## 1deuea2026001

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### Real activity, shocks, and outlook
- Recent performance and context:
  - Economy contracted in both 2023 and 2024; recovery began in late-2024 as energy-price and interest-rate shocks dissipated.
  - Real GDP growth in 2025 estimated at 0.2 percent (chapter text) / 0.3 percent (selected figures table).
  - Output gap estimated around -1¼ percent of potential output in 2025; projected to narrow from -1.2 percent of GDP in 2025 to 0.1 percent in 2027 and turn modestly positive thereafter.
- Key headwinds and structural constraints:
  - Higher energy prices in 2022 hit Germany harder than euro-area average due to natural gas dependence.
  - REER appreciation, US tariffs, and increased uncertainty in 2025 raised the drag from net exports.
  - Overall productivity declined: construction and manufacturing productivity fell; IT productivity growth remains much lower than in the US; environment for young, innovative firms is insufficiently supportive.
- Projections:
  - Growth: 1.1 percent in 2026; around 1.3 percent in 2027–28.
  - Medium-term potential growth expected to settle at around 0.7 percent.
  - Working-age population projected to shrink by 0.7 percent per year between 2025 and 2030.
  - Fixed investment projected to recover meaningfully in 2026–28 on higher public infrastructure spending and a recovery in residential construction.

### Labor market and inflation
- Labor market:
  - Harmonized unemployment rate rose to 3.8 percent in late 2025 (from 3.0 percent in early 2023); ILO series: 2025: 3.7 percent; 2026: 3.6 percent; 2027: 3.3 percent.
  - Total hours worked broadly flat over past two years and roughly 1 percent below pre-pandemic levels.
  - Part-time employment share (workers aged 15 to 64): 2019: 27.5; 2020: 28.2; 2021: 27.8; 2022: 27.9; 2023: 28.6; 2024: 29.1; 2025e: 29.4 (average through Q3).
  - Real wages rose by close to 3 percent in 2024–25 despite slack.
- Inflation:
  - Headline HICP: 6.0 percent in 2023; 2.5 percent in 2024; 2.3 percent in 2025; projected 2.3 percent in 2026; 2.0 percent in 2027.
  - Core inflation (ex energy and unprocessed foods): 2.8 percent in 2025; projected 2.3 percent in 2026.
  - Services inflation fell from 5.1 percent y/y in January 2025 to 4.0 percent in December 2025.
  - A federal subsidy for transmission grid charges expected to reduce household electricity prices by up to 2.4 cents per kWh and cut about 0.2 percentage points from headline inflation; largely offset by a 9 percent increase in the Deutschland-Ticket.

### Fiscal policy, public investment, and debt-brake reform
- March 2025 fiscal rule reform highlights:
  - Previous structural net borrowing limit: 0.35 percent of GDP.
  - Exemptions: defense spending above 1 percent of GDP; borrowing of a Special Fund for Infrastructure and Climate Neutrality (€500bn over 12 years).
  - States’ net borrowing constraint eased from zero to 0.35 percent of GDP.
  - Borrowing by the fund exempt from the debt-brake only if public investment in the federal budget is at least 10 percent of total federal budget spending.
  - €100bn of the special fund transferred to the Climate and Transformation Fund; €100bn allocated to state and local governments.
- Near-term fiscal stance and effects:
  - Overall fiscal deficit narrowed to 2.4 percent of GDP in 2025 from 2.7 percent in 2024.
  - Fiscal stance set to ease; overall deficit expected to widen to about 4 percent of GDP by 2027.
  - Fiscal impulse (change in cyclically adjusted primary balance) around 1 percent of GDP in both 2026 and 2027; excluding COVID-19, largest fiscal impulse in twenty-five years.
  - Staff estimate fiscal easing will boost growth by about ½ pp in 2026 and ¾ pp in 2027 (average multiplier assumed around 0.8).
  - Public investment increased 0.2 percentage points of GDP in 2025; preliminary national accounts: general government investment increased by 8 percent in 2025.
- Medium- and long-run pressures and consolidation needs:
  - Projected annual increases between 2027 and 2035: aging-related costs about 2.2 percent of GDP; defense spending about 0.5 percent of GDP; interest payments about 0.4 percent of GDP.
  - An increase in the structural fiscal balance of around 1.7 percent of GDP will be needed between 2027 and 2035 to stabilize the debt-to-GDP ratio.
  - Implied total need for fiscal measures of around 5 percent of GDP by 2035 to offset rising spending pressures while stabilizing the debt ratio.
- Recommended high-quality fiscal targeting and adjustment principles:
  - Target additional fiscal room to measures that boost potential growth (transport infrastructure, energy transition, digitalization) and/or defense; avoid fiscally costly and inefficiently distortive measures (example cited: lower VAT rate for restaurants/catering).
  - Safeguard public investment when implementing medium/long-term consolidation; minimize increases in labor tax and social insurance contribution rates.
  - Suggested revenue options include cutting environmentally harmful tax expenditures; closing inheritance tax loopholes; eliminating non-standard VAT exemptions and reduced rates (EC simulations estimate eliminating reduced VAT rates could boost revenue by about 1.1 percent of GDP, estimate for 2024); increasing property taxes and alcohol excises.

### Investment ramp-up: needs and implementation challenges
- Special Fund for Infrastructure and Climate Neutrality: €500bn over 12 years; funding allocation and conditionality as above.
- Historical execution and efficiency concerns:
  - Public investment efficiency declined 15 percent over the last 10 years.
  - Germany scores below peers in infrastructure planning.
- Recommended implementation measures:
  - Increase centralized provision of investment planning services.
  - Strengthen project appraisal and prioritization.
  - Expand use of joint procurement and digitalize procurement.
  - Cut red tape and accelerate permitting approvals.

### External sector: trade shocks, current account, and external assessment
- US tariffs and trade effects:
  - Trade-weighted statutory US tariffs on EU goods exports estimated to have increased from 1.4 percent at start-2025 to 14 percent by end-2025.
  - Implicit effective tariff rate on imports from Germany and from the EU were 10.8 and 8.6 percent, respectively, in October 2025.
  - Goods exports to the US fell by 18 percent during August–November 2025 vs same period a year earlier; goods exports to the rest of the EU rose almost 5 percent.
  - Germany’s surplus with the US in goods decreased by €8.3 bn (about 0.6 percent of 2025 GDP, annualized) during August–November 2025 vs same period a year earlier.
  - Staff estimates current US tariffs will reduce German GDP by about 0.2–0.4 percent by end-2027.
  - Trade policy uncertainty estimated to reduce aggregate demand by about ¼ percent of GDP in both 2025 and 2026.
- China and other trade dynamics:
  - China accounted for 5 percent of total exports over four quarters through Q3 2025 (~€82 billion, or 1.9 percent of GDP); imports from China ~11 percent of total imports (~€167 billion, or 3.9 percent of GDP).
  - On a rolling 4-quarter average, exports to China were lower by about 1 percentage point of GDP in Q3 2025 relative to Q4 2021.
- Current account and external assessment:
  - Current account estimated to have decreased to 4.5 percent of GDP in 2025 from 5.8 percent in 2024.
  - Staff preliminary external assessment: current account gap 1.1 percent of GDP (surplus stronger than warranted); exchange rate assessed undervalued by about 3.3 percent (Annex III).
  - Current account projected to narrow from 5.8 percent of GDP in 2024 to around 3.8 percent of GDP in 2031.

### Banking sector, NPLs, and macro-financial risks
- Credit and banks:
  - Credit growth 1.2 percent year-on-year (most recent observation); credit gap negative as of Q2 2025.
  - Banks tightened credit underwriting standards; CET1 capital ratio reached 17.4 percent in June 2025.
  - Return on equity rose during 2022–23 and broadly stabilized in 2024; German bank profitability remains below euro-area average.
- Non-performing loans:
  - NPLs rose to 1.9 percent of loans in June 2025 (from 1.7 percent a year earlier).
  - CRE NPLs 5.3 percent of CRE loans in June 2025.
  - Residential real estate loan NPLs remain low.
  - BaFin cut the SSyRB on RRE from 2 percent to 1 percent effective May 2025.
- Liquidity and funding:
  - Banking sector liquidity measures (LCR and NSFR) broadly stable.
- Nonbank financial sector:
  - German insurers’ average solvency ratio 288 percent in Q2 2025.
  - Emerging liquidity risks from insurers’ increasing allocations to illiquid assets (venture capital, private equity, private debt).
- Systemic risk and stress tests:
  - EBA/ECB stress tests of EU banks showed strong resilience of 21 significant German banks included.
  - Bundesbank/BaFin stress tests of 1,200 Less Significant Institutions showed overall resilience but pockets of weakness in adverse scenarios.
  - Overall systemic financial risk assessed as moderately higher since last Article IV consultation.
- Policy and macroprudential recommendations:
  - Maintain CCyB at 0.75 percent and SSyRB on RRE at 1 percent as buffers that could be released in systemic stress.
  - Adopt legislation to allow a positive-neutral CCyB setting (current German legislation does not allow this).
  - Adopt borrower-based measures (DTI and DSTI limits) for residential real estate lending once recovery is firmly underway; draft law and data collection processes prepared.
  - Close CRE data gaps and deepen stress tests covering banks and NBFIs.
  - Encourage prudence in capital distributions and investment in technology to counter cyberattacks.

### Financial safety arrangements and supervisory recommendations
- Deposit insurance and resolution:
  - A single deposit insurance scheme with a public backstop would strengthen safeguards; reinsurance mechanism between separate schemes also suggested.
  - Progress stalled due to lack of political support.
  - Recommended: simulations of Institutional Protection Schemes (IPS); continue unification efforts; strengthen cross-border supervisory and resolution mechanisms; periodic crisis simulation exercises.
- Institutional progress:
  - Implementations noted: top-down stress tests for interest rate and climate transition risks; expanded climate-related disclosures; strengthened BaFin operational independence; updated supervisory framework.
  - Next FSAP scheduled for completion in mid-2027 (preparatory work starting in 2026).

### Structural reforms: labor supply, red tape, and entrepreneurship
- Labor supply reforms and expected impacts:
  - Increase childcare and eldercare access; childcare rate for children under 3: 2024: 37.4 percent; 2025: 37.8 percent.
  - Tax system reforms suggested: move away from current joint taxation while providing additional child allowances and lowering income tax rates to reduce high marginal effective tax rates for second earners.
  - Merging multiple benefits and creating uniform withdrawal rates could increase labor supply by 149,000 full-time equivalent jobs and deliver fiscal savings of about €4.5 billion (0.1 percent of GDP).
  - Pension measures: indexing pensions-in-payment to inflation rather than nominal wages could generate over 1 percent of GDP in annual savings by 2040 (assuming average annual real wage increases of 0.7 percent); review pension deductions for early retirement.
- Reducing bureaucracy and permitting delays:
  - Government Modernization Agenda targets reducing the cost of bureaucracy for businesses by 25 percent by end of legislative period and cutting compliance costs by €10 billion.
  - Measures include online company setup in 24 hours, centralized digital portals, deadlines beyond which new objections cannot be brought, and harmonization across regions.
- Start-up and finance ecosystem:
  - Government financing instruments for startups (commitments in millions of euros; total listed as 16,971) — detailed line items include:
    - European Tech Champions Initiative: 1,000
    - Venture Tech Growth Financing 2.0: 1,155
    - GFF EIF Wachstumsfazilität: 2,891
    - Wachstumsfonds Deutschland: 216
    - ERP/ZF-Wachstumsfazilität: 2,491
    - ERP/VC-Fondsinvestments: 2,254
    - ERP/EIF-Dachfonds: 2,110
    - EIF German Equity: 1,400
    - Scale-Up Direct: 1,000
    - Emerging Manager Facility: 200
    - Impact Facility: 200
    - RegioInnoGrowth: 90
    - HTGF Opportunity: 660
    - DeepTech & Climate Fonds: 1,000
    - High-Tech Gründerfonds IV: 305
    - Total: 16,971
  - EXIST Startup Factories (launched in 2025): 10 startup factories, each received €100 million from the federal government equally matched by the private sector; collaboration with more than 120 academic institutions and over 140 firms.
  - VC investment in Germany: 0.06 percent of GDP as of end-2023 (compared with 0.1 percent in the UK and 0.5 percent in the US).
  - Policy options: increase transparency, reduce corporate tax bias against equity (Allowance for Corporate Equity), review preferential inheritance tax treatment for business assets.

### Energy, climate, and European integration
- Energy price and market developments:
  - German domestic electricity production declined by around 22 percent since 2017 peak; Germany became a net importer of electricity in 2023–24.
  - Real wholesale electricity prices remained elevated and were "almost double" their pre-Covid average as of mid-2025.
  - Pre-tax retail electricity prices about 25–35 percent higher than European average for medium-sized consumers; taxes and levies share declined from ~50 percent pre-pandemic to ~29 percent in 2023–2025H1 for medium household consumers.
  - Wholesale natural gas prices in Europe around 60 percent higher relative to the U.S. on average in 2025 (adjusted), with futures (as of January 22, 2026) suggesting convergence to pre-pandemic ratio by 2028–29.
- Policy recommendations:
  - Accelerate permitting for new generation and grid expansion; expand direct cross-border connections and better integrate European energy markets ("Energy Union"); increase use of variable pricing.
  - Power Plant Strategy: build 10 gigawatts of dispatchable capacity by 2030; participating natural gas-fired plants must be hydrogen-ready and switch to hydrogen by 2045 at the latest.
  - Climate neutrality target by 2045; electricity mix about 60 percent from renewables; target 80 percent by 2030.
- European integration:
  - Support deepening of the Single Market, Savings and Investment Union, and digital euro to improve financing and reduce barriers to cross-border activity.
  - Simulations suggest key reforms to reduce EU trade barriers could boost European GDP by over 3 percent by 2035.

### Risks, scenarios, and recommended policy responses
- Key downside-tilted risks (relative likelihood and impacts summarized in Annex IV):
  - Geopolitical tensions: Relative Likelihood: High; Impact: Medium. Policy: allow automatic stabilizers; targeted support; labor market integration for refugees.
  - Escalating trade measures and prolonged uncertainty: Relative Likelihood: High; Impact: High. Policy: support multilateral rules-based trading system; identify critical dependencies; structural reforms.
  - Financial market volatility and correction: Relative Likelihood: High; Impact: High. Policy: allow automatic stabilizers; intensify monitoring of bank and non-bank liquidity; conservative capital distributions.
  - Aging workforce and low productivity adaptation: Domestic risk with Relative Likelihood: High; Impact: High. Policy: boost labor supply (childcare, eldercare, tax reform), digitization, and training.
- Contingent policy framework:
  - Automatic stabilizers should operate freely for mild shocks; in significant downturns, timely, targeted, and temporary discretionary stimulus is appropriate.
  - Fiscal rule design considerations: ensure post-escape transition, align net borrowing concept with EU Maastricht concepts, strengthen Stability Council monitoring, and ensure safeguards for public investment once infrastructure fund expires in 2037.
  - Bundesbank proposal summary for debt-brake adjustment (process proposals to guide transition and limits) included as staff discussion; government commission to refine the debt brake by Q1 2026.

### Key numeric highlights (selected)
- Real GDP growth (percent change, working-day adjusted): 2023: -0.7; 2024: -0.5; 2025: 0.3; 2026: 0.8; 2027: 1.3.
- Unemployment rate (percent, ILO): 2023: 3.1; 2024: 3.4; 2025: 3.7; 2026: 3.6; 2027: 3.3.
- CPI (HICP) period average: 2023: 6.0; 2024: 2.5; 2025: 2.3; 2026: 2.3; 2027: 2.0.
- General government overall balance (percent of GDP): 2024: -2.7; 2025: -2.4; 2026: -3.4; 2027: -4.1.
- General government gross debt (percent of GDP): 2023: 62.3; 2024: 62.2; 2025: 62.6; 2026: 63.9; 2027: 65.7.
- Current account balance (percent of GDP): 2023: 5.5; 2024: 5.8; 2025: 4.5; 2026: 4.2; 2027: 4.0.
- Banking sector selected ratios (2024 unless noted): Regulatory capital to risk-weighted assets: 20.5; Return on average assets (after-tax): 0.3; Return on average equity (after-tax): 4.0; Net interest margin: 2.2; NPLs to gross loans (2024): 1.8.
- Special Fund for Infrastructure and Climate Neutrality: €500bn over 12 years (allocation details as noted above).
- Outstanding general government guarantees at end-2023: 14.6 percent of GDP; liabilities of public corporations at end-2023: 86.5 percent of GDP.

*IMF staff report: excerpted chapter content for content unit 1deuea2026001.*

### 1. Real Activity ___________________________________________________________________________________ 38

### 1. Real Activity

### Context
- Parliamentary elections in February 2025 resulted in a coalition government consisting of the Christian Democratic Union/Christian Social Union and the Social Democrats.
- The coalition agreement prioritizes: raising public investment; incentivizing higher private investment, including through more generous investment allowances in the corporate income tax (CIT) and reductions in the CIT rate; boosting labor supply, including through incentivizing longer working lives; and reducing bureaucracy and red tape.
- A landmark reform of Germany’s fiscal rule in March 2025:
  - Previously limited structural net borrowing to 0.35 percent of GDP.
  - Exempts borrowing to fund defense spending above 1 percent of GDP from the rule.
  - Exempts borrowing of a newly established Special Fund for Infrastructure and Climate Neutrality, which can spend €500bn over 12 years.
  - Eases state governments’ net borrowing constraint from zero to 0.35 percent of GDP.
  - Borrowing by the fund is only exempt from the debt-brake if public investment in the federal budget is at least 10 percent of total federal budget spending.
  - €100bn of the special fund will be transferred to the Climate and Transformation Fund, and €100bn will be allocated to state and local governments.
- Policy priorities going forward: ensure fiscal room is channeled to pro-growth measures (transport infrastructure, energy transition, digitalization); complement investment with structural reforms to boost productivity and labor supply; implement medium-term fiscal adjustment to fund higher public investment and offset pressures from population aging, rising defense and interest costs; maintain financial stability and agile shock response.

### Recent Developments and Shocks
- The economy contracted in both 2023 and 2024, significantly underperforming the rest of the euro area following the 2022 energy-price shock and subsequent monetary tightening.
- Key adverse effects:
  - Higher energy prices hit Germany harder than the euro-area average due to higher dependence on natural gas, cutting into real wages and consumption and depressing energy output and production in energy‑intensive industries.
  - Investment fell in response to monetary tightening and depressed sentiment; construction investment fell 13 percent below its 2021 level.
  - Gross value-added in construction and manufacturing contracted sharply; these sectors have seen rising delinquencies.
  - External demand weakened, with a decline in the cyclically adjusted trade balance driven largely by capital goods and more recently services sectors.
  - Regional trade shifts (four-year changes): trade deficit with China rose by 1.7 percentage points of GDP; trade surplus versus the US broadly unchanged; trade surplus declined by 0.5 percentage points versus the euro area and by 1 percentage point versus the rest of the world.
- Overall productivity has declined:
  - Cyclical factors: construction and manufacturing productivity fell due to labor hoarding amid weak demand.
  - Structural factors: IT productivity growth remains much lower than in the US; environment for young, innovative firms is insufficiently supportive.

### Recovery in 2025 and Trade Headwinds
- The economy began expanding in late-2024 as energy-price and interest-rate shocks dissipated, supporting private consumption recovery and slower contraction in investment.
- New headwinds in 2025: REER appreciation, US tariffs, and increased uncertainty raised the drag from net exports.
- Real GDP growth in 2025 is estimated to have turned positive but muted at 0.2 percent.
- Manufacturing and construction gross value-added contracted for a third consecutive year with tentative recovery signs toward year-end.

### Labor Market
- Harmonized unemployment rate:
  - Rose to 3.8 percent in late 2025, up from a trough of 3.0 percent in early 2023 and close to the peak of 3.9 percent during the pandemic.
- Hours worked:
  - Total hours worked broadly flat over the past two years and roughly 1 percent below pre-pandemic levels.
- Part-time employment share (workers aged 15 to 64):
  - Rose from 27.5 percent in 2019 to 29.4 percent in the first three quarters of 2025.
  - Time series shown: 2019: 27.5; 2020: 28.2; 2021: 27.8; 2022: 27.9; 2023: 28.6; 2024: 29.1; 2025e: 29.4 (note: 2025 is average through the third quarter).
- Output gap:
  - Estimated around -1¼ percent of potential output in 2025.
- Real wages:
  - Despite slack, real wages rose by close to 3 percent in 2024–25, reflecting lagged adjustments to past inflation and past real wage declines.

### Inflation
- Period average headline HICP inflation:
  - Dropped from 6.0 percent in 2023 to 2.3 percent in 2025 due to falling energy prices and subdued goods price increases.
- Core inflation (excluding energy and unprocessed foods):
  - Moderated but remained above headline inflation at 2.8 percent in 2025.
- Services inflation:
  - Fell from a recent peak of 5.1 percent y/y in January 2025 to 4.0 percent as of December 2025.
  - Elevated services inflation partly reflects reversal of pandemic-era surge in goods demand and stronger labor-intensity and past real wage increases; only partially mitigated by a decline in corporate profits.

### Fiscal Developments
- Overall fiscal deficit:
  - Narrowed to 2.4 percent of GDP in 2025 from 2.7 percent of GDP in 2024.
- Revenue and expenditure drivers:
  - Higher social contributions boosted revenue via a 1.4 percentage point increase in the healthcare and long-term care insurance contribution rates.
  - Total social insurance contribution rate rose to over 42 percent of covered gross wages (i.e., excluding exempt amounts) for most individuals.
  - Public expenditure increased 0.9 percentage points of GDP, largely due to higher social benefits including pensions and healthcare costs from population aging.
  - Public investment increased 0.2 percentage points of GDP, somewhat below the level envisioned in the 2025 Budget.
- Debt:
  - IMF staff estimate debt-to-GDP increased by 0.4 percentage points to 62.6 percent.
  - This remains the lowest ratio among G7 economies; debt sustainability risks assessed as low (Annex II).

### External Position
- Current account:
  - Estimated to have decreased to 4.5 percent of GDP in 2025 from 5.8 percent of GDP in 2024, mainly due to a lower goods trade surplus; services deficit broadly unchanged.
  - Decline partially attributed to REER appreciation reducing price competitiveness.
- External assessment (preliminary):
  - Estimated current account gap: 1.1 percent of GDP (surplus stronger than warranted).
  - Exchange rate assessed to be undervalued by about 3.3 percent (Annex III).

### Banking Sector and Credit Conditions
- Profitability:
  - Return on equity rose during 2022–23 as lending rates increased faster than deposit rates, raising net interest margins; net interest margins and profitability broadly stabilized in 2024.
  - German bank profitability remains below the euro-area average, reflecting higher operational costs (e.g., dense physical branch networks).
- Credit quality:
  - NPLs rose to 1.9 percent of loans in June 2025, up from 1.7 percent a year earlier.
  - NPLs on commercial real estate (CRE) loans reached 5.3 percent of CRE loans in June 2025.
  - Residential real estate (RRE) loan NPLs remain low; households deleveraging helped by solid real wage growth and elevated savings rates.
  - BaFin cut the Sectoral Specific Systemic Risk Buffer (SSyRB) on RRE (including multi-family CRE) from 2 percent of risk-weighted RRE assets to 1 percent, effective May 2025.
  - Corporate debt levels broadly flat while business insolvencies continued to rise from historic lows.
- Capital and liquidity:
  - CET1 capital ratio reached 17.4 percent in June 2025.
  - Banking sector liquidity measures (LCR and NSFR) broadly stable.

*IMF staff report: "1. Real Activity" (excerpt).*

### 11.      Notwithstanding banks’ improved

### 11. Notwithstanding banks’ improved

### Banking sector developments
- Credit growth remains weak, mainly due to weak demand:
  - Credit gap was negative as of Q2 2025.
  - Credit growth was 1.2 percent year-on-year (most recent observation).
  - Since 2022, low credit growth has been driven primarily by weak demand from households and corporates.
- Banks continued to tighten credit underwriting standards in response to higher credit risks (Bundesbank lending survey).
- Capital, liquidity, and performance indicators (text charts referenced):
  - CET1 ratio and leverage ratio tracked (CET1 ratio in percent of risk-weighted assets; leverage ratio in percent of assets).
  - Liquidity and stable funding metrics (LCR, NSFR) monitored as percent of 1-month liabilities and percent of required stable funding.
  - Net interest income, operational expense, non-performing loans, and return on equity shown in comparative charts (Germany vs EA average).

### Nonbank financial sector
- Key elements broadly stable:
  - Average solvency ratio of German insurers was 288 percent in Q2 2025 and has strengthened over the past three years as the yield curve steepened.
  - Insurers and pension funds benefited from recent gains in valuation of equities and other risk assets.
- Emerging risks:
  - Liquidity risks may be rising in the insurance sector due to increasing allocations to illiquid assets such as venture capital, private equity, and private debt (BaFin flagged).
  - Recent Solvency II reforms incentivize long-term equity investments by insurers.

### Systemic risk assessment
- Overall systemic financial risk has risen moderately since the last Article IV consultation.
- Stress test results:
  - EBA/ECB stress tests of EU banks (including an adverse scenario with US trade tariffs) showed strong resilience of the 21 significant German banks included.
  - Bundesbank and BaFin stress tests in February of 1,200 Less Significant Institutions (representing 91 percent of all credit institutions in Germany) showed overall resilience but identified pockets of weakness in adverse scenarios.
- Property-related risks:
  - RRE-related risks eased somewhat as the housing market appears in early stages of recovery.
  - CRE-related risks remain elevated but may be nearing a peak based on property pricing and easing of monetary policy.
- Market valuation and nonbank channels:
  - Stretched global asset valuations have risen; German equity valuations have risen over the past two years though not near dot-com levels (based on equity risk premia).
  - Holdings of equity securities (including fund shares) are less than 1 percent of banks’ assets as of September 2025 — limiting direct bank exposure to a sharp global equity decline.
  - Insurers and pension funds have greater exposure to equities, corporate credit securities, and illiquid assets and could face higher losses from sharp global capital market declines.
  - Interlinkages with NBFIs amount to about 13 and 14 percent of banking system assets, respectively; a sudden withdrawal of deposits that NBFIs maintain as liquidity buffers at banks could weaken bank liquidity in stressed periods.
  - Large share of interlinkages between German banks and NBFIs is through derivative contracts, which could produce cascade effects if leveraged investments suffer adverse shocks.

### Outlook and key macro projections
- Growth outlook:
  - Growth expected to pick up to 1.1 percent in 2026.
  - Growth could accelerate to around 1.3 percent in 2027–28.
  - Fixed investment projected to recover meaningfully in 2026–28 on higher public infrastructure spending and a recovery in residential construction.
  - Growth spillovers to the rest of the euro area expected to be small in aggregate.
- Output gap and potential:
  - Germany’s output gap projected to narrow from -1.2 percent of GDP in 2025 to 0.1 percent in 2027 and turn modestly positive in the outer years.
  - Medium-term potential growth expected to settle at around 0.7 percent (about 0.6 percentage points below the pre-pandemic average).
  - Working-age population projected to shrink by 0.7 percent per year between 2025 and 2030—the most rapid decline among G7 economies.
  - Increased public infrastructure spending expected to lift potential growth by around 0.2 percentage points per year relative to the pre-expansion baseline.
- Inflation:
  - Inflation projected to rise moderately in first half of 2026 due to base effects and sticky core inflation, then trend back toward 2 percent by year-end.
  - Headline inflation expected to average 2.3 percent in 2026.
  - Core inflation projected to average 2.3 percent in 2026.
  - A federal subsidy for transmission grid charges expected to reduce household electricity prices by up to 2.4 cents per kWh and cut about 0.2 percentage points from headline inflation; largely offset by a 9 percent increase in the Deutschland-Ticket.
- Current account:
  - Current account surplus projected to narrow from 5.8 percent of GDP in 2024 to around 3.8 percent of GDP in 2031.
  - Main driver of narrowing expected to be a reduction in the public sector savings-investment balance, with some contribution from the private sector.

### Risks to the outlook
- Downside-tilted risks:
  - Key external risks: intensifying geopolitical tensions, escalating trade barriers, disruptions to global value chains, commodity price volatility, weaker global confidence/investment/trade.
  - Stretched global financial market valuations could trigger corrections leading to contractions in global aggregate demand and capital flow volatility; elevated leverage among NBFIs could amplify risks.
  - Domestic risks: worse-than-expected productivity growth (failure to adapt to technological change/digitalization) could constrain medium-term growth and increase fiscal pressures.
  - Failure to ramp up high-quality public investment could hamper rotation to domestic demand-led growth and weaken medium-term potential.
- Upside: effective policy responses and structural reforms could mitigate risks and support stronger-than-projected recovery.

### Authorities’ views
- Authorities broadly agreed with staff on outlook and key risks:
  - Expect growth to strengthen in 2026–27 due to substantial fiscal easing and cyclical recovery in investment and consumption.
  - Expect population aging to weigh on medium-term potential growth, which they estimate at around 0.4–0.6 percent.
  - Expect inflation at around 2 percent and noted similar key risks to growth as staff.

### Policy discussions and recommendations
- Near-term and medium-term policy priority:
  - Provide stimulus to close the output gap and offset weakening external demand while laying groundwork for sustained medium-term growth.
- Near-term: undertake high-quality fiscal easing focused on increased public investment and other pro-growth measures.
- Medium-term: gradually implement high-quality fiscal adjustment to:
  - Fund higher public investment;
  - Offset rising spending pressures from aging-related, defense, and interest costs;
  - Take measures to stabilize the debt-to-GDP ratio.
- Complement fiscal measures with bold structural reforms (domestic and EU-level) to boost labor supply and productivity while maintaining financial stability and agility to respond to shocks.
  - Example: cutting red tape and simplifying permitting procedures to facilitate public investment expansion.
- Fiscal policy specifics and impact:
  - Fiscal stance set to ease in near term; overall deficit expected to widen to about 4 percent of GDP by 2027.
  - Fiscal impulse (change in cyclically adjusted primary balance) of around 1 percent of GDP in both 2026 and 2027.
  - Excluding the COVID-19 shock in 2020, this is the largest fiscal impulse in twenty-five years.
  - Expansion reflects higher public investment and defense spending; social spending also rises with aging pressures.
  - Revenues projected broadly unchanged as higher social insurance contributions are offset by tax cuts (accelerated depreciation for machinery and equipment, reduced electricity grid charges, lower VAT rate for restaurants/catering).
  - Staff estimate the fiscal easing will boost growth by about ½ pp in 2026 and ¾ pp in 2027, assuming an average multiplier of around 0.8; the boost is split evenly between the year of the stimulus and the following year and then gradually dissipates.
  - Higher infrastructure spending will boost potential growth by around 0.2 pp per year in the medium term due to higher capital stock and positive hysteresis effects.

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

### 22.      It will be important to implement a high-quality easing. The additional fiscal room

### 1deuea2026001 - 22. It will be important to implement a high-quality easing. The additional fiscal room created by the reform of the debt-brake rule should be targeted toward measures that boost potential growth—such as increasing public investment or reducing high effective marginal income tax rates (Text Figure 8)—and/or support other identified national priorities such as defense.

### High‑quality fiscal easing: targeting and avoidance
- Additional fiscal room from the debt-brake reform should be targeted toward measures that boost potential growth (examples cited: increasing public investment; reducing high effective marginal income tax rates) and/or support other identified national priorities such as defense.
- Avoid fiscally costly and inefficiently distortive measures (example given: lower VAT rate for restaurants/catering).

### Investment ramp-up: needs, plans, and execution challenges
- Urgent need to raise investment in transport, digitalization, and energy infrastructure.
- Plans: new €500bn Special Fund for Infrastructure and Climate Neutrality foresees a rapid and sustained increase in investment; this is in addition to ensuring at least 10 percent of the core federal budget is dedicated to investment.
- Historical execution and efficiency concerns:
  - Past execution rate of the public investment budget has often been low.
  - Public investment efficiency has declined 15 percent over the last 10 years.
  - Germany scores below peers in infrastructure planning (Text Figure 9).
- Recommended measures to support full and efficient implementation:
  - Increase centralized provision of investment planning services.
  - Strengthen project appraisal and prioritization.
  - Expand use of joint procurement.
  - Step-up digitalization of procurement.
  - Cut red tape, including accelerating permitting approvals (¶34).

### Near‑term fiscal policy stance and shock response
- Automatic stabilizers should be allowed to operate freely in both directions for mild shocks.
- In a significant deflationary downturn (example: a global recession driven by a major financial market correction; Annex IV), the government has fiscal space for further discretionary stimulus, which should be timely, targeted, and temporary.

### Medium‑ and long‑run fiscal pressures and consolidation needs
- Between 2027 and 2035, projected annual increases (percent of GDP) in spending pressures:
  - Aging-related costs (pensions and healthcare): about 2.2 percent of GDP.
  - Defense spending: about 0.5 percent of GDP.
  - Interest payments: about 0.4 percent of GDP.
- Needed changes to stabilize debt-to-GDP:
  - An increase in the structural fiscal balance of around 1.7 percent of GDP will be needed between 2027 and 2035 to stabilize the debt-to-GDP ratio.
  - Implied total need for fiscal measures of around 5 percent of GDP by 2035 to offset rising spending pressures while stabilizing the debt ratio.

### High‑quality fiscal adjustment: principles and options
- Timing: adopt medium/long-term consolidation once the output gap has mostly closed.
- Minimize adverse growth effects by safeguarding public investment and minimizing increases in labor tax and social insurance contribution rates.
- Focus especially on social benefits (account for over half of government spending and are growing pressures due to population aging).
- Specific option areas and illustrative measures:
  - Pensions:
    - Germany’s standard retirement age set to rise to 67 by 2031; replacement rates are at the lower end due to past reforms.
    - Indexing pensions-in-payment to inflation rather than nominal wages could generate over 1 percent of GDP in annual savings by 2040 (assuming average annual real wage increases of 0.7 percent) and improve progressivity.
    - Reviewing pension deductions for early retirement to encourage longer working lives could generate additional savings.
    - After 2031, retirement ages could be linked to increases in life expectancy.
    - Government has established an expert commission tasked with making proposals in 2026 to improve sustainability while maintaining adequacy.
    - Note: In 2023, 51 percent of the retiring cohort retired early (not including insurees with disabilities).
  - Healthcare:
    - Germany spends considerably more on healthcare than peer countries even after adjusting for older population, while achieving broadly average health outcomes.
    - Expected efficiency savings from the recent hospital reform (consolidate inpatient care, reform pricing to disincentivize unnecessary procedures).
    - Further gains via greater use of joint procurement and digitalization.
  - Other spending measures:
    - Reductions in subsidies, especially fossil fuel subsidies, could improve economic efficiency while supporting the energy transition.
    - Sectoral expenditure reviews to facilitate spending restraint and prioritization.
    - Greater EU-level investment, procurement, and coordination in areas where EU-level action can generate efficiency gains and economies of scale (examples: energy, innovation, defense) to relieve pressure on the national budget.
  - Revenue measures:
    - Cutting environmentally harmful tax expenditures.
    - Closing loopholes in inheritance taxes.
    - Eliminating non-standard VAT exemptions and reduced rates (EC simulations suggest that eliminating reduced VAT rates could boost revenue by about 1.1 percent of GDP, estimate for 2024).
    - Increasing property taxes and alcohol excises (noted as relatively low by international standards).
    - Improving tax enforcement and strengthening digitalization of revenue administration (savings difficult to quantify).

### Debt‑brake reform: design considerations and recommendations
- Objectives: maintain fiscal discipline while creating room for investment and flexibility to respond to shocks.
- Identified design issues:
  1. Additional defense spending currently exempt from the debt-brake’s constraints; all spending eventually needs coverage to safeguard fiscal sustainability.
  2. Adjustments may be needed to ensure the rule adequately safeguards public investment once the new infrastructure fund expires in 2037.
  3. If the escape clause is triggered, the rule does not currently allow for a gradual transition back to its requirements after the escape clause expires.
  4. The debt brake is based on a net borrowing concept not fully consistent with the EU’s Maastricht overall balance concept, reducing alignment with EU rules and concepts.
  5. Germany’s Stability Council could be strengthened to monitor compliance and use of the escape clause.
- Process and proposals:
  - Government appointed a commission to develop a proposal to refine the debt brake by the first quarter of 2026.
  - The Bundesbank’s proposal (summary provided):
    - During 2025–29, no changes to the current debt brake, allowing deficits of up to 4 percent of GDP over the medium term.
    - Years 2030–35 would be a transition period with a 0.5 percentage point of GDP cut in the overall structural deficit per year, reaching 1 percent of GDP by 2035.
    - After this, the debt brake would revert to a permanent rule: net borrowing of up to 0.8 percent of GDP per year allowed for additional infrastructure spending (additionality defined with respect to infrastructure investment-to-GDP ratio in 2024).
    - Definition of infrastructure investment in the proposal is narrower than the current infrastructure fund.
    - Federal budget and states would each have a net borrowing limit for non-infrastructure spending of 0.1 percent of GDP, such that the total general government net borrowing limit would be 1 percent of GDP.
    - If debt falls below 60 percent of GDP, non-infrastructure net borrowing limit would increase to 0.35 percent of GDP for the federal government and states, bringing total general government net borrowing limit to 1.5 percent of GDP.
  - Transitions out of the escape clause could be made more gradual.

### Authorities’ stated actions and institutional developments
- Government commitment: use fiscal space to modernize the economy and promote sustained growth.
- Implementation supports for Special Fund:
  - New publicly available monitoring mechanism for close monitoring of Fund’s spending.
  - New investment and innovation advisory board created to advise the Federal Minister of Finance on using funds quickly and targeted to boost innovation.
- Institutional commissions and working groups:
  - Expert commission on pension reform.
  - Expert commission for the financial stabilization of statutory health insurance.
  - Working group on long-term care insurance tasked with proposals to stabilize contribution rates.

### Financial sector policies: macroprudential stance and reforms
- Current macroprudential settings and rationale:
  - Credit gap is now slightly negative; weak credit growth mainly reflects weak demand rather than supply constraints.
  - Countercyclical capital buffer (CCyB) currently at 0.75 percent of risk-weighted assets.
  - Systemic Risk Buffer on Residential Real Estate (SSyRB on RRE) at 1 percent.
  - These buffers could be released in conditions of aggregate financial stress to provide loss-absorbing capacity.
- Legislative and policy recommendations:
  - Authorities should consider adopting legislation to explicitly allow a positive-neutral setting for the CCyB (German legislation does not allow for a positive-neutral CCyB at present).
  - Supervisors should encourage banks to remain prudent in capital distributions (bonuses, dividends) and ensure investment in technology to counter cyberattacks (Annex IV).
  - Further efforts recommended to close CRE data gaps.
- Borrower‑based measures:
  - Authorities should adopt legislation to add borrower-based measures to the macroprudential toolkit (debt-to-income (DTI) and debt service-to-income (DSTI) limits for residential real estate lending).
  - A working group with MoF, BaFin, and the Bundesbank prepared a draft law enabling DTI and DSTI limits; corresponding data collection processes have been established.
  - Recommendation: use collected data to analyze the impact of potential limits, to be applied (along with existing powers to implement LTV limits) when the credit cycle turns and real estate market recovery is firmly underway.
- Non‑bank financial intermediation (NBFI) risks:
  - Insurers:
    - EA member states have until January 2027 to transpose Solvency II reform into national laws.
    - Revised directive provides new macroprudential powers to limit solvency and liquidity risks of insurers (examples: restrict bonuses and dividend payments; adjustments to insurers’ own risk assessments).
    - Authorities should establish operational frameworks for a wide range of tools.
  - Crypto asset exposure:
    - Reporting indicates German banks and insurers currently do not have significant direct holdings of crypto assets.
    - Ongoing monitoring of financial sector exposures and risks from crypto assets remains appropriate and should be coordinated with national supervisors and the ECB.
    - Important to monitor market conduct and operational risks as anticipated under Markets in Crypto-Assets (MiCA) regulation.
  - Links between banks and NBFIs:
    - Need to deepen system-wide stress tests covering banks and NBFIs to assess solvency‑liquidity interactions and network vulnerabilities (Euro Area Policies Financial System Stability Assessment).
    - Better cross-border exchange of existing data on links between banks and NBFIs would assist these efforts.

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

### 32.      Financial safety arrangements should be reviewed and tested. A single deposit insurance

### 1deuea2026001 - 32.      Financial safety arrangements should be reviewed and tested. A single deposit insurance

### Financial safety arrangements and supervisory resilience
- Single deposit insurance scheme with a public backstop would strengthen system safeguards against liquidity risks.
- A reinsurance mechanism between separate deposit guarantee schemes would also strengthen safeguards.
- Progress on unifying deposit insurance schemes remains stalled due to lack of political support.
- Recommended actions:
  - Carry out simulations of the effectiveness of Institutional Protection Schemes (IPS) in Germany.
  - Continue efforts to unify fragmented deposit insurance schemes.
  - Strengthen cross-border supervisory and resolution mechanisms for banks.
  - Conduct periodic crisis simulation exercises within supervisory colleges.
- Implementation status:
  - Ongoing efforts to implement financial sector recommendations from past Article IV and FSAP consultations are welcome (Annex V and VI).
  - Notable implementations include: comprehensive top-down stress tests for interest rate and climate transition risks; expanded climate-related disclosures; strengthened BaFin's operational independence and cooperation with the Bundesbank on banking supervision; and an updated supervisory framework.
  - The next FSAP is scheduled for completion in mid-2027, with preparatory work starting in 2026.

### Systemic risks and authorities’ views on financial sector resilience
- Authorities assess the German financial sector as broadly resilient but identify continuing risks requiring vigilance.
- Key cited risks:
  - Potential trade-related impacts on exposed corporates.
  - Prospects for disorderly adjustments in global capital markets, which could be magnified by asset and funding linkages between banks and non-bank financial intermediaries (NBFIs).
  - Rising cyber threats and the need to strengthen operational resilience.
- Specific notes:
  - System-wide solvency and liquidity stress testing involving interactions between banks and NBFIs faces data limitations and methodological uncertainties.
  - Macroprudential measures for insurers, aligned with the Solvency II review, are anticipated by 2027.
  - Authorities support improved data sharing and cross-border supervisory coordination at the European level.

### Diversifying banks’ income, reducing operational costs, and EU integration
- Over time, diversifying banks’ income sources and reducing operational costs would support financial stability.
- EU-level Savings and Investment Union progress could create opportunities for banks to expand cross-border services (investment banking, asset management).
- Further digitalization of financial services (payments, credit risk assessment, loan underwriting) would lower operational costs and reduce the need for physical branches.
- Completing the EU Banking Union remains a key priority to enhance resilience and remove barriers to efficiency-enhancing cross-border mergers.

### Boosting labor supply — key constraints and targeted reforms
- Demographic issue:
  - Population aging implies persistent labor shortages that may constrain medium- and longer-term growth.
- Labor market characteristics:
  - Germany’s employment rate is high, but the share of part-time work is high and rising, especially for women, parents, and older workers.
- Targeted reform areas and expected outcomes:
  - Women and parents:
    - Uneven access to reliable child- and eldercare contributes to high female part-time employment.
    - Plans to increase funding for construction of childcare facilities are welcome and should be complemented by measures to increase childcare staff and ensure quality.
    - Childcare statistics: childcare rate for children under the age of 3 rose slightly to 37.8 percent in 2025 from 37.4 percent in 2024, driven in part by an 0.6 percent increase in daycare centers (up to about 61,000) and in part by fewer children under 3.
    - Tax reforms suggested: move away from current joint taxation while providing additional child allowances and lowering income tax rates to reduce high marginal effective tax rates for second earners.
  - Older workers:
    - Review pension deductions for early retirement to encourage longer working lives and generate fiscal savings (see ¶26).
  - Lower-income earners:
    - Current tax and transfer system complexity creates disincentives due to high effective marginal tax rates (sometimes in excess of 100 percent) from benefit withdrawal as income rises.
    - Simulations indicate that merging multiple benefits (citizen’s benefit, housing benefit, and child supplement) and creating uniform withdrawal rates could:
      - Increase labor supply by 149,000 full-time equivalent jobs.
      - Deliver fiscal savings of about €4.5 billion (0.1 percent of GDP).
  - Immigrants:
    - Immigration over the last decade increased labor supply and output.
    - Ongoing integration efforts (language support; more efficient digital recognition of qualifications via the new digital “Work-and-Stay Agency”) should continue.

### Authorities’ views on labor supply measures
- Government measures:
  - Sustained increase in childcare places since 2006; further investments planned through a new investment program (Childcare Provision) financed from the Special Fund for Infrastructure and Climate Neutrality.
  - For older workers: focus on voluntary employment after retirement age via fiscal incentives and improved working conditions.
  - For lower-income earners: an expert commission on welfare reform is due to provide proposals in early 2026 on modernizing the social welfare state while maintaining social protection, including digitalization, simplification, and possible mergers of benefits.
  - Continued support for immigrant integration, including development of an online portal (“Work and Stay Agency”) to speed up recognition of foreign professional qualifications and measures like the Job-Turbo launched in 2023.

### Boosting productivity — skills, red tape, and start-ups
- Strengthening worker training:
  - Need to boost skills amid AI deployment and other technological trends to support sectors such as IT, healthcare, renewable energy, construction, and transportation.
  - Challenges: low training rates for adults, population aging, weaker foundational and digital skills, and educational/training systems not adapting sufficiently.
  - Authorities emphasize raising access to early childhood education and expanding vocational and adult training; further steps needed to improve quality of basic education.
- Cutting red tape:
  - Government Modernization Agenda targets:
    - Reduce the cost of bureaucracy for businesses by 25 percent by the end of the legislative period.
    - Reduce compliance costs by €10 billion by the end of the legislative period.
    - Modify “one in, one out” to a “one in, two out” rule and include direct implementation of EU requirements.
    - Key projects: enable companies to set up in 24 hours online by standardizing current 6,000 municipal processes; create centralized digital portals for citizen access (e.g., vehicle registration, direct payment of federal benefits); shorten planning period for housing construction.
    - Challenge: goals include reducing federal staff by 8 percent by 2029.
  - Recommended general strategies:
    - Minimize duplication of reporting requirements.
    - Rely more on risk-based auditing rather than onerous reporting.
    - Accelerate permitting and licensing procedures; harmonize regulations across regions and the EU.
    - Establish deadlines beyond which new objections to projects cannot be brought.
    - Enhance measures of bureaucracy (e.g., average times to receive permits) and avoid watering down essential safeguards (e.g., bank capital buffers).
- Supporting innovative start-ups:
  - Observation: average age of the 10 largest companies in Germany is 145 years versus 53 years in the United States — indicating less growth of new firms with innovative technologies.
  - Government financing instruments for startups (commitments in millions of euros; total listed as 16,971):
    - European Tech Champions Initiative: 1,000
    - Venture Tech Growth Financing 2.0: 1,155
    - GFF EIF Wachstumsfazilität: 2,891
    - Wachstumsfonds Deutschland: 216
    - ERP/ZF-Wachstumsfazilität: 2,491
    - ERP/VC-Fondsinvestments: 2,254
    - ERP/EIF-Dachfonds: 2,110
    - EIF German Equity: 1,400
    - Scale-Up Direct: 1,000
    - Emerging Manager Facility: 200
    - Impact Facility: 200
    - RegioInnoGrowth: 90
    - HTGF Opportunity: 660
    - DeepTech & Climate Fonds: 1,000
    - High-Tech Gründerfonds IV: 305
    - Total: 16,971
  - Initiatives to promote collaboration:
    - EXIST Startup Factories (launched in 2025) and Digital Hub (de:hub; launched in 2015, expanded during 2025) to support startups in AI, Greentech, quantum computing, fintech, health, cybersecurity.
    - EXIST Startup Factories: 10 startup factories, each received €100 million from the federal government equally matched by the private sector; collaboration between more than 120 academic institutions and over 140 firms.
    - de:hub: 25 hubs enabling collaboration between several thousand startup firms and partners.
  - Regulatory support:
    - Future Financing Act (November 2023) lowered minimum capital requirement for IPO listing, raised tax-exemption on share ownership by private individuals, and created more flexible company share structures with multiple voting rights.
  - Policy options to boost institutional VC investment and equity financing:
    - Increased transparency (benchmarks for EU VC investments).
    - Reduce corporate tax code bias against equity (e.g., Allowance for Corporate Equity).
    - Review preferential inheritance tax treatment for inherited business assets to assess effects on capital reallocation.

### Deepening the EU Single Market and Savings and Investment Union
- Importance:
  - Supporting a deepening of the EU Single Market can boost innovation and productivity in Germany; significant barriers to cross-country trade within the EU remain.
  - Simulations suggest key reforms to reduce these barriers could boost European GDP by over 3 percent by 2035.
- Savings and Investment Union:
  - Would improve availability of equity and capital market financing for startups and expanding firms in bank-dominated EU financial sector.
  - Equity financing context:
    - VC investment in Germany was 0.06 percent of GDP as of end-2023, compared with 0.1 percent in the UK and 0.5 percent of GDP in the US.
  - Benefits:
    - Enhanced economies of scale could bolster VC and other equity financing in Europe.
    - Harmonization of markets regulation across the EU and consolidation of exchanges could provide scale benefits, making IPOs and equity access easier and more attractive.
  - Combined with accelerated licensing and permitting, increased equity availability could stimulate investment, boost growth, and help avoid widening external imbalances linked to future fiscal adjustment needs (Annex I, ¶24).

*Italicized source: IMF staff summary of content unit 1deuea2026001*

### 43.      The proposed 28th corporate regime could, if properly designed and implemented,

### The proposed 28th corporate regime could, if properly designed and implemented,

### Deepening the Single Market and a 28th corporate regime
- A proposed optional harmonized legal framework for firms operating across the EU could cover corporate governance requirements, accounting rules, insolvency procedures, and possibly some tax treatment (such as loss carryforward) and labor laws.
- Potential benefits:
  - Simplify cross-border operations of firms and make it easier to expand across national boundaries.
  - Allow production in Europe to be more specialized across countries based on comparative advantage, increasing efficiency and productivity across Europe and lowering costs of living.
  - Increase the availability of investment capital for growing firms.
- Timing and process:
  - The European Parliament and Commission are reviewing draft proposals and public feedback, with a target to develop proposed legislation in early 2026.
- Authorities’ caveat:
  - Authorities consider a 28th corporate regime a promising concept if it does not undermine national labor and social standards; definitive views await a concrete proposal.

### Digital euro
- The digital euro could deepen integration of financial services within Europe.
- Potential effects:
  - As a secure, low-cost pan-euro area payment solution, it could improve payment system efficiency and reduce transaction costs for users, especially households and small enterprises.
  - Could enhance competition in the retail payments system.

### Reducing energy costs and energy market integration
- Recent developments and challenges:
  - German energy costs have fallen significantly from their peaks following the 2022 energy-price shock, in part due to reductions in energy taxes.
  - Electricity and natural gas prices remain significantly higher than in many other countries (Annex VII).
  - Domestic electricity production has declined by around 22 percent since the 2017 peak.
  - Germany became a net importer of electricity in 2023–24.
- Policy recommendations:
  - Accelerate permitting processes for new generation and grid expansion to increase supply and bring down prices.
  - Increase use of variable pricing to improve incentives that match timing of electricity generation and use.
  - Better integrate European energy markets (“Energy Union”) to reduce level and variability of energy costs by optimizing generation and electricity trade and avoiding over-investment in storage needs.
  - Expand direct cross-border connections to balance supply and demand across regions as variable renewables increase.
- Energy Union benefits:
  - Lower costs through optimized generation and electricity trade.
  - Improve energy security by providing a buffer against regional shocks and reducing dependence on third countries.
  - Enable faster and cheaper deployment of renewables.

### Supply-chain resilience and geoeconomic fragmentation
- Recommended actions:
  - Continue to assess and prepare for risks related to rising global geo-economic fragmentation.
  - Identify critical dependencies and assess the impact and transmission channels of different scenarios (e.g., stress tests of supply-chain disruptions).
  - Develop strategies for coping with risks and promote mutually beneficial cooperation with trading partners on trade and cross-border flows.

### Authorities’ views and domestic reform efforts
- On skills and education:
  - Federal support to increase students meeting minimum standards in mathematics and German through the “Startchancen” program.
  - Development of a National Skills Strategy to provide an overarching, partnership-based exchange process on continuing education and training policies.
- On cutting red tape:
  - Goal of a 25 percent drop in the cost of bureaucracy for businesses through measures such as reducing documentation requirements and banning multiple data collection.
  - Efforts to streamline processes between federal and state governments, advance “reality checks” on regulations, and promote “regulatory sandboxes” (experimentation clauses in law).
- On Single Market initiatives:
  - Authorities broadly support a Savings and Investment Union, Energy Union, and a digital euro.
  - Support for deeper capital market integration, harmonized capital market regulation, and simplified cross-border processes.
  - Energy Union emphasis on developing and approving common, cross-border energy networks and greater interconnection of national energy markets.
  - Domestic reforms to simplify and accelerate approval of new energy production complement EU-level efforts.

### Strengthening AML/CFT and transnational corruption assessment
- Ongoing reforms:
  - Enactment of the Combatting Financial Crime Act (Finanzkriminalitätsbekämpfungsgesetz) would enable establishment of the Federal Office for Combatting Financial Crime (BBF) and increase synergies by combining analysis, criminal and administrative investigations, and supervision.
  - Key Act provisions include centralization of AML/CFT competencies, improved data access to specialized registers, and adopting a “follow the money” approach.
  - Establishment of a real estate transaction register to collate data on financial flows related to real estate, identified as a high-risk sector.
- National ML/TF Risk Assessment:
  - Enhancement of methodology expected to be completed in 2026 to develop a more granular understanding of ML/TF risks and implement FATF recommendations on leveraging data and advanced analytics.
- Transnational corruption:
  - A draft bill published in October 2025 to transpose the EU Directive would increase the maximum fine for legal entities to €40 million for intentional offences, which will also apply to foreign bribery.
- Authorities’ intent:
  - Working to address remaining deficiencies identified by the FATF in 2022 and preparing to implement the EU AML package in 2027.

### Staff appraisal: macroeconomic outlook and policy guidance
- Recent performance and risks:
  - Several years of negative or weak growth; energy-price shock in mid-2022 and rapid monetary tightening contributed to two years of negative growth during 2023–24.
  - Recovery began in late 2024 but constrained by new trade-related headwinds.
  - Weak growth also reflects lackluster productivity growth and increasing competition in export markets; current account surplus has declined and the external position is assessed as moderately stronger than implied by medium-term fundamentals and desirable policies.
  - Inflation has receded, supported by lower energy prices and subdued domestic demand.
  - Downside risks include geopolitical tensions, trade conflicts, commodity price volatility, potential financial market corrections, weaker productivity, slower public investment implementation, and labor shortages.
- Fiscal stance and recommendations:
  - The reform of the debt-brake rule has set the stage for economic recovery; planned fiscal easing in 2026–27 and lagged effects of monetary loosening are expected to boost growth.
  - Fiscal space should be used judiciously to boost longer-term productive capacity through higher public investment and reducing high effective marginal income tax rates.
  - Avoid fiscally expensive and distortionary measures, such as reduced VAT rates for specific sectors.
  - Improve efficiency and execution of infrastructure spending by streamlining permitting processes and red tape, and stepping up centralized planning services, joint procurement, and digitalization.
- Medium- and long-term fiscal adjustment:
  - Needed to offset pressures from aging-related and defense spending and to stabilize the debt ratio.
  - Minimize adverse growth effects by safeguarding public investment and minimizing increases in labor tax and social insurance contribution rates.
  - Growth-friendly options include sectoral spending reviews; cutting environmentally harmful subsidies and tax expenditures; closing inheritance tax loopholes; reducing nonstandard VAT exemptions and special rates; and raising property and alcohol excise taxes.
  - Pension reforms could include indexing pensions-in-payment to inflation rather than wage growth and reviewing early retirement pension deductions.
  - Greater use of EU-level investment, procurement, and coordination could reduce overall fiscal costs.
  - Any refinement of the debt brake should preserve sustainable public finances while safeguarding public investment and countercyclical flexibility.
- Structural reforms and labor supply:
  - Immediate implementation of pro-growth structural reforms is essential, including incentives for higher private investment (e.g., more generous investment allowances in the CIT) and reducing bureaucracy and red tape.
  - Targeted measures to boost labor supply: expand access to reliable, high-quality child- and eldercare; move away from the current joint taxation system while providing additional child allowances; merge multiple benefits and create more uniform withdrawal rates for lower-income earners; continue facilitating labor market integration of immigrants.
- Productivity and entrepreneurship:
  - Create a more supportive environment for formation and expansion of new, innovative firms, including reviewing tax code features that may hold back equity investment in new enterprises.
  - Continue cutting excessive red tape by minimizing duplication of reporting requirements, relying more on risk-based auditing, harmonizing regulations across regions and the EU, and accelerating permitting and licensing procedures—while maintaining essential safeguards such as bank capital buffers.
  - Expand digital infrastructure and digital skills, including vocational and adult training.
- Macroprudential policy:
  - Current positive settings of macroprudential capital buffers are broadly appropriate and provide buffers that could be released in aggregate stress.
  - Supervisors should remain vigilant, encourage prudence in capital distributions, and ensure adequate investment in technology to counter cyberattacks.
  - Adopt legislation enabling prudential limits on debt-to-income and debt-service-to-income ratios on new residential real estate lending to reduce future macro-financial risks and align with common euro area practice.

*IMF staff assessment as presented in the chapter.*

### 63.      It is recommended that the next Article IV consultation take place on the standard

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

### Real activity
- German GDP growth has underperformed the rest of the euro area over the past three years.
- Production has declined due to high input costs, weak demand, and high uncertainty.
- Sharp fall in capacity utilization and a sizable output gap.
- Manufacturers point to demand as the factor most commonly holding back production.
- Business confidence declined as a series of shocks hit the German economy; consumer confidence remains at low levels.
- Chart references and indices (as presented): Selected Economies: Real GDP (2019Q4=100); Factors Limiting Production: Demand (Percent, NSA); Industrial Production (Index 2015=100, seasonally adjusted); Capacity Utilization (Percentage points); BusinessSurvey 1/ (Seasonally adjusted, LHS: 50+=expansion, RHS: % balance); Weekly Activity Index and Confidence Indicators (LHS: 7-day moving average, per 100K people; RHS: % balance).

### Prices and labor market
- The labor market has eased.
- Hours worked remain below pre-pandemic levels partly due to an increase in part-time work.
- Consumer energy prices have declined but remain above pre-energy-crisis levels.
- Inflation has been contained on the back of falling energy prices and subdued demand.
- The breadth of inflation pressures has normalized but remains wider than pre-Covid.
- Inflation expectations have returned to pre-Covid levels.
- Chart references and indicators (as presented): Employment, 2019Q4=100; Unemployment rate, %; Labor market slack, % of extended labor force; Hours Worked (Index 2019Q4=100, seasonally adjusted); Household Electricity Price (Euro/KWh); Inflation (Headline and Core, 3m-on-3m and y-on-y); Inflation Dispersion (Y-on-y percent change, NSA); Inflation Expectation 2/.

### Fiscal developments and outlook
- Germany's headline deficit narrowed to 2.4 percent of GDP in 2025 from 2.7 percent of GDP in 2024.
- Social contributions increased sharply due to higher health and long-term care contribution rates.
- Social benefits increased due to rising health and pension costs as well as other social transfers.
- Public investment is planned to rise significantly following an extended period of low levels of investment.
- The fiscal stance is expected to widen as infrastructure and defense spending increase following the reform of the debt brake rule.
- Looser fiscal policy will raise the ratio of public debt to GDP, although it remains at a moderate level over the forecast horizon.
- Chart references and indicators (as presented): General and Central Government Balances (Percent of GDP); Tax Revenue and Social Security Contributions (Percent of GDP); General Government Spending (Percent of GDP); General Government Gross Fixed Capital Formation, Staff Projections (Percent of GDP); General Government Structural Balances, Staff Projection (Percent of GDP); General Government Fiscal Outlook, Staff Projection (Percent of GDP).

### Balance of payments
- Through Q3 2025, the current account (CA) surplus fell during 2025 mainly due to a lower goods balance.
- The CA decline was spread across multiple regions.
- The savings-investment balance of the private sector declined more than that of the public sector, mainly due to nonfinancial corporates.
- The NIIP was broadly flat as a percent of GDP.
- The CA surplus financed mainly "other investments" abroad via accounts of banks. Net portfolio investments abroad rose sharply in 2025 versus 2024.
- The REER appreciated in 2025 with the REER based on ULC rising more sharply than on the CPI measure.
- Note: *Data for 2025 is the rolling 4-quarter number as of Q3 2025.
- Chart references and indicators (as presented): Current Account Balance Breakdown (Percent of GDP); Current Account Balance by Region (Percent of GDP); Saving-Investment Balances (Percent of GDP); Net International Investment Position by Instrument (Percent of GDP); Financial Account (Percent of GDP); REER 1/ (2010M1=100).

### Credit conditions and asset prices
- Long-term interest rates have risen slightly over the last year, while real interest rates remain positive.
- Banks' risk perceptions have risen somewhat.
- Lending rates for nonfinancial corporates have declined.
- Credit demand has picked up over the last year.
- Credit growth remains low but is starting to pick up.
- German stock prices have been rising, outpacing broader European indexes and benefiting recently from expectations of fiscal stimulus.
- Chart references and indicators (as presented): 10-year Bond Yield (Nominal and Real, Percent per year); Bank Lending Standards to Enterprises (Net percentage balance); Lending Rates on New Loans (Percent); Credit Demand by Enterprises (Net percentage of banks reporting stronger demand); Lending by Monetary Financial Institutions (Year-over-year growth rate); Stock Market Indices (2007M1=100).

### Real estate developments
- Real house prices have stabilized.
- Price-to-rent and price-to-income ratios have stabilized.
- New housing supply slowed during the real estate downturn.
- Unfilled orders of housing construction declined.
- Commercial property prices appear to be stabilizing and real estate lending is picking up.
- Chart references and indicators (as presented): Real House Price Index (Index, 2015=100); House Price Valuation (Price-to-income, Price-to-rent); New Residential Housing Units (Thousands); New Orders and Unfilled Orders of Housing Construction (Index, 2021=100); Commercial Real Estate Prices (Index, 2015Q1=100); MFIs: Exposure to Commercial Real Estate (Percent, year-on-year growth).

### Banking sector developments
- CDS spreads of large banks rose sharply during the April US tariff announcements but have since come down.
- The two largest commercial banks continue to trade at a discount relative to many European peers.
- Low structural profitability among many German banks contributes to discounts versus peers, reflecting lower net interest rate margins versus advanced economy peers.
- German banks' risk-weighted capital buffers remain stronger than some peers; most banks' leverage ratios are broadly in line with peers.
- Chart references and indicators (as presented): Banks 5-Year CDS Spreads (Basis points); Price to Book Ratio, January 14, 2026 (Percent); Return on Assets (Percent); Net Interest Margin (Percent); Common Equity Tier 1 Ratio (Percent); Leverage Ratio 1/ (Percent).

### Key projections and numeric highlights (from tables)
- Real GDP growth projections (percent change, working-day adjusted):
  - 2023: -0.7
  - 2024: -0.5
  - 2025: 0.3
  - 2026: 0.8
  - 2027: 1.3
- Unemployment rate (percent) ILO definition:
  - 2023: 3.1
  - 2024: 3.4
  - 2025: 3.7
  - 2026: 3.6
  - 2027: 3.3
- Consumer price index (harmonized), period average:
  - 2023: 6.0
  - 2024: 2.5
  - 2025: 2.3
  - 2026: 2.3
  - 2027: 2.0
- General government overall balance (percent of GDP):
  - 2024: -2.7
  - 2025: -2.4
  - 2026: -3.4
  - 2027: -4.1
- General government gross debt (percent of GDP):
  - 2023: 62.3
  - 2024: 62.2
  - 2025: 62.6
  - 2026: 63.9
  - 2027: 65.7
- Current account balance (percent of GDP):
  - 2023: 5.5
  - 2024: 5.8
  - 2025: 4.5
  - 2026: 4.2
  - 2027: 4.0
- Net international investment position (percent of GDP), staff projection:
  - 2023: 79.7
  - 2024: 77.7
  - 2025: 78.1
  - 2026: 78.8
  - 2027: 80.0
- Banking sector key ratios (selected, percent):
  - Regulatory capital to risk-weighted assets (2024): 20.5
  - Return on average assets (after-tax, 2024): 0.3
  - Return on average equity (after-tax, 2024): 4.0
  - Net interest margin (2024): 2.2 (presented in chart context; individual bank values shown in figures)
  - NPLs to gross loans (2024): 1.8

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

*International Monetary Fund — Germany: selected figures, projections, and analysis as presented in the content unit.*

### Annex I. Pressures on Germany’s Export Economy

### Annex I. Pressures on Germany’s Export Economy

### A. Impact of US Tariffs
- Structural exposure
  - Goods and services exports equal over 40 percent of GDP.
  - Trade with the rest of Europe accounts for 69 percent of German exports.
  - The US accounted for about 8 percent of Germany’s exports of goods and services over the last 12 months and about 10 percent of Germany’s goods exports.
  - The pharmaceutical sector is especially export-dependent on the US (high share of production exported to the US) while accounting for about 0.5 percent of German employment.
- Tariff changes in 2025
  - The US increased tariffs on many EU exports in April 2025.
  - Agreement in July 2025 capped statutory tariffs at 15 percent for most sectors and exempted some sectors, including generic pharmaceuticals, some types of semiconductor equipment, and selected chemicals; uncertainty about coverage of exemptions remained (for example, the list of exempt chemicals had not been released as of end-2025).
  - Trade-weighted statutory US tariffs on EU goods exports are estimated to have increased from 1.4 percent at the start of 2025 to 14 percent by end-2025.
  - The implicit effective tariff rate (as calculated by collected duties) on imports from Germany and from the EU were 10.8 and 8.6 percent, respectively, in October 2025.
  - The effective rate is lower than the statutory rate due to exemptions and a reallocation of trade patterns across partners and products.
- Observed trade effects in 2025
  - Goods exports to the US fell by 18 percent during August–November 2025 compared to the same period a year earlier.
  - Goods exports to the rest of the EU rose by almost 5 percent over the same interval.
  - Germany’s surplus with the US in goods trade decreased by €8.3 bn, or about 0.6 percent of 2025 German GDP (annualized), during August–November 2025 relative to the same period a year earlier.
  - German exports to the US for January–November 2025 were down 9.3 percent relative to 2024.
  - Tariffs have not prompted aggregate reductions in prices of US imports from Germany (before tariffs) in US dollar terms; these prices have risen by about 2.4 percent since the beginning of 2025.
  - In euro terms, prices of US imports from Germany (before tariffs) have fallen somewhat as the euro has appreciated by nearly 15 percent over this period.
- Macroeconomic estimates
  - Staff estimates that current US tariffs will reduce German GDP by about 0.2–0.4 percent by end-2027, based on multi-country macroeconomic models and standard trade elasticities.
  - Trade policy uncertainty is estimated to reduce aggregate demand by about ¼ percent of GDP in both 2025 and 2026, with most of this effect unwinding during 2027–28 as uncertainty eases.

### B. Trade with China
- Scale and composition
  - China accounted for 5 percent of Germany’s total exports during the four quarters through Q3 2025, amounting to about €82 billion, or 1.9 percent of GDP.
  - Germany’s imports from China over the same period were 11 percent of total imports, amounting to €167 billion, or 3.9 percent of GDP.
  - Germany exports mainly vehicles, machinery, and electrical equipment to China; key imports from China are in similar sectors (electrical equipment, machinery, vehicles).
- Recent trends in exports and imports
  - The value of German exports to China has declined steadily since early-2022.
  - On a rolling 4-quarter average, exports to China were lower by about 1 percentage point of German GDP in Q3 2025 relative to Q4 2021.
  - Exports to China declined by about 0.2 percent of German GDP over the 2025 period cited, similar in magnitude to the decline in exports to the US in 2025.
  - German imports from China have been on a rising trend over the last decade as a share of GDP and of total imports; import values spiked in 2021–22 and mostly reversed during 2023.
  - The volume of German imports from China rose 6.8 percent during Q2–Q3 2025 relative to Q2–Q3 2024—slower than the 8.4 percent rise in 2024 vs 2023.
- Drivers of decline in exports to China
  - Factors contributing to the decline include euro appreciation against the yuan, slower Chinese domestic demand following the drop in domestic property prices, reduced production and exports of German energy-intensive goods after the 2022 energy price spike, Chinese productivity advances in competing sectors (e.g., autos), and increased localization of production as evidenced by rising FDI.
- Competitive pressure and price dynamics
  - Over the past 15 years, China’s share of global exports has risen substantially while Germany’s share has declined, particularly in chemicals, machinery, and vehicle sectors (not in pharmaceuticals).
  - According to a survey by IW Koeln, nearly two-thirds of German firms report feeling heightened competition from Chinese imports, particularly in third markets.
  - Despite increased competition, there is little evidence of widespread price-cutting by German exporters; sectoral terms-of-trade indexes suggest most German export prices have been broadly stable or rising relative to import prices.
- Foreign direct investment
  - German FDI in Chinese manufacturing has been rising steadily for over a decade; Chinese FDI in German manufacturing is also documented (charts and series reported).

*Source: Annex I. Pressures on Germany’s Export Economy (IMF staff analysis and figures).*

### Annex II. Figure 2. Germany: Debt Coverage Disclosures

### Annex II. Figure 2. Germany: Debt Coverage Disclosures

### 1. Debt coverage in the DSA
- Coverage: 1/CGGGNFPSCPSOther
- 1a. If central government, are non-central government entities insignificant? n.a.

### 2. Subsectors included in the chosen coverage
- Sub-sectors captured in the baseline / Inclusion
  - 1 Budgetary central government: Yes
  - 2 Extra budgetary funds (EBFs): Yes
  - 3 Social security funds (SSFs): Yes
  - 4 State governments: Yes
  - 5 Local governments: Yes
  - 6 Public nonfinancial corporations: No
  - 7 Central bank: No
  - 8 Other public financial corporations: No

### 3. Instrument coverage
- (No explicit instrument list provided in the figure text.)

### 4. Accounting principles
- (No explicit accounting principle detail provided in the figure text.)

### 5. Debt consolidation across sectors (holder / issuer indicators)
- Color code context: █ chosen coverage; █ Missing from recommended coverage; █ Not applicable
- Holder / Issuer matrix (as reported):
  - 1 Budget. central govt: 0
  - 2 Extra-budget. funds: 0
  - 3 Social security funds: 0
  - 4 State govt.: 0
  - 5 Local govt.: 0
  - 6 Nonfin pub. corp.: 0
  - 7 Central bank: 0
  - 8 Oth. pub. fin. corp: 0
  - Total: 000000000
- Additional reporting fields shown (no values reported in figure text):
  - NFPS; Oth acct. payable 2/; Market value 7/; Nominal value 5/; Face value 6/;
  - Non-consolidated CPS NFPS GG: expected CG; Non-cash basis 4/; Cash basis; Consolidated; Currency & deposits; Debt securities

### Reporting on intra-government debt holdings
- Not applicable (Basis of recording / Valuation of debt stock: Not applicable)

### Commentary and key statistics
- "The debt coverage remains unchanged from the last Article IV -- i.e., it covers general government debt, with most debt issued by the federal (central) government."
- Outstanding general government guarantees at end-2023 amounted to 14.6 percent of GDP.
- Liabilities of public corporations at end-2023 amounted to 86.5 percent of GDP.

*Source: Annex II. Figure 2. Germany: Debt Coverage Disclosures (as provided).*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### Global Conjunctural and Structural Risks
- Geopolitical Tensions
  - Relative Likelihood: High
  - Impact: Medium
  - Key transmission channels and effects:
    - May trigger commodity price volatility, increase migration pressures, reignite inflation, and weigh on growth by undermining confidence, investment, tourism, trade, and supply chains.
    - Germany is vulnerable due to high integration in global value chains; higher energy/commodity prices could add to inflation pressures and reduce consumer and business confidence.
  - Policy Response:
    - Allow automatic stabilizers to operate fully.
    - Provide targeted support to vulnerable households.
    - Facilitate labor market integration of refugees and use fiscal space to provide further support if necessary.
    - Monitor potential implications for financial markets and calibrate measures to ensure financial stability as needed.

- Escalating Trade Measures and Prolonged Uncertainty
  - Relative Likelihood: High
  - Impact: High
  - Key transmission channels and effects:
    - Rising trade barriers and prolonged policy uncertainty could reduce trade, investment, and growth; inflationary pressures may re-emerge, amplified by strategic complementarities or bottlenecks in global value chains or inventory overhang.
    - Germany’s high degree of trade openness makes it susceptible to fluctuations in global trade and trade costs; higher trade barriers and/or supply disruptions could lead to shortages of crucial inputs.
  - Policy Response:
    - Continue support for the multilateral rules-based trading system. Promote cooperation within and across continents to realize mutual benefits from cross-border flows.
    - Identify critical dependencies, assess the impact and transmission channels of different fragmentation scenarios, and develop strategies for coping with risks.
    - Undertake structural reforms to continue to enhance Germany's attractiveness as an investment destination.

- Commodity Price Volatility
  - Relative Likelihood: High
  - Impact: Medium
  - Key transmission channels and effects:
    - Shifts in supply and demand—driven by geopolitical tensions and conflicts, OPEC+ actions, or the green transition—may fuel commodity price swings, intensifying external and fiscal pressures, social unrest, and macroeconomic instability.
    - Germany’s energy imports are a similar share of GDP as those of other large EU member states. Rising energy prices could lead to consumer price inflation and erode corporate profits and household real income.
  - Policy Response:
    - Continue to develop secure alternative energy resources and associated storage and processing facilities.
    - Maintain price signals to promote energy savings.
    - Provide targeted support to vulnerable households hurt by high energy prices, if necessary.
    - Monitor potential implications for financial markets and calibrate measures to ensure financial stability as needed.

- Financial Market Volatility and Correction
  - Relative Likelihood: High
  - Impact: High
  - Key transmission channels and effects:
    - Stretched asset valuations, easy financial conditions, and subdued volatility could be disrupted by sudden shifts in investor sentiment or policy stance, triggering market corrections, exchange rate turbulence, spikes in sovereign bond yields, and capital flow volatility.
    - Elevated leverage among Non-Bank Financial Intermediaries amplifies risks; rapid growth of unregulated crypto markets could increase risk of redemption runs and market dislocations.
    - Large corrections could depress consumption and investment, trigger recession, and stress financial-sector segments exposed to market movements and shocks to aggregate demand and unemployment.
  - Policy Response:
    - Allow automatic stabilizers to operate freely. Deploy further fiscal stimulus in the event of a major negative demand shock.
    - Intensify monitoring of bank and non-bank liquidity and risk management practices to contain systemic risk.
    - Encourage a conservative approach to bank capital distributions.
    - Take swift action to address weak financial institutions and undertake contingency planning.

- Fiscal Vulnerabilities and Higher Long-Term Interest Rates
  - Relative Likelihood: High
  - Impact: Medium
  - Key transmission channels and effects:
    - Rising public debt and deficit levels may put upward pressure on long-term interest rates and increase the risk of sovereign bond market disruptions, amplifying capital flow volatility, tightening financial conditions, threatening sovereign debt sustainability, and triggering global spillovers.
    - A rise in sovereign yields may reduce the values of sovereign debt on the balance sheets of German financial institutions; weak growth in fiscally vulnerable trading partners could reduce export demand.
  - Policy Response:
    - Ensure that banks’ liquidity and capital buffers are adequate; encourage further adoption of liquidity management tools among investment funds.
    - Bolster the stability and efficiency of the euro area by completing the pan-European Banking Union and Capital Markets Union.
    - Enhance liquidity support for financial institutions and markets, coordinating with the ECB.

- Cyberthreats
  - Relative Likelihood: High
  - Impact: Medium
  - Key transmission channels and effects:
    - Cyberattacks on physical or digital infrastructure, technical failures, or misuse of AI technologies could trigger financial and economic instability, erode confidence in financial institutions, and disrupt energy supply.
    - With increased remote work and digitalization, Germany’s economic activity and financial system are dependent on smooth functioning of digital systems.
  - Policy Response:
    - Assess and address the vulnerabilities and other potential weaknesses exposed by cyberattacks.
    - Update and further strengthen governance and risk management of large public and private organizations, including in the financial system, and scale up investment in cyber risk monitoring and resilience.

- Note on the RAM’s likelihood categories:
  - “low” indicates a probability below 10 percent, “medium” indicates a probability between 10 and 30 percent, and “high” indicates a probability between 30 and 50 percent.
  - The RAM reflects staff views as of the time of discussions with the authorities. Conjunctural shocks and scenario risks may materialize over a shorter horizon (between 12 to 18 months); structural risks remain salient over a longer horizon. Non-mutually exclusive risks may interact and materialize jointly.

### Domestic Risks
- Aging Workforce
  - Relative Likelihood: High
  - Impact: High
  - Key transmission channels and effects:
    - Unfavorable demographics due to an aging workforce, slowing immigration, and subdued productivity growth reduce medium-term growth and lead to increased fiscal spending pressures.
    - Over the past decade, Germany’s working-age population has been buoyed by migrants fleeing regional conflicts. A faster-than-expected shrinking of the workforce could result in lower productivity growth, lower per capita GDP growth, and increased public spending on pensions and healthcare.
  - Policy Response:
    - Boost labor supply through measures to increase female labor force participation, including increasing access to reliable child- and eldercare.
    - Reduce high marginal tax rates on second earners in married couples to boost labor supply.
    - Facilitate the integration of immigrants into the labor force.
    - Boost labor productivity through digitalization and improving conditions for startups.

- Key Sectors Fail to Adjust to Technological Change and Digitalization
  - Relative Likelihood: Medium
  - Impact: High
  - Key transmission channels and effects:
    - Lack of timely adaptation to technological and digital revolutions could undermine Germany’s position as an innovation leader.
    - Loss of competitiveness and shrinking market shares for key export products (automobiles and machinery) could threaten the growth model, increase structural unemployment, and lower potential growth.
  - Policy Response:
    - Increase public investment in digital infrastructure, digital skills training, and digital government services. Crowd-in private investment in digitalization.
    - Ensure trade barriers remain low so that key technologies can be imported as needed.
    - Continue to support innovation hubs.

- Low-Quality Fiscal Spending (Underspending of Public Investment)
  - Relative Likelihood: Medium
  - Impact: Medium
  - Key transmission channels and effects:
    - Routine underspending of money budgeted for public investment could persist or deepen, or public investment plans could be scaled back due to unexpected fiscal shortfalls.
    - Lower-than-expected implementation of public investment plans would reduce near-term aggregate demand and medium-term potential growth and exacerbate external imbalances.
  - Policy Response:
    - Prioritize public investment in the budgeting process.

*Annex IV. Risk Assessment Matrix (as provided in the source document).*

### Annex VII. How Much Has the Energy Shock Increased German

### Annex VII. How Much Has the Energy Shock Increased German Energy Prices?

### A. Electricity Price Developments
- Pre-pandemic context
  - Retail electricity prices in Germany were significantly higher than in the U.S. and China and somewhat higher than the average across Europe.
  - Excluding taxes, retail electricity prices in Germany were essentially the same as the average across Europe.
  - Lower U.S. prices reflected the shale-driven boom in U.S. natural gas production in the 2010s.

- 2022 shock and wholesale prices
  - Wholesale natural gas prices in Germany rose sharply in 2022 after Russia’s invasion of Ukraine and the shut-off of Russian gas supplies.
  - Higher gas prices increased electricity generation costs from gas and coal, with a stronger effect in Germany than in many other major European economies.
  - Real German wholesale electricity prices remained elevated and were "almost double" their pre-Covid average as of mid-2025.
  - Futures markets suggest real wholesale electricity prices in Germany will fall moderately, "settling at about 50 percent above their 2015–19 average in 2030."

- Pre-tax retail prices
  - German pre-tax retail electricity prices rose after 2022 to be about 25–35 percent higher than the European average for medium-sized consumers.

- Taxes, levies, and post-tax prices
  - Taxes and levies as a share of total retail electricity prices decreased since 2022.
  - For medium-sized household consumers (annual consumption between 2,500 kWh and 5,000 kWh), the share of taxes and levies declined from a pre-pandemic average of around 50 percent to around 29 percent in 2023–2025H1.
  - For non-household consumers (annual consumption between 500 MWh and 2,000 MWh), the share fell from around 60 percent to around 30 percent.
  - As a result, post-tax retail electricity prices in Germany are now broadly in line with pre-pandemic averages relative to the U.S. and the rest of the euro area, and lower relative to the U.K.
  - Retail electricity prices have risen relative to China and Japan, in part due to exchange rate moves (yen/euro -40 percent; euro/renminbi -10 percent versus the 2015–19 average).

### B. Other Energy Price Developments
- Natural gas and broader energy prices
  - CPI data indicate retail natural gas prices in Germany have risen moderately relative to the U.S., U.K., and euro-area average and substantially relative to Japan (latest observation: November 2025).
  - Broader CPI and PPI measures show German consumer relative energy prices similar to pre-pandemic averages versus the U.S., U.K., and euro-area average; producer prices are essentially unchanged versus the euro-area average, somewhat lower versus the U.K., and somewhat higher versus the U.S.
  - Both consumer and producer prices have risen relative to China and Japan.

- Wholesale gas futures and outlook
  - Compared to the average pre-pandemic ratio between European wholesale LNG prices and U.S. Henry Hub prices, European wholesale natural gas prices were around 60 percent higher relative to the U.S. (adjusted for exchange rate developments) on average in 2025.
  - Futures prices (taken on January 22, 2026) suggest the price ratio might converge to the pre-pandemic average by 2028–29 as European prices decline while U.S. prices remain broadly stable.
  - This implies relative retail gas prices in Germany might decline somewhat in coming years; further planned energy tax cuts and subsidies may further reduce some German energy prices.

### C. Takeaways and Policy Implications
- Key findings
  - Pre-tax electricity prices remain elevated in Germany, but electricity tax cuts have substantially mitigated this increase.
  - In percentage terms since the pandemic, post-tax electricity prices in Germany have not risen substantially more than in the U.S. or the average for the rest of Europe.
  - German electricity prices have risen relative to major Asian countries, partly due to euro depreciation versus the yuan and yen.

- Policy recommendations to lower energy costs and improve efficiency
  - Focus energy policy on addressing market failures (e.g., internalizing negative externalities) and policy failures (e.g., excessive red tape, onerous permitting procedures, and barriers to trade) rather than targeting a specific price level.
  - Deeper integration of European energy markets and coordinated planning to lower costs through optimized generation and electricity trade and to avoid over-investment in storage.
  - Expand direct cross-border connections to better balance supply and demand across regions, which becomes more important as variable renewables grow.
  - A unified market would improve energy security by providing a buffer against regional shocks, reducing dependence on third countries, and enabling faster and cheaper deployment of renewables.
  - Domestically, accelerating permitting processes for new generation and grid expansion could increase energy supply and bring down prices.
  - Adoption of these reforms at the German and EU level could lower energy prices in Germany, provide affordability relief for consumers, and increase business productivity.

*Source: IMF staff analysis in Annex VII, "How Much Has the Energy Shock Increased German Energy Prices?"*

### Annex VIII. Table 3. Germany: Table of Common Indicators Required for Surveillance

### Annex VIII. Table 3. Germany: Table of Common Indicators Required for Surveillance

### Data provision and dissemination
- As of January 12, 2026: entries for frequency, reporting, and timeliness of standard indicators are presented (dates of latest observation and date received shown for many series, e.g., "Dec-25", "Nov-25", "Q3:2025", "Jan-26").
- Data Standards Initiatives: entries based on Summary of Observance for SDDS and SDDS Plus participants, and Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board.
- Frequency and timeliness legend provided: (“D”), (“W”), (“M”), (“Q”), (“A”), ("SA"), ("I"), ("NA"), ("NLT").
- Notes clarify: reserve assets include pledged/encumbered assets and net derivative positions; interest rates include market-based and officially determined rates; financing includes foreign, domestic bank, and domestic nonbank financing; general government definition includes central, state and local governments.

### Fund relations and membership
- Membership Status: Joined August 14, 1952; Article VIII.
- Quota and SDR holdings (as of November 30, 2025, unless specified otherwise):
  - Quota: 26,634.40 (SDR Million) — 100.00 (Percent of Quota)
  - IMF's Holdings of Currency: 19,701.85 (SDR Million) — 73.97 (Percent of Quota)
  - Reserve Tranche Position: 6,952.97 (SDR Million) — 26.11 (Percent of Quota)
- SDR Department:
  - Net cumulative allocation: 37,587.04 (SDR Million) — 100.00 (Percent of Allocation)
  - Holdings: 39,826.43 (SDR Million) — 105.96 (Percent of Allocation)
- Outstanding Purchases and Loans: None
- Latest Financial Commitments: None
- Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 0.18 for 2026, 0.18 for 2027, 0.18 for 2028, 0.18 for 2029
  - Total: 0.18 for 2026, 0.18 for 2027, 0.18 for 2028, 0.18 for 2029
- Exchange rate arrangements:
  - Currency: euro; euro area arrangement: free floating.
  - Germany participates in EMU with 20 other members and has no separate legal tender.
  - Article VIII member; maintains exchange system free of multiple currency practices and restrictions on payments and transfers for current international transactions, with security measures notified under Decision 144–(52/51).

### Article IV consultation and authorities’ statement
- Previous Article IV consultation discussions: May 2024; Executive Board discussion: July 15, 2024.
- Authorities’ statement (February 6, 2026): concurrence with IMF staff’s emphasis on promoting productivity, strengthening labor supply, and deepening European economic integration; federal government advancing reforms in these areas.

### Recent economic developments and outlook
- Post-2022 energy shock: period of economic stagnation; output contracted in 2023 and 2024.
- 2025 GDP: growth of 0.2 percent.
- Inflation: fell back to around 2 percent; core inflation moderated but remains elevated due to services.
- Authorities expect inflation to stay near the ECB’s target over the forecast horizon; rising real wages not expected to re-ignite inflation given moderated wage pressures.
- 2026 outlook: authorities expect "about 1 percent" GDP growth for 2026.
- Drivers of recovery: debt brake reform enabling higher public expenditure (growth-enhancing investments and defense); private consumption supported by higher real incomes; projected recovery in external demand and exports; equipment and construction investment expected to recover.
- Investment composition note: only 10 percent of equipment investment in Germany is public — underscores importance of improving environment for private investment.
- Structural constraints: demographic trends and productivity dynamics weigh on long-term growth; need for sustained structural reforms to accelerate innovation, green/digital transformation, and strengthen labor supply.
- Current account: surplus has decreased markedly due to lower goods trade balance; expected to further decrease with higher infrastructure and defense spending.

### Fiscal policy and public investment framework
- March 2025 debt brake reform: three elements
  - Exemption from debt brake for security and defense-related spending that exceeds a baseline level of 1 percent of GDP.
  - Federal states granted new structural borrowing margin of 0.35 percent of GDP.
  - Special Fund for Infrastructure and Climate Neutrality (SFIC) credit authorization of €500 bn. in total for 12 years, with allocations:
    - €300 bn. at federal level focused on transportation infrastructure, digitalization and hospitals.
    - €100 bn. added to existing Climate and Transformation Fund (CTF).
    - €100 bn. allocated to federal states.
- Government intends to strongly increase public investment; preliminary national accounts: general government investment increased by 8 percent in 2025.
- Fiscal stance: expansionary in coming years with deficits increasing in medium term; debt-to-GDP ratio projected to remain below levels observed in most other advanced economies.
- Authorities recognize need to accommodate aging-related and defense expenditures while preserving fiscal sustainability and investment.
- Institutional work:
  - Pension Reform 2025 (“Rentenpaket 2025”) passed December 2025: stabilizes gross replacement rate at 48 percent and expands pension credits for mothers.
  - Pension Commission to present recommendations by mid-2026 on long-term sustainability, adequacy, and intergenerational fairness.
  - Expert commission and working group on health and long-term care reforms; results for long-term care published in December 2025.
  - Commission on Reform of the Welfare State published proposals to streamline tax-financed social benefits and improve work incentives; government to review and implement.
  - Commission for Modernizing the Debt Brake to make concrete proposals by end of Q1 2026; guidance to preserve fiscal credibility, debt sustainability, EU fiscal rules compatibility, sufficient public investment, and countercyclical shock response.

### Structural reforms: bureaucracy, productivity, and labor supply
- Modernization agenda: over 200 measures to simplify/accelerate planning and approval procedures and reduce administrative burdens; aim to cut red tape by 25 percent by 2029.
- Measures include eliminating duplicative data collection, digitalization, reducing compliance costs, simplifying building codes and regional planning regulations, acceleration of approvals, deadlines for objections, digital submissions, streamlined procedures.
- Investment incentives and support:
  - Immediate Investment Program (July 2025): reintroduction of declining-balance depreciation of up to 30 percent for equipment investments acquired by end of 2027.
  - Research allowance assessment basis increased from €10 to €12 mil. starting in 2026.
  - Federal corporate income tax rate to be reduced from 15 percent to 10 percent starting in 2028 over a 5-year period.
  - Germany Fund (“Deutschlandfonds”) launched December 2025: focus areas (industrial sector and SMEs; energy infrastructure; startups and scaleups) with €30 bn. of public funds and guarantees to stimulate around €130 bn. in total investments.
  - Future Fund (“Zukunftsfonds”) reinforced with focus on scaleups and capital-intensive sectors (deep tech, biotech, defense & security).
  - Work to reduce time to set up a company and promote regulatory sandboxes for innovation.
- Digital and AI infrastructure:
  - Deutschland‑Stack: sovereign, open‑standard technology stack for government services.
  - Marketplace for AI use in public administration (“MaKI”) created.
  - Expansion of fiber and mobile networks legally declared overriding public interest.
  - Implementation of EU Data Act and KRITIS Framework to enhance data availability, interoperability, and security.
- Labor supply and immigration:
  - Emphasis on mobilizing domestic labor reserves and attracting skilled workers abroad; focus on female labor participation, flexibility for older workers, broader skilled immigration, upskilling and training.
  - SFIC investments include substantial childcare infrastructure funding (SFIC’s €100 bn. for federal states).
  - Earnings limits for pensioners abolished; Pension Reform 2025 includes “Aktivrente”: older workers at statutory retirement age can earn €2,000 per month tax-free.
  - Revised Skilled Immigration Act: residence permit for highly skilled non-EU applicants for non-regulated professions.
  - Opportunity Card: job search for non-EU applicants in Germany for up to one year based on points system.
  - Digital service portal Work-and-Stay-Agency to streamline skilled migration processes.
  - Programs supporting labor market entry and upskilling for refugees and migrants: Job-Turbo, MyTurn – Women with Migration Experience Get Started, Integration through Qualification (IQ) Initiative.
  - National Skills Strategy and Act to Strengthen the Promotion of Vocational Training and Skills expand continuing vocational education; vocational training guarantee to ensure access for young people.

### Financial sector policies and AML/CFT
- Financial system: robust; capital ratios of banks and insurers solid; liquidity buffers ample.
- Supervisory stress tests confirm resilience under severe shocks, though pockets of vulnerability exist under adverse conditions.
- Concerns: global equity valuations appear stretched; potential indirect and second-round effects from sharp equity price declines.
- Non-performing loans have increased from very low levels, notably in commercial real estate (CRE) and some corporate segments; CRE downturn orderly so far.
- Supervisory actions: intensified engagement, on-site inspections, deep dives into banks’ CRE portfolios, and new top-down macroprudential CRE stress test for credit institutions.
- Macroprudential policy: maintain countercyclical capital buffer and sectoral systemic risk buffer for now to provide room for maneuver in systemic stress; authorities will monitor and adjust measures as needed.
- Monitoring interconnectedness: authorities follow links between banks and non-bank financial institutions and cryptoasset exposures; supporting European/international efforts to close data gaps and ensure prudential standards.
- Insurance sector: transposition of macroprudential enhancements under revised Solvency II Directive and Insurance Recovery and Resolution Directive underway.
- AML/CFT: intensified efforts to combat transnational corruption and address deficiencies from 2022 FATF Mutual Evaluation Report; implementing EU AML package by 2027.
  - EU Anti-Money Laundering Authority (AMLA) opened in Frankfurt in June 2025.
  - Authorities using cross-border payments data for IMF financial flows analysis and greater quantitative/empirical research.
  - Maximum fines for criminal offences, including foreign bribery, to be increased to €40 mil. via corporate liability reform consistent with new EU law.

### Climate, energy transition, and European/international engagement
- Climate neutrality target: by 2045.
- 2024 emissions: approximately 649 million tons of CO₂ equivalents — 48.2 percent compared to 1990.
- Carbon pricing remains central; CTF provides funding to decarbonize industry, modernize buildings, and support electromobility ramp-up.
- Electricity mix: about 60 percent sourced from renewable energies (wind and solar); target to reach 80 percent by 2030.
- Measures to accelerate renewables: designate acceleration areas for onshore wind, streamline species protection assessments, simplify and digitalize permitting.
- Power Plant Strategy (agreement in principle with EU Commission in January 2026): foresees build-up of 10 gigawatts of dispatchable capacity by 2030; participating natural gas-fired power plants must be hydrogen-ready and switch to hydrogen by 2045 at the latest.
- European energy integration: government favors greater interconnection and cross-border energy networks; hosted third North Sea Summit and agreed to build 100 gigawatts of cross-border offshore wind capacity with Belgium, Denmark, France, Iceland, Ireland, Luxembourg, the Netherlands, Norway and the United Kingdom.
- International economic stance: committed to open markets, free trade, rules-based multilateral system; supports deepening the Single Market, Savings and Investment Union, capital markets integration, work on digital markets and AI; supportive of a well-designed 28th corporate regime and the digital euro.
- Multilateral finance: Germany advocates a strong, well-capitalized and inclusive multilateral system and financial institutions, supports IMF and trust funds, multilateral/regional development banks, international climate initiatives (Climate Club, Global Shield against Climate Risks), and participates actively in the Network for Greening the Financial System.

*Source: Annex VIII. Table 3. Germany: Table of Common Indicators Required for Surveillance (As of January 12, 2026) and accompanying informational annex materials.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1deuea2026001.pdf_