policy actions to boost training and reskilling. - ICT specialists were scarce before the pandemic; the pandemic accelerated digitalization and skills mismatches. - Policy recommendations: - Provide lifelong learning opportunities in collaboration with employers, leveraging digital learning formats. - Curricula reforms to include computer programming and upgrades in ICT equipment in schools. - Targeted training programs to facilitate reallocation of workers from internal combustion engine production to EV-related and greener occupations. - Stepped-up efforts to make up learning deficits caused by the pandemic. - Authorities’ initiatives: - The National Skills Strategy aims to reform, systematize, and strengthen Continuing Education and Training (CET) policies. - Government launched the “Hubs for Tomorrow” program to support companies and employees in shaping digital change. - Working on a national user-centered one-stop shop CET platform. - Digitalization status (Box highlights): - Pandemic accelerated expansion of high-speed internet but availability outside large cities and towns remains relatively limited. - Firms have lagged in adopting key ICT tools required to create value with data. - To expand broadband and 5G, government action includes streamlining digital application and approval procedures, standardizing alternative laying techniques, and establishing a nationwide gigabit land register. - At least €43 billion are available for the commercial expansion of fiber optic networks in Germany over the next five years (BMWK 2022). - The government is also considering development of a 6G mobile network. ### Fiscal policy — stance and contingencies - The government has been appropriately vigilant and flexible in setting fiscal policy in 2022, introducing generally well-designed and time-bound support and measures to avert adverse macro-financial feedback loops in a potential gas cut-off scenario. - The broadly neutral overall fiscal stance is judged appropriate for 2022, balancing support through relief measures against inflationary pressures. - Near-term fiscal plans may need revision to accommodate other spending needs stemming from the fallout from the war, including assistance for refugees. - The government has already stepped-up humanitarian support for refugees with a budget allocation of €4 billion (0.1 percent of GDP), and more may be needed. *Source: Excerpt from IMF staff report content provided in the supplied content unit.* ### 31. Fiscal policy should remain flexible in 2023. The draft federal budget for 2023 assumes a ### Fiscal policy should remain flexible in 2023 ### Fiscal stance and 2023 budget assumptions - The draft federal budget for 2023 assumes a return to complying with the debt brake rule that limits new borrowing to 0.35 percent of GDP. - The government can nevertheless carry a deficit exceeding that amount in the coming years because spending financed by general reserves and special funds (totaling €240 bn or 6.7 percent of GDP), including the Energy and Climate Fund and Special Defense Fund, is not bound by the debt rule. - The government’s plan is to reduce the general government deficit by 1¾ percentage of GDP to 2 percent of GDP in 2023 by letting relief measures introduced for the pandemic and high energy prices expire at the end of the year. - This adjustment is deemed manageable under the baseline economic forecast where international energy prices would soften, and the take-up of pandemic programs would drop autonomously as private demand strengthens. - If downside risks materialize (e.g., higher commodity prices and weaker growth), further relief measures would likely be needed, including: - extending relief to vulnerable households for higher energy costs; - maintaining the expanded Kurzarbeit program to avert layoffs; - prolonging the pandemic-era grant program for firms. - Given high inflation, continuing with targeted relief measures rather than broad-based fiscal support is emphasized. - In a severe downside scenario, postponing the reactivation of the debt-brake rule by a year might be called for to ensure sufficiently supportive fiscal policy. ### Key fiscal balances (Text Table 2 excerpts) - Headline balance (Percent of GDP): 2019: 1.5; 2020: -4.3; 2021: -3.7; 2022: -3.0; 2023: -1.5; 2024: -1.0; 2025: -0.8; 2026: -0.6; 2027: -0.5 - Cyclically-adjusted balance (Percent of GDP): 2019: 1.2; 2020: -2.2; 2021: -2.7; 2022: -2.3; 2023: -1.0; 2024: -0.8; 2025: -0.8; 2026: -0.6; 2027: -0.5 - Drawdown of the Energy and Climate Fund, Special Defense Fund, and Reserves (Percent of GDP): 2019: 0.0; 2020: 0.0; 2021: 0.0; 2022: 0.6; 2023: 1.1; 2024: 1.0; 2025: 0.7; 2026: 0.5; 2027: 0.0 - Balance that is compatible with the debt brake (Percent of GDP): 2019: 1.2; 2020: -2.2; 2021: -2.7; 2022: -1.7; 2023: 0.0; 2024: 0.2; 2025: -0.1; 2026: -0.1; 2027: -0.5 - Memorandum: Debt brake - 0.35 ... ... ... - 0.35 - 0.35 - 0.35 - 0.35 - 0.35 - Government debt (Percent of GDP): 2019: 58.9; 2020: 68.7; 2021: 70.2; 2022: 70.4; 2023: 67.5; 2024: 64.6; 2025: 62.4; 2026: 60.6; 2027: 59.3 ### Use and risks of extra-budgetary funds - The government is increasingly leveraging extra-budgetary vehicles to boost investments in decarbonization and defense spending while maintaining a political commitment to return to the debt-brake rule. - All associated spending is reported above the line in the general government accounts under the EU Stability and Growth Pact standards. - Extensive use of extra-budgetary funds to bypass the debt-brake rule may: - undermine the credibility of the fiscal framework, and - erode support for the reforms and transformation the funds are meant to facilitate. - Recommendation: Further use of extrabudgetary funds should be minimized. - Recommendation: To enhance fiscal transparency and risk management, the Ministry of Finance could provide a consolidated report of fiscal risks covering contingent liabilities associated with quasi-fiscal activities undertaken by state-owned banks (e.g., KfW) and public corporations, based on analysis by line ministries on the public corporations under their respective span of control. - The expected cost and maximum probable loss of contingent liabilities should be quantified in this report. - Special funds include: (i) the Special Fund for Defense (€100 billion); (ii) the Energy and Climate Fund (€60 billion); (iii) the Refugee Fund from 2015 (€40 billion); and (iv) other miscellaneous funds (€40 billion). ### Fiscal space, investment, and medium-term trajectory - Higher spending compared to the pre-pandemic era on childcare, decarbonization, defense, energy security, innovation, and digitalization—and some tax reduction (e.g., partial abolition of the solidarity surcharge)—have narrowed room for maneuver within the constitutional debt brake rule (which limits the federal deficit to 0.35 percent of GDP in the medium term). - Despite heightened spending, Germany’s public debt is projected to resume a downward trajectory from 2023 onwards, declining to its pre-pandemic level of about 60 percent of GDP by 2027 (Annex VIII). - The government could review Germany’s overall fiscal framework—including the level and composition of expenditures and revenues, and the design of the debt-brake rule—to ensure fiscal policy can continue to respond to structural needs. ### Authorities’ views on fiscal framework and risks - The government generally shared staff’s assessment that fiscal policy should cushion effects of the war and pandemic while supporting green and digital transformation. - The government concurred that the fiscal stance in 2022 would be broadly neutral and that well-targeted support should add little to inflation pressures. - The government noted that once resources in the defense fund are used up and climate and defense spending are fully brought under the coverage of the debt limit, fiscal space under the national debt-brake rule would be largely exhausted. - The government does not plan to modify the debt brake rule by amending the constitution, but suggested technical modifications—such as the method of adjusting fiscal variables for the business cycle and symmetric use of the control account—could create additional fiscal space. - Line ministries are primarily in charge of managing fiscal risk related to public corporations, while the finance ministry reports public corporations’ financial conditions collectively on an annual basis. ### Staff appraisal and policy recommendations - The war in Ukraine has clouded the outlook; after a likely sharp slowdown in 2022, a tepid recovery is expected for 2023. Inflation is expected to stay elevated before moderating in 2023, though remaining well above target. - In this uncertain environment, fiscal policy should remain flexible. Specific recommendations: - Allow automatic stabilizers to operate fully if downside risks materialize. - Continue to flexibly provide targeted support. - Consider activating the escape clause of the debt-brake rule for another year in severe downside scenarios. - Immediate priority: cushion spillovers from the war and limit scarring effects on potential growth. - Staff view: the government’s package to support households and firms against high energy prices is generally well-designed, especially one-off income support payments to vulnerable individuals. - Recommendation: phase out cuts to fuel taxes as planned because they are distortive and costly; better targeting should be possible once household income and energy use information is integrated. - Boosting energy security and resilience: - Welcome measures: diversifying gas sources; financing facilities to re-gasify LNG; requirements to fill gas storage facilities; additional emergency powers. - Recommendation: increase transparency about infrastructure bottlenecks in gas shortfall scenarios to encourage investment and help firms develop crisis plans. - Recommendation: cooperate with other EU countries, including in the context of the REPowerEU, to secure additional gas supplies and ensure infrastructures and legal frameworks enable sharing gas in shortages. - Recommendation: keep subsidies for firms’ energy expenditures temporary as planned and consider meaningful financial incentives to encourage voluntary gas-saving behavior. - In a full gas shutoff scenario: - Automatic stabilizers would be the first line of defense. - Ensure solvency of energy companies to prevent financial constraints from exacerbating shortages. - The plan to allow energy companies to pass on cost increases to end-users should be complemented with further targeted income support for vulnerable households. - Authorities’ ongoing assessments of economic and financial implications will help plan additional support for firms; if rationing becomes necessary, macroeconomic implications should be weighed alongside technical, legal, and social dimensions. *Source: IMF staff assessment and staff appraisal in the Germany report.* ### 47. Removing obstacles to public investment is essential for a green investment push, ### 47. Removing obstacles to public investment is essential for a green investment push ### Public investment and green transition - Germany’s ambitious emissions goals are laudable; staff welcomes the Easter package of legislative initiatives to expand renewable energy. - Much of the additional green investment must be undertaken by the private sector, but scaling up public green investment is also vital to tackle network externalities and crowd in private investment. - The government should urgently: - simplify administration; - enhance planning capacity, financing, and coordination across different levels of governments. - Scaling public green investment would help reduce Germany’s large external imbalances, since the external position is assessed as stronger than the level implied by medium-term fundamentals and desirable policies. - The current upward trend in public investment was hampered by supply bottlenecks in 2021. ### Labor force participation, skills, and structural transformation - Increasing labor force participation is critical to counter population aging, and boosting skills would facilitate structural transformation. - Policy recommendations: - expand high-quality childcare; - strengthen incentives to work for secondary earners to promote female labor-force participation and working hours; - complement the government’s plan to ease immigration rules with continued efforts to integrate immigrants; - reduce the labor tax for lower-skilled workers to boost disposable income and labor supply; - enhance training and up- or re-skilling to address skill mismatches, facilitate efforts to green the economy and jobs, and adapt to digitalization. ### Fiscal policy stance and budgetary framework - Germany should continue to use its fiscal space to invest in growth potential and resilience. - Staff welcomes spending on energy security and the transition to net zero emissions, and encourages further investments in: - life-long learning; - digitalization; - innovation; - labor supply; and - social protection. - Concern: extensive use of extra-budgetary funds outside the core federal budget—to create borrowing allowances for unforeseen needs associated with the pandemic and the war—may undermine the credibility of Germany’s fiscal framework. - Recommendation: structural increases in spending for strategic priorities should be integrated into the core budget over time. ### Banking sector resilience and supervisory gaps - The German banking sector was assessed in the FSAP as generally resilient to shocks, but pockets of vulnerability warrant continued close monitoring and some additional action. - Stress tests in the context of the 2022 FSAP find overall bank capital is generally sufficient. - To address vulnerabilities, the FSAP suggests the authorities should: - continue to closely monitor prudential ratios for large, systemically important commercial banks; - establish additional bank-specific buffers for less capitalized banks as needed; - strengthen data collection at less systemically-important institutions; - review the design of the fragmented deposit insurance system and consolidate existing mandatory schemes into a single scheme to facilitate greater risk pooling and diversification. ### Macroprudential policy and housing market - Authorities have appropriately tightened macroprudential policy in the face of elevated and rising house prices; staff welcomes: - the counter-cyclical capital buffer increase; and - the introduction of a sectoral systemic risk buffer on loans secured by domestic residential real estate. - With house prices estimated to be above fundamentals, staff recommends precautionary use of borrower-based measures. - Authorities should address obstacles to activating borrower-based measures by modifying the law on borrower-based measures, and in the interim strengthen guidance on lending standards. - Authorities are encouraged to accelerate closing data gaps and add income-based measures into the macroprudential toolkit. ### Key statistics and projections mentioned - Net International Investment Position continued to rise, approaching 70 percent of GDP by end-2021. - The next Article IV consultation is recommended to take place on the regular 12-month cycle. *Source: IMF staff report chapter: "47. Removing obstacles to public investment is essential for a green investment push."* ### 7.4 percent of GDP. ### 7.4 percent of GDP. ### Saving‑Investment Balances - Saving‑Investment Balances (Percent of GDP) series shown for 2000–2021 by sector: Households, Non‑financial corporations, Government, Financial sector, Total net lending. (Chart present in source.) ### Credit Conditions and Asset Prices - Key observations from chart notes: - After tightening at the onset of the pandemic, a slight majority of banks eased lending standards in 2021. - Credit growth picked up in 2021 and 2022 as the economic recovery proceeded and as some mortgagors anticipated rising interest rates. - Rising government bond yields passed through to lending rates, especially for mortgages. - Following a surge in precautionary liquidity demand in Q2 2020, demand for corporate credit eased. - The war in Ukraine has led to higher inflation expectations and a tighter monetary stance that increased government bond yields. - Stock prices surpassed pre‑pandemic levels, but pared back gains after Russia's invasion of Ukraine. - Lending rates on new loans (Percent) and Lending by Monetary Financial Institutions (Year‑over‑year growth rate) charts illustrated for Jan‑2008–Jan‑2022 and May‑2017–May‑2022 respectively. - Change in Credit Demand by Enterprises in the Next 3 Months (Net percentage of banks reporting stronger demand) shown for Mar‑2008–Mar‑2022. ### Housing Market Developments - Key observations: - The pandemic has not altered the decade‑long upward trend in real estate prices. - Gradual increases in new housing construction are not adequate to meet demand; unfilled orders continued to accumulate. - The pandemic has weakened retail CRE prices while office CRE prices started rising again after pausing for a year. - Housing loans continue to grow at record levels while loans to CRE sectors decelerated marginally from the peak of 8.3 percent in early 2019. - Selected indicators and indices shown: - New Residential Housing Units (Thousands) series, 2000–2020. - Commercial Real Estate Prices (Index, 2015Q1=100) for Office, Retail. - Germany: Housing Prices (2010=100, log scale) for 127 cities and 7 large cities. - New Orders and Unfilled Orders of Housing Construction (Index, 2015=100). - House Price Valuation: Ave. Price‑to‑income (1990–2021Q4) and Ave. Price‑to‑rent (1990–2021Q4). - German MFIs: Exposure to Real Estate (In percent, year‑on‑year growth): Loans to other real estate activities; Loans to housing corporations; Loans to construction; Housing loans. ### Recent Developments in the German Banking Sector - Key observations: - After narrowing with the economic recovery, the fallout from the war in Ukraine lifted banks' credit spreads. - The two largest commercial banks continue trading at a discount relative to many European peers. - Low profitability in part reflects lower interest rate margins than European peers. - Despite the recession in 2020, German banks maintained generally comfortable risk‑weighted capital buffers in 2021, yet some German banks have lower leverage ratios than European peers. - Market and bank metrics illustrated: - German Banks 5‑Year CDS Spreads (basis points) for Sep‑19 to Jun‑22. - Price to Book Ratio, June 23, 2022 for a set of European banks. - Return on Assets (Percent) for 2020–2021 across banks. - (Phase in) Common Equity Tier 1 Ratio (Percent) for 2020–2021 across banks. - Leverage Ratio 1/ (Percent) and Net Interest Margin (Percent) comparisons for 2020–2021. ### Selected Economic Indicators and Projections (2019–23) - National Accounts (Percent change, working‑day adjusted unless noted): - GDP: 2019 1.1; 2020 -4.9; 2021 2.9; 2022 1.6; 2023 2.1 - Private consumption: 2019 1.6; 2020 -6.1; 2021 0.3; 2022 3.3; 2023 2.7 - Public consumption: 2019 3.0; 2020 3.5; 2021 2.9; 2022 -0.1; 2023 -0.5 - Gross fixed investment: 2019 1.9; 2020 -3.3; 2021 1.0; 2022 3.5; 2023 2.9 - Exports of goods and services: 2019 1.1; 2020 -10.1; 2021 9.5; 2022 3.2; 2023 3.7 - Imports of goods and services: 2019 2.9; 2020 -9.2; 2021 9.0; 2022 5.1; 2023 3.6 - Output gap (percent of potential GDP): 2019 0.4; 2020 -3.6; 2021 -1.6; 2022 -0.9; 2023 -0.6 - Unemployment: - Unemployment rate (ILO definition): 2019 3.2; 2020 3.8; 2021 3.6; 2022 3.2; 2023 3.1 - Prices and incomes: - GDP deflator: 2019 2.1; 2020 1.6; 2021 3.0; 2022 5.8; 2023 3.1 - Consumer price index (harmonized): 2019 1.4; 2020 0.4; 2021 3.2; 2022 7.5; 2023 4.5 - Consumer price index (harmonized), core: 2019 1.4; 2020 0.8; 2021 2.3; 2022 4.1; 2023 4.0 - Household saving ratio (percent): 2019 10.8; 2020 16.1; 2021 15.0; 2022 11.2; 2023 10.2 ### Public Finances (2019–23) and Fiscal Projections - General government (Percent of GDP): - Overall balance (Net lending/borrowing): 2019 1.5; 2020 -4.3; 2021 -3.7; 2022 -3.0; 2023 -1.5 - Structural balance: 2019 1.2; 2020 -2.8; 2021 -2.9; 2022 -2.6; 2023 -1.2 - General government debt: 2019 58.9; 2020 68.8; 2021 70.2; 2022 70.4; 2023 67.5 - Table 2: General Government Operations (Percent of GDP), selected rows: - Revenue: 2018 46.2; 2019 46.5; 2020 46.5; 2021 47.9; 2022 47.0; 2023 46.9 - Expense: 2018 44.4; 2019 45.0; 2020 50.9; 2021 51.6; 2022 49.9; 2023 48.3 - Gross public investment: 2018 2.3; 2019 2.4; 2020 2.7; 2021 2.5; 2022 2.9; 2023 2.9 - Net lending/borrowing: 2018 1.9; 2019 1.5; 2020 -4.3; 2021 -3.7; 2022 -3.0; 2023 -1.5 - Public gross debt (Maastricht definition): 2018 61.2; 2019 58.9; 2020 68.8; 2021 70.2; 2022 70.4; 2023 67.5 ### Medium‑Term Projections, 2018–27 (Selected series) - Real GDP (Percent change): - 2018 1.1; 2019 1.1; 2020 -4.9; 2021 2.9; 2022 1.6; 2023 2.2; 2024 1.1; 2025 0.7; 2026 1.4; 2027 1.2 - Households saving ratio (in percent): - 2018 11.3; 2019 10.8; 2020 16.1; 2021 15.0; 2022 11.2; 2023 10.2; 2024 10.3; 2025 10.3; 2026 10.5; 2027 10.7 - Current account balance (Percent of GDP): - 2018 7.9; 2019 7.6; 2020 7.1; 2021 7.4; 2022 6.1; 2023 6.7; 2024 7.0; 2025 7.1; 2026 7.0; 2027 6.9 - Overall balance (Percent of GDP) projections: - 2018 1.9; 2019 1.5; 2020 -4.3; 2021 -3.7; 2022 -3.0; 2023 -1.5; 2024 -1.0; 2025 -0.8; 2026 -0.6; 2027 -0.5 - Gross debt (Percent of GDP) projections: - 2018 61.2; 2019 58.9; 2020 68.8; 2021 70.2; 2022 70.4; 2023 67.5; 2024 64.6; 2025 62.4; 2026 60.6; 2027 59.3 ### Balance of Payments and International Investment Position - Balance of Payments (Percent of GDP), selected projections 2018–27: - Current account: 2018 7.9; 2019 7.6; 2020 7.1; 2021 7.4; 2022 6.1; 2023 6.7; 2024 7.0; 2025 7.1; 2026 7.0; 2027 6.9 - Trade balance: 2018 6.1; 2019 5.7; 2020 5.7; 2021 5.7; 2022 4.3; 2023 5.1; 2024 5.2; 2025 5.1; 2026 5.1; 2027 5.0 - International Investment Position (Percent of GDP), 2013–2021 highlights: - Assets: 2013 247.1; 2014 261.7; 2015 260.8; 2016 264.2; 2017 261.4; 2018 260.6; 2019 276.4; 2020 310.1; 2021 316.4 - Liabilities: 2013 222.5; 2014 232.7; 2015 226.3; 2016 225.0; 2017 217.1; 2018 205.8; 2019 216.1; 2020 246.7; 2021 248.1 - Net International Investment Position: 2013 24.7; 2014 29.0; 2015 34.6; 2016 39.2; 2017 44.2; 2018 54.2; 2019 54.8; 2020 60.3; 2021 63.4 ### Core Financial Soundness Indicators for Banks (2016–21) - Capital Adequacy (Regulatory capital to risk‑weighted assets): - Total: 2016 18.8; 2017 19.4; 2018 18.9; 2019 18.6; 2020 19.2; 2021 18.8 - Asset Composition: - Loan to households (percent of total loans): 2016 28.5; 2017 28.6; 2018 29.1; 2019 29.5; 2020 28.4; 2021 27.9 - Loans to non‑financial corporations: 2016 14.9; 2017 15.1; 2018 15.7; 2019 16.1; 2020 15.4; 2021 15.1 - Asset Quality: - NPLs to gross loans: 2016 1.7; 2017 1.5; 2018 1.2; 2019 1.1; 2020 1.7; 2021 1.5 - NPLs net of provisions to capital: 2016 14.7; 2017 11.9; 2018 9.1; 2019 6.8; 2020 6.2; 2021 5.4 - Earnings and Profitability: - Return on average assets (after‑tax): 2016 0.2; 2017 0.2; 2018 0.2; 2019 0.0; 2020 0.1; 2021 ... - Return on average equity (after‑tax): 2016 4.3; 2017 4.1; 2018 2.4; 2019 -0.4; 2020 1.1; 2021 ... - Net interest margin (2020 vs 2021): 2020 values shown and 2021 comparisons in charts. - Liquidity: - Liquid assets to total short‑term liabilities: 2016 146.6; 2017 151.3; 2018 151.7; 2019 161.2; 2020 169.6; 2021 170.9 - Additional indicators and sectoral breakdowns are presented in Tables 6 and 7 (2016–21), including deposit‑taking institutions' capital to assets, geographic distribution of loans, FX loans to total loans, funding and market liquidity, insurance sector solvency ratios, corporate sector debt metrics, household debt to GDP, and real estate price indices. *Source: Excerpts and tables from the IMF staff calculations and data presented in the provided PDF content.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - The external position in 2021 was stronger than the level implied by medium-term fundamentals and desirable policies. - Assessment accounts for continued temporary weakness in outbound travel in 2021 due to the ongoing COVID-19 pandemic. - Russia’s invasion of Ukraine in February 2022 and associated economic sanctions are expected to weaken Germany’s current account significantly in 2022, as energy import prices surge, supply disruptions intensify and exports to Russia collapse. - The current account surplus is projected to increase in 2023 and 2024 as energy prices and supply bottlenecks ease, before declining over the medium term on reduced competitiveness and revived domestic demand. - Potential policy responses to support external rebalancing: - Promote investment and diminish excess saving to reduce the current account balance towards its norm. - Investment priorities: expand generation and distribution of renewable electricity; broaden electric vehicle charging station network; widen coverage of fiber optic and 5G mobile networks. - Structural reforms: foster innovation (development of the venture capital market; reduce administrative steps to start a business). - Additional tax relief for lower-income households to help reduce excess saving and ameliorate external imbalances. - Fiscal measures to relieve the current impact of high energy prices are welcome; a previous sizeable fiscal stimulus in response to COVID-19 also helps. ### Foreign Asset and Liability Position and Trajectory - Background facts: - Germany’s NIIP reached 65 percent of GDP in 2021, from 67 percent in 2020. - TARGET2 claims on the Eurosystem increased to €1.3 trillion by end-2021, from €1.1 trillion at the end of 2020. - In 2021, the NIIP was revised up by 3.4 percent of GDP for the period between 2017 and 2021 due to new data on safe custody accounts abroad of German insurers and pension funds. - The allocation of SDRs in 2021 did not affect the NIIP, because it caused both assets and liabilities to rise by the same amounts. - Between 2017 and 2021, the NIIP has increased by some 23 percent of GDP, which lifts the primary income balance of the CA going forward. - Assessment: - Germany’s exposure to the Eurosystem remains large, given continued quantitative easing by the ECB. - 2021 (% GDP) key figures: - NIIP: 65 - Gross Assets: 302 - Debt Assets: 170 - Gross Liabilities: 237 - Debt Liabilities: 163 ### Current Account - Background facts: - The current account surplus was 7.4 percent of GDP in 2021 (compared with 7.1 percent in 2020 and 7.8 percent on average over 2017–19). - Strengthening of the current account in 2021 was driven by a recovery of earnings on foreign direct investment within the primary income balance. - The goods trade balance remained weaker than pre-pandemic levels, largely due to costlier energy imports. - The services trade balance remains stronger than pre-pandemic levels due to elevated licensing fees for COVID-19 vaccines and still subdued imports of tourism and travel services. - The bulk of the CA surplus reflects the large saving—investment surplus of households, only partially offset by the government saving—investment deficit. - Assessment and adjustments: - The cyclically adjusted CA balance is estimated by the EBA model to reach 7.5 percent of GDP. - Staff assess the cyclically adjusted CA balance to be 6.9 percent of GDP, which is 0.6 percent of GDP lower than estimated by the model after accounting for: - temporary drop in outbound travel (+0.5), - temporary pandemic-induced shift of consumption from services to goods (+0.2), - temporarily higher net exports of medical goods (-0.1). - Staff assesses the CA norm to be between 2.8 and 3.8 percent of GDP, with a midpoint of 3.3 percent of GDP, in line with the EBA model. - The CA gap in 2021 is in the range of 3.1 to 4.1 percent of GDP, with a midpoint of 3.6 percent of GDP. - Note: the demographic adjuster from past assessments has been phased out this year. - 2021 (% GDP) key figures: - CA: 7.4 - Cycl. Adj. CA: 7.5 - EBA Norm: 3.3 - EBA Gap: 4.2 - COVID-19 Adj.: -0.6 - Other Adj.: 0 - Staff Gap: 3.6 ### Real Exchange Rate (REER) - Background: - The REER based on consumer prices depreciated by 2 percent in 2021, driven by real depreciations against the United States, China and the U.K. - Between December 2021 and February 2022, the REER based on consumer prices depreciated a further 0.3 percent. - Assessment: - The staff CA gap implies a REER gap of 10.6 percent in 2021, after applying an estimated elasticity of 0.34. - The EBA REER level and index models suggest an undervaluation of 7.8 percent and an overvaluation of 8 percent, respectively. - Staff assess the REER to be undervalued with a midpoint of 10.6 percent and a range of uncertainty of +/-1.5 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2021, the global economy began to recover from the COVID-19 pandemic, reversing safe-haven inflows experienced in 2020 and resulting in large portfolio outflows. - Net foreign direct investment outflows resumed in 2021 after negligible outflow in 2020. - Portfolio and direct investment outflows were partially mirrored by “other” inflows reflecting: - declining net foreign assets of the Bundesbank, and - banks’ transfer of some securities business from the U.K. to Germany. - Assessment: - Risks are limited, given Germany’s safe haven status and the strength of its external position. ### FX Intervention and Reserves Level - Background: - The euro has the status of a global reserve currency. - Assessment: - Reserves held by euro area countries are typically low relative to standard metrics. - The currency floats freely. *Source: Annex I. External Sector Assessment (Germany).* ### Annex VI. Germany’s Key Climate Goals and Measures ### Annex VI. Germany’s Key Climate Goals and Measures ### Electricity sector: targets and capacity - 80 percent of electricity demand will be met with renewables by 2030, from 42 percent in 2021, and reach 100 percent renewable electricity by 2035. - The Easter Package envisages 215 gigawatts (96 percent of Germany’s installed production capacity in 2020) of solar power and at least 30 (13.5 percent) gigawatts of offshore wind power by 2030. - Aim to bring forward the coal phase-out to 2030, from 2038 previously. - Increase targets and tender volumes of offshore wind energy. - Develop strategies for alternative energy sources, including bioenergy and geothermal. - Accelerate the expansion of grid networks and aligning it with the GHG neutrality goal. ### Electricity sector: specific measures and instruments - Electrolyze 10 gigawatts (4.5 percent of Germany’s installed production capacity in 2020) of green hydrogen by 2030, and to ensure that all new natural gas power plants are compatible with future hydrogen fuel sources. - Increase the subsidy rates for rooftop photovoltaic (PV), with privileges being given to systems that feed all electricity into the grid. - For onshore wind: - suspend the degression of the maximum values of the feed-in tariff for two years; - improve the reference yield model for low-wind locations; - lift the size limit for pilot plants; - allow municipalities to financially participate in onshore and ground-mounted wind turbines. - Increase tenders for biomethane to 600 MW per year from 2023, while reducing those for biomass. - Enhance subsidies for innovation and storage. - Introduce a new tender segment "Renewables + Hydrogen" to provide additional support for ramping up the hydrogen economy. - The new Energy Allocation Act (EnUG) regulates that in the future, levies will only be payable for withdrawal from the grid. Self-consumption, direct delivery and, heat pumps in general will be exempt from paying surcharges. ### Carbon pricing - Introduce a minimum carbon price of €60 per tonne domestically, even if Europe-wide prices fall below this level. - Note from source: The minimum carbon price is currently planned to be applied the sectors covered by the EU ETS. Germany’s national carbon price (for transportation and buildings) is scheduled to be raised in a stepwise manner from €30 per tonne in 2022 to €55 per tonne in 2025; in 2026 auctions will be introduced alongside a price collar of €55-65 per tonne CO2. ### Transport targets and measures - 15 million fully electric cars on the roads (31 percent of total registered cars in 2021) by 2030. - One million public charging stations by 2030. - Electrify three-quarters of the rail network by 2030. - Phase out internal combustion engine cars by 2035. - Electrify rail transport, and create incentives to route more freight and passenger traffic from roads and air to railways, which are more carbon efficient. ### Buildings targets and measures - 65 percent of energy used by newly installed heating systems should be renewable from 2025. - Half of all energy used to heat buildings should be climate-neutral by 2030. - Solar panels will be required on new commercial buildings. *Annex VI. Germany’s Key Climate Goals and Measures.* ### 2012. The effect on public debt and gross financing needs would also be relatively modest. ### 1deuea2022001 - 2012. The effect on public debt and gross financing needs would also be relatively modest. ### Stress tests and additional scenarios - Combined macro-fiscal shock: - Tests combined shocks to growth, the interest rate, and the primary balance while avoiding double-counting. - Impact on debt dynamics is slightly worse than that of a growth shock. - Contingent fiscal shock: - Assumes a cumulative 3 percent of GDP (about 120 billion euros) additional fiscal cost for public guarantees called over 2023–24. - Based on the assumption that contracted guarantees will double from the level of end-2021, and about one-third of the guarantees contracted will be called. - Assumes a higher funding cost—25 bps compared to the baseline scenario per year—for 2023–27. - Shock outcome: would raise debt to 80 percent of GDP in 2023, which would decline over the medium time yet remain above the pre-shock level. - Real exchange rate shock: - Not discussed because virtually all outstanding sovereign debt is denominated in euros; scenario would not have a relevant effect on debt. ### Baseline projections and key statistics (selected figures) - Nominal gross public debt (in percent of GDP): - 2020: 71.0 - 2021: 68.7 - 2022: 70.2 - 2023: 70.4 - 2024: 67.5 - 2025: 64.6 - 2026: 62.4 - 2027: 60.6 - Projection for 2027 shown as 59.3 in figure heading context. - Public gross financing needs (in percent of GDP): - 2020: 13.8 - 2021: 8.3 - 2022: 18.0 - 2023: 19.3 - 2024: 13.9 - 2025: 12.2 - 2026: 9.7 - 2027: 9.7 (and 9.3 in another projection line) - Real GDP growth (in percent): - 2020: 1.7 - 2021: -4.6 - 2022: 2.9 - 2023: 1.5 - 2024: 1.9 - 2025: 2.2 - 2026: 1.7 - 2027: 1.4 and 1.2 in projection entries - Inflation (GDP deflator, in percent): - 2020: 1.7 - 2021: 1.6 - 2022: 3.0 - 2023: 5.8 - 2024: 3.1 - 2025: 2.3 - 2026: 2.0 - 2027: 1.8 (and 1.8 in projection entries) - Nominal GDP growth (in percent): - 2020: 3.4 - 2021: -3.0 - 2022: 6.0 - 2023: 7.4 - 2024: 5.1 - 2025: 4.6 - 2026: 3.7 - 2027: 3.2 and 3.1 in projection entries - Effective interest rate (in percent): - 2020: 2.1 - 2021: 1.0 - 2022: 0.9 - 2023–2027: around 0.9–1.0 depending on year - 10-year bond yield: - 2020: 0.9 - 2021: -0.5 - 2022: -0.3 - 2023: 1.1 - 2024: 1.8 - 2025: 1.8 - 2026: 1.9 - 2027: 2.0 ### Contribution to changes in public debt (selected flows, in percent of GDP) - Change in gross public sector debt (annual): - 2020: -2.6 - 2021: 9.8 - 2022: 1.4 - 2023: 0.2 - 2024: -2.9 - 2025: -2.9 - 2026: -2.2 - 2027: -1.8 - Cumulative (2020–2027): -10.9 - Identified debt-creating flows (annual): - 2020: -2.8 - 2021: 9.3 - 2022: 1.6 - 2023: 0.3 - 2024: -2.8 - 2025: -2.8 - 2026: -2.1 - 2027: -1.7 - Cumulative: -10.1 - Primary deficit (in percent of GDP): - 2020: -1.9 - 2021: 3.9 - 2022: 3.2 - 2023: 2.6 - 2024: 1.1 - 2025: 0.6 - 2026: 0.4 - 2027: 0.2 - Cumulative (2020–2027): 4.9 - Primary (noninterest) revenue and grants (in percent of GDP): - 2020: 45.0 - 2021: 46.3 - 2022: 47.8 - 2023: 46.9 - 2024: 46.8 - 2025: 46.8 - 2026: 47.0 - 2027: 47.1 - Cumulative: 281.6 - Primary (noninterest) expenditure (in percent of GDP): - 2020: 43.1 - 2021: 50.2 - 2022: 51.0 - 2023: 49.5 - 2024: 47.8 - 2025: 47.4 - 2026: 47.3 - 2027: 47.2 - Cumulative: 286.5 - Automatic debt dynamics (contribution, derived formula): - 2020: -0.9 - 2021: 2.5 - 2022: -3.3 - 2023: -4.3 - 2024: -2.8 - 2025: -2.4 - 2026: -1.7 - 2027: -1.3 - Cumulative: -13.8 - Interest rate/growth differential (same values as automatic debt dynamics in table): - Real interest rate contribution (selected): - 2020: 0.3 - 2021: -0.3 - 2022: -1.4 - 2023: -3.3 - 2024: -1.5 - 2025: -1.0 - 2026: -0.7 - 2027: -0.5 - Cumulative: -7.5 - Real GDP growth contribution (selected): - 2020: -1.2 - 2021: 2.8 - 2022: -1.9 - 2023: -1.0 - 2024: -1.3 - 2025: -1.4 - 2026: -1.1 - 2027: -0.8 - Cumulative: -6.3 - Other identified debt-creating flows: - 2020: 0.0 - 2021: 3.0 - 2022: 1.7 - 2023: 2.0 - 2024: -1.1 - 2025: -1.0 - 2026: -0.7 - 2027: -0.5 - Cumulative: 0.0 (series shows end value -1.2 across horizon) - Other stock/flow adjustments (note): - Positive entries for 2021 and 2022 reflect the accumulation of debt to create the Energy and Climate Fund (60 bn) and Special Defense Fund (100 bn), respectively. - Negative entries for 2023–26 reflect deficits financed by these funds and general reserves. - Residual, including asset changes: - 2020: 0.3 - 2021: 0.5 - 2022: -0.1 - 2023: -0.1 - 2024: -0.1 - 2025: -0.1 - 2026: -0.1 - 2027: -0.1 - Cumulative: -0.7 ### Composition of public debt and alternative scenarios - Underlying assumptions (baseline): - Real GDP growth: 2022: 1.5; 2023: 1.9; 2024: 2.2; 2025: 1.7; 2026: 1.4; 2027: 1.2 - Inflation: 2022: 5.8; 2023: 3.1; 2024: 2.3; 2025: 2.0; 2026: 1.8; 2027: 1.8 - Primary Balance: 2022: -2.6; 2023: -1.1; 2024: -0.6; 2025: -0.4; 2026: -0.2; 2027: -0.1 - Effective interest rate: 2022–2027: 0.9–1.0 - Historical scenario assumptions (selected): - Real GDP growth: 2022: 1.5; 2023–2027: 1.3 each year - Inflation: same as baseline - Primary Balance: 2022: -2.6; 2023–2027: 0.9 each year - Effective interest rate: increases to 1.5–1.8 in later years - Constant Primary Balance Scenario: - Primary Balance fixed at -2.6 for 2022–2027 - Other assumptions as in baseline - Composition charts indicate: - By maturity: medium and long-term vs short-term shares over 2011–2027 (visuals shown in source). - By currency: local currency-denominated vs foreign currency-denominated (Germany is effectively all local currency—euro). ### Stress test outcomes (selected scenarios) - Stress test shocks and assumption highlights: - Primary Balance Shock: primary balance path modified (e.g., 2022: -2.6; 2023: -2.3; 2024: -1.8; 2025: -0.4; 2026: -0.2; 2027: -0.1). - Real GDP Growth Shock: real GDP growth path includes 2022: 1.5; 2023: -0.3; 2024: 0.0; 2025: 1.7; 2026: 1.4; 2027: 1.2. - Real Interest Rate Shock: effective interest rate increases (e.g., 2024: 1.5; 2025: 1.9; 2026: 2.2; 2027: 2.5). - Real Exchange Rate Shock: not materially relevant given euro-denominated debt. - Combined Shock: combines adverse paths (example values: 2023 real GDP growth -0.3; effective interest rate up to 2.0–2.5 in later years). - Visuals show gross nominal public debt and public gross financing needs under baseline and stress tests (figures provided in source). ### Risk assessment and heat map - Debt burden benchmark: 85 percent (cells highlighted based on whether benchmark exceeded under baseline or shocks). - Gross financing needs benchmark: 20 percent of GDP (cells highlighted based on whether benchmark exceeded under baseline or shocks). - Market perception and indicators: - Long-term bond spread over German bonds calculated as an average over 25-Mar-22 through 23-Jun-22. - Benchmarks referenced: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for public debt held by non-residents. - Distributional projections: - Percentiles and predictive densities of gross nominal public debt across 2020–2027 shown in figure panels (10th–90th percentiles and restricted/asymmetric distributions depicted). ### Authorities’ response to IMF 2021 Article IV recommendations (selected replies) - Fiscal policy recommendations and responses: - Pace of withdrawal of COVID-19 relief measures: expanded Kurzarbeit scheme and grants to firms extended through mid-2022; employers reimbursed half of social security contributions for employees receiving training during Kurzarbeit until July 31, 2023. - Use fiscal space to raise growth potential and facilitate structural transformation: government expanded support for green transition, energy security, innovation, digitalization, childcare, and defense; fiscal space under the national debt-brake rule would be largely exhausted once defense fund and climate spending are fully covered by the debt limit. - Address capacity constraints at municipal level for public investment: inter-ministerial steering group including the Länder; expansion of Partnerschaft Deutschland consultancy services. - Redress pandemic-induced income inequality: expanded access to basic income support through end-2022; €2 bn allocated for post-COVID catch-up program; measures to reduce gender pay inequality and support childcare including €5.5 bn to Länder through end-2022 and up to €3.5 bn for all-day education and childcare investment. - Financial sector policy responses: - Macroprudential toolkit and data gaps: counter-cyclical capital buffer raised to 0.75 percent in February 2022; sectoral systemic risk buffer of 2 percent on loans secured by domestic residential real estate to apply from February 1, 2023; new data collection on lending standards expected in 2023; legislative proposals to add income-based instruments being drafted; Bundesbank project to monitor effects. - Strengthen oversight of nonbank operations: “Act to Strengthen Financial Market Integrity” passed in 2021 and entered into full force; organizational reform of BaFin implemented. - Structural reform responses: - Climate mitigation and distributional measures: government aims to introduce a minimum carbon price of €60 per tonne domestically in 2027; revenues from national emission trading system to be returned to citizens through lower electricity prices via reduction of the EEG surcharge (abolished as of July 1, 2022); housing benefit increased; increased tax allowance for long-distance commuters and mobility bonus for lower income households. - Digital infrastructure and ICT diffusion: promotion of digital infrastructure expansion in rural areas; development of a gigabit strategy; progress on National e-Government Strategy; launch and expansion of “hubs for tomorrow”; Digital Pact for Schools with supplements during the pandemic. - Promote innovation and business dynamism: as part of the €10 billion Future Fund, KfW Capital to implement a growth fund; legislative package to accelerate planning and authorization for renewable energy (“Easter-Package”); coalition treaty agreed to introduce a “super depreciation” for climate protection and digital assets. *Source: IMF staff.* ### 2014. Since then, the legal and organizational framework for AML/CFT has been comprehensively ### STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION— SUPPLEMENTARY INFORMATION (July 12, 2022) ### AML/CFT legal and organizational framework - Since 2014, the legal and organizational framework for AML/CFT has been comprehensively restructured, including to transpose the EU’s fifth Money Laundering Directive (5AMLD). - Germany was recently assessed against the current AML/CFT standard using the 2013 assessment methodology (which notably focuses on the effectiveness of AML/CFT measures). The assessment was conducted by the Financial Action Task Force (FATF) in November 2021. - The relevant FATF report was discussed in June 2022 and will be published by September 2022. ### Statistical issues — Assessment of data adequacy for surveillance - General: The economic database is generally comprehensive and of high quality, and data provision is adequate for surveillance. - National Accounts: - Germany adopted the European System of Accounts 2010 (ESA2010) in September 2014, with GDP calculated both annually and quarterly on a current and chained volume basis. - Germany has received multiple derogations from ESA2010 requirements, most of which were scheduled to be addressed by 2020. - A direct source for quarterly changes in inventories is lacking; extrapolations of changes in inventories are based on the difference between the monthly production index and turnover index in manufacturing. - Government Finance Statistics: - Comprehensive data reporting systems support the accuracy and reliability of the government finance statistics. - These data are based on cash accounting systems, although documentation explains differences between ESA2010 (noncash) classification and general cash data on an administrative basis. - Germany publishes—through Eurostat—general government revenue, expenditure, and balances on a noncash/accrual basis on a quarterly basis (ESA2010) and these data are presented in a GFSM 2014 format in International Financial Statistics, albeit with delay. - Germany submits annual data for publication in the Government Financial Statistics Yearbook, in GFSM 2014 format. Monthly data are disseminated on a cash basis. - Monetary and Financial Statistics: - The ECB reporting framework is used for monetary statistics and data are reported to the IMF through a “gateway” arrangement with the ECB. - Monetary statistics published in the IFS cover data on central bank and other depository corporations (ODCs) using euro area-wide residency criterion. Data based on national residency criterion is also published as memorandum items. - Germany reports data on some series and indicators of the Financial Access Survey (FAS), including the two indicators adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs). - Financial Sector Surveillance: - Germany participates in the IMF’s Coordinated Direct Investment Survey (CDIS), Coordinated Portfolio Investment Survey (CPIS) and financial soundness indicators (FSIs) databases. - Of the 40 FSIs, Germany reports all except net foreign exchange exposure to equity (I31). - Former FSI ratios on nonperforming loans have been switched from annual to quarterly periodicity. The quarterly data stemming from the harmonized FINREP reporting is due to the EBA ITS on reporting. The former use of data provided by the annual accounts has been suspended in line with the periodicity concept of the SDDS plus. - External Sector Statistics: - The Bundesbank compiles the balance of payments in close cooperation with the Federal Statistical Office. - Balance of payments, International Investment Position statistics, and related cross-border statistics are compiled according to BPM6 and the legal requirements of the ECB and Eurostat. ### Data standards and quality - Adherent to the Special Data Dissemination Standard Plus (SDDS Plus) since February 2015. - Implementing G-20 DGI recommendations: Currently disseminates a residential property price index and a commercial property price index. - Data ROSC from 2006 is available. ### Table of Common Indicators Required for Surveillance (selected metadata as of June 12, 2022) - Exchange Rates: Date of Latest Observation Jun 12, 2022; Date Received Jun 12, 2022; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation May 2022; Date Received Jun 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Date of Latest Observation Apr 2022; Date Received May 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad Money: Date of Latest Observation Apr 2022; Date Received May 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Date of Latest Observation May 2022; Date Received Jun 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation Apr 2022; Date Received May 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates: Date of Latest Observation May 2022; Date Received May 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer Price Index: Date of Latest Observation May 2022; Date Received May 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of Latest Observation Q1:2022; Date Received May 2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Stocks of General Government and Government-Guaranteed Debt: Date of Latest Observation 2021; Date Received Apr 2022; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - External Current Account Balance: Date of Latest Observation Apr 2022; Date Received Jun 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Exports and Imports of Goods and Services: Date of Latest Observation Apr 2022; Date Received Jun 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Date of Latest Observation Q1:2022; Date Received May 2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross External Debt: Date of Latest Observation Q4:2021; Date Received Mar 2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - International Investment Position: Date of Latest Observation Q4:2021; Date Received Mar 2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. ### Supplementary information and near-term risk assessment (as of July 12, 2022) - Gas market developments and risks: - Natural gas futures for the second half of 2022 and early 2023 stood, as of July 12th, 2022, 50 percent higher than their levels prior to the reduction in Nord Stream 1 flows. - Staff continues to estimate that Germany can avoid, albeit narrowly, shortages of gas in the next two winters if gas flows from Russia do not decline further (and re-exports of gas decline proportionally with the recent reduction in gas flows through Nord Stream 1). - Gas reserves would drop to low levels even under normal winter temperatures, leaving Germany vulnerable in case of a stoppage of the remaining supplies of Russian gas. - Policy actions: - Authorities amended the Energy Security Act. Key changes include a temporary legal amendment to facilitate rapid government intervention to stabilize critical companies in the energy sector, and a price adjustment mechanism that would allow the increased costs of gas procurement to be passed on to end users. - Staff continues to encourage such pass through to incentivize energy savings and to ensure that gas inventories can be built further ahead of the winter. - Macroeconomic projection revisions: - Germany’s GDP growth has been revised down to 1.2 percent for 2022 and 0.8 percent for 2023 (-0.3 and -1.1 percentage points relative to the staff report projections, respectively), reflecting expectations of more subdued activity through 2023. Growth is expected to pick up from the second half of 2023 onwards, as floating LNG terminals come online, temperatures increase, and tensions in the gas market thus begin to ease. The output gap is expected to close in 2026, one year later than previously envisaged. - Average headline consumer price inflation has been revised up further to 7.7 and 4.8 percent for 2022 and 2023, respectively (about 0.3 percentage point higher than the staff report projections for both years), with consumer energy prices expected to increase relative to prior projections. - Fiscal policy guidance and contingencies: - Staff’s fiscal advice remains as set out in the staff report: fiscal policy should remain flexible and ready to respond with well-targeted measures given the more precarious outlook (weaker growth and higher inflation). - The draft budget, approved by the Cabinet on July 1, confirms the authorities’ intention to return to the constitutional debt-brake rule. The tightening in the cyclically-adjusted deficit would be around 1½ percent of GDP, close to the projection in the staff report, reflecting the expected phase-out of the majority of temporary COVID-19 and energy-related relief measures. - Staff assesses that under the revised baseline the envisaged fiscal tightening would remain manageable, with reduced support for domestic demand helping to cool inflation pressures. The budget rule is flexible enough to accommodate some extra spending if nominal GDP growth disappoints. - The economy—and in particular low-income households and energy companies—would likely need more support in case of a further sizeable increase in gas prices. The authorities should plan for such a contingency, which would require relief measures to be well-targeted and time-bound to avoid adding to inflation pressures. - If there is a complete shut-off of remaining gas flows from Russia, the government should allow automatic stabilizers to operate fully and if needed consider activating the escape clause of the debt break rule for another year to be able to respond flexibly to the change in the outlook. *Prepared by European Department; supplement provides information available since the staff report issued to the Executive Board on July 1, 2022.* ### 5. The thrust of the staff appraisal remains unchanged. ### 5. The thrust of the staff appraisal remains unchanged. ### Growth revision and baseline shift - The total downward revision to growth triggered by the partial shut-off of Nord Stream 1 flows is about 0.5 percentage point for 2022 and 0.6 percentage point for 2023. - Staff has shifted 30–40 percent of the output loss for 2022 and 2023 in a full shut-off scenario into the baseline. ### Selected economic indicators (2020–25) — key figures - Output - Real GDP growth (%): -4.6, 2.9, 1.2, 0.8, 2.4, 2.2 (2020, 2021, 2022, 2023, 2024, 2025) - Total domestic demand growth (%): -4.0, 2.3, 2.2, 0.7, 2.4, 2.4 - Output gap (% of potential GDP): -3.6, -1.6, -1.2, -1.2, -1.0, -0.3 - Employment - Unemployment rate (%, ILO): 3.8, 3.6, 3.1, 3.4, 3.1, 3.0 - Employment growth (%): -1.0, -0.7, 1.6, -0.2, 0.1, 0.1 - Prices - Inflation (%, headline, period avg.): 0.4, 3.2, 7.7, 4.8, 3.2, 2.2 - Inflation (%, core, period avg.): 0.8, 2.3, 4.0, 3.9, 3.3, 2.5 - General Government Finances - Fiscal balance (% of GDP): -4.3, -3.7, -3.2, -1.8, -1.3, -0.9 - Revenue (% of GDP): 46.5, 47.9, 47.1, 46.9, 47.0, 47.1 - Expenditure (% of GDP): 50.8, 51.6, 50.2, 48.7, 48.3, 48.0 - Public debt (% of GDP): 68.7, 70.2, 70.9, 68.9, 65.8, 63.2 - Money and Credit - Broad money (M3) (end of year, % change) 1/: 8.2, 5.6 - Credit to private sector (% change): 4.9, 5.4 - 10-year government bond yield (%): -0.5, -0.3 - Balance of Payments - Current account balance (% of GDP): 7.1, 7.4, 5.7, 6.2, 6.9, 6.9 - Trade balance (% of GDP): 5.7, 5.4, 3.9, 4.4, 4.7, 4.5 - Exports of goods (% of GDP): 35.2, 38.3, 37.5, 37.6, 37.4, 37.3 - Volume (% change): -9.0, 10.0, 1.9, 4.2, 4.3, 4.3 - Imports of goods (% of GDP): 29.6, 32.9, 33.7, 33.0, 32.5, 32.5 - Volume (% change): -5.3, 8.0, 1.5, 3.4, 4.4, 4.8 - FDI balance (% of GDP): -0.1, 2.9, 1.6, 1.5, 2.0, 1.7 - Reserves minus gold (billions of US$): 64.0, 99.2 - External Debt (% of GDP): 165.1, 171.8 - Exchange Rate - REER (% change): 1.3, 0.9 - NEER (% change): 2.4, 0.8 - Real effective rate (2005=100) 2/: 96.7, 97.6 - Nominal effective rate (2005=100) 3/: 103.8, 104.7 Sources noted in text: Deutsche Bundesbank, Eurostat, Federal Statistical Office, Haver Analytics, and IMF staff calculations. 1/ Reflects Germany's contribution to M3 of the euro area. 2/ Real effective exchange rate, CPI based, all countries. 3/ Nominal effective exchange rate, all countries. ### Authorities’ assessment and policy priorities (statement by Mr. Joerg Stephan and Mr. Tobias Krahnke, July 1, 2022) - Appreciation of staff's report as substantive, insightful, constructive, well-written, and well-balanced. - Authorities largely concur with staff’s key findings and recommendations. - Top priorities: cushion spillovers from the war, limit scarring effects on potential growth, ensure energy security. - Fiscal stance and budget - Federal government recently adopted the draft of the 2023 federal budget and its fiscal plan to 2026. - Government aims to gradually exit from crisis-mode and to re-build risk buffers while avoiding adding to inflationary pressure. - Investments to be kept at historically high levels to promote a strong, green, and inclusive economy and to build up defense capacities. - Federal draft 2023 budget provides for EUR 58.4 billion in investment spending. - Medium-term fiscal plan envisages government investment levels to remain continuously high, at about EUR 52 billion per year until 2026. - Social and inclusiveness measures - Preserve and further improve inclusiveness via a lower labor tax wedge on low-income earners, investment in social housing, assistance for job transition, measures to address gender inequities in the labor market. - Emergency context and risks - Current environment characterized by exceptionally high uncertainties; balance of risks tilted to the downside. - Greatest immediate threat: persistent and full shut-off of Russia’s gas exports to Germany and Europe. - Renewed surges in COVID-19 infections pose additional risks. - Authorities expect recovery to regain some momentum by mid-2022 if the listed risks do not materialize. - Fiscal consolidation envisaged for 2023 is driven by automatic phasing out of temporary measures and automatic stabilizers; authorities state it has limited impact on growth. ### Policies to safeguard the recovery - Income support and subsidies - Government response included timely and targeted measures, including various forms of income support for vulnerable households, designed as immediate and temporary relief amid rapidly rising energy prices; committed to phase them out as planned. - Temporary support to firms (subsidies for firms’ gas and electricity costs) considered justifiable due to strict eligibility criteria, temporary nature (last only until September), coverage of only a portion of increased energy cost, and decline over time. - Authorities stand ready to employ additional measures if needed. - Labor market tools - Enhancement of the short-time work allowance (Kurzarbeitergeld) seen as effective in containing unemployment, stabilizing disposable income, and domestic demand. - Phase-out of the expanded Kurzarbeit program prolonged until September 2022 to avert layoffs and limit scarring. - Energy security measures - Continuous analysis of economic impact of a potential Russian gas shutoff and development of contingency plans. - In mid-June, authorities declared the second phase of the three-stage emergency gas plan, triggering measures such as accelerating the filling of storage facilities and reducing use of gas for power generation. - Plans to encourage further gas savings by firms and households, develop an auction mechanism for industrial gas consumers, and consider promoting exchange of gas heaters for heat pumps (noting potential capacity constraints). ### Assessment of gas shutoff impact and modeling caveats - Authorities welcome staff’s comprehensive analysis on potential output loss of a gas shutoff and regard staff’s reduction in GDP estimate as reasonable given assumptions and model used. - They caution treating point estimates with care because: - Economic models (e.g., static general equilibrium models) capture only part of transmission mechanisms and spillovers. - Results heavily depend on underlying assumptions subject to high uncertainty. - A shutoff can entail substantial costs and could require additional policy support. ### Fiscal and structural policy for resilience and sustainability - Forward-looking fiscal and economic policy to promote sustainable public finances and boost potential growth. - Investment and structural transformation - Government pursuing decisive fiscal policy action to expand public investment, promote innovation, and facilitate structural transformation including digitalization and decarbonization. - Commitment to exit pandemic crisis mode to safeguard against interest rate risks and rising fiscal burden from social expenditure, and to rebuild risk buffers. - “Law for financing the future” (Zukunftsfinanzierungsgesetz) under development to reduce red tape, foster digitalization and financial innovation, and facilitate firms’ access to private capital markets (in particular for start-ups and SMEs). - External position and current account - Authorities acknowledge current account surplus remains high, note demographic and exogenous influences. - Staff assesses Germany’s external position in 2021 to be stronger than level implied by medium-term fundamentals and desirable policies. - Authorities note EBA methodology/model limitations and that the bulk of the EBA-estimated gap for 2021 reflects the regression’s residual. - Current account surplus expected to shrink considerably this year given surge in energy prices and large investment needs; future evolution subject to high uncertainty. ### Climate policy and decarbonization - Climate action remains a government key priority; goal of greenhouse gas neutrality by 2045. - International commitments and financing - Draft 2023 budget includes EUR 22 billion for international development. - Government commits to prospectively increase international climate finance from EUR 4 to 6 billion by 2025 the latest. - Domestic climate investment - Over EUR 80 billion earmarked for climate policy measures to support 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. - Carbon pricing stance - Authorities view carbon pricing as the most efficient and effective instrument to reduce emissions and see merit in a single carbon price in the EU. - National carbon pricing system and a rebating scheme aim to be socially fair and burden-neutral; revenues redistributed to citizens and companies. - Potential adjustments to the mechanism will be re-evaluated while preserving predictability of carbon pricing. - Carbon price needs to be complemented by supporting sectoral measures; a yet-to-be announced “summer package” will contain further decarbonization measures in transport, building, and agriculture. - Authorities note staff’s suggestion to introduce feebates but emphasize practical and political economy difficulties. ### Labor force participation and demographic policy - Need to boost labor force participation and address demographic challenges. - Policy measures - Promote up- and re-skilling of workers and provide incentives for labor force participation. - Commit to expanding provision of needs-based and high-quality childcare facilities to increase working hours and participation of female workers. - Address high effective marginal tax rate for secondary earners by promoting more active use of existing alternatives in the current tax code to equalize marginal tax rates on the first euro earned for both earners, increasing net income for the secondary earner. - Enhance integration programs for migrants to facilitate labor market participation. ### Financial sector resilience and supervisory priorities - Overall assessment - German financial sector is overall stable with high capital and liquidity buffers strengthened since the last FSAP. - Robust public and private sector balance sheets have supported financial stability during the COVID-19 pandemic and fallout from the war. - Stress tests and emerging policy areas - Authorities take note of broadly reassuring results of staff’s adverse stress tests that include potential fallout of current detrimental developments. - Authorities welcome inclusion of emerging policy areas in this year’s FSAP and will continue efforts on climate risk, fintech, and digitalization supervision. - Macroprudential and microprudential measures - Continuous efforts to improve macroprudential policy implementation and strengthen the microprudential supervisory framework. - Authorities share staff’s assessment of residential real estate market dynamics and are planning initiatives in line with staff recommendations: - Closing data gaps on lending standards for housing loans to private households. - Working on adding income-based instruments to the macroprudential toolkit. - Potential activation of borrower-based measures would require a solid financial stability risk assessment based on available information generating sufficient evidence that such step is needed. - Recent tightening of macroprudential policy expected to bolster banking system resilience to adverse developments. - Ongoing intensive monitoring of residential and commercial real estate risks, banks’ interest rate risks, and implications for the financial system. - Deposit protection schemes - Authorities agree reforms of depositor and institutional protection schemes will strengthen the German banking system. - They support maintaining existing multiple deposit guarantee schemes as appropriate to reflect the three-pillar structure of the German banking system and do not view this structure as a pivotal obstacle to European discussions on a single European deposit insurance scheme. *Source: Statement and staff appraisal excerpts as provided in the content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022001.pdf_