## 1deuea2023001

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### Real activity, labor market, and inflation
- GDP:
  - Grew by 1.8 percent in 2022.
  - Quarterly contractions: -0.5 percent (q-o-q) in Q4 2022 and -0.3 percent (q-o-q) in Q1 2023.
- Drivers and constraints:
  - Easing supply bottlenecks and excess-saving-buffered consumption supported 2022 growth.
  - Energy-intensive sectors suffered from high energy prices; falling real wages amid high inflation depressed consumption.
  - Firms increasingly cite financing bottlenecks as a constraint as interest rates rose.
- Labor market:
  - Employment back to the pre-pandemic trend; unemployment at historic lows.
  - Labor shortages increased in nearly all sectors.
  - Nominal wage growth picked up in 2022 but remains below consumer price inflation to date.
  - Use of Kurzarbeit ticked up slightly in Q4 2022.
  - Fixed-rate mortgages accounted for 84 percent of new mortgages in April 2023, down 7 percentage points over twelve months.
- Inflation dynamics:
  - Inflation averaged 8.7 percent in 2022; about half explained by energy goods.
  - As of May 2023: core inflation 6.7 percent vs. headline 6.3 percent.
  - Core inflation broad-based: about half of components now have inflation over 4 percent.
  - Processed food and travel services saw sharp price increases.

### External sector, terms of trade, and current account
- Current account:
  - Surplus narrowed to 4.2 percent of GDP in 2022, from 7.7 percent of GDP in 2021.
  - Staff estimate current account gap at 2.8 percent of GDP in 2022 (external position stronger than warranted).
  - Projection: current account surplus to recover to some 6 percent of GDP by 2026.
- Terms of trade:
  - Deteriorated by 12 percent in the 12 months to August 2022 (largest since reunification), before partial recovery.
- Contributing factors:
  - Surge in energy imports, high travel imports, and weak demand from Asia.

### Fiscal developments, stance, and projections
- Recent fiscal outcomes:
  - Headline fiscal deficit declined to around 2½ percent of GDP in 2022.
  - COVID-related fiscal cost reduced to around 1¼ percent of GDP in 2022, from around 4 percent of GDP in 2021.
  - Public debt-to-GDP decreased by 2½ percent of GDP in 2022 to 66.2 percent of GDP.
- Budget and headline numbers:
  - Title/finding: "4.5 percent of GDP deficit envisaged in the budget" motivated mainly by lower-than-expected spending on gas/electricity brakes and some revenue overperformance.
  - Selected fiscal indicators (Percent of GDP, 2020–28 headline balance series): -4.3 (2020), -3.7 (2021), -2.7 (2022), -3.0 (2023), -1.5 (2024), -0.9 (2025), -0.6 (2026), -0.5 (2027), -0.5 (2028).
  - Public Gross Debt (Maastricht): 68.7 (2020), 69.3 (2021), 66.2 (2022), 66.4 (2023), 65.0 (2024), 62.8 (2025), 61.1 (2026), 59.8 (2027), 58.6 (2028).
- Staff projections and stance:
  - Staff project headline deficit to widen by 0.3 percent of GDP in 2023 to 3 percent of GDP.
  - CAPB expected to tighten by ½ percent of GDP in 2023.
  - Staff expect fiscal deficit to narrow to around ½ percent of GDP by 2026 as energy-relief measures phase out and the output gap closes.
  - Staff recommend moderately tight fiscal policy in 2023 to support disinflation; further consolidation in 2024 under baseline.

### Outlook, growth projections, and scenarios
- Growth path:
  - Slightly negative GDP growth projected for 2023 before gradual recovery in 2024–25.
  - Output gap expected to turn negative; unemployment to rise only modestly due to Kurzarbeit.
  - Growth projected to strengthen in 2024 and peak in 2025; output gap closing in 2026.
  - Medium-term potential growth expected to fall below 1 percent due to population aging and tepid productivity growth.
- Inflation and wages:
  - Headline inflation expected to decline to around 3 percent by late-2023.
  - Core inflation projected to decline more slowly to around 4½ percent by end-2023 and to around 2½ percent by late-2024.
  - Wage growth expected to increase to around 5¾ percent in 2023–24.
- Immigration scenarios affecting labor force:
  - High immigration scenario: net immigration increases to 450,000 in 2023 then linearly falls to 320,000 in 2035.
  - Moderate immigration scenario: net immigration remains at 220,000 per year.
- Downside scenario (severe financial tightening, G20 Model):
  - Real GDP decrease relative to baseline: 1.8 and 1.4 percent in 2023 and 2024, respectively.
  - Core inflation would cool by about 0.7 percentage points in 2023 and 2024.

### Financial conditions, banks, and housing risks
- Interest rates and credit:
  - Interest rates rose substantially reflecting ECB tightening expectations.
  - Real lending growth turned negative.
  - ECB surveys show households’ and firms’ loan demand declined.
  - Banks report tighter lending standards: higher interest margins, higher collateral requirements, lower LTVs.
- Housing and property:
  - Residential real-estate prices now falling, though prices remain 20 percent and 40 percent above historical average price-to-income and price-to-rent ratios, respectively.
  - Basel credit gap: +4.3 percent of GDP as of Q4 2022.
  - Retail property prices and office prices have been falling since 2017 and 2020, respectively.
- Banking sector soundness:
  - Total CET1 capital 19.2 percent of risk-weighted assets at end-2022.
  - Regulatory capital to RWA: 19.2 (2022) with variation across years.
  - Return on average assets (after-tax): 0.4 (2022).
  - NPLs to gross loans: 1.4 (2022).
  - Liquid assets to total short-term liabilities: methodological break noted; series show 34.1 (2022) but earlier years much higher.
- Interest-rate risk and profitability:
  - Staff expect average long-term government bond yields to rise by 2.8 percentage points in 2023 (compared with 1.5 percentage points increase in 2022).
  - Losses in 2023 could be about twice those of 2022.
  - Net interest margins rose in 2022Q2–Q3 but expected to decline as banks raise deposit rates faster than loan rates.
- Mortgage market and household vulnerabilities:
  - Household debt 100 percent of disposable income.
  - Mortgages mostly fixed-rate with average duration around 10 years; full-recourse loans.
  - Rising mortgage rates increased share of high-DSTI loans in new loans.
  - With falling house prices, some borrowers could experience negative equity.
- Commercial real estate (CRE) risks:
  - One-third of CRE loans at floating rates; half have bullet repayments.
  - Some CRE loans have LTV ratios >100 percent.
  - German banks allocate 10 percent of loans to CRE versus European average of 12 percent.
  - Recommendation to harmonize definitions, collect and publish comparable LTV and coverage ratio data, and strengthen supervision.

### Liquidity risk, market funding, and nonbank vulnerabilities
- Elevated liquidity risks after central banks’ withdrawal of liquidity and funding volatility; early-2023 bank distress in U.S. and Switzerland affected German markets.
- Liquidity coverage ratios (end-2022):
  - Significant institutions: 154 percent
  - Less-significant institutions: 178 percent
- Nonbank sector:
  - Open-ended funds exposed to redemption risk; one-quarter of investment funds introduced liquidity management tools (gates/notice periods).
- TLTRO withdrawal illustrative impact:
  - Back-of-the-envelope: withdrawal could reduce aggregate bank profits by about 1 percent for each 0.1 percentage point in TLTRO interest margin.
  - Example: if average interest margin in range 0.5-1.0 percentage points, withdrawal would reduce aggregate profits by around 5-10 percent.
  - Calculation basis: €400 billion outstanding TLTRO funding; banking system assets €10 trillion; ROA 0.4 percent.
- Recommendations on safety nets and crisis management:
  - Move to a single mandatory deposit insurance scheme.
  - Establish a public liquidity backstop with sufficient resources to compensate depositors under severe scenarios.
  - Ensure resolution plans account for joint resolution of IPS members and IPSs.

### Macroprudential policy, data, and supervisory recommendations
- Recent macroprudential measures (effective February 2023):
  - CCyB requirement: 0.75 percent
  - Sectoral systemic risk buffer: 2 percent on loans secured by domestic residential real estate
- Data and toolkit:
  - Close data gaps on lending standards; Bundesbank WIFSta data collection started; first quarterly data expected in summer 2023.
  - Consider adding DSTI/DTI limits to macroprudential toolkit; legislative draft prepared but delayed.
  - Encourage adoption of liquidity management tools by investment funds.
- Supervisory actions:
  - Identify and intensively supervise banks most vulnerable to interest-rate and liquidity stress.
  - Increase stress testing and interest-rate risk analyses for LSIs.
  - Enhance transparency by publishing additional risk analyses and more information on LSIs.

### Energy price brakes (Annex I) — design, costs, and recommendations
- Objective: cushion impact of high energy prices for end-users via gas and electricity "price brakes" adopted December 2022.
- Fiscal cost and funding:
  - Estimated fiscal cost: 1.4 percent of GDP (€57 bn).
  - Funded by the €200 billion "protective shield" established in 2022.
- Key parameters (Households and SMEs, Period January–December 2023; extension through April 2024 possible):
  - Price caps:
    - Natural gas: 12 cents/KWh
    - Heat: 9.5 cents/KWh
    - Electricity: 40 cents/KWh (including grid fees, taxes, charges, levies)
  - Eligible amount: 80 percent of consumption forecasted in September 2022; electricity limit up to 30,000 KWh.
  - Refund mechanism: lump-sum based on prior consumption, preserving marginal conservation incentives.
- Industry (Period January–December 2023; extension possible):
  - Price caps:
    - Natural gas: 7 cents/KWh
    - Electricity: 13 cents/KWh (before grid fees, taxes, charges, levies)
  - Eligible amount: 70 percent of consumption in 2021.
  - Beneficiary caps and conditionality include limits of €150 mn, €100 mn, €50 mn etc., job retention obligations for firms receiving €2 mn or more, and bans on bonuses/dividends for firms receiving large aid.
- Staff recommendations:
  - Allow electricity and gas price brakes to expire as planned by April 2024 at the latest; avoid new energy price subsidies.
  - Improve targeting: consider temporary solidarity taxes on higher-income households or greater claw-back of relief provided to higher-income households.
  - Expedite creation of consolidated household income and bank-account information systems to improve targeting for future shocks.

### Public debt, gross financing needs (GFN), and baseline debt projections
- Long-term interest rates and GFN:
  - Long-term interest rates on German bonds: 1.2 percent in 2022; projected 2.9 percent in 2025; around 2½ percent by 2028.
  - Effective interest rates: 1 percent in 2022; 1.9 percent by 2028.
  - Gross financing needs: 18.9 percent of GDP in 2022; expected to decline to below 13 percent of GDP in 2028.
- Baseline public debt (Percent of GDP):
  - 2022: 66.2; 2023: 66.4; 2024: 65.0; 2025: 62.8; 2026: 61.1; 2027: 59.8; 2028: 58.6; 2029: 57.5; 2030: 56.4; 2031: 55.3; 2032: 54.2; 2033: 53.2.
- Primary deficit (Percent of GDP): 2.2 (2022), 2.3 (2023), 0.7 (2024), -0.1 (2025), -0.3 (2026) ... trending negative thereafter.
- Risk assessment:
  - Germany at low overall risk of sovereign stress; debt sustainable.
  - Probability of debt not stabilizing: 15.0 (pct).
  - Average GFN in baseline: 14.9 (memo).
  - Outstanding federal government guarantees as of end-2022: 16¼ percent of GDP.
- Debt coverage: general government; most debt issued by federal government; public debt entirely in domestic currency; share held by central bank rose to 15 percent in 2022.

### Human capital, productivity, innovation, and digitalization
- Human capital and labor measures:
  - Authorities view enhancing human capital as key to the green transition and boosting growth.
  - Skills development component of Bürgergeld should be assessed using adequate data and program design adjusted as needed.
  - Measures include vocational training guarantee and skills development benefit.
  - Immediate access to integration measures for asylum-seekers since early 2023.
- Productivity constraints and policy priorities:
  - Labor productivity growth has declined and trails non-European advanced economies.
  - Decline driven by lower ICT capital deepening and weaker multifactor productivity.
  - Recommendations: foster business dynamism, improve access to finance for young firms, reduce administrative burdens, increase R&D incentives, and expand funding for start-ups and VC.
- R&D tax credit details:
  - Paid equal to 25 percent of assessment base (wages and salaries of research staff).
  - Capped at €2 million (a firm can receive up to €500,000 per financial year).
  - Cap on assessment base raised to €4 million during July 2020–June 2026 as COVID relief.
- Digital infrastructure:
  - 5G coverage jumped to 86.5 percent of households in 2022, from 18 percent in 2021.
  - Fixed broadband availability high but download speeds slower than peers; connectivity weaker outside large cities.
  - Gigabit Strategy aims to expand fiber and wireless outside large cities and enhance digital government and cybersecurity.

### Green transition, climate policy, and EV targets
- Emissions and energy:
  - Power and heat generation sector reduced energy consumption by 4.7 percent in 2022; increased coal and oil use partially offset emission reductions.
  - Industry met 2022 CO2 targets; building and transportation sectors did not meet targets.
- EV targets and infrastructure:
  - EV share of new car registrations in 2022: about 45 percent.
  - Target: 15 million EVs (stock) by 2030.
  - Annual EV sales required: increase from around 1.1 million in 2022 to more than 1.4 million per year.
  - EV charging stations required: increase from around 70,000 in 2022 to one million by 2030.
- Subsidies:
  - 2022 subsidies: €5,000-6,000 for new BEV and €3,750–4,500 for new PHEV.
  - Since January 2023: subsidies for PHEV eliminated; subsidies for BEV reduced to €3,000–4,500.
- Policy guidance:
  - Resume increase in domestic carbon pricing in 2024 as planned; consider further strengthening carbon pricing.
  - Limit additional subsidies to market failures and ensure fiscal affordability across EU countries.
  - Accelerate EV charging stations and smart grid expansion; consider revenue-neutral feebate schemes.
  - Support EU CBAM and Germany’s role in the Climate Club.

### AML/CFT, governance, and institutional reforms
- FATF mutual evaluation (September 2022) found improvements and priority areas: risk-based supervision, use of financial intelligence, prosecutions, transparency of legal persons, and targeted sanctions implementation.
- Government initiated "Project BBF" to set up a federal AML agency expected to start operations in 2025 with three pillars: investigation, FIU analysis, and AML supervision coordination.
- Beneficial ownership transparency: need to align with revised international standard; current Transparency Register access limited following Court of Justice ruling.
- Authorities plan draft legislation for a new federal AML agency and expect EU-level AML/CFT regulation and a European AML agency.

### Key policy recommendations (near-term and medium-term)
- Near-term priorities:
  - Support disinflation: ECB monetary tightening critical; complement with moderately tighter fiscal policy in 2023 and close monitoring of systemic financial risks.
  - Improve targeting of energy relief (temporary solidarity taxes, claw-backs).
  - Allow gas and electricity price brakes to expire by April 2024 at the latest.
  - Allow automatic stabilizers to operate fully; deploy targeted discretionary support if large shocks materialize.
- Financial stability actions:
  - Intensify analysis of interest-rate and liquidity risks; expand stress testing and data collection, especially for LSIs.
  - Identify vulnerable banks for intensive supervision and enhance transparency; adopt conservative stance on capital distributions.
  - Move toward single mandatory deposit insurance and establish public liquidity backstop (subject to European-level debate).
- Medium-term fiscal strategy:
  - Create room for green transition, digitalization, and human capital by expenditure reforms, additional revenue mobilization, and/or modest adjustment to the debt-brake rule (consider increasing annual deficit limit by perhaps 1 percentage point of GDP), timed with EU fiscal rules review.
  - Reduce reliance on extra-budgetary funds and enhance transparency and cohesion with EU fiscal rules.
  - Accelerate public investment implementation by reducing regulatory burdens, expanding municipal planning capacity, and digitizing procurement.

### Major risks and contingency responses
- Principal risks (selected):
  - Intensification of regional conflict(s) — relative likelihood: High; impact: High.
  - Deepening geo-economic fragmentation — relative likelihood: High; impact: High.
  - Abrupt global slowdown — relative likelihood: Medium; impact: High.
  - Commodity price volatility — relative likelihood: Medium; impact: High.
  - Monetary policy miscalibration and systemic financial instability — relative likelihood: Medium; impact: Medium.
- Policy responses emphasized:
  - Allow automatic stabilizers, provide targeted support, preserve viable jobs, monitor refugee integration needs, and strengthen financial safety nets.
  - In severe global tightening, euro-area-level decisive monetary and financial policy response required; Germany could relax CCyB to preserve credit supply.

*Source: IMF staff report (content unit: 1deuea2023001).*

### 1. Real Activity ___________________________________________________________________________________ 33

### 1. Real Activity

### Context and Recent Developments
- GDP grew by 1.8 percent in 2022, better-than-expected following the shut-off of Russian gas to Germany in mid-2022.
- Germany experienced successful efforts to cut gas consumption; gas storage levels remained high, and Germany is on track to have five new floating LNG import terminals in place by end-2023.
- Growth in 2022 was supported by easing supply bottlenecks and excess-saving-buffered consumption.
- Recent quarters saw a downturn: GDP contracted by 0.5 percent (q-o-q) in Q4 2022 and by 0.3 percent (q-o-q) in Q1 2023.
- Energy-intensive sectors suffered from high energy prices; falling real wages amid high inflation depressed consumption.
- Firms increasingly cite financing bottlenecks as a constraint on output as interest rates rose.

### Labor Market
- Employment is back to the pre-pandemic trend and the unemployment rate is at historic lows.
- Labor shortages have increased in nearly all sectors.
- Nominal wage growth started to pick up in 2022 but remains below consumer price inflation to date.
- Use of the short-time work program (Kurzarbeit) began to tick up slightly in Q4 2022.
- Fixed-rate mortgages accounted for 84 percent of new mortgages in April 2023, down 7 percentage points over twelve months.

### Inflation Dynamics
- Inflation averaged 8.7 percent in 2022; about half of that is explained by energy goods.
- Headline inflation has been falling since late-2022 as energy prices softened, but core inflation (excluding energy and unprocessed food) continued to rise until March 2023.
- As of May 2023, core inflation exceeds headline inflation: core 6.7 percent vs. headline 6.3 percent.
- Core inflation is broad-based: about half of its components now have inflation over 4 percent.
- Processed food and travel services experienced some of the sharpest price increases.

### External Sector and Terms of Trade
- Germany’s current account surplus narrowed to 4.2 percent of GDP in 2022, from 7.7 percent of GDP in 2021, driven by a surge in energy imports.
- The terms-of-trade deteriorated by 12 percent in the 12 months to August 2022, the largest since German reunification, before recovering somewhat.
- High travel imports and weak demand from Asia also contributed to the falling surplus.
- The external position in 2022 is assessed to have been stronger than warranted by fundamentals and desirable policy settings, with the current account gap estimated at 2.8 percent of GDP.

### Financial Conditions, Credit, and Housing
- Interest rates rose substantially over the last year, reflecting actual and anticipated ECB monetary tightening.
- Real lending growth turned negative.
- ECB surveys indicate households’ and firms’ loan demand declined on higher interest rates and lower investment.
- Banks report risk perceptions as a key driver of tighter lending standards, reflected in higher interest margins, higher collateral requirements, and lower loan-to-value (LTV) ratios.
- Residential real-estate prices are now falling, though prices remain 20 percent and 40 percent above the historical average price-to-income and price-to-rent ratios, respectively.
- The Basel credit gap was a positive 4.3 percent of GDP as of Q4 2022.
- In real terms, retail property prices and office prices have been falling since 2017 and 2020, respectively.

### Fiscal Developments
- The headline fiscal deficit declined to around 2½ percent of GDP in 2022 due to lower COVID-related spending and solid economic growth.
- COVID-related fiscal cost reduced to around 1¼ percent of GDP in 2022, from around 4 percent of GDP in 2021.
- Public debt-to-GDP decreased by 2½ percent of GDP in 2022 to 66.2 percent of GDP, helped by high nominal GDP growth.
- Energy relief measures, aid for Ukraine, and increased climate-related spending partially offset deficit improvements.

### Outlook and Risks
- Staff project slightly negative GDP growth in 2023 before gradual recovery in 2024–25.
- Tightening financial conditions and the energy shock are expected to keep annual GDP growth slightly negative in 2023, partly offset by rebounding external demand as China re-opens.
- The output gap is expected to turn negative; unemployment is expected to rise only modestly due to the Kurzarbeit scheme dampening the output gap-unemployment relationship.
- Growth is projected to strengthen in 2024 and peak in 2025, with the output gap closing in 2026.
- Technology transition costs are expected to keep steady-state output about 1¼ percent below a no-energy-crisis scenario; futures markets expect medium-term natural gas prices to be roughly twice the level expected before the crisis.
- Medium-term potential growth is expected to fall below 1 percent, given population aging and tepid productivity growth.
  - Germany had 1.1 million Ukrainian refugees by end-2022; whether they stay and join the labor force affects the working-age population path.
  - In the high immigration scenario net immigration is assumed to increase to 450,000 in 2023 and then linearly fall to 320,000 in 2035.
  - In the moderate immigration scenario net immigration is assumed to remain at 220,000 per year.
- Headline inflation is expected to decline to around 3 percent by late-2023; core inflation is projected to decline more slowly to around 4½ percent by end-2023 and to around 2½ percent by late-2024.
- Wage growth is expected to increase to around 5¾ percent in 2023–24.
- The current account surplus is projected to recover to some 6 percent of GDP by 2026.
- The fiscal stance is expected to be moderately tight in 2023:
  - Staff project the headline deficit to widen by 0.3 percent of GDP in 2023, from 2022, to 3 percent of GDP.
  - The cyclically-adjusted primary balance (CAPB) is expected to tighten by ½ percent of GDP.
  - A range of energy relief measures amount to around 2 percent of GDP on a gross basis, broadly unchanged from 2022, while the phase-out of temporary measures (e.g., COVID-relief) will more than offset these.

*Source: IMF staff chapter "1. Real Activity" from the provided Germany report content.*

### 4.5 percent of GDP deficit envisaged in the budget, due mainly to lower-than-expected spending on

### 1deuea2023001 - 4.5 percent of GDP deficit envisaged in the budget, due mainly to lower-than-expected spending on

### Macro outlook and uncertainty
- Baseline: growth muted in 2023, strengthens in 2024–25, averaging below 1 percent over the longer run.
- Inflation:
  - Headline inflation has likely peaked; core inflation normalization will take longer.
  - Uncertainty around persistency of core inflation is unusually high; risks tilted downward for growth.
  - Persistent core inflation could require tighter monetary policy, weighing on growth and triggering disorderly corrections in real estate and financial markets.
- Risks (both directions):
  - Downside: renewed global banking turbulence raising funding costs; abrupt global slowdown (hurts exports); prolonged war in Ukraine (affects commodity prices and confidence); insufficient structural reforms lowering potential growth; deeper GEF harming trade and financial stability.
  - Upside: faster unwinding of supply disruptions and stronger external demand; faster-than-expected easing of core inflation allowing earlier easing of financial conditions.

### Fiscal outlook and headline numbers
- Budget position:
  - Title: "4.5 percent of GDP deficit envisaged in the budget" (motivated mainly by lower-than-expected spending on the gas and electricity brakes, limited demand for additional capital injections for gas importers due to falling energy prices, and some fiscal revenue overperformance).
- Selected fiscal indicators (Text Table 2, Percent of GDP):
  - Headline Balance: -4.3 (2020), -3.7 (2021), -2.7 (2022), -3.0 (2023), -1.5 (2024), -0.9 (2025), -0.6 (2026), -0.5 (2027), -0.5 (2028).
  - Change from the previous year: -5.9, 0.6, 1.0, -0.3, 1.5, 0.7, 0.2, 0.1, 0.0.
  - Cyclically-Adjusted Primary Balance: -2.4, -2.5, -2.3, -1.7, -0.1, 0.4, 0.4, 0.6, 0.6.
  - Implied fiscal impulse: 1/ -4.5, 0.1, -0.2, -0.6, -1.6, -0.5, 0.0, -0.2, -0.1.
  - Structural Balance: -3.0, -3.1, -2.3, -2.6, -1.1, -0.7, -0.7, -0.5, -0.5.
  - Public Gross Debt (Maastricht definition): 68.7, 69.3, 66.2, 66.4, 65.0, 62.8, 61.1, 59.8, 58.6 (2020–28).
- Staff expectation: fiscal deficit to narrow to around ½ percent of GDP by 2026 as energy-relief measures phase out and the output gap closes.

### Authorities’ views
- Broad agreement with staff on the outlook and risks.
- Baseline forecasts: muted 2023 growth; strengthening 2024–25; long-run growth below 1 percent.
- Labor market: seen as resilient; authorities expect nominal wage growth to pick up significantly in near term.
- Authorities view headline inflation as peaked but expect core inflation to normalize more slowly.
- Ministry of Finance (MoF) stance:
  - Plans to save expected windfalls from higher-than-budgeted revenue and lower-than-budgeted spending on the electricity and gas price brakes in 2023.
  - Plans additional consolidation in 2024.
  - Does not see a need to revise the debt brake or increase revenue for medium-term needs; prefers cutting lower-priority spending.
  - Argues time-bound extra-budgetary funds facilitate smooth consolidation post-crisis and make adjustments visible.

### Policy recommendations — near term
- Top near-term priority: support disinflation.
  - ECB monetary tightening is critical; German authorities can support by:
    - (i) moderately tightening fiscal policy in 2023;
    - (ii) closely monitoring and addressing systemic financial sector risks.
- Fiscal flexibility if risks materialize:
  - Allow automatic stabilizers to operate fully.
  - Deploy discretionary measures targeted to the most vulnerable in case of large shocks.

### Energy relief, targeting, and transition
- Evaluation of energy relief:
  - Main measures (gas and electricity price brakes) maintain strong incentives to conserve energy.
  - Many household relief measures are income-taxable and thus progressive.
  - Fiscal cost of household relief measures is considerably larger than estimated fiscal cost to compensate the bottom 40 percent of households (Text Figure 7) — indicating scope for improved targeting.
- Recommendations:
  - Consider partially offsetting the cost of energy price relief via temporary solidarity taxes on higher-income households or greater claw-back of relief provided to them.
  - Allow electricity and gas price brakes to expire as planned by April 2024 at the latest; avoid new energy price subsidies.
  - Expedite creation of an information system consolidating data on households’ incomes and bank accounts to improve targeting for future shocks and climate-transition support.

### Medium-term fiscal room and reform options
- Constraints:
  - Little room under constitutional debt-brake rule: limits structural net borrowing to 0.35 percent of GDP per year at the federal level and to zero at the Länder (state) level.
  - Even using a debt-stabilizing overall deficit of around 1¾ percent of GDP (assuming steady-state annual nominal GDP growth of 3 percent and debt of 60 percent of GDP), envisaged increases in aging-related and defense spending leave essentially no scope for higher public investment.
- Options to create room:
  - Undertake expenditure reforms.
  - Mobilize additional revenue.
  - Adjust the debt brake rule (recommendation to consider modest increase in annual deficit limit).
  - Specific measures: reform property taxes; reduce distortionary or environmentally harmful subsidies (estimated at 1.2 percent of GDP based on latest available data); further expenditure reviews to identify low-priority spending.
- Timing: any adjustment to the debt-brake rule should await conclusion of the EU’s review of its fiscal rules.

### Debt-brake rule and extra-budgetary funds
- Facts:
  - Germany created multiple extra-budgetary funds totaling about 9 percent of GDP (Climate and Transformation Fund, Special Defense Fund, and “Protective Shield”).
  - Two Länder governments (Saarland and Bremen) created extra-budgetary funds in late-2022 (0.15 percent of GDP in total).
  - Spending from these funds does not count against the debt-brake limit if financing was approved while the escape clause was triggered, but does count toward the general government deficit under EU statistical standards.
- Recommendations:
  - Revise the debt-brake rule to limit use of extra-budgetary funds and consider increasing the annual deficit limit by perhaps 1 percentage point of GDP to improve realism and reduce incentives to rely on extrabudgetary funds.
  - Enhance transparency and cohesion with EU fiscal rules.

### Public investment and implementation
- Positive recent actions:
  - Leasing floating gas terminals and building new LNG/hydrogen terminals.
  - 2022 “Easter Package” to accelerate renewables by prioritizing renewables over other concerns until greenhouse gas neutrality achieved.
- Recommended further reforms to accelerate public investment:
  - Reduce regulatory burdens.
  - Expand planning capacity at municipal level.
  - Provide additional funding to municipal governments given rising material costs.
  - Enhance support from Partnerschaft Deutschland.
  - Strengthen the role of external project managers to reduce administrative workload.
  - Simplify, professionalize, and digitize public procurement via a comprehensive procurement transformation package planned for 2023–24.

### Financial stability amid rising interest rates
- Banking sector resilience and vulnerabilities:
  - Total CET1 capital of 19.2 percent of risk-weighted assets at end-2022.
  - Significant institutions’ CET1 capital ratios in line with peers.
  - Savings and cooperative banks suffered large mark-to-market losses from securities revaluation, temporarily lowering profitability.
  - 47 percent of significant institutions’ government bonds are held at amortized cost (implying unrealized losses for securities not marked-to-market).
- Prospective losses and margins:
  - Staff expect average long-term government bond yields to rise by 2.8 percentage points in 2023, compared to their increase of just 1.5 percentage points in 2022.
  - Losses in 2023 could be about twice those of 2022.
  - Net interest margins (NIMs) rose in 2022Q2–Q3 but are expected to start declining in the near term as banks raise deposit rates faster than loan rates.
- Insurers:
  - Insurers suffered mark-to-market losses and saw an uptick in lapses, but solvency positions were well hedged.
  - German insurers and pension funds are not active users of interest-rate derivatives; a UK-style fire-sale event in 2022 is unlikely.

*Source: IMF staff report text (Germany).*

### 25. Liquidity risk is elevated for all financial intermediaries, given central banks’

### 25. Liquidity risk is elevated for all financial intermediaries, given central banks’ withdrawal of liquidity and volatility in funding costs

### Elevated liquidity and market funding risks
- Liquidity risk rose after central banks’ withdrawal of liquidity and volatility in funding costs; bank distress in early 2023 in the U.S. and Switzerland put pressure on bank CDS spreads and equity prices globally, including in Germany, with markets stabilizing since then.
- Liquidity coverage ratios at end-2022:
  - Significant institutions: 154 percent
  - Less-significant institutions: 178 percent
- Nonbank vulnerabilities:
  - Open-ended investment funds are exposed to redemption risk as interest rates rise, having increased interest-rate sensitivity of their assets over the last decade and being highly interconnected.
  - A quarter of investment funds have introduced liquidity management tools, including gates and notice periods; further adoption is needed.

### Non-financial firms, energy costs, and insolvency
- Firms have largely passed higher energy input costs onto consumers while maintaining strong profits (Text Figure 9).
- Bankruptcies have ticked up but remain at very low levels due in part to strong government support during the pandemic and energy crisis.
- Risks:
  - Labor costs could rise this year.
  - Adjustment to structurally higher energy prices could pressure energy-intensive firms once temporary relief expires.
  - Highly-indebted enterprises account for a disproportionately large share of banks’ loan portfolios, increasing default risk if interest rates continue to rise.
- Bundesbank note: around 70 percent of total credit claims are on firms with below-average interest coverage ratios (EBITDA over interest expense).

### Household and mortgage market vulnerabilities
- Household debt is 100 percent of disposable income (Text Figure 10), concentrated among wealthier households.
- Mortgage characteristics:
  - Mortgages are full-recourse and mostly at fixed rates (average duration is around 10 years).
  - Since 2018, a high share of high-LTV lending and a rapid rise in house prices during 2018–21 led to overvaluation concerns.
  - Authorities announced:
    - Counter-cyclical capital buffer (CCyB) requirement of 0.75 percent
    - Sectoral systemic risk buffer requirement of 2 percent on loans secured by domestic residential real estate
    - These buffers took effect in February 2023, one year after announcement.
  - Rising mortgage rates have increased the share of high-DSTI loans in new loans.
  - With house prices now falling, some borrowers could experience negative equity.

### Recommendations: supervision, transparency, and buffers
- Authorities should:
  - Continue intensive analysis of implications of rising interest rates and liquidity risk for the financial sector.
  - Increase data collection and stress tests of interest-rate risks at less-significant institutions (FSSA ¶ 33).
  - Use the EU-wide stress test for significant institutions (SIs) as an important assessment tool.
  - Anticipate effects of withdrawal of TLTRO support on bank profitability, bank liquidity, and credit supply.
  - Identify banks most vulnerable to interest-rate and liquidity stress and subject them to more intensive supervision.
  - Enhance transparency around bank health by publishing additional risk analyses, disclosing more information on less-significant institutions, and clarifying available safety nets to reduce funding volatility.
  - Encourage conservative approaches to bank capital distributions (dividend payouts, share buy-backs, and bonuses).
  - For insurers: use the Solvency II reporting framework review to strengthen supervisors’ access to market risk information.
- TLTRO withdrawal illustrative calculation:
  - A back-of-the-envelope calculation suggests the withdrawal could reduce aggregate bank profits by about 1 percent for each 0.1 percentage point in TLTRO interest margin.
  - Example context: if average interest margin is in the range of 0.5-1.0 percentage points, the withdrawal would reduce aggregate profits by around 5-10 percent.
  - Calculation basis: €400 billion in outstanding TLTRO funding to the German banking system; banking system assets of €10 trillion; ROA of 0.4 percent.

### Strengthening safety nets and crisis management
- Recommendations:
  - Move to a single mandatory deposit insurance scheme to reduce costs.
  - Establish a public liquidity backstop with sufficient resources to compensate depositors under severe but plausible downside scenarios (e.g., distress of a medium-sized LSI) (FSSA ¶61).
  - Ensure resolution plans account for potential joint resolution of several members of each institutional protection scheme (IPS) and joint resolution of an IPS member with an IPS itself (FSSA ¶63).

### Residential real estate and macroprudential tools
- Data and policy needs:
  - Close data gaps on lending standards in 2023 to better analyze borrower-based measures.
  - Consider adding income-based instruments (e.g., DSTI limits) to the macroprudential toolkit (FSSA ¶ 44).
  - Strengthen guidance on lending standards from qualitative to more quantitative guidance as markets recover.
  - Example interim step: advise banks to phase-out lending to cover taxes and transaction costs associated with a house purchase as a first step toward adopting binding LTV limits.
- Authorities welcome new data to inform debates and address perceived obstacles to activation of borrower-based measures early in the next real estate market cycle.

### Commercial real estate (CRE) risks and supervisory actions
- Risk drivers:
  - One-third of CRE loans are at floating rates, increasing exposure to rising interest rates.
  - Half of CRE loans have a bullet repayment structure, increasing refinancing risk.
  - Some CRE loans have LTV ratios greater than 100 percent; German banks’ LTVs on CRE are higher than in other European countries, implying potentially low recovery rates if defaults occur.
  - German banks allocate 10 percent of loans to CRE versus a European average of 12 percent (ESRB).
  - German banks have recourse to borrower’s assets for about two-thirds of CRE loans.
- Supervisory recommendations:
  - Harmonize definitions of lending standards across banks.
  - Collect and publish comparable data on LTV ratios, interest- and debt-service-coverage ratios, and debt-yield ratios.
  - Strengthen supervision and enforcement, noting that German IRB banks may underestimate CRE credit risks given lower risk weights than STA banks and ECB review findings of weaknesses in CRE underwriting, provisioning, and appraisals.

### Policy response if downside risks materialize
- If a downside scenario of severe tightening of global financial conditions materializes (Annex VII), a decisive monetary and financial policy response at the euro area level would be required.
- German authorities could consider relaxing the countercyclical capital buffer to preserve credit supply.
- Fiscal policy:
  - Fiscal automatic stabilizers—including Kurzarbeit—should operate freely.
  - Discretionary support should be deployed in the event of a large contractionary and disinflationary shock.

### Authorities’ views on financial stability measures
- Authorities generally agreed with staff’s assessment of financial sector health and emphasized system stability.
- Supervisory stance:
  - Supervisors are more closely examining banks with high interest-rate and liquidity risks and publish stress tests of SIs and LSIs regularly.
  - Authorities are open to international discussions on interest-rate risk within the Basel III framework and LCR calibration.
- On real estate and deposit insurance:
  - Authorities highlighted ongoing initiatives to close data gaps and recent declines in new high-LTV lending.
  - They assessed the package of macroprudential capital buffers introduced in the past year as appropriate.
  - They consider maintaining the existing structure of deposit guarantee schemes appropriate to reflect the three-pillar banking structure and view the lack of a public liquidity backstop as a way to avoid moral hazard, while noting views will be shaped by ongoing European-level discussions.

### Green transition, emissions, and EV targets (connected policy context)
- Emissions and energy:
  - The power and heat generation sector reduced energy consumption by 4.7 percent in 2022, but increased coal and oil use partially offset emission reductions.
  - Industry met 2022 CO2 targets through enhanced energy efficiency and production cuts; building and transportation sectors did not meet targets.
- Electric vehicles and infrastructure:
  - Share of EVs in total new car registrations in 2022: about 45 percent.
  - Target: 15 million EVs (stock) by 2030.
  - Annual EV sales required to meet stock target: increase from around 1.1 million in 2022 to more than 1.4 million per year.
  - EV charging stations required: increase from around 70,000 in 2022 to one million by 2030.
- Subsidies:
  - In 2022, government subsidies: €5,000-6,000 for new battery-electric vehicles (BEV) and €3,750–4,500 for new plug-in hybrids (PHEV).
  - Since January 2023, subsidies for PHEV eliminated; subsidies for BEV reduced to €3,000–4,500.
- Policy guidance:
  - Resume increase in domestic carbon pricing in 2024 as planned and consider further strengthening carbon pricing.
  - Subsidies, if used, should target market failures (e.g., green R&D, energy efficiency) and be fiscally affordable across EU countries.
  - Simplify procedures and ensure cohesion across existing programs supporting the green transition.
  - Accelerate expansion of EV charging stations and smart grid network; consider revenue-neutral feebate schemes.
  - Support for the EU’s Carbon Border Adjustment Mechanism (CBAM) and recognition of Germany’s role in the Climate Club.

*Source: 1deuea2023001 - 25. Liquidity risk is elevated for all financial intermediaries, given central banks’ withdrawal of liquidity and volatility in funding costs.*

### 39. The authorities agreed that enhancing human capital is key to facilitating the green

### 1deuea2023001 - 39. The authorities agreed that enhancing human capital is key to facilitating the green

### Enhancing human capital and labor market measures
- Authorities view enhancing human capital as key to facilitating the green transition, boosting growth, and easing inflationary pressures.
- Assessment and adjustment:
  - The skills development component of Bürgergeld should be assessed once adequate data is accumulated and program design modified as needed.
- Measures to encourage employment and training:
  - Early retirees can work and earn additional income without any loss of pension entitlements.
  - Vocational training strengthened through:
    - Vocational training guarantee: aims to provide all youth with access to fully-qualified in-company vocational training.
    - Skills development benefit: for employees whose jobs are threatened by structural changes but can be reallocated to other positions in the same company by continuing training.
- Integration of migrants:
  - Immediate access to integration measures (e.g., language training) for all asylum-seekers since the beginning of 2023.

### Lifting productivity via capital deepening, innovation, and digitalization
- Diagnosis:
  - Germany’s labor productivity growth has declined over the last decade and trails non-European advanced economies.
  - Decline driven mainly by lower ICT capital deepening and weaker multifactor productivity.
  - Number of business registrations has been on a downward trend.
- Policy priorities to lift productivity:
  - Foster business dynamism and promote private investment by facilitating optimal resource allocation and technology diffusion.
  - Improve access to finance, especially for young firms and investment in intangible assets.
  - Reduce administrative burdens.

- Specific recommendations:
  - Further increase incentives for R&D:
    - Germany is an innovation leader in Europe with relatively high overall R&D spending, but R&D investment is concentrated in a few large businesses and Germany’s global share of R&D exports has been gradually eroding faster than its share of global GDP.
    - Consider further enhancing incentives to undertake R&D, including by further raising the ceiling for the R&D tax credit and increasing the availability of qualified workers.
    - R&D tax credit specifics:
      - Paid in an amount equal to 25 percent of the assessment base (i.e., wages and salaries paid to research staff).
      - Capped at €2 million (a firm can receive up to €500,000 per financial year).
      - As part of COVID-19 relief measures, the cap on the assessment base has been raised to €4 million during July 2020–June 2026.
  - Expand funding for young and innovative firms:
    - VC investment cooled in 2022 after solid increases through 2021.
    - Consider reducing regulatory barriers on the participation of institutional investors in venture capital markets.
    - Facilitate the use of employee stock-ownership option plans (ESOPs) by aligning their tax treatment with international standards.
    - Completion of the Capital Markets Union could reduce costs and restrictions on investors.
  - Lower market entry and growth barriers:
    - Reduce administrative burden of starting new firms, including increased use of digital government.
    - Strengthen competition framework, e.g., easing services sector regulation.

### Digital infrastructure, adoption, and the Gigabit Strategy
- Connectivity status:
  - Coverage of 5G jumped to 86.5 percent of households in 2022, from 18 percent in 2021.
  - High-speed mobile subscriptions continue to trail peers.
  - Availability and subscriptions of fixed broadband are high, but download speed of fixed broadband connection is slower than peers.
  - High-speed internet is less available outside large cities.
  - Use of digital technologies in business and digital skills is lower compared to the EU average.
- Gigabit Strategy (2022) aims to:
  - Expand digital infrastructure (e.g., high-speed fiber-optic and wireless networks) outside of large cities.
  - Enhance diffusion of ICT tools in the business and health sector, including by establishing an interoperable education ecosystem.
  - Strengthen digital government and cyber security.
- Authorities’ commitments:
  - Aim to increase R&D spending to 3.5 percent of GDP by 2025, including through potentially increasing the ceiling for the R&D tax credit.
  - “Future Fund” launched in December 2020 remains a key vehicle for expanding financial support for start-ups in capital-intensive growth phases.
  - MoF and Ministry of Justice presented a draft bill in April to create better conditions for start-ups and growth companies to go public and to promote ESOPs.
  - Preparing to introduce an investment allowance for green investment and digital assets.
  - Implementation of the Gigabit Strategy to expand connectivity continues on schedule.

### Exposure to Global Economic Fragmentation (GEF) and recommended actions
- Exposure and risks:
  - Rise in trade restrictions affecting EU countries following COVID-19, the war in Ukraine, and intensified geo-political tensions.
  - Germany’s relatively low trade concentrations insulate from geographically isolated shocks, but Germany is highly open to trade with significant trade connections outside the EU.
  - Substantial import dependency on China, and to a lesser extent on the U.S., for hard-to-substitute intermediate and high-tech goods, as well as semiconductors.
  - Securing sufficient supplies of critical raw materials could be challenging given geographic concentration.
  - Financial exposures to major non-EU countries through the banking system and FDI are relatively limited on an aggregate basis.
- Policy recommendations:
  - Assess and prepare for GEF-related risks while pursuing structural reforms to increase attractiveness as an investment destination.
  - Continue to support a multilateral, rules-based trading system.
  - Identify critical dependencies, assess impacts and transmission channels of different GEF scenarios (e.g., stress tests of value chains), and develop coping strategies.
  - Structural reforms to retain Germany’s attractiveness for investment.
- Authorities’ views and measures:
  - Commitment to free-trade policies within a multilateral and rules-based trading system.
  - Federal Institute for Geoscience and Natural Resources working with industry to identify critical raw material dependencies.
  - Joint proposal with France for a European Raw Material Act to identify and address critical raw material dependencies at the EU level.
  - Considering higher premiums on investment guarantees for firms with highly concentrated investment.
  - Differing views on energy price subsidies beyond 2024: some favor subsidizing electricity prices for energy-intensive firms until 2030; others favor market-based reforms and general business climate improvements.
  - Agreement that medium- to long-term, market-based reforms to boost availability of affordable electricity based on renewable resources are key to industrial competitiveness.

### Fighting transnational corruption and strengthening AML/CFT
- FATF mutual evaluation (September 2022) recognized improvements but identified priority areas for improvement:
  - Risk-based supervision, use of financial intelligence, investigation and prosecution of money laundering, transparency of legal persons and arrangements, and implementation of targeted financial sanctions.
- Government initiatives:
  - Commissioned “Project BBF” (Projekt Bundesoberbehörde zur Bekämpfung von Finanzkriminalität) at the Ministry of Finance in December 2022 to set up a new federal AML agency planning to start operations in 2025.
  - Planned new structure with three pillars:
    - Investigation of international and complex money laundering cases with a connection to Germany.
    - Analysis of suspicious transaction reports by the Financial Intelligence Unit.
    - A central coordination office for AML supervision.
  - BaFin improving collection of statistics and performance monitoring; work underway to update the National Risk Assessment (last published in 2019).
- Beneficial ownership transparency:
  - Need to bring the framework in line with the revised international standard and improve availability and accuracy of data in the Transparency Register.
  - Following the Court of Justice of the European Union ruling, Germany’s Transparency Register is now only available to those who can demonstrate a legitimate interest, assessed case-by-case.
- Authorities’ actions:
  - Welcomed the 2022 Mutual Evaluation Report and noted initiatives to strengthen governance and transparency.
  - Draft legislation for a new federal AML agency to be presented to parliament in the summer.
  - Expectation of an EU regulation on AML/CFT and creation of a European AML agency.
  - Introduced legal obligations and automated links to the company register to ensure accurate and up-to-date beneficial ownership information; strengthened enforcement and informed companies of obligations.

### Staff appraisal: near-term outlook and fiscal policy guidance
- Near-term macroeconomic assessment:
  - Tighter financial conditions and the energy price shock are weighing on near-term growth, while core inflation remains elevated.
  - Strong policies helped limit adverse spillovers from the war in Ukraine.
  - Energy shock and tighter financial conditions likely to keep GDP growth in mildly negative territory in 2023, before gradually strengthening in subsequent years.
  - Inflation expected to continue falling, but core inflation likely to decline more slowly than headline inflation due to lags in pass-through from declining commodity prices and rising nominal wage pressures.
  - Unusually high uncertainty around the baseline forecast, especially regarding persistency of core inflation.
- Fiscal stance and recommendations:
  - Moderately tight fiscal stance in 2023 will help support disinflation and reduce risks around these efforts.
  - Spending on gas and electricity brakes likely to be lower than budgeted in 2023 due to falling energy prices; fiscal revenue may also overperform.
  - Staff welcomes plans to save these windfalls, making the fiscal stance moderately contractionary in 2023.
  - Further fiscal contraction warranted in 2024 under the baseline scenario of a shallow recession with recovery toward the end of 2023.
  - Improve targeting of energy relief measures by temporary solidarity taxes on higher-income households or greater claw-back of energy price relief provided to them.
  - Gas and electricity price brakes should be allowed to expire as planned by April 2024 at the latest to facilitate adjustment to structurally higher fossil fuel prices.
  - Fiscal stance should remain flexible, allowing automatic stabilizers to operate freely and lessening or reversing planned structural fiscal adjustment in 2024 if the downturn is significantly more prolonged or deeper and inflation risks are well-contained.
- Medium-term fiscal strategy:
  - Create more fiscal room for investing in the green transition, digitalization, and boosting human and physical capital by undertaking expenditure reforms, mobilizing additional revenue, and/or adjusting the debt brake rule.
  - Reform of the debt brake could better align it with EU fiscal rules and lessen recourse to extrabudgetary funds.
  - Increased public investment over the medium term would boost growth and reduce imbalances in Germany’s external position.
  - Staff welcomes authorities’ efforts to accelerate public investment execution by improving planning and approval procedures, simplifying public procurement, and addressing staff shortages among municipal governments.

*Source: IMF staff report content provided in the submitted PDF excerpt.*

### 52. Financial stability risks associated with rapidly rising interest rates should be closely

### 52. Financial stability risks associated with rapidly rising interest rates should be closely

### Financial stability and interest-rate risks
- The overall capital and liquidity positions of Germany’s banking system and insurance system remain sound.
- Recent bank distress in other advanced economies has highlighted risks associated with excessive interest-rate exposure and unstable funding structures.
- The current calibration of the countercyclical capital buffer remains appropriate for now, but it may need to be eased if a severe tightening of global financial conditions materializes.

### Supervisory actions and bank safeguards
- Authorities should continue to identify banks that are most vulnerable to interest-rate and liquidity stress and subject them to intensive supervision.
- Supervisors should encourage a conservative approach to bank capital distributions given elevated risks associated with macroeconomic and financial market uncertainty.
- Further enhancing transparency around bank health could reduce volatility in funding conditions.
- Data collection and stress tests of interest-rate risks at LSIs should be enhanced.

### Market-based liquidity and investment funds
- Authorities should encourage investment funds to continue adopting liquidity management tools, including gates and notice periods.

### Safety nets and crisis management
- The volatility of global bank funding conditions underscores the need to further strengthen safety nets and crisis management frameworks.
- Germany should consider simplifying the structure of depositor protection by moving to a single mandatory scheme with a robust public liquidity backstop.
- Completion of the pan-European Banking Union and Capital Markets Union would further enhance financial stability and economic efficiency.

### Macroprudential policy and real estate risks
- Staff welcome the higher capital requirements that took effect in February 2023 to help address risks in the real estate sector.
- To enhance the ability to respond earlier and more effectively during the next real-estate market upswing:
  - Modify the law on borrower-based measures to add income-based instruments to the toolkit.
  - Address any perceived obstacles to the early activation of borrower-based measures.
- To better assess risks in commercial real estate:
  - Facilitate harmonization of definitions of lending standards across banks.
  - Collect and publish comparable data on LTV ratios, interest- and debt-service-coverage ratios, and debt-yield ratios.

### Green transition and climate-related policy
- Accelerating the green transition is essential to meet climate goals.
- Recommendations:
  - Resume the increase in domestic carbon pricing in 2024 as planned and consider further strengthening it.
  - Enhance take-up of existing programs that support the green transition by simplifying procedures and ensuring cohesion across programs.
  - Limit any additional subsidies for the green transition to addressing market failures and ensure they are fiscally affordable both in Germany and other EU countries, consistent with single-market principles.
  - Accelerate the expansion of EV charging stations and the smart grid network.
  - Consider revenue-neutral feebate schemes to further speed the green transition.
- Staff welcome:
  - Ongoing efforts to accelerate the implementation of public investment.
  - The introduction of the EU Carbon Border Adjustment Mechanism, which reduces carbon leakages.
  - Germany’s leadership in creating the Climate Club.

### Labor market, human capital, and productivity
- To help lift medium-term potential growth, Germany should further enhance human capital and boost labor productivity.
- Plans to augment the Skilled Immigration Act should help cushion the projected decline in the labor force due to population aging.
- The recently passed Bürgergeld includes training initiatives aimed at helping the unemployed find better-paying jobs; use should be closely monitored and design adjusted if needed to ensure it achieves objectives and does not unduly lengthen unemployment spells.
- To lift labor productivity: further enhance incentives to undertake R&D, expand funding for young and innovative firms, and lower market entry barriers for such firms.

### GEF-related risks and structural reforms
- Intensified global geopolitical tensions have raised GEF-related risks.
- Germany and its trading partners should continue to support a multilateral, rules-based trading system.
- Germany should identify critical dependencies, assess the impact and transmission channels of different GEF scenarios (e.g., stress tests of value chains), and develop strategies for coping with risks.

### AML/CFT and transparency
- Germany is encouraged to further strengthen its AML/CFT framework and enhance beneficial ownership transparency.
- Staff welcome government initiatives to address key areas for improvement identified in the 2022 FATF mutual evaluations.
- Germany should further improve the availability and accuracy of data in the Transparency Register.

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

*Source: IMF staff report excerpt (chapter content as provided).*

### 2.6 percent of GDP, from 3.7 percent of GDP in 2021...

### 1deuea2023001 - 2.6 percent of GDP, from 3.7 percent of GDP in 2021...

### Public finances and fiscal stance
- Overall balance: -3.7 (2021), -2.7 (2022), -3.0 (2023), -1.5 (2024), -0.9 (2025) — (Percent of GDP).
- Structural balance: -3.1 (2021), -2.3 (2022), -2.6 (2023), -1.1 (2024), -0.7 (2025) — (Percent of GDP).
- General government debt (Maastricht definition): 69.3 (2021), 66.2 (2022), 66.4 (2023), 65.0 (2024), 62.8 (2025) — (Percent of GDP).
- Finding: Less-than-budgeted spending on the gas/electricity price brakes due to lower energy prices and possible revenue overperformance are expected to lead to a moderately contractionary fiscal stance in 2023.
- Finding: The public debt ratio is projected to fall back to the pre-crisis level over the medium term as the overall balance improves.

### Tax revenue and expenditure composition
- Revenue: 46.5 (2019), 46.1 (2020), 47.5 (2021), 47.0 (2022), 46.5 (2023) — (Percent of GDP) and projected to remain around 46.5–46.8 through 2028.
- Taxes (Percent of GDP): 23.8 (2019), 22.6 (2020), 24.4 (2021), 24.5 (2022), 23.9 (2023).
  - Indirect taxes: 11.1 (2019), 10.6 (2020), 11.6 (2021), 11.3 (2022), 11.2 (2023).
  - Direct taxes: 12.7 (2019), 12.1 (2020), 13.0 (2021), 13.3 (2022), 12.9 (2023).
- Social contributions: 17.2 (2019), 17.9 (2020), 17.6 (2021), 17.2 (2022), 17.2 (2023) — (Percent of GDP).
- Expense: 45.0 (2019), 50.4 (2020), 51.3 (2021), 49.8 (2022), 49.5 (2023) — (Percent of GDP).
  - Social benefits: 24.3 (2019), 26.6 (2020), 26.1 (2021), 25.1 (2022), 24.8 (2023).
  - Interest: 0.8 (2019), 0.6 (2020), 0.6 (2021), 0.7 (2022), 0.9 (2023).
  - Gross public investment: 2.4 (2019), 2.7 (2020), 2.6 (2021), 2.6 (2022), 2.8 (2023).

### Macroeconomic projections and key indicators
- GDP growth (working-day adjusted): 2.6 (2021), 1.9 (2022), -0.1 (2023), 1.3 (2024), 2.0 (2025) — (Percent change).
- Output gap (percent of potential GDP): -1.3 (2021), 0.5 (2022), -0.9 (2023), -0.9 (2024), -0.4 (2025).
- Unemployment rate (ILO): 3.6 (2021), 3.1 (2022), 3.3 (2023), 3.3 (2024), 3.1 (2025) — (Percent).
- CPI (harmonized), period average: 3.2 (2021), 8.7 (2022), 5.8 (2023), 2.6 (2024), 2.1 (2025) — (Percent).
- GDP deflator: 3.1 (2021), 5.5 (2022), 4.8 (2023), 3.2 (2024), 2.9 (2025) — (Percent).
- Household saving ratio (percent): 15.2 (2021), 11.4 (2022), 11.1 (2023), 10.9 (2024), 10.9 (2025).

### External sector and balance of payments
- Current account balance: 8.2 (2019), 7.1 (2020), 7.7 (2021), 4.2 (2022), 5.4 (2023), 5.7 (2024), 6.6 (2025) — (Percent of GDP).
- Trade balance: 5.9 (2019), 5.8 (2020), 5.5 (2021), 2.1 (2022), 3.3 (2023), 3.6 (2024), 4.3 (2025).
- Finding: The current account (CA) surplus fell in 2022 on higher energy import costs.
- Net International Investment Position (Net IIP): 58.5 (2019), 63.8 (2020), 70.1 (2021), 71.1 (2022) — (Percent of GDP).
- Financial account: 5.8 (2019), 5.6 (2020), 6.9 (2021), 5.7 (2022), 5.4 (2023) — (Percent of GDP).

### Credit conditions, interest rates, and asset prices
- Lending rates on new loans (recent behavior): rising government bond yields are passing through to lending rates, especially for mortgages.
- Lending by monetary financial institutions: decelerating growth with contributions from loans to households and NFCs.
- Long-term interest rates: in a little over a year, long-term interest rates have risen to their highest levels since 2014, with long-term real interest rates around zero.
- Stock market indices: DAX and EURO STOXX 50 recoveries partially offset interest-rate effects on stock prices.

### Housing market and real estate
- New residential housing units (Thousands): upward trend through 2022; public investment and tight labor market conditions left public investment as a percent of GDP broadly unchanged in 2022.
- Housing prices: decade-long upward trend continued; recent interest rate increases have softened house prices.
- Finding: Despite the upward trend, housing supply is not adequate to meet demand, leading to overvaluation.
- Unfilled orders and new orders: backlog of unfilled orders; recent interest rate increases have slowed new orders.
- Real estate lending: slowed since 2022 on higher interest rates.
- Gross public investment: 2.6 (2021), 2.6 (2022), 2.8 (2023) — (Percent of GDP).

### Banking sector soundness and recent developments
- CDS spreads: Recent banking sector turmoil lifted CDS spreads to levels last seen during the 2022 energy crisis.
- Profitability: The two largest commercial banks continue trading at a discount relative to many European peers, reflecting structurally low profitability and lower interest rate margins than European peers.
- Capital and leverage (selected indicators):
  - Regulatory capital to risk-weighted assets (Total, Percent): 19.4 (2017), 18.9 (2018), 18.6 (2019), 19.2 (2020), 18.8 (2021), 19.2 (2022).
  - (Phase in) Common Equity Tier 1 Ratio (selected banks): shown across 2021–2022 with variation among banks.
  - Leverage ratio (Percent): examples for 2022 show variation across institutions; some German banks' leverage ratios are lower than peers.
- Profitability metrics (selected):
  - Return on average assets (after-tax): 0.2 (2017), 0.2 (2018), 0.0 (2019), 0.1 (2020), 0.2 (2021), 0.4 (2022).
  - Return on average equity (after-tax): 4.1 (2017), 2.4 (2018), -0.4 (2019), 1.1 (2020), 3.2 (2021), 5.7 (2022).
  - Net interest margin (Percent): 1.0–2.6 range across bank types with lower margins vs. some peers.
- Asset quality:
  - NPLs to gross loans: 1.5 (2017), 1.2 (2018), 1.1 (2019), 1.7 (2020), 1.5 (2021), 1.4 (2022).
- Liquidity:
  - Liquid assets to total short-term liabilities (Percent): 151.3 (2017), 151.7 (2018), 161.2 (2019), 169.6 (2020), 170.9 (2021), 34.1 (2022) — note methodological break in 2022.

### Monetary and financial aggregates
- Money and quasi-money (M3) growth: 5.7 (2021), 5.1 (2022) — (Percent change).
- Credit to private sector: 5.4 (2021), 6.6 (2022) — (Percent change).
- Three-month interbank rate: -0.5 (2021), 0.3 (2022) — (Percent).
- Yield on ten-year government bonds: -0.3 (2021), 1.3 (2022) — (Percent).
- Exchange rates and effective rates:
  - Euro per US$: 0.84 (2021), 0.95 (2022).
  - Nominal effective rate (2010=100): 104.7 (2021), 102.4 (2022).
  - Real effective rate (2010=100), CPI based: 97.1 (2021), 93.6 (2022).

*Source: IMF staff estimates and projections as presented in the source document.*

### Annex I. Germany’s Gas and Electricity Price Brakes

### Annex I. Germany’s Gas and Electricity Price Brakes

### Overview
- Purpose: To cushion the impact of high energy prices on end-users, the German government adopted a “price brake” for gas and electricity in December 2022.
- Fiscal cost and funding:
  - Estimated fiscal cost: 1.4 percent of GDP (€57 bn).
  - Funded by the €200 billion “protective shield” established in 2022.
- Mechanism: Households and firms have access to gas (including heating) and electricity at a subsidized price up to a pre-determined amount calculated based on previous year’s consumption. Consumption exceeding this threshold is priced at a “work price” (Arbeitspreis) agreed between customer and supplier.

### Households and SMEs — design and incentives
- Refund mechanism:
  - Households and small- and medium-size enterprises (SMEs) receive a refund if their gas or electricity consumption does not reach the threshold amount.
  - This functions as a lump-sum cash transfer based on the previous year’s consumption and the “work price” while the marginal price for all gas and electricity consumption equals the supplier’s market price, creating strong incentives to conserve energy.
- Payment flow:
  - Subsidies are paid by the government to energy suppliers, which are obligated to credit the relief amount to consumers, either in their annual bill or via their instalments or advance payments.
- Tenants:
  - Landlords must pass on any relief amounts they received via the utility bill.

Key parameters for Households and SMEs:
- Period: January–December 2023, but extension through April 2024 is possible.
- Price cap:
  - Natural gas: 12 cents/KWh
  - Heat: 9.5 cents/KWh
  - Electricity: 40 cents/KWh, including grid fees, taxes, charges, and levies
- Eligible amount:
  - Gas/heat: 80 percent of consumption forecasted in September 2022
  - Electricity: 80 percent of consumption forecasted in September 2022, up to 30,000 KWh
- Other considerations:
  - Incentive to conserve energy: Refund is independent of current consumption; marginal cost equals the actual price of the supplier, preserving the full incentive to save energy.
  - Tenants: landlords must pass on relief via the utility bill.

### Industry — design, eligibility, and conditionality
- General design:
  - Period: January–December 2023, but extension through April 2024 is possible.
  - Price cap:
    - Natural gas: 7 cents/KWh
    - Electricity: 13 cents/KWh, before grid fees, taxes, charges, and levies
  - Eligible amount: 70 percent of consumption in 2021
- Beneficiary categories and limits:

  Hard-hit companies:
  - €150 mn: Energy-intensive company (i.e., energy costs in 2021 of 3 percent of turnover; or energy costs in 2022H1 of 6 percent of turnover) and operating in one of the 4-digit trade-exposed industries (as listed in EU TCF)
  - €50 mn: Energy-intensive company
  - €100 mn: Other companies, subject to a limit of 40 percent of the eligible energy costs

  Non-Hard-hit companies:
  - €4 mn: Provided that the aid does not exceed 50 percent of the eligible energy costs
  - €2 mn: Other companies (aid can cover up to 100 percent of eligible energy costs)

- Other conditions and restrictions:
  - Job retention obligation: Firms receiving €2 mn or more are required to maintain a workforce of at least 90 percent of the full-time equivalent jobs as of January 1, 2023, through April 30, 2025.
  - Ban on bonuses and dividend payouts:
    - Firms receiving €25 million or more are not allowed to provide (i) bonuses to the management of the company or to members of the company’s supervisory bodies; and (ii) the payment of variable compensation components and increases in fixed salaries paid to corporate bodies until after end-2023.
    - Firms receiving €50 million or more are not allowed to pay out dividends.
  - Aid for hospitals and inpatient care facilities: Benefit from the price brakes under the same conditions, with special aid funds to ensure uninterrupted supply.

### Behavioral and market implications
- Households/SMEs:
  - The refund structure (lump-sum based on prior consumption) preserves the marginal incentive to conserve energy because consumers face the supplier’s market price for additional consumption.
- Large firms:
  - The scheme functions effectively as a lump-sum cash transfer; the marginal price for consumption is the market price.
  - Conditionality (job retention, limits on payouts) is used to target support and limit potential moral hazard.

### Key administrative and timeline notes
- Program timing: January–December 2023, with extension through April 2024 possible.
- Implementation: Subsidies flow from government to energy suppliers, who are obligated to credit consumers via annual bills, instalments, or advance payments.

*Source: Annex I. Germany’s Gas and Electricity Price Brakes*

### 5. Interest rates and gross financing needs (GFN). Long-term interest rates on German

### 1deuea2023001 - 5. Interest rates and gross financing needs (GFN). Long-term interest rates on German bonds are projected to rise from 1.2 percent in 2022 to 2.9 percent in 2025 and then decline to around 2½ percent by 2028.

### Interest rates and gross financing needs (GFN)
- Long-term interest rates on German bonds:
  - 1.2 percent in 2022
  - 2.9 percent in 2025
  - around 2½ percent by 2028
- Effective interest rates:
  - 1 percent in 2022
  - 1.9 percent by 2028 (projected to steadily rise from 1 percent in 2022)
- Gross financing needs (GFN):
  - Nearly 19 percent of GDP in 2022
  - Expected to decline to below 13 percent of GDP in 2028

### Baseline fiscal and debt projections (selected series from the Baseline Scenario table)
- Public debt (Percent of GDP; Actual and projections):
  - Actual 2022: 66.2
  - 2023: 66.4
  - 2024: 65.0
  - 2025: 62.8
  - 2026: 61.1
  - 2027: 59.8
  - 2028: 58.6
  - 2029: 57.5
  - 2030: 56.4
  - 2031: 55.3
  - 2032: 54.2
  - 2033: 53.2
- Change in public debt (Percent of GDP):
  - 2022: -3.0
  - 2023: 0.2
  - 2024: -1.4
  - 2025: -2.2
  - 2026: -1.7
  - 2027: -1.3
  - 2028: -1.2
  - 2029: -1.2
  - 2030: -1.1
  - 2031: -1.1
  - 2032: -1.1
  - 2033: -1.0
- Contribution of identified flows (Percent of GDP):
  - Mirrors the "Change in public debt" row for 2022–2033: -2.1, 0.2, -1.4, -2.2, -1.7, -1.3, -1.2, -1.1, -1.1, -1.1, -1.0
- Primary deficit (Percent of GDP):
  - 2022: 2.2
  - 2023: 2.3
  - 2024: 0.7
  - 2025: -0.1
  - 2026: -0.3
  - 2027: -0.5
  - 2028: -0.5
  - 2029: -0.5
  - 2030: -0.5
  - 2031: -0.5
  - 2032: -0.6
  - 2033: -0.7
- Noninterest revenues (Percent of GDP):
  - 2022: 46.9; 2023: 46.4; 2024–2033: 46.4–46.7 (values repeated in table)
- Noninterest expenditures (Percent of GDP):
  - 2022: 49.1; 2023: 48.7; 2024: 47.1; 2025: 46.4; 2026–2033: 46.4–46.1 (values as in table)
- Automatic debt dynamics (Percent of GDP):
  - 2022: -4.1
  - 2023: -1.9
  - 2024: -2.0
  - 2025: -2.0
  - 2026: -1.3
  - 2027: -0.7
  - 2028: -0.6
  - 2029: -0.5
  - 2030: -0.5
  - 2031: -0.4
  - 2032: -0.4
  - 2033: -0.2
- Real interest rate and relative inflation (Percent):
  - 2022: -2.9
  - 2023: -2.2
  - 2024: -1.1
  - 2025: -0.8
  - 2026: -0.2
  - 2027: 0.0
  - 2028: 0.0
  - 2029: 0.0
  - 2030: 0.0
  - 2031: 0.1
  - 2032: 0.1
  - 2033: 0.2
- Real growth rate (Percent):
  - 2022: -1.2
  - 2023: 0.2
  - 2024: -0.9
  - 2025: -1.2
  - 2026: -1.1
  - 2027: -0.7
  - 2028: -0.5
  - 2029: -0.5
  - 2030: -0.5
  - 2031: -0.5
  - 2032: -0.5
  - 2033: -0.5
- Other identified flows and other transactions (Percent of GDP):
  - 2022: -0.1; 2023–2033: -0.1 (each year)
- Contribution of residual:
  - 2022: -1.0; 2023–2033: 0.0 (each year)
- Gross financing needs (GFN) (Percent of GDP):
  - 2022: 18.9
  - 2023: 15.4
  - 2024: 16.2
  - 2025: 16.3
  - 2026: 16.3
  - 2027: 12.4
  - 2028: 11.3
  - 2029: 11.6
  - 2030: 11.0
  - 2031: 9.7
  - 2032: 12.0
  - 2033: (table shows 12.0 as last memo line for average; use series above)
- Of which: debt service (Percent of GDP):
  - 2022: 16.8
  - 2023: 13.3
  - 2024: 15.7
  - 2025: 16.5
  - 2026: 16.7
  - 2027: 13.0
  - 2028: 13.3
  - 2029: 11.9
  - 2030: 12.2
  - 2031: 11.7
  - 2032: 10.4
  - 2033: 12.8
- GFN by currency:
  - Local currency series (Percent of GDP): 0.7 (2022), 12.9 (2023), 15.6 (2024), 16.4 (2025), 16.3 (2026), 13.0 (2027), 13.3 (2028), 11.9 (2029), 11.7 (2030), 11.6 (2031), 10.4 (2032), 12.4 (2033)
  - Foreign currency: 0.0 for 2022–2033

### Realism of baseline assumptions and forecast track record
- Forecast errors for debt-related variables for Germany:
  - For three-year and five-year horizons: in the range of the 25th to 50th percentile (variables include public debt-to-GDP ratio, primary balance, r-g, and stock flow adjustments (SFA))
  - Over a one-year horizon:
    - Public debt-to-GDP ratio and SFA: in the range of the 50th to 75th percentiles
    - Primary balance and r-g: in the range of the 25th to 50th percentiles
- Commentary: Past forecast errors do not reveal any systematic biases and the projected fiscal adjustment and debt reduction are well within norms.

### Factors contributing to the evolution of public debt-to-GDP ratios
- Past five years:
  - Debt evolution dominated by adverse growth impact of the pandemic and associated fiscal support measures.
- Next five years:
  - Debt creation from the primary deficit expected to decrease somewhat as sizable energy-relief measures phase out over the medium term.
  - Projected strengthening of GDP growth expected to improve debt dynamics.

### Risk assessment and mitigating factors
- Overall sovereign stress risk:
  - Germany is at a low overall risk of sovereign stress, and debt is sustainable.
  - Public debt expected to start declining in 2024 and reach below 60 percent of GDP by 2028.
- Key risks that could push debt ratio and GFN higher:
  - Large negative growth shocks
  - Faster-than-expected monetary policy tightening
- Risk-mitigating factors:
  - Relatively long average debt maturity of around seven years, which slows pass-through from higher yields to effective interest rates
  - Large, stable investor base and home bias, which mitigate liquidity risks
  - Virtually no debt denominated in foreign currency, insulating Germany from FX risks
- Additional notes:
  - Outstanding federal government guarantees issued as of end-2022 amounted to 16¼ percent of GDP

### Debt coverage, structure, and medium-term risk analysis (selected indicators)
- Debt coverage in the DSA: covers general government; most debt issued by the federal (central) government
- Subsector inclusion in baseline coverage:
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): Yes
  - Social security funds (SSFs): Yes
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No
- Public debt currency and holder composition (commentary):
  - Public debt is entirely in domestic currency and predominantly marketable.
  - Share held by the central bank rose from zero in 2014 to 15 percent in 2022.
  - Share of external private creditors declined from 23 percent in 2014 to 2 perecent in 2022.
- Residual and probability metrics (from Medium-Term Risk Analysis):
  - Fanchart width: 29.6
  - Probability of debt not stabilizing (pct): 15.0
  - Terminal debt level x institutions index: 11.9
  - Average GFN in baseline: 14.9
  - GFN financeability index: 6.4
  - Bank claims on government (pct bank assets): 3.8
  - Change in claims on govt. in stress (pct bank assets): 0.3
  - Prob. of missed crisis, 2023-2028 (if stress not predicted): 0.0 pct.
  - Prob. of false alarm, 2023-2028 (if stress predicted): 70.5 pct.
- Commentary: The debt fanchart shows a relatively low probability (below 25 percent) that Germany's public debt will not stabilize over the medium term. All medium-term tools point to a low level of risks.

### Core inflation dynamics (Annex V) — drivers and implications for wages, profits, and inflation
- Nature of recent inflation surge:
  - First significant, sustained spike in core inflation in Germany since euro adoption, driven by exceptionally large shocks from the pandemic and the energy crisis.
- Energy-sensitivity decomposition:
  - Energy-sensitive items have substantially outstripped inflation of non-energy sensitive items, reflecting passthrough of higher energy input costs into core inflation.
  - Lower energy prices have not fully passed through to core prices; lags imply continued near-term downward pressure on core inflation.
  - Inflation for non-energy sensitive items has doubled over the last 18 months and now exceeds 4 percent, with no strong signs yet of deceleration; staff project this item will start to decline as slowing economic activity weighs on aggregate demand.
- Wages, profits, and inflation:
  - Since 2020Q3, unit profit (nominal profit per unit of real GDP) has exceeded the historical trend and increased by more than 20 percent as of 2023Q1.
  - Unit labor compensation spiked during spring 2020 lockdown then subsided to trend until late 2022.
  - From 2022Q1 to 2023Q1:
    - Import prices contributed about two fifths to total consumption deflator inflation.
    - Domestic profits contributed a similar two fifths.
    - Labor compensation contribution was muted relative to historical averages.
  - With reversal of energy prices, contribution from import prices has been decreasing since its mid-2022 peak; contribution from labor compensation has gradually picked up in recent quarters.
- Implications of full wage recoupment scenarios:
  - Staff baseline assumes wages and profits both bear part of the terms-of-trade shock, with wage growth of around 5¾ percent on average for 2023-24 and profit margins unwinding back to their 2019 levels by 2024.
  - If nominal wages rise by 7 percent to fully recoup real wage losses during 2019–24 (holding projected inflation constant in line with staff’s baseline), either:
    - Profit margins would have to fall by another 1 percentage points relative to their 2019 levels in 2024, or
    - Inflation would rise higher than staff’s projection, implying real wages would not be fully recouped and pointing to potential upside risks to inflation in the event of higher-than-expected wage pressures and/or an inability to unwind recent profit margin increases.
  - For reference, profit margins decreased by 1.5 percentage points between 2017 and 2019 and by 1 percentage point from 2019 to 2020.

_International Monetary Fund (content unit: 1deuea2023001)._

### Conclusion

### Conclusion

### Inflation outlook and risks
- Core inflation is expected to continue to decline, but with high uncertainty and risks.
- Key risks to declining inflation:
  - Inflation declines may become more difficult after passthrough of lower energy prices has played out and as inflation gets closer to target.
  - Increasing nominal wage pressures could put pressure on core inflation.

### Risk Assessment Matrix — major global and regional risks (selected)
- Intensification of regional conflict(s)
  - Relative likelihood: High
  - Impact: High
  - Key vulnerabilities for Germany: high integration in global value chains; exposure to trade disruptions, higher energy/commodity prices, weakened consumer and business confidence.
  - Policy responses:
    - Allow automatic stabilizers to operate fully.
    - Provide targeted support to vulnerable households.
    - Support firms to preserve viable jobs.
    - Closely monitor refugee influx from Ukraine and use fiscal space if necessary to accommodate refugees and enhance integration programs.
- Abrupt global slowdown or recession
  - Relative likelihood: Medium
  - Impact: High
  - Channels described: U.S. hard landing via tighter labor markets and commodity shocks; Europe hit by energy crisis and monetary tightening; China disrupted by COVID or property sector slowdown.
  - Policy responses:
    - Allow automatic stabilizers to operate fully and supplement with discretionary stimulus in the event of a significant downturn.
    - Carefully monitor financial markets and calibrate measures to ensure financial stability as needed.
- Commodity price volatility
  - Relative likelihood: Medium
  - Impact: High
  - Germany vulnerability: high dependence on energy imports; rising energy prices could raise consumer price inflation and erode corporate profits and household real income.
  - Policy responses:
    - Intensify search for secure alternative energy resources and associated storage and processing facilities.
    - Maintain price signals to promote energy savings.
    - Provide targeted support to vulnerable households and firms.
    - Monitor financial markets and calibrate measures to ensure financial stability.
- Monetary policy miscalibration
  - Relative likelihood: Medium
  - Impact: Medium
  - Concern: premature loosening could de-anchor inflation expectations and trigger a wage-price spiral.
  - Policy responses:
    - Monetary policy responses need to be recalibrated at the euro area level.
    - Ensure that fiscal policy works in concordance with monetary policy.
- Systemic financial instability
  - Relative likelihood: Medium
  - Impact: Medium
  - Risks: rising rates could tighten financial conditions; correction in residential real estate could impair bank balance sheets.
  - Policy responses:
    - Intensify monitoring of banks’ liquidity and capital positions and risk management practices.
    - At the euro-area level, provide ample liquidity to solvent banks.
    - Encourage conservative approach to bank capital distributions.
    - Swiftly intervene in weak institutions and undertake contingency planning.
    - In a sharp downturn, relax macroprudential settings so banks can keep credit flowing.
- Deepening geo-economic fragmentation
  - Relative likelihood: High
  - Impact: High
  - Germany vulnerability: high degree of trade openness; risk of shortages of crucial inputs.
  - Policy responses:
    - Continue support for the multilateral rules-based trading system.
    - Identify critical dependencies, assess impacts of GEF scenarios, and develop coping strategies.
    - Undertake structural reforms to enhance Germany’s attractiveness for investment.
- Cyberthreats
  - Relative likelihood: Medium
  - Impact: High
  - Policy responses:
    - Assess and address loopholes exposed by cyberattacks.
    - Strengthen governance and risk management of large public and private organizations; scale up investment in cyber resilience.

- Regional risk: shift in market sentiment against some high-debt euro area countries
  - Relative likelihood: High
  - Impact: Medium
  - Implication for Germany: rise in sovereign yields may affect German banks.
  - Policy responses:
    - Ensure banks’ liquidity and capital buffers are adequate; encourage liquidity management tools among investment funds; contingency planning.
    - Bolster euro-area stability by completing the pan-European Banking Union and Capital Markets Union.

- Domestic risk: key sectors fail to adjust to technological change and digitalization
  - Relative likelihood: Medium
  - Impact: High
  - Consequence: loss of competitiveness in automobiles and machinery, higher structural unemployment, lower potential growth.
  - Policy responses:
    - Increase public investment in digitalization to crowd-in private investment and boost digital infrastructure.
    - Ensure the energy transition proceeds as planned.

(Note: the Risk Assessment Matrix classifies relative likelihood as: “low” = probability below 10 percent, “medium” = probability between 10 and 30 percent, and “high” = probability between 30 and 50 percent.)

### Downside scenario — modeled severe financial tightening (G20 Model)
- Shock assumptions:
  - Global credit crunch: a decline in credit supply equivalent to a 250 bp increase in corporate spreads for the U.S., euro-area countries, and Japan, with proportional adjustments for other G20 countries.
  - Decline in equity prices: global equity prices fall by 10 percent on impact and by about 6 percent on average in 2023.
  - Flight to safety and dollar appreciation: in emerging markets excluding Asia, sovereign premiums increase considerably, and the U.S. dollar appreciates by close to 10 percent. Shock for emerging market economies in Asia is about half as large; China is not directly affected. Sovereign spreads in some euro-area countries increase by a modest amount.
  - Fall in confidence: greater precautionary saving (about 75 percent of the estimated increase in precautionary saving during the global financial crisis) and weaker business sentiment reduce consumption and investment.
- Quantified impacts:
  - Real GDP decrease relative to the baseline: 1.8 and 1.4 percent in 2023 and 2024, respectively.
  - Contribution channels:
    - Credit crunch would cut real GDP by more than half of a percentage point, with persistent impact through 2024.
    - Weakened confidence and global equity market declines would reduce real GDP by 1 percent in 2023, with effects dissipating to about one-half of a percentage point in 2024.
  - Core inflation: lower domestic and foreign demand would cool core inflation by about 0.7 percentage points in 2023 and 2024 (including endogenous monetary policy response).

### Financial sector and macroprudential recommendations — FSAP implementation (selected)
- Systemic risk analysis
  - Perform top-down stress tests of interest rate risks (Timing: I/NT)
    - Implementation status: comprehensive microprudential top-down stress test developed and continuously improved; simulates macroeconomic scenarios including interest-rate shocks; validated against 2022 bottom-up LSI stress test; further analyses planned for 2023.
    - Ad hoc analyses: Bundesbank performed a dedicated top-down analysis in Q1 2022 on net interest income (NII) and bond portfolio depreciations; BaFin directed most-vulnerable institutions to perform focused IRRBB reviews in 2022 annual audits.
    - Regular monitoring: Bundesbank conducts regular analysis of banks' reported data for the Basel interest-rate coefficient; a dedicated report has been developed.
  - Strengthen monitoring of larger LSIs with significant FX (USD) exposures to mitigate liquidity risk (Timing: NT)
    - Implementation status: not implemented; BaFin considers FX liquidity risks adequately monitored via Liquidity SREP.
- Climate transition risks
  - Expand analytical capacity of banks for climate risks, promote disclosure, conduct supervisory climate stress tests for LSIs (Timing: NT)
    - Implementation status: ESG risks included in on-site inspection plan for 2023; Bundesbank developed a climate risk stress test covering German banks including small and medium-sized institutions; BaFin and Bundesbank joined 2022 ECB Thematic Review on Climate and Environmental Risks.
- Macroprudential framework and policy
  - Introduce powers to set debt-to-income (DTI) and debt service-to-income (DSTI) limits (Timing: NT)
    - Implementation status: legislative draft from Bundesfinanzministerium to add DSTI and DTI limits is being prepared; legislative process delayed; no concrete timeframe for legislating DSTI and DTI limits.
  - Strengthen guidance on residential real estate lending standards (Timing: NT)
    - Implementation status: BaFin conducted a mid-2022 survey focusing on DSTI; results mixed due to data definition differences. Average LTV and DTI ratios decreased in 2022 while DSTI ratios and share of loans with high DSTI rose. A Deep Dive into loans with LTV >90% and DTI >7 found high-risk loans more prevalent than expected but data quality issues limit quantitative conclusions. New Bundesbank WIFSta data collection on housing loans starts in 2023; first quarterly-reporting data with aligned definitions to become available in summer 2023.
  - Develop communication strategy to support activation of borrower-based measures (Timing: NT)
    - Implementation status: adjustment to Financial Stability Committee's communication standards to communicate more regularly (biannually) is being considered.
  - Close data gaps on lending standards (Timing: I)
    - Implementation status: Bundesbank initiated WIFSta data collection by general administrative act in September 2021; lenders with quarterly reporting obligation report new housing loans data for first quarter of 2023 by May 15, 2023; lenders with yearly reporting obligation report data for 2023 by February 15, 2024.  

*Source: Conclusion, Risk Assessment Matrix, Annex VII (Downside Scenario), and Annex VIII (2022 FSAP Key Recommendations—Implementation Status) from the provided IMF chapter.*

### 2024. These raw data will have to undergo relevant quality checks before they can be analysed

### 1deuea2023001 - 2024. These raw data will have to undergo relevant quality checks before they can be analysed

### Data collection and availability
- "These raw data will have to undergo relevant quality checks before they can be analysed and used to also create pre-defined aggregates."
- The Bundesbank "does not expect to start using the first data from quarterly-reporting institutions before June 2023."
- The Bundesbank’s workstreams include "Data Exchange" and "Analysis of Structured Data" and "Analysis of Unstructured Data."

### Macroprudential framework and price-at-risk models
- Supplement the toolkit to assess real estate risks with price-at-risk model for commercial and residential real estate prices.
- Bundesbank experts have developed a price-at-risk model for residential real estate prices as part of their toolkit for analyzing macroprudential risks related to RRE financing internally, with "a technical paper on the model planned in the future."
- Bundesbank experts have also "started work on setting up a price-at-risk model for commercial real estate prices."

### Supervision and regulation — strategic cooperation and governance
- Strengthen BaFin’s operational independence and strategic cooperation between BaFin and Bundesbank on banking supervision. (Timing: I)
- BaFin and the BMF have amended the principles of cooperation. In exercising legal and technical supervision, "the BMF respects the operational independence of BaFin."
- BaFin informs the BMF "about the methods and manner of its supervision in a risk-oriented way and with regard to the achievement of the agreed objectives."
- BaFin "assumes responsibility for public relations in connection with its supervisory mandate."
- A three-day senior management workshop took place in May 2022 to strengthen strategic cooperation; it "identified five areas for further work" including:
  - specification of a common strategy for banking supervision (definition of long-term goals and an enhanced process for medium- and short-term goals and the annual supervisory strategy);
  - development of a risk-tolerance framework;
  - a framework to evaluate the degree to which supervisory goals were reached by chosen strategies and measures;
  - review of the current cooperation structure in joint groups at various levels;
  - measures for improvement of trustful cooperation (including joint teambuilding measures and staff exchanges) and measures for an enduring change of the supervisory culture.
- "The five working groups started their work in September." Interim results were presented at a joint workshop in December 2022; a second workshop took place in March 2023.
- One goal is "to set up the supervisory strategy for 2024 and ensure supervisory and inspection planning already under the new framework."
- The Digital Agenda (continued in autumn 2021) consists of five work streams with joint teams of BaFin and the Bundesbank: (1) Supervisory Processes, (2) Data Exchange, (3) Analysis of Structured Data, (4) Analysis of Unstructured Data, and (5) Change Management.
- The work is managed by a Project Management Office and steered by a Steering Group which "meets once a month."

### Corporate governance, supervisory engagement and inspection frequency
- Align the corporate governance framework with international best practices; provide additional supervisory guidelines to align MaRisk with EBA Guidelines on key banking risk issues. (Timing: NT/MT)
  - Policy departments of banking supervision at BaFin and BBk "have checked whether a clarification of the supervisory expectation is possible."
  - Given the legal framework in Germany ("Gesellschaftsrecht"), they consider "that the possibilities of BaFin/BBk are limited," especially regarding "formal independence."
  - With respect to "independence of mind," "some clarification might be achievable."
  - BaFin and BBk agreed to "a higher minimum engagement level (e.g., the interaction with the supervisory board or key function holder)."
  - "With a view to the EU Capital Requirements Directive (CRD) VI developments and implementation, further adjustments of the legal framework are expected relating to the improvement of the relationship between the internal control functions and the management bodies in its supervisory function."
  - This refers "in particular to the reporting lines and the removal of the heads of the internal control functions."

- Review the minimum engagement level and inspection frequency, strengthen the ability to effectively challenge external auditor’s work, and make earlier use of corrective and sanctioning powers. (Timing: NT)
  - "The inspection-frequency framework has been adopted and comes into effect with the on-site inspection plan for 2023."
  - Example: "the largest LSIs with the lowest quality are on a 2-year inspection cycle."
  - "The MEL framework has been significantly changed."
  - SNCI are covered in the impact dimension explicitly; high-risk and high-impact institutions and all other categories are considered in the framework.
  - Engagement levels are "now more risk-orientated than before," with higher attention on institutions with MEL 3 and MEL 4.
  - The framework contains more activities for supervisors at BaFin and BBk and "extends the supervisory dialogue with the MEL 3 and 4 institutions."
  - The framework is "the basis for on-site inspection and supervisory planning for 2023." This includes challenging external auditor's work, more meetings with the external auditor, and "more own on-site presence (Aufsichtsbesuche)."

### Fintech, crypto-assets, and horizon scanning
- Step up efforts on fintech data collection, forward looking dynamic market monitoring and related financial stability analysis. (Timing: NT)
  - "BaFin exchanges generally-available data with the Bundesbank."
  - BaFin "closely monitors significant trends, developments, and conspicuities in the fintech segment of the financial market" by evaluating scientific papers, press reports, reports from consulting firms or venture capital companies, and by participation in specialist congresses and industry conferences.
  - BaFin is "currently evaluating solutions available on the market with regards to crypto-asset-market data," and "blockchain analytics are currently under review as they might be used to get a more holistic picture in DeFi space."
  - BBk (DG Banking and Financial Supervision) "will start a systematic supervisory 'horizon scanning' of relevant tends in financial technology."

### Insurance solvency framework
- Take steps to strengthen the solvency framework for insurers. (Timing: I)
  - "This recommendation has not been implemented, as the authorities consider that extreme interest-increase scenarios on the funding of the Zinszusatzreserve (ZZR) are not necessary."

### Clearstream and financial market infrastructure
- Improve the independence of the internal control functions at the Executive Board level. (Timing: NT)
  - "In line with current reorganization of the Executive Board of Clearstream Banking AG, responsibilities of each Executive Board member will be reviewed and allocated."
  - "In particular, the functions of the CEO (incl. responsibilities for risk management and compliance) will be newly allocated."
  - "A new distribution-of-business plan has been shared with BaFin and Bundesbank."
  - "The transfer of responsibilities is currently scheduled to become effective from July 1, 2023."

- Broaden Clearstream’s explicit identification criteria for clients of direct participants by including system-level thresholds. (Timing: NT/MT)
  - "Based on the definition of a SSS in accordance with the CSDR and the Settlement Finality Directive, BaFin is currently in discussion with Clearstream Banking AG to identify and determine further risk control measures based on criteria for clients of direct participants."

### Crisis management and financial safety nets
- Ensure robust planning for financial distress of IPSs, including planning for recovery and resolution at a consolidated level, promoting review of EU legislation if necessary. (Timing: NT)
  - Status: "Not implemented"

- Establish a single mandatory DGS as a public body, with access to a robust backstop liquidity line. (Timing: NT)
  - Status: "Not implemented"

### IMF Fund relations and key statistics (as of June 13, 2023)
- Membership Status: "Joined August 14, 1952; Article VIII."
- General Resources Account:
  - Quota 26,634.40 100.00
  - IMF's Holdings of Currency 19,182.65 72.02
  - Reserve Tranche Position 7,473.04 74.49 28.06
- SDR Department:
  - Net cumulative allocation 37,587.04 100.00
  - Holdings 39,158.57 104.18
- Mission: "May 2–16, 2023."
- Staff team: "Mr. Fletcher (head), Mmes. Lan, Mineshima, and Zhou and Mr. Sher (all EUR)."
- Country interlocutors include Bundesbank Vice President Buch and officials from multiple federal ministries and agencies, the ECB, EIOPA, and representatives from private sector and civil society.

*Source: IMF staff report informational annex content provided in the supplied PDF extract.*

### 2022. The staff report was discussed by the Executive Board on July 18, 2022. The Executive

### GERMANY — IMF Staff Report (sections summarized)

### Overdue Obligations and Fund Payments
- Charges/Interest (SDR Million; based on existing use of resources and present holdings of SDRs):
  - 2023: 0.49
  - 2024: 0.49
  - 2025: 0.49
  - 2026: 0.49
- Total:
  - 2023: 0.49
  - 2024: 0.49
  - 2025: 0.49
  - 2026: 0.49
- Outstanding Purchases and Loans: None
- Latest Financial Commitments: None

### Exchange Arrangements and External Position
- Currency: euro; exchange rate arrangement: free floating.
- Germany participates in a currency union (EMU) with 19 other members of the EU and has no separate legal tender.
- Germany is an Article VIII member and maintains an exchange system free of multiple currency practices and restrictions on payments and transfers for current international transactions.
- Maintains measures adopted for security reasons, notified to the Fund under Decision 144–(52/51).
- Staff assessment: Germany’s external position in 2022 assessed by staff as stronger than level implied by medium-term fundamentals and desirable policies; current account expected to moderately rise in 2023 but stay below pre-pandemic level; projected to remain unchanged in 2024 at a level somewhat above 6 %.

### Anti‑Money Laundering / Combating the Financing of Terrorism (AML/CFT)
- Post-2009/10 reforms, transposition of EU’s fifth Money Laundering Directive (5AMLD).
- November 2021 FATF assessment (2013 methodology) and September 2022 FATF report:
  - Acknowledges considerable improvement.
  - Identifies priority areas: risk-based supervision; use of financial intelligence, investigation, and prosecution of money laundering cases; transparency of legal persons; arrangements and implementation of targeted financial sanctions.
- Government initiatives:
  - Commissioned “Project BBF” at the Ministry of Finance to set up a new federal AML agency consolidating analysis, investigation, and supervision; expected to start operations in 2025.
  - Improving statistics and performance monitoring of AML/CFT and updating National Risk Assessment.
- Executive branch: planning a “Bundesbehörde zur Bekämpfung von Finanzkriminalität” to unify competences; supports establishment of a common European AML agency.
- Administrative improvement: automated links between beneficial ownership information in the Transparency Register and the Company Register.

### Statistical Issues — Data Adequacy and Standards (As of June 13, 2023)
- General: economic database generally comprehensive and of high quality; data provision adequate for surveillance.
- National Accounts:
  - Adopted ESA2010 in September 2014.
  - GDP calculated annually and quarterly on current and chained volume basis.
  - Multiple derogations from ESA2010 requirements, most scheduled to be addressed by 2020.
  - Direct source for quarterly changes in inventories lacking; extrapolations based on difference between monthly production index and turnover index in manufacturing.
- Government Finance Statistics:
  - Comprehensive reporting systems; data based on cash accounting systems.
  - Documentation explains differences between ESA2010 (noncash) general government and general cash administrative data.
  - Publishes general government revenue, expenditure, and balances on noncash/accrual basis (ESA2010) quarterly through Eurostat; presented in GFSM 2014 format in IFS with delay.
  - Submits annual data for Government Financial Statistics Yearbook in GFSM 2014 format; monthly data disseminated on a cash basis.
- Monetary and Financial Statistics:
  - Uses ECB reporting framework; reports to IMF via gateway arrangement with ECB.
  - Monetary statistics in IFS cover central bank and other depository corporations (ODCs) using euro area-wide residency criterion; national residency criterion published as memorandum items.
  - Reports some Financial Access Survey (FAS) indicators, including two indicators adopted by UN to monitor Target 8.10 of SDGs.
- Financial Sector Surveillance:
  - Participates in CDIS, CPIS, and FSI databases.
  - Compiled comprehensive FSI data and metadata; reports all of the 40 FSIs except net foreign exchange exposure to equity (I31).
  - Former FSI ratios on nonperforming loans moved from annual to quarterly periodicity; quarterly data stem from harmonized FINREP reporting due to EBA ITS on reporting.
  - Former use of annual accounts data suspended in line with periodicity concept of SDDS plus.
- External Sector Statistics:
  - Bundesbank compiles balance of payments in cooperation with Federal Statistical Office.
  - BOP, IIP, and related cross-border statistics compiled according to BPM6 and legal requirements of ECB and Eurostat.
- Data Standards and Quality:
  - Adherent to Special Data Dissemination Standard Plus (SDDS Plus) since February 2015.
  - Currently disseminates a residential property price index and a commercial property price index.
  - Data ROSC from 2006 available.

### Table of Common Indicators Required for Surveillance (As of June 13, 2023) — Selected entries
- Exchange Rates:
  - Date of Latest Observation: Jun 13, 2023
  - Date Received: Jun 13, 2023
  - 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 2023
  - Date Received: Jun 2023
  - Frequency of Data/Reporting/Publication: M / M / M
- Reserve/Base Money:
  - Date of Latest Observation: Apr 2023
  - Date Received: May 2023
  - Frequency: M / M / M
- Broad Money:
  - Date of Latest Observation: Apr 2023
  - Date Received: May 2023
  - Frequency: M / M / M
- Central Bank Balance Sheet:
  - Date of Latest Observation: May 2023
  - Date Received: Jun 2023
  - Frequency: M / M / M
- Consolidated Balance Sheet of the Banking System:
  - Date of Latest Observation: Mar 2023
  - Date Received: Apr 2022
  - Frequency: M / M / M
- Interest Rates:
  - Date of Latest Observation: May 2023
  - Date Received: May 2023
  - Frequency: M / M / M
- Consumer Price Index:
  - Date of Latest Observation: May 2023
  - Date Received: May 2023
  - Frequency: M / M / M
- Revenue, Expenditure, Balance and Composition of Financing — General Government:
  - Date of Latest Observation: Q1:2023
  - Date Received: May 2023
  - Frequency: Q / Q / Q
- Stocks of General Government and Government-Guaranteed Debt:
  - Date of Latest Observation: 2022
  - Date Received: Apr 2023
  - Frequency: A / A / A
- External Current Account Balance:
  - Date of Latest Observation: Mar 2023
  - Date Received: May 2023
  - Frequency: M / M / M
- Exports and Imports of Goods and Services:
  - Date of Latest Observation: Mar 2023
  - Date Received: May 2023
  - Frequency: M / M / M
- GDP/GNP:
  - Date of Latest Observation: Q1:2023
  - Date Received: May 2023
  - Frequency: Q / Q / Q
- Gross External Debt:
  - Date of Latest Observation: Q4:2022
  - Date Received: Mar 2023
  - Frequency: Q / Q / Q
- International Investment Position:
  - Date of Latest Observation: Q4:2022
  - Date Received: Mar 2023
  - Frequency: Q / Q / Q

### Executive Board Statement — Key Economic Developments and Policy Responses (Executive Board Meeting July 12, 2023)
- Growth and outlook:
  - Real GDP increased by 1.8 % in 2022.
  - Bundesbank projections: real GDP contracting by 0.5 % in 2023.
  - Bundesbank projects expansion by 1.2 % p.a. in 2024 and 2025.
  - After buoyant start in 2023, industrial activity suffered a setback in March 2023; overall growth in 2023 expected to remain muted as tighter financial conditions materialize and real income losses reduce private consumption.
  - Economic activity expected to have slightly risen in the second quarter of 2023.
- Inflation:
  - Headline inflation has likely peaked; core inflation will take longer to normalize.
  - Bundesbank projections: headline inflation set to fall from 8.7 % in 2022 to 6 % in 2023 and to decline further but remain clearly above its 2 % target in 2025.
  - Recent small re-increase in headline inflation in June explained largely by base-effects from short-term support measures between June and August 2022.
- Fiscal policy and investment:
  - EUR 200 billion “protective shield” (electricity, gas, and heating price brakes) deployed to stabilize price expectations; temporary measures envisaged to expire in April 2024 at the latest.
  - Government pursuing supply-oriented fiscal economic policies to mobilize private investment, strengthen labor market, increase productivity growth, and reduce inflationary pressures.
  - Government views federal budget 2023 as first step in transition to normalizing fiscal policy and returning to regular upper net borrowing limit of the debt brake rule.
  - 2022 budget deficit dropped below 3 % for the first time since 2020.
  - Extrabudgetary funds: Climate and Transformation and Special Defense Fund used to address large investment needs; government considers such temporary funds effective for targeted investments with credible phase-out.
- Public investment and administrative reforms:
  - Legal basis for storing bank details of recipients created with Annual Tax Act 2022; IT implementation ongoing.
  - Work with state governments to improve planning and approval procedures; comprehensive procurement transformation package planned in 2023/24.
- Financial stability and macroprudential policy:
  - Financial sector remains stable and well-capitalized despite mark-to-market losses.
  - February 2023: macroprudential measures activated in 2022 by BaFin became effective:
    - Countercyclical Capital Buffer set at 0.75 %
    - Sectoral systemic risk buffer of 2 % for loans secured by residential real estate
  - Residential property prices experienced first decline in second half of 2022 after more than a decade of growth.
  - Roll-over risks from higher interest rates are limited in short-term due to long interest fixing periods of mortgage loans; medium-term risks when lower-rate vintages come due need close monitoring.
  - Increased risks in commercial real estate subject to close monitoring; CRE valuation pressure from interest rate rises since mid-2022.
  - Reporting of lending standards for new mortgage loans started on 31. March 2023.
  - German macroprudential toolkit already contains borrower-based measures (BBMs) such as LTV limits and amortization requirements; activation requires solid financial stability risk assessment based on solid data; technical preparatory work on income-based measures ongoing.
- Green transition and climate policy:
  - Target: carbon neutrality by 2045.
  - Instruments: carbon pricing, regulatory instruments, targeted support measures; domestic carbon price to increase stepwise from 2024 onwards.
  - Germany met its 2022 CO2-emissions target mainly due to industrial emissions reduction.
  - Renewable Energy Act update: renewables target increased from 65 % to 80 % of total electricity consumption until 2030.
  - Climate and Transformation Special Fund budgeted around EUR 178 billion for 2023–2026, with EUR 36 billion available for 2023 alone.
  - Automotive green transformation: goal to set up 1 million publicly accessible fast charging points by 2030.
  - From 2027: shift from national emissions trading system for buildings and transport to newly established EU system; supports a single carbon price in the EU and the European Carbon Border Adjustment Mechanism (CBAM).
- Labor market, pensions, and migration:
  - Measures to address labor shortages and skills mismatches; vocational training guarantee planned; skills development benefit proposed.
  - Skilled Immigration Act modified to offer new possibilities for skilled migrants; introduces temporary work quota for unskilled workers and a new point-based visa for job seekers.
  - Pension regulation adjustments: gradual increase in standard retirement age to 67 scheduled until 2031; intends to introduce a funded component (“Generationenkapital”).
  - Since January 2023: possible to combine early pension with additional earnings without loss of pension entitlements.
- Innovation and finance for start-ups:
  - EUR 10 billion “Future Fund” established to support growth capital for German firms and expand financing options for start-ups.
  - Initiatives such as “Gründerplattform” to help founders develop business plans and access finance.
- AML/CFT and transnational corruption:
  - August 2022 FATF Mutual Evaluation Report assessed German AML/CFT regime as overall fair on average; government plans to unify competences under a new federal authority and remains committed to addressing remaining recommendations.

*Source: IMF staff report and Executive Board materials (text as provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1deuea2023001.pdf_