## _cr11168

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### Executive Summary — background, challenges, and policy recommendations
- Background
  - Germany’s large size and international connections mean it has responsibilities to assist the global economic recovery and that a robust German financial system is important for German and global financial stability.
- Challenges
  - Short-term stimulative measures—more rapidly raising wages or delaying fiscal consolidation—could compromise German strengths with dubious value for other countries.
  - Core challenge: strengthen areas of weakness to play a more medium-term international role by counteracting growth constraints while supporting sustainable rebalancing via higher domestic demand growth.
  - Given the financial system’s large size, international connections, and nonlinear behavior during stress, developing stronger systemic shock absorbers is an important forward-looking goal.
- Policy recommendations to enhance growth
  - Tax policy to raise labor force participation and investment.
  - Education and innovation policy to raise productivity, especially in services via more widespread use of information technology.
  - An efficient and stable financial sector that is more sensitive to financing start-up ventures.
  - Expectation: these measures should help raise consumption growth, boost domestic autonomous demand, narrow Germany’s current account surplus, and strengthen Germany’s role as an international locomotive.
- Financial stability recommendations
  - Purposeful progress in resolving crisis legacy.
  - Greater clarity on regulatory and supervisory regime to facilitate proactive supervisory practice.
  - Staff suggested streamlining permanent resolution and deposit insurance mechanisms and changes in the three-pillar banking system; authorities viewed these as more medium-term tasks.
- Outlook — key findings
  - In 2010 German GDP grew by 3½ percent, and in the first quarter of 2011 German GDP surpassed its pre-crisis level.
  - Employment is higher than before the crisis.
  - Staff projects the economy to expand by 3 percent in 2011.
  - Growth will remain above potential in the short term but is expected to slow gradually as fiscal consolidation takes hold, the output gap closes, and world trade growth slows.
  - The output gap is projected to close towards the end of 2011.
  - Germany’s crisis contraction and recovery were driven more by external demand than in most other countries.
  - Authorities noted domestic demand may grow stronger than staff projected due to expected increases in the wage bill and a pickup in investment; staff views such rebalancing as cyclical.

### Growth potential, productivity, and labor market dynamics
- Long-term potential and crisis impact
  - Staff estimates German long-term potential growth at about 1¼ percent annually.
  - Authorities see potential output growth at between 1¼ and 1½ percent.
  - Staff estimates German potential GDP declined only moderately from its pre-crisis rate and will likely suffer limited permanent damage.
- Productivity patterns
  - Total factor productivity (TFP) fell sharply in the crisis and recovered; recent flattening consistent with low long-term average TFP growth.
  - Productivity growth strong in traditional goods sectors but low in services, especially business and trade services.
  - Germany lagged the United States in ICT-related productivity growth and in private services productivity growth.
- Labor market dynamics
  - Employment remained remarkably stable during the crisis due to firms adjusting hours rather than widespread layoffs.
  - Flexible workweeks, work-time accounts, the Kurzarbeit subsidy, and the Hartz reforms supported labor market stability.
  - Steady-state unemployment rate projected to reach about 6¼ percent or less, down from over 8 percent historically.

### Credit, investment, and external demand sensitivity
- Credit and investment
  - Germany experienced a creditless recovery: bank credit and indicators of economic activity have been only loosely correlated.
  - Anemic credit growth to households and enterprises despite strong recovery; corporates relied on internal profits.
  - For sustained rise in investment rates and rebalancing, stronger credit growth will be important.
- External sensitivity and spillovers
  - A one percentage point increase in growth in Germany’s main trading partners can lift German growth by up to ½ percent.
  - External shocks accounted for almost half of business cycle fluctuations in Germany, the highest among the G-20 countries.
  - Despite large economic size, Germany’s outward growth spillovers have been small compared to other large countries.
  - Fiscal policy spillovers are limited because fiscal actions convey across borders through trade, diluting growth impact.

### Chapter 6 — Export dependence: upside potential and downside risks
- Export dependence and growth implications
  - Strong growth prospects in emerging markets offer continued opportunities, but dependence on exports represents a downside risk, including maintaining export market shares as emerging market producers grow more sophisticated.
  - Necessity to strengthen domestic sources of demand due to volatility of export-dependent growth.
- Multi-pronged growth agenda
  - Labor: to offset the sharp decline in the working-age population over the next decade would require an about 2½ percentage point increase in labor force participation, a gap unlikely to be filled by additional immigration.
  - Capital: the low investment rate needs to be raised.
  - Productivity: higher productivity growth will benefit from investment and innovation, especially outside Germany’s traditional strengths; productivity gaps in services require greater usage of ICT.
- Policy measures with greatest expected leverage
  - Tax policy: increase incentives for labor participation and investment (discussed in section IV on public finances).
  - Education policy: more widespread early childhood care and education; reorient vocational training to emphasize lifelong learning; further upwards mobility within the education system.
  - Innovation policy: promote availability of risk capital; remove uncertainties regarding tax treatment and redesign the change-of-ownership rule; improve insolvency process efficiency; increase commercial use of intellectual property rights held by universities and research institutions.
- ICT, procurement, and venture capital findings
  - The share of investment and research in information technologies is relatively small in Germany.
  - Private services sector invested relatively less in ICT compared with peers.
  - Public procurement of high-technology products is low by advanced-country standards.
  - High-risk financing (venture capital availability) is less available in Germany than in other OECD countries.

### Inflation outlook and monetary policy
- Headline inflation projections
  - Headline inflation projected to increase from 1.2 percent in 2010 to 2½ percent in 2011 due largely to energy and food price pressures.
  - Headline inflation projected to drop to about 1½ percent in 2012, then converge back to about 2 percent in the medium term.
- Core inflation projections
  - Core inflation projected to rise to 1¼ in 2011 and to about 2 percent in 2012, up from 0.8 percent in 2010.
- Monetary policy assessment
  - With German inflation slightly below the euro area average but the output gap closing somewhat faster, euro area monetary policy has been broadly appropriate for Germany.

### Financial system risks, cross-border exposure, and bank sector measures
- Financial system vulnerabilities and cross-border exposure
  - German financial system could generate outward spillovers and is susceptible to shocks from other large financial systems.
  - Aggregate exposure of German banks to sovereign and bank debt held in peripheral economies is small relative to assets but represents about 30 percent of total bank equity and is concentrated in select banks.
  - Market perception: German sovereign perceived as safe haven when the periphery is under stress.
- External risk drivers
  - Risks of financial spillovers into Germany arise mainly from other large financial systems and uncertainty regarding debt obligations of euro area sovereigns and banks.
  - Staff proposed a more comprehensive and consistent European policy response; authorities emphasized need for a clear framework that pays due regard to moral hazard and private sector involvement.

### Chapter 18 — Current account, competitiveness, and investment dynamics
- Current account and trade balance
  - Germany’s current account surplus rose to about 7½ percent of GDP just before the Great Recession and has since receded to about 5 percent of GDP.
  - Germany has not recorded a trade deficit in goods in the past 50 years.
  - CGER-like estimates show a moderate competitive advantage between 2 and 9 percent.
- Drivers and policy implications
  - Structural analysis suggests Germany could reduce its surplus through: lower taxes on business and labor; further reduction in the gross unemployment replacement rate; a smaller public share of the banking system.
  - The most sustainable approach to reducing the current account surplus is raising domestic investment rates, which are low among advanced economies.
  - Corporate sector contributed to increased surplus via a rise in corporate savings not matched by domestic investment.
- International investment position
  - Outward FDI increased to above 40 percent of GDP.
  - At end-2009, Germany’s foreign assets were highly concentrated in other Euro countries, for a gross exposure of almost 120 percent of GDP.
  - Foreign asset position vis-à-vis Greece, Ireland, and Portugal was around 15 percent of GDP.
  - Germany financed 12 percent of the international liabilities of Greece, Ireland, and Portugal (end-2008); public banks account for 31 percent of German banking sector’s exposure to these countries.
  - From 1986 to 2009 Germany earned an average 3 percent real return on its foreign assets.

### Chapter 31 — Reducing labor taxes along participation margins: proposal and simulations
- Main proposal and rationale
  - Marginal tax rate relief best targeted at the participation margin of labor supply, and tagged to paid work.
  - Implementation options: in-work credit programs for the elderly and secondary earners; an earned income tax credit with possibility of negative income tax; raise threshold for low-income tax relief (mini-jobs); reform income splitting; shift marginal tax burden away from flexible partners.
- Empirical evidence highlights
  - High tax wedge increases unemployment by discouraging job search and acceptance of formal jobs; women and secondary earners more responsive to tax incentives.
- Quantitative simulation results (presented)
  - Income tax credit amounts (Euros) considered: 500 600 700 1000
  - Fiscal Cost (percent of GDP)
    - Total 0.3 0.4 0.5 0.7
    - Elderly 0.1 0.1 0.2 0.2
    - Secondary Earners 0.2 0.3 0.3 0.5
  - Increase in the Labor Force (number)
    - Total 288,000 345,000 402,000 575,000
    - Elderly 72,000 86,000 100,000 143,000
    - Secondary Earners 216,000 259,000 302,000 432,000
  - Elimination of Income Splitting — Increase in the Labor Force (number)
    - Total 330,000
    - Women 430,000
    - Men -100,000
  - Total Impact on Labor Force 618,000 675,000 732,000 905,000
  - Rough aggregate estimate: tax credits for the elderly and secondary earners combined with move to individual taxation could increase labor force by about 900,000 people if tax credit is 1,000 euros per person/family, with fiscal cost of 0.7 percentage points of GDP.
- Fiscal and revenue options
  - Potential revenue gains (percent of GDP)
    - Reduce VAT policy gap by half 1/2.4
    - Increase Property Tax 2/1
    - Total 3.4
  - In Germany the estimated VAT policy gap is estimated at 44 percent.
  - Increase revenue by raising property taxes to yield the average ratio to GDP achieved in the United States, Canada and the United Kingdom.
- Complementary measures
  - Improve childcare availability and quality to stimulate female labor supply.
  - Consider abolishing local-level trade tax and offsetting with property and inheritance taxes; reduce debt bias via an allowance for the normal return on new equity (gradual approach).

### Chapter 41 — Bank levy, deposit insurance, supervision, and macroprudential framework
- Bank levy and resolution fund
  - Bank levy designed to fund the new resolution fund and will build up additional resources; interim contingency arrangements remain critical.
  - Envisaged calculation: focused on liabilities side (excluding deposits and capital) and includes interconnectedness (nominal derivatives positions).
  - Initial contributions may be lower than expected due to a ceiling on the levy linked to bank profits.
  - Consider broadening levy to other systemic participants such as insurance.
- Deposit insurance schemes
  - Identified weaknesses: fragmentation, parts lacking full transparency, legal certainty, and well-defined funding modalities.
  - Recommendation: harmonized and legally-binding deposit guarantee of €100,000 in all pillars as first step; clarify interaction between deposit insurance schemes and the restructuring fund.
  - Authorities prefer gradual change and keeping resolution fund and deposit insurance separate for now.
- Supervision and macroprudential framework
  - Authorities intend to strengthen the Bundesbank’s role for macro-prudential oversight based on a “10-point plan”; BaFin’s micro-prudential integrated supervision would be preserved.
  - Recommended instruments: countercyclical capital buffers; systemic risk charges as foreseen under Basel III; higher levels and quality of capital.
  - FSAP Update estimate: for most banks, such capital charges fall within existing capitalization; where needed, additional capital could be covered by contingent capital.
  - Micro-prudential improvements: regular stress testing (including U.S. dollar liquidity, group-wide spillovers); forward-looking assessment and action; advance vetting of bank acquisitions; timely reporting of emerging risk factors; shorter lags in publication of financial sector data.
- Public banks and Sparkassen
  - Sparkassen have sizeable exposure to Landesbanken; partial responsibility for Landesbanken losses via mutual protection scheme.
  - Recommendation: gradual shift to private ownership while carving out public functions to create a level playing field (medium- to long-term perspective).
- Effect of raising capital adequacy (Box 7, staff estimates)
  - Commercial banks may be expected to raise capital ratios by about two percentage points on average over the next eight years.
  - Macroeconomic impact estimates for Germany:
    - Peak output loss of 0.14 to 0.22 percent assuming monetary policy counteracts part of the effect.
    - Abstracting from monetary policy stabilization, peak output loss estimated at 0.64 to 0.68 percent.
  - Modeling assumption: estimates based on a 0.24 percent increase in the interest rate spread.

### VI. Staff appraisal — four forward-looking areas to limit systemic risk
- Areas for action
  - Legacy of the crisis: carve out viable segments of distressed banks and return them to private hands; sell distressed assets at a deliberate pace.
  - Clarify regulatory and supervisory regime: designate macro-prudential oversight (likely Bundesbank); clarify macro- vs micro-prudential interactions; establish information sharing requirements.
  - Deposit insurance schemes: move towards common, statutory payout obligations across pillars as first step to eventual unification and synergies with the restructuring fund.
  - Sparkassen: consider gradual shift to private ownership while carving out public functions.

### Recommendation on Article IV consultation cycle and country snapshot (Chapter 57)
- Recommendation: next Article IV consultation with Germany be held on the standard 12-month cycle (Decision No. 14747-(10/96) (9/28/2010)).
- Country basics and headline indicators
  - Total area: 357,041 square kilometers
  - Total population (2010): 81.6  million
  - GDP per capita (2010): US$ 40,670
- Selected macro projections and indicators (years 2007–2012, and projections)
  - GDP: 2.8, 0.7, -4.7, 3.5, 3.2, 2.0
  - Output gap (In percent of potential GDP): 2.4, 2.0, -3.8, -1.6, 0.0, 0.2
  - Private consumption (% changes, 2007–2012): -0.2, 0.7, -0.2, 0.5, 1.3, 1.2
  - Gross fixed investment (% changes, 2007–2012): 4.7, 2.5, -10.1, 6.0, 8.2, 3.4
  - Current account (in percent of GDP): 7.4, 6.2, 5.6, 5.7, 5.1, 4.8
  - General government debt (in percent of GDP): 64.9, 66.3, 73.4, 83.2, 82.3, 81.0
- Financial soundness indicators (selected, 2005–2010)
  - Regulatory capital to risk-weighted assets: 12.2, 12.5, 12.9, 13.6, 14.8, 16.1
  - Regulatory Tier I capital to risk-weighted assets: 8.0, 8.2, 8.5, 9.5, 10.8, 11.8
  - NPLs to gross loans (selected): 4.0, 3.4, 2.6, 2.9, 3.2...
  - Return on average assets (after-tax): 0.3, 0.3, 0.2, -0.3, -0.1...
  - Return on average equity (after-tax): 9.2, 7.5, 4.7, -8.1, -2.0...

### Medium-term balance of payments projections (2008–2016, selected)
- Current account (in percent of GDP): 6.2, 5.6, 5.7, 5.1, 4.8, 4.8, 4.6, 4.2, 3.7
- Trade balance (levels, selected): 262, 193, 205, 204, 193, 193, 191, 183, 169
- Exports (levels): 1,448, 1,119, 1,263, 1,448, 1,516, 1,581, 1,647, 1,717, 1,790
- Imports (levels): -1,186, -926, -1,058, -1,244, -1,323, -1,388, -1,456, -1,535, -1,621

### Fund mission, membership, and AML/CFT assessment (as of May–June 2011)
- Mission: May 4 to May 17, 2011 in Frankfurt, Bonn, Mannheim, Munich and Berlin.
- IMF membership and positions (as of April 30, 2011)
  - Quota (SDR Million): 14,565.50 (100.00 percent of quota)
  - Fund holdings of currency: 10,648.48 (73.11 percent of quota)
  - Reserve position in Fund: 3,917.09 (26.89 percent of quota)
- AML/CFT assessment (May 2009 / adopted February 17–19, 2010)
  - Assessment concluded the AML/CFT framework is not fully in line with the standard and identified weaknesses.
  - Recommendations include amendments to Criminal Code and AML Act, clarification of FIU functions, full implementation of UNSCRs on TF, improved sanctioning, strengthened implementation for DNFBPs, and improved statistics and guidance.

### ANNEX II — Statistical issues and recommended priorities
- Data provision and dissemination
  - Germany subscribes to the Fund’s SDDS and publishes a full range of statistics; ESA95 adopted in 1999.
  - Monthly data are only disseminated on a cash-basis.
- Methodological shortcomings and priorities
  - Improve sources for estimating value added for a few service industry categories.
  - Develop a direct source or methodology for quarterly changes in inventories.
  - Establish systematic monitoring of representativeness of samples between PPI rebases.
  - Address differences between ESA95-based general government data and administrative cash data.
  - Enhance timeliness of FSI publication (latest data in source: third quarter of 2010).
- Table of common indicators (selected latest observation dates as of May 24, 2011)
  - GDP/GNP: Date of latest observation Q1 11; Date received: May 11; Frequency: Q / Q / Q.
  - Exchange Rates: Date of latest observation: 05/24/2011; Date received: 05/24/2011; Frequency: D / D / D.
  - International Reserve Assets: Date of latest observation: April 11; Date received: May 11; Frequency: M / M / M.

### Authorities’ views (selected)
- Germany’s international role
  - Authorities agree Germany contributes to global growth and financial stability by safeguarding internal stability through sound public finances, a fiscal and economic framework conducive to growth, and a stable and sound financial system.
  - They noted the current account “saw a significant reduction since 2008” and that the trend “might continue as projected in the staff report and the recent WEO update.”
  - External account drivers largely explained by “a multitude of private business decisions in Germany and abroad” and “is not the result of targeted policy measures.”
  - Raising wages to reduce competitiveness judged “neither analytically nor pragmatically sound.”
- Fiscal and structural stance
  - Authorities will consider lowering personal income tax rates to narrow the tax wedge, “in particular for lower and medium incomes,” subject to fiscal consolidation needs.
  - Authorities agree in principle with reforming municipal financing by replacing locally set trade tax but noted lack of municipal majority support.
  - Authorities “fully agree with the importance of further implementing structural measures with a view to improve productivity growth, in particular in the service sector.”
- Financial sector and supervision
  - Authorities “broadly agree with the staff’s thorough analysis” and will use recommendations to reflect on and adjust structures.
  - A “10-point plan to reform the financial markets supervision structure envisages expanding the Bundesbank's mandate in macroprudential supervision, and respective legislation is under preparation.”
  - Deposit insurance: statutory deposit guarantee of EUR 100,000 and significant prefunding in place; unification not seen as per se necessary.
  - Stress tests: authorities share most conclusions; note differences in profitability and capital assessment assumptions (e.g., cooperative sector profitability projections and core Tier 1 capital estimates).

*Source: IMF staff report materials (as provided in the content unit).*

### Executive Summary

### Executive Summary

### Background
- Germany’s large size and international connections mean it has responsibilities to assist the global economic recovery and that a robust German financial system is important for German and global financial stability.
- The authorities welcomed that the consultation focused on Germany’s international role.

### Challenges
- Short-term stimulative measures—more rapidly raising wages or delaying fiscal consolidation—could compromise German strengths with dubious value for other countries.
- The core German challenge is to strengthen areas of weakness to play a more medium-term international role by counteracting growth constraints while supporting sustainable rebalancing via higher domestic demand growth.
- Given the financial system’s large size, international connections, and nonlinear behavior during stress, developing stronger systemic shock absorbers is an important forward-looking goal.

### Policy Recommendations
- Enhance growth through:
  - Tax policy to raise labor force participation and investment.
  - Education and innovation policy to raise productivity, especially in services via more widespread use of information technology.
  - An efficient and stable financial sector that is more sensitive to financing start-up ventures.
- These measures should help raise traditionally-anemic consumption growth and boost domestic autonomous demand, narrowing Germany’s current account surplus and strengthening Germany’s role as an international locomotive.
- On financial stability:
  - Purposeful progress is needed in resolving the legacy of the crisis.
  - Greater clarity on the regulatory and supervisory regime is needed to facilitate proactive supervisory practice.
  - Staff suggested streamlining permanent resolution and deposit insurance mechanisms and changes in the three-pillar banking system; the authorities viewed these as more medium-term tasks.

### Outlook — Key Findings
- Recovery status:
  - In 2010 German GDP grew by 3½ percent, and in the first quarter of 2011 German GDP surpassed its pre-crisis level.
  - Employment is higher than before the crisis; only a few advanced economies have matched this.
- Growth projections and path:
  - Staff projects the economy to expand by 3 percent in 2011, in line with the authorities' assessment.
  - Growth will remain above potential in the short term but is expected to slow gradually as fiscal consolidation takes hold, the output gap closes, and world trade growth slows.
  - The output gap is projected to close towards the end of 2011.
- Output gap and demand composition:
  - Germany’s crisis contraction and recovery were driven more by external demand than in most other countries, which helped firms retain workers and rely on hourly flexibility and Kurzarbeit.
- Domestic demand:
  - Authorities noted domestic demand may grow stronger than staff projected due to expected increases in the wage bill and a pickup in investment; staff views such rebalancing as cyclical.

### Growth Potential and Productivity
- Long-term potential:
  - Staff estimates German long-term potential growth at about 1¼ percent annually.
  - Authorities see potential output growth at between 1¼ and 1½ percent.
- Crisis impact:
  - Staff estimates German potential GDP declined only moderately from its pre-crisis rate and will likely suffer limited permanent damage; unlike the U.S., German potential GDP has suffered no permanent loss relative to its pre-crisis trend.
- Productivity patterns:
  - Total factor productivity (TFP) fell sharply in the crisis and recovered, but the recent flattening is consistent with low long-term average TFP growth.
  - Productivity growth has been strong in traditional goods sectors but low in services, especially business and trade services.
  - Germany lagged the United States in ICT-related productivity growth and in private services productivity growth.

### Labor Market Dynamics
- Employment resilience:
  - German employment remained remarkably stable during the crisis because firms viewed the shock as temporary and adjusted hours rather than laying off workers.
  - Flexible workweeks, work-time accounts, the Kurzarbeit subsidy, and the Hartz reforms supported labor market stability.
- Unemployment trends:
  - The steady-state unemployment rate is projected to reach about 6¼ percent or less, down from over 8 percent historically.

### Credit and Investment
- Creditless recovery:
  - Germany experienced a creditless recovery: bank credit and indicators of economic activity have been only loosely correlated.
  - Anemic credit growth to households and especially to enterprises has occurred despite strong recovery; corporates appear to have relied on internal profits with very limited substitution to other external financing.
  - For a sustained rise in investment rates and rebalancing, stronger credit growth will be important.
  - Authorities noted credit historically picks up with a lag and expect further GDP growth will be supported by extension of more credit.

### Fiscal and Financial Sector Notes (excerpted implications)
- Fiscal consolidation is slated to take hold and will contribute to the gradual slowdown in growth.
- Strengthening financial-sector shock absorbers and clarifying regulatory/supervisory regimes are medium-term priorities to enhance resilience.

*IMF staff Executive Summary, _cr11168 - Executive Summary_*

### 6.      Export dependence offers some upside growth potential but the downside risks

### 6.      Export dependence offers some upside growth potential but the downside risks

### Export dependence and growth implications
- Growth in Germany’s main trading partners is a major determinant of German export performance: a one percentage point increase in growth in its main trading partners can lift German growth by up to ½ percent.
- Strong growth prospects in emerging markets offer continued opportunities for Germany, but:
  - Dependence on exports represents a downside risk, including the challenge of maintaining export market shares as emerging market producers grow more sophisticated.
  - The volatile nature of export-dependent growth underscores the necessity to strengthen domestic sources of demand.
- This view is shared by the authorities in their contribution to the Group of Twenty (G-20) mutual assessment program.

### Required multi-pronged growth agenda
- All three contributors to potential growth—labor, capital, and productivity—need attention:
  - Labor: Merely to offset the sharp decline in the working-age population over the next decade would require an about 2½ percentage point increase in labor force participation, a gap unlikely to be filled by additional immigration.
  - Capital: The low investment rate needs to be raised.
  - Productivity: Higher productivity growth will benefit from investment and innovation, especially in areas outside Germany’s traditional strengths; productivity gaps in the services sector require greater usage of information and communication technology (ICT), where Germany can close the gap with the international frontier.

### Policy measures with greatest expected leverage
- Tax policy
  - Tax policy to increase incentives for labor participation and investment is discussed in section IV on public finances.
- Education policy
  - Need for more widespread early childhood care and education.
  - Reorient vocational training to emphasize lifelong learning.
  - Further upwards mobility within the education system.
- Innovation policy
  - Promote availability of risk capital to raise incentives to invest in higher-risk, higher-growth sectors.
  - Remove uncertainties regarding tax treatment and redesign the change-of-ownership rule, which eliminates loss and interest carry-forward.
  - Improve efficiency of the insolvency process (by promoting faster restructuring proceedings, including through legislative initiatives currently underway) to help develop further venture capital and private equity markets.
  - Consider further efforts to increase commercial use of intellectual property rights held by universities and research institutions.

### ICT, procurement, and venture capital (findings)
- The share of investment and research in information technologies is relatively small in Germany.
- The private services sector in Germany has invested relatively less in information technologies compared with peers.
- Public procurement of high-technology products is low by advanced-country standards.
- High-risk financing (venture capital availability) is less available in Germany than in other OECD countries.

### Inflation outlook
- Headline inflation
  - Staff and authorities project headline inflation to increase from 1.2 percent in 2010 to 2½ percent in 2011, due largely to energy and food price pressures.
  - With these pressures currently seen as temporary, and inflation expectations already scaling back, headline inflation is projected to drop to about 1½ percent in 2012, and then converge back to an annual rate of about 2 percent in the medium term.
- Core inflation
  - For 2011, staff projects core inflation to rise to 1¼ and to about 2 percent in 2012, up from 0.8 percent in 2010.
  - Part of this rise is influenced by prices of imported raw materials and will subside as the rate of increase of imported prices falls.
  - A declining output gap will pull up core inflation, but slack in most sectors suggests the increase will remain moderate in 2011.
- Monetary policy
  - With German inflation slightly below the euro area average but the output gap closing somewhat faster, euro area monetary policy has been broadly appropriate for Germany.

### Spillovers and external sensitivity
- External shocks
  - Germany has been a sensitive recipient of external real and financial shocks; these external shocks have accounted for almost half of business cycle fluctuations in Germany, the highest among the G-20 countries.
  - Recent market data show large movements of German stock and bond prices have been driven mainly by developments outside Germany.
- Outward spillovers
  - Despite its large economic size, Germany has not been a significant independent source of global growth; Germany’s outward growth spillovers have been small compared to other large countries.
  - Countries with high sensitivity to external shocks generate limited outward spillovers; Germany transmits impulses from the United States and Asia mainly to European economies with strong trade links.
  - The authorities suggested Germany’s robust recovery could enhance its role as an independent engine of growth and noted beneficial effects from German foreign direct investment on growth in Central and Eastern European countries integrated into Germany’s regional supply chain.
- Fiscal policy spillovers
  - German fiscal policy has limited consequence for European growth: fiscal actions convey across borders through trade, which dilutes the growth impact even where strong trade links exist.
  - With multipliers in a generally-accepted range, external growth effects of German fiscal policy are small; for the most stressed peripheral economies, high fiscal multipliers would need to operate for relatively modest effects.
  - Fiscal policy changes in Germany have only a small impact on the trade balance of peripheral countries and are thus unlikely to contribute to the reduction in intra-European imbalances.
  - The authorities noted the low import content of public consumption and argued that German fiscal consolidation could benefit the periphery by lowering interest rates and helping with high risk premia.

### Financial system risks and cross-border exposure
- The German financial system could generate outward spillovers and is susceptible to shocks from other large financial systems due to its large size and international connections; nonlinear behavior at times of stress implies potential for larger cross-border influence through the financial system than through the real economy.
- Risks to Germany
  - Risks of financial spillovers into Germany arise mainly from other large financial systems and from uncertainty regarding debt obligations of euro area sovereigns and banks under stress, elevating contagion risks.
  - Staff proposed these challenges warrant a more comprehensive and consistent European policy response; the German authorities emphasized the need for a clear framework that pays due regard to moral hazard and private sector involvement.
- Exposure to the European periphery
  - Aggregate exposure of German banks to sovereign and bank debt held in peripheral economies is small relative to the size of their assets, but this exposure represents about 30 percent of total bank equity.
  - Exposure is concentrated in select banks, which, if placed under stress, could have more widespread knock-on effects.
  - Stress from the periphery to banks outside Germany could also create stress in Germany.
  - Thus far, market perception has been that the German sovereign is a safe haven when the periphery has been under financial stress—in such conditions German bond yields have declined or remained constant.

### External accounts and competitiveness: current account
- Germany’s current account balance
  - Germany’s current account surplus rose to about 7½ percent of GDP just before the Great Recession.
  - The peak surplus reflected long-term forces generating precautionary savings in Germany and a cyclical rise in exports during the boom years.
  - The German surplus has since receded to about 5 percent of GDP.
- Structural analysis (Box 3)
  - Traditional drivers of the current account (per capita income level, fiscal policies, demographic factors, oil prices, initial net foreign assets) cannot explain the recent surge in global imbalances; residuals from current account equations largely mirror imbalances from 2000–09.
  - Econometric results suggest Germany could reduce its surplus through:
    - Lower taxes on business and labor,
    - Further reduction in the gross unemployment replacement rate,
    - A smaller public share of the banking system.
  - The impact of structural reforms on the current account is not robust across country samples; some reforms increase and some reduce the current account balance.

*Source: IMF staff analysis in the provided chapter: "6. Export dependence offers some upside growth potential but the downside risks"*

### 18.      Germany’s current account surplus reflects a positive trade balance especially

### 18.      Germany’s current account surplus reflects a positive trade balance especially

### Current account and trade balance
- Germany’s current account surplus is primarily driven by trade surpluses in goods.
- Germany has not recorded a trade deficit in goods in the past 50 years.
- Estimates based on CGER-like methodologies show Germany enjoys a moderate competitive advantage between 2 and 9 percent.
- The surplus with other European countries has risen in recent years, raising concern about “intra-European” imbalances.
- The trade balance with China has been negative and has widened in the last decade; authorities agreed these developments are related.

### Export competitiveness and specialization
- Germany’s export competitiveness derives from comparative advantage in a large number of specialized product varieties.
- German firms are specialized in many capital goods, consumer durables, and pharmaceuticals and enjoy significant world market shares in these products.
- Germany was able to hold market share through the pre-crisis boom, allowing exports to ride global trade growth.
- Cautionary precedent: the United States, despite similar specialization, has been losing market share in the past decade, implying emerging-nation competition may challenge German dominance.

### Intra-European imbalances and China’s role
- Growth in intra-European imbalances reflects continued German competitiveness alongside rising non-European (especially Chinese) competition.
- Increased exports to the rest of Europe maintained traditional German supply chains and resulted in larger European imports of intermediate goods from Visegrad countries (Czech Republic, Hungary, Poland, Slovakia).
- Germany’s import tilt toward products produced most cost-effectively by China contributed to increased trade imbalances within Europe.
- Advanced Europe—including the periphery—faced increased exposure to global low-wage competition; authorities felt the periphery’s weak competitiveness would require solutions in the periphery.

### Wages, savings, and common policy prescriptions
- Popular prescriptions—raising German wages or reducing household savings—to reduce competitiveness are judged neither analytically nor pragmatically sound by staff and authorities.
- Despite recent wage moderation, German wages remain amongst the highest in Europe (changes in nominal wages and unit labor costs are highly correlated).
- Because competitiveness derives from product specialization, raising German wages would do little to improve export prospects of countries that do not compete with Germany in its specialized products.
- German national saving rate is about on par with advanced European peers; household saving rates are not exceptionally high.
- Reducing domestic savings would require reversing long-standing precautionary saving behavior and providing greater social security would conflict with public finance considerations.
- Addressing high precautionary savings is better seen as the outcome of raising domestic sources of growth rather than a starting point.

### Investment, corporate savings, and implications for surpluses
- The most sustainable approach to reducing the German current account surplus is raising domestic investment rates, which are low among advanced economies.
- The corporate sector was the main contributor to the increased surplus during the boom years through a rise in corporate savings (increased profits and low dividend payout) that was not matched by domestic investment.
- Corporate investment remained low compared to European peers even after accounting for outward FDI.
- Key constraints to higher investment include long-standing low returns to investment in Germany and incentives structures; raising investment likely requires restructuring public finance priorities and improving the investment climate.
- Staff and authorities view merit in reducing banks’ incentives to seek higher yields abroad and encouraging more proactive domestic business development by banks.

### International investment position
- Germany exported capital to match its surpluses, sharply increasing its holdings of international assets.
- Outward foreign direct investment (FDI) has increased to above 40 percent of GDP.
- Before the crisis, financial investments by banks—through loans and purchases of stocks and bonds—were primary drivers of large outflows.
- Since 2007 banks have reduced foreign asset holdings, partly transferred to the public sector through resolution agencies.
- Public banks (notably Landesbanken) contributed significantly to accumulation of foreign assets; Landesbanken rapidly increased foreign investments pre-crisis and financed these with wholesale funding and deposits from Sparkassen.
- At end-2009, Germany’s foreign assets were highly concentrated in other Euro countries, for a gross exposure of almost 120 percent of GDP.
- Foreign asset position vis-à-vis Greece, Ireland, and Portugal was around 15 percent of GDP.
- Germany financed a moderate share—12 percent—of the international liabilities of Greece, Ireland, and Portugal (end-2008); public banks account for 31 percent of the German banking sector’s exposure to these countries.
- Returns on foreign assets: from 1986 to 2009 Germany earned an average 3 percent real return on its foreign assets, approximately half the return on U.S. foreign assets; Germany’s return performance improved only slightly since 1996.

### Public finances, consolidation, and debt dynamics
- The authorities moved from a sizeable fiscal stimulus to a gradual consolidation; the stimulus was comparable to—or larger than—other advanced economies.
- Staff estimates suggest the size of the consolidation is about ¾ percentage points of GDP per year and is likely larger than implied by authorities’ structural-balance estimates based on the output gap.
- The European Stability and Growth Pact (SGP) target can be achieved in 2011, and the objectives of the national fiscal rule and the preventive arm of the SGP are within reach at the latest by 2016.
- Increased primary surplus will help bring down the debt-to-GDP ratio from its current level of over 83 percent of GDP (recently boosted by banking sector support).
- Staff views the proposed consolidation path as appropriate but recommended slowing the pace of consolidation in case of a substantial negative shock to growth.
- Risks to large fiscal adjustments are documented from past episodes; political commitment is key to success.
- Stress-test scenarios noted include: growth shock (real GDP growth at baseline minus one-half standard deviation), real interest rate shock (baseline interest rate plus one standard deviation), and contingent liability shock (assumes a 10 percent of GDP increase in other debt-creating flows in 2012).

### Structural reform priorities to support growth and rebalancing
- Rebalancing public finances to promote growth is desirable while staying within the consolidation path.
- Need to increase labor participation given projected workforce decline; scope exists similar to Scandinavian experience.
- Low-skilled, female, and elderly labor force participation in Germany is low compared to Scandinavian countries.
- The German labor tax wedge is particularly high for low-income earners and remains high across family types, discouraging labor participation.
- The 2008 corporate income tax reform improved tax competitiveness, but municipalities still rely on an inefficient and volatile trade tax with differential rates causing regional competition.
- The tax system favors debt over equity in corporate financing and tax constraints hinder development of high-growth/high-risk ventures.
- These tax and institutional factors act to reduce labor and capital inputs and hence potential growth.

*Source: IMF staff report text provided in the content unit.*

### 31.      Reducing labor taxes along the participation margins could be most effective

### 31.      Reducing labor taxes along the participation margins could be most effective

### Summary of main proposal and rationale
- Marginal tax rate relief is best targeted at the participation margin of labor supply, and tagged to paid work.
- Implementation options:
  - Introduction of in-work credit programs for the elderly and secondary earners.
  - An earned income tax credit for the low-income, with the possibility of a negative income tax.
  - Alternatively, raise the threshold for the low-income tax relief (the so-called mini-jobs) and reduce the speed at which tax benefits are withdrawn.
  - Reform the regime of income splitting for tax purposes to shift the marginal tax burden away from more flexible partners towards inelastic primary earners.
- Empirical evidence summarized in Box 5:
  - A high tax wedge significantly increases the unemployment rate by discouraging job search and acceptance of formal jobs and induces trade unions to increase wage claims.
  - For a given tax wedge, progressivity in the income tax tends to reduce involuntary unemployment.
  - The net impact of after-tax wages on formal hours worked is small for men; women tend to be more responsive to tax rates.
  - Responsiveness is larger for decisions on whether or not to take paid work (secondary earners, unemployed with social benefits, elderly considering early retirement, low skilled in informal sector).
  - High tax wedge can affect on-the-job training, willingness to work irregular hours, and underreporting of formal income.

### Quantitative simulation results and estimates
- Simulation of the Impact of Tax Reforms (as presented):
  - Income tax credit
    - 5006007001000
  - Fiscal Cost (percent of GDP)
    - Total0.30.40.50.7
    - Elderly0.10.10.20.2
    - Secondary Earners0.20.30.30.5
  - Increase in the Labor Force (number)
    - Total288,000        345,000      402,000      575,000       
    - Elderly72,000          86,000        100,000      143,000       
    - Secondary Earners216,000        259,000      302,000      432,000       
  - Elimination of Income Splitting
    - Increase in the Labor Force (number)
      - Total330,000
      - Women430,000
      - Men-100,000
  - Total Impact on Labor Force618,000        675,000      732,000      905,000       
  - Tax credit amount (Euros) (columns correspond to the income tax credit amounts shown above)

- Rough aggregate estimate highlighted in the text:
  - Tax credits for the elderly and secondary earners combined with the move to individual taxation of married couples could increase the labor force by about 900,000 people if the tax credit is 1,000 euros per person/family, with a fiscal cost of 0.7 percentage points of GDP.

### Fiscal implications and revenue options
- The proposed reductions in direct taxes might require larger revenues from indirect taxes and reductions in social entitlements.
- Measures noted to bolster revenue (staff estimates):
  - Estimated potential revenue gains (percent of GDP)
    - Reduce VAT policy gap by half 1/2.4
    - Increase Property Tax 2/1
    - Total3.4
  - In Germany the estimated VAT policy gap is estimated at 44 percent. The VAT policy gap is defined as the difference between collections under current law, and those that would be obtained if all exemptions not consistent with best practice and all reduced rates were eliminated, in both cases assuming full compliance with the law. In Germany the VAT policy gap largely reflects reduced VAT rates.
  - Increase in revenue from raising property taxes to yield the average ratio to GDP achieved in the United States, Canada and the United Kingdom.

- Expenditure-side considerations:
  - Eliminating concessions in VAT and raising property and inheritance taxes will help bolster revenue.
  - Elimination of unconditional child transfers would need careful design considering existing benefits and tax incentives.
  - Evidence suggests substantial scope to increase efficiency of education spending (see Box 6).

### Policy recommendations and implementation considerations
- Target marginal tax relief at participation margin and tag benefits to paid work to maximize labor supply response.
- Consider implementing:
  - In-work credits for elderly and secondary earners.
  - Earned income tax credit or negative income tax for low-income households.
  - Gradual reforms to income splitting and individual taxation for married couples, taking constitutional constraints into account.
- Complementary policies:
  - Improve the quality and availability of childcare to stimulate labor supply of women.
  - If reducing corporate tax distortions, consider abolishing the local-level trade tax and offsetting with property and inheritance taxes; reduce debt bias via an allowance for the normal return on new equity (recognizing initial fiscal cost and need for gradual approach).
- Authorities’ views noted:
  - Agreed with need to reduce the labor tax wedge but favored a more generalized tax reduction.
  - Pointed to constitutional constraints on eliminating income splitting.
  - Emphasized childcare improvements as essential for female labor supply.

### Related efficiency and spending observations (Box 6)
- Social protection:
  - In 2008 Germany spent 27.8 percent of GDP on social protection benefits, a decline of 2 ¾ points from 2003, but still roughly ⅔ of public expenditure.
  - Scope to increase efficiency by broader use of means testing instead of unconditional transfers (for example, universal child benefits), to be considered alongside tax allowances.
- Education:
  - Spending on primary and secondary education in Germany is about the OECD average, but educational attainment (measured by cross-country scores) is low, indicating significant potential efficiency gains.
  - Potential efficiency gains in education using the same financial inputs are notable (percent of output estimates presented in source).

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

### 41.      The bank levy to fund the new resolution fund will build up additional resources

### 41.      The bank levy to fund the new resolution fund will build up additional resources

### Bank levy and resolution fund
- The bank levy is designed to fund the new resolution fund and will build up additional resources, but given its target size, interim contingency arrangements remain critical.
- Envisaged calculation of the bank levy:
  - Focused on the bank’s liabilities side (excluding deposits and capital).
  - Includes interconnectedness (nominal derivatives positions).
- Measurement and implementation issues:
  - Measuring interconnectedness risk remains an ongoing task.
  - Initial contributions may be lower than expected due to a ceiling on the levy linked to bank profits.
  - Authorities are finalizing regulations on the determination of the levy.
- Policy considerations:
  - Consider broadening the levy to other systemic financial sector participants benefitting from a stable financial sector, such as insurance.
  - Contingency arrangements for the event of a substantial need of resolution funding need clarification.

### Deposit insurance schemes and interaction with restructuring fund
- Staff view:
  - A phased unification of the deposit insurance schemes, along with synergies with the restructuring fund, would create greater certainty and stability.
- Identified weaknesses in the German deposit insurance regime:
  - Fragmentation, and some parts lacking full transparency, legal certainty, and well-defined funding modalities in line with international best practice.
  - Broad exemptions mean voluntary deposit protection and mutual guarantee schemes do not need to embody the minimum elements of the 1994 European Union Directive.
- Recent actions and recommendations:
  - European Commission staff have recently been in discussions with the German authorities on the removal of the exemptions for mutual guarantee schemes.
  - As a first step to reduce inconsistencies with the BCBS-IADI core principles, legal certainty, transparency and funding of the regime should be enhanced by providing for a harmonized and legally-binding deposit guarantee of €100,000 in all pillars.
  - Interaction between the deposit insurance schemes and the restructuring fund should be clarified.
  - As a next step, resilience and credibility should be strengthened by limiting the high coverage promised under the voluntary schemes.
- Authorities’ stance:
  - Recognize relevance of issues but see scope only for gradual change.
  - Note depositor confidence was maintained during the crisis and expect issues will be addressed once discussions at the European level are completed.
  - Prefer to keep the resolution fund and deposit insurance separate for now, despite staff pointing to possible efficiency gains from combining them.

### Supervision and macroprudential framework
- General lesson: more proactive, forward-looking supervision is essential following the last crisis.
- Organizational reforms:
  - Reform of the organizational structure for financial supervision has dragged on.
  - Authorities abandoned earlier plans to consolidate all prudential banking supervision into the Bundesbank; now intend to strengthen the Bundesbank’s role for macro-prudential oversight based on a “10-point plan.”
  - BaFin’s micro-prudential integrated financial services supervision would be preserved.
- Recommendations:
  - Proceed decisively to establish clear structures and remove lingering uncertainty.
  - Legal enhancements needed to remove constraints on expedient exchange of relevant information within and between institutions.
  - Early consideration required to prevent risks slipping through the cracks.
  - Further clarity needed on interactions between the Bundesbank, BaFin, and the European Supervisory Authorities, and on the relationship between macro- and micro-prudential regulation.
- Macroprudential instruments under consideration:
  - Countercyclical capital buffers.
  - Systemic risk charges as foreseen under Basel III.
  - Higher levels and quality of capital (e.g., through Pillar 2 charges).
  - FSAP Update estimate: for most banks, such capital charges fall within the existing capitalization; where needed, additional capital could be covered by contingent capital, for example.
- Micro-prudential supervision improvements (FSAP Update recommendations):
  - Regular stress testing of the banking and insurance sectors (longer-term risks, U.S. dollar liquidity, group-wide spillovers).
  - Forward-looking assessment and action to head off vulnerabilities.
  - Advance vetting of bank acquisitions of subsidiaries.
  - Timely reporting of emerging risk factors and shorter lags in the publication of financial sector data.
  - Authorities are in broad agreement and consider these priorities part of their ongoing agenda.

### Public banks and Sparkassen
- Emerging challenges for the Sparkassen:
  - Sparkassen have sizeable exposure to the Landesbanken; they place a sizeable fraction of their deposits with the Landesbanken.
  - As Landesbanken invested abroad at the end of the previous decade, Sparkassen increased the share of deposits held with Landesbanken.
  - Sparkassen are partially responsible for Landesbanken losses as part owners and guarantors in a mutual protection scheme.
  - One large Sparkasse faced significant financial stress during the crisis.
  - Deposit base will face competition as European financial integration—particularly internet banking—unfolds; adequate returns will be required on higher and better-quality capital under Basel III.
  - Some Länder have allowed for private ownership (yet without voting rights in the case of Sparkassen).
- Recommendation:
  - A gradual shift to private ownership, while carving out their public functions, would create a level playing field and deserves serious consideration; any reform would need to be considered in a medium- to long-term perspective.

### Effects of raising capital adequacy requirements (Box 7)
- Expected response to Basel III in the European Union:
  - Commercial banks may be expected to raise their capital ratios by about two percentage points on average over the next eight years, and to complete this adjustment well in advance of the deadline.
- Macroeconomic impact estimates for Germany (staff estimates):
  - Peak output loss in Germany of 0.14 to 0.22 percent assuming that monetary policy counteracts some part of the overall effect.
  - Abstracting from monetary policy stabilization, the peak output loss is estimated at 0.64 to 0.68 percent.
  - The peak output loss is higher, the faster the speed of adjustment, and occurs shortly after the end of the adjustment period.
- Modeling assumption:
  - These estimates are based on a 0.24 percent increase in the interest rate spread, following the Macroeconomic Assessment Group, 2010.

### Staff appraisal and key policy recommendations (VI. STAFF APPRAISAL)
- Broad assessment:
  - Enduring strengths and supportive short-term policy measures helped achieve an impressive recovery from the crisis.
  - Counteracting medium-term growth constraints and securing financial stability remain important.
- Role for Germany:
  - Calls for Germany to play a more prominent international role; scope for short-term gains limited, sustained effort required.
- Growth and structural reform priorities:
  - Increase labor participation, deploy labor productively, complement with physical investment and innovation especially outside traditional strengths.
  - Tax policy to raise labor participation and improve investment climate; educational reform; enhanced provision of risk capital; more efficient insolvency process.
- Fiscal policy:
  - Government’s fiscal consolidation path is appropriate but must build room for responding to negative surprises and for fostering growth.
  - With the output gap closing, longer-term considerations require lowering the public debt-to-GDP ratio to regain lost ground.
  - A reassessment of the speed of consolidation may be needed if growth turns out to be significantly weaker than expected.
- Financial sector stability and vulnerabilities:
  - Financial system broadly stable but pockets of vulnerability remain: high leverage, low profitability, dependence of large banks on market funding.
  - Particular vulnerabilities in some Landesbanken.
  - Delays in data publication and lack of transparency are troubling.
- Four areas for forward-looking actions to limit systemic risk:
  - Legacy of the crisis: carve out viable segments of distressed banks and return them to private hands; sell distressed assets at a deliberate pace to avoid fire sales but minimize delays.
  - Clarify regulatory and supervisory regime: designate macro-prudential oversight likely to the Bundesbank; clarify relationship between macro- and micro-prudential regulations; establish necessary information sharing requirements.
  - Deposit insurance schemes: move towards common, statutory payout obligations across pillars as a first step to eventual unification to realize economies of scale; unified statutory schemes could allow use of their resources for early intervention and synergies with the proposed restructuring fund.
  - Sparkassen: gradual shift to private ownership while carving out public functions deserves serious consideration.

*Source: _cr11168 - 41.      The bank levy to fund the new resolution fund will build up additional resources*

### 57.      It is recommended that the next Article IV consultation with Germany be held on the

### _cr11168 - 57.      It is recommended that the next Article IV consultation with Germany be held on the

### Recommendation on Article IV consultation cycle
- It is recommended that the next Article IV consultation with Germany be held on the standard 12-month cycle, in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96) (9/28/2010)).

### Snapshot: country basics and headline indicators
- Total area: 357,041 square kilometers
- Total population (2010): 81.6  million
- GDP per capita (2010): US$ 40,670

### Selected real sector indicators (percentage changes, years 2007–2012 1/)
- Private consumption: -0.2, 0.7, -0.2, 0.5, 1.3, 1.2
- Public consumption: 1.6, 2.3, 2.9, 1.9, 1.4, 0.6
- Gross fixed investment: 4.7, 2.5, -10.1, 6.0, 8.2, 3.4
  - Construction: -0.5, 1.2, -1.5, 2.9, 6.7, 3.5
  - Machinery and equipment: 10.7, 3.5, -22.6, 10.9, 11.0, 3.5
- Final domestic demand: 1.2, 1.4, -1.7, 1.9, 2.7, 1.5
- Inventory accumulation 2/: -0.1, -0.2, 0.1, 0.5, -0.9, -0.1
- Total domestic demand: 1.3, 1.2, -1.9, 2.4, 2.1, 1.5
- Exports of goods and nonfactor services: 7.6, 2.5, -14.3, 14.7, 7.2, 4.4
- Imports of goods and nonfactor services: 5.0, 3.3, -9.4, 13.0, 5.4, 3.7
- Foreign balance 2/: 1.6, -0.1, -3.2, 1.3, 1.2, 0.6
- GDP: 2.8, 0.7, -4.7, 3.5, 3.2, 2.0
- Output gap (In percent of potential GDP): 2.4, 2.0, -3.8, -1.6, 0.0, 0.2

### Labor market and prices (levels/rates and percentage changes)
- Labor force (millions): 43.3, 43.4, 43.3, 43.6, 43.5, 43.6
- Employment (millions): 39.7, 40.2, 40.2, 40.4, 40.8, 40.9
- Unemployment 3/: 3.6, 3.1, 3.1, 3.2, 2.7, 2.7
- Unemployment rate (in percent) 4/: 8.8, 7.6, 7.7, 7.1, 6.3, 6.2
- GDP deflator: 1.7, 1.3, 1.3, 0.7, 0.2, 1.1
- Consumer price index (harmonized): 2.3, 2.8, 0.2, 1.2, 2.5, 1.6
- Average hourly earnings (total economy): 1.4, 2.4, 3.0, 0.0, 2.9, 2.9
- Unit labor cost (industry): -1.8, 7.6, 15.7, -8.1, 0.9, 2.2
- Real disposable income 5/: 0.0, 1.8, -0.9, 0.8, 0.8, 1.1
- Personal saving ratio (in percent): 10.8, 11.7, 11.1, 11.4, 11.0, 10.9

### Public finances (levels, percent of GDP, and balances)
- General government expenditure (in billions): 1,059, 1,086, 1,139, 1,164, 1,184, 1,202
  - (In percent of GDP): 43.6, 43.8, 47.5, 46.6, 45.8, 45.1
- General government revenue (in billions): 1,066, 1,088, 1,066, 1,082, 1,135, 1,172
  - (In percent of GDP): 43.8, 43.9, 44.5, 43.3, 43.9, 44.0
- Overall balance 6/ (in billions): 63, -73, -82, -49, -31
  - (In percent of GDP): 0.3, 0.1, -3.0, -3.3, -1.9, -1.1
- Structural balance (in billions): -22, -12, -24, -57, -46, -34
  - (In percent of GDP): -0.9, -0.5, -1.0, -2.3, -1.8, -1.3
- Federal government overall balance 6/ (in billions): -19, -14, -39, -57, -38, -24
  - (In percent of GDP): -0.8, -0.6, -1.6, -2.3, -1.5, -0.9
- General government debt (in billions): 1,579, 1,644, 1,761, 2,080, 2,128, 2,159
  - (In percent of GDP): 64.9, 66.3, 73.4, 83.2, 82.3, 81.0

### Balance of payments and external sector (levels, billions of USD, and percent of GDP)
- Trade balance 7/: 254.8, 262.4, 193.2, 205.0, 203.6, 193.4
- Services balance: -20.4, -17.1, -14.5, -10.6, -21.1, -24.7
- Factor income balance: 59.4, 52.3, 69.8, 59.0, 61.2, 72.1
- Net private transfers: -22.3, -24.7, -23.4, -22.3, -24.0, -24.0
- Net official transfers: -22.7, -24.4, -22.6, -28.2, -32.2, -34.1
- Current account (in billions): 248.3, 227.9, 186.3, 187.7, 187.5, 182.7
  - (In percent of GDP): 7.4, 6.2, 5.6, 5.7, 5.1, 4.8
- Foreign exchange reserves (e. o. p.) 8/: 27.7, 27.7, 25.6, 28.0, 25.9...

### Monetary and interest rate indicators
- Money and quasi-money (M3) 9/ (percent change): 10/10.7, 9.7, -1.5, 4.4, 4.2...
- Credit to private sector 9/ (percent change): 3.3, 6.6, -0.5, -1.9, -1.0...
- Three-month interbank rate 11/: 4.3, 4.6, 1.2, 0.8, 1.1...
- Yield on ten-year government bonds 11/: 4.3, 4.1, 3.3, 2.8, 3.2...
- Euro per US$ 11/: 0.73, 0.73, 0.68, 0.76, 0.69...
- Nominal effective rate (1990=100) 12/: 119.7, 120.7, 122.2, 114.9, 118.4...
- Real effective rate (1990=100) 13/: 101.5, 100.1, 105.6, 98.5, 100.5...

### General government operations and projections (selected items, in percent of GDP, 2007–2016 projections)
- Revenue: 43.8, 43.9, 44.5, 43.3, 43.9, 44.0, 44.2, 44.2, 44.3, 44.3
- Taxes: 23.9, 24.0, 23.7, 22.9, 23.4, 23.5, 23.8, 23.8, 23.9, 23.9
- Social contributions: 16.5, 16.4, 17.1, 16.8, 17.0, 16.9, 16.9, 16.8, 16.8, 16.8
- Expenditure: 43.6, 43.8, 47.5, 46.6, 45.8, 45.1, 45.0, 44.4, 44.1, 44.1
- Consumption of fixed capital: 1.6, 1.6, 1.7, 1.6, 1.7, 1.4, 1.4, 1.3, 1.3, 1.3
- Gross Operating Balance: 1.6, 1.5, -1.4, -2.0, -0.3, 0.2, 0.6, 1.1, 1.4, 1.5
- Net lending (+)/borrowing (–): 0.3, 0.1, -3.0, -3.3, -1.9, -1.1, -0.8, -0.2, 0.2, 0.2
- Structural Balance (output gap methodology) (memorandum): -0.9, -0.5, -1.0, -2.3, -1.8, -1.3, -1.0, -0.3, 0.1, 0.2
- Public gross debt (Maastricht definition) (percent of GDP): 64.9, 66.3, 73.4, 83.2, 82.3, 81.0, 79.2, 77.0, 74.7, 72.8

### General government stock positions (selected, percent of GDP, 2007–2010)
- Net financial worth: -42, -44, -48, -50
- Financial assets: 23.1, 25.3, 28.1, 36.8
  - Currency and deposits: 8.1, 8.0, 8.2, 10.5
  - Debt securities: 0.5, 2.0, 2.3, 7.5
  - Loans: 2.6, 2.9, 3.3, 5.4
  - Equity and investment fund shares: 8.3, 8.7, 10.4, 10.6
- Liabilities: 65.4, 69.2, 76.4, 86.8
  - Debt securities: 47.4, 50.6, 56.9, 59.2
  - Loans: 17.6, 18.1, 18.9, 27.0
- Maastricht debt: 64.9, 66.3, 73.4, 83.2

### Core Financial Soundness Indicators for Banks (selected, percent, 2005–2010 6/)
- Regulatory capital to risk-weighted assets: 12.2, 12.5, 12.9, 13.6, 14.8, 16.1
  - Commercial banks: 11.6, 12.5, 13.3, 13.5, 14.9, 15.4
  - Landesbanken: 12.1, 11.7, 11.6, 12.7, 14.9, 17.1
  - Savings banks: 12.5, 13.0, 13.0, 14.4, 14.7, 15.1
  - Credit cooperatives: 12.1, 12.2, 12.9, 14.2, 14.0, 14.7
- Regulatory Tier I capital to risk-weighted assets 2/: 8.0, 8.2, 8.5, 9.5, 10.8, 11.8
- NPLs to gross loans 5/: 4.0, 3.4, 2.6, 2.9, 3.2...
  - Commercial banks: 3.3, 2.6, 1.8, 2.0, 2.5...
  - Savings banks: 6.6, 5.9, 5.1, 4.7, 4.1...
- Return on average assets (after-tax): 0.3, 0.3, 0.2, -0.3, -0.1...
- Return on average equity (after-tax): 9.2, 7.5, 4.7, -8.1, -2.0...

### Additional financial soundness indicators (selected, percent, 2005–2010 11/)
- Capital to assets (deposit-taking institutions): 4.1, 4.3, 4.3, 4.5, 4.8, 4.3 11/
- Geographical distribution of loans to total loans: Germany: 75.2, 72.6, 71.1, 71.2, 72.9...
- FX loans to total loans: 10.2, 10.5, 11.5, 12.2, 11.5...
- Customer deposits to total (non-interbank) loans: 71.8, 75.2, 76.2, 77.7, 76.5, 73.6
  - Commercial banks: 85.5, 95.7, 92.6, 90.6, 89.7, 84.9
  - Savings banks: 102.2, 103.3, 105.4, 108.3, 109.9, 106.9
  - Credit cooperatives: 113.6, 113.1, 114.7, 119.6, 122.7, 119.0
- Loans/assets: 43.8, 42.5, 41.2, 40.6, 42.1...
- Securities holdings/assets: 23.0, 23.5, 23.0, 22.5, 23.5...

### Medium-term balance of payments projections (2008–2016, selected, in billions of USD and percent of GDP)
- Current account (levels): 228, 186, 188, 187, 183, 186, 184, 172, 153
  - In percent of GDP: 6.2, 5.6, 5.7, 5.1, 4.8, 4.8, 4.6, 4.2, 3.7
- Trade balance (levels): 262, 193, 205, 204, 193, 193, 191, 183, 169
  - Exports (levels): 1,448, 1,119, 1,263, 1,448, 1,516, 1,581, 1,647, 1,717, 1,790
  - Imports (levels): -1,186, -926, -1,058, -1,244, -1,323, -1,388, -1,456, -1,535, -1,621
- Nonfactor services balance (levels): -17, -15, -11, -21, -25, -28, -31, -36, -43
  - Nonfactor services exports (levels): 259, 233, 240, 262, 275, 287, 299, 312, 325
  - Nonfactor services imports (levels): -276, -248, -251, -284, -300, -315, -330, -348, -368
- Balance on factor income (levels): 52, 70, 59, 61, 72, 79, 85, 89, 90
  - Credit: 288, 249, 231, 305, 340, 372, 404, 433, 462
  - Debit: -235, -179, -172, -243, -267, -292, -319, -346, -371
- Current transfers, net: -49, -46, -51, -56, -58, -60, -61, -62, -63
- Capital and financial accounts (levels): -236, -202, -175, -187, -183, -186, -184, -172, -153
  - FDI, net: -73, -41, -59, -68, -72, -73, -75, -77, -78
  - Portfolio investment, net: 31, -98, -189, -210, -217, -223, -228, -232, -236

### Fund mission, staff, and relations (as of May–June 2011)
- Mission: May 4 to May 17, 2011 in Frankfurt, Bonn, Mannheim, Munich and Berlin. A one day conference was organized jointly with the Ministry of Finance.
- Staff team: Messrs. Kähkönen (Head), Mody, Ms. Ivanova, and Messrs. Bornhorst, and Sandri (all EUR), Brockmeijer, and Schmieder (MCM), Vitek (SPR), and Ms. Luedersen (LEG).
- Country interlocutors included: The Bundesbank President Weidman, Director General at the Ministry of Finance Kerber, members of the German Council of Economic Experts, senior representatives at the Chancellery, several ministries, the Bundesbank, and BaFin. Mr. Temmeyer, Executive Director for Germany, also participated.
- Previous Article IV consultation discussions: February 2010; staff report discussed by the Executive Board on March 30, 2010.

### IMF membership and financial positions (as of April 30, 2011)
- Membership status: Joined August 14, 1952; Article VIII.
- Quota (SDR Million): 14,565.50 (100.00 percent of quota)
- Fund holdings of currency: 10,648.48 (73.11 percent of quota)
- Reserve position in Fund: 3,917.09 (26.89 percent of quota)
- Net cumulative allocation (SDR Department): 12,059.17 (100.00 percent of allocation)
- Holdings: 11,801.38 (97.86 percent of allocation)
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Projected Payments to Fund (SDR Million; charges/interest): 2011: 0.79; 2012: 1.55; 2013: 1.55; 2014: 1.55; 2015: 1.55

### Exchange rate arrangement and AML/CFT assessment
- Exchange rate arrangement: Germany’s currency is the euro, which floats freely and independently. Germany is an Article VIII member and maintains an exchange system free of restrictions on payments and transfers for current international transactions.
- AML/CFT: An assessment under the international standard for AML/CFT was conducted by the Fund's Legal Department in May 2009; the detailed assessment was adopted by the joint MENAFATF-FATF Plenary Meeting in Abu Dhabi from February 17–19, 2010.
  - The report concluded the AML/CFT framework is not fully in line with the standard and identified weaknesses in the legal framework and in sanctioning for non-compliance.
  - Recommendations include:
    - amending the Criminal Code to: criminalize (i) ML in a way that covers all serious predicate offenses, and (ii) TF in a way fully consistent with international standards;
    - amending the AML Act to: (i) improve preventive measures notably by imposing a reporting obligation based on suspicion rather than knowledge and that relates to the proceeds of criminal activity; and (ii) clearly establish that the FIU should carry out more of the core functions of an FIU as contemplated by the FATF standard;
    - fully and effectively implementing the UN Security Council Resolutions (UNSCRs) on TF;
    - applying sanctioning powers more effectively for breaches of AML/CFT obligations;
    - strengthening the effective implementation of AML/CFT obligations imposed on designated non-financial businesses and professions (DNFBPs);
    - improving the collection of statistics and the provision of guidance and feedback to FIs.
  - Germany has made a clear commitment to further strengthen the national system for the prevention, detection and suppression of money laundering and terrorist financing.

### IMF staff analytical work on Germany (2003–11, thematic listing)
- Growth, Current Account and Competitiveness (selected studies and reports listed)
  - Growth Linkages within Europe, IMF Country Report No. 08/81.
  - Economic Impact of Shortages of Skilled Labor in Germany, IMF Country Report No. 08/81.
  - What explains Germany’s Rebounding Export Market Share? CESifo Working Paper No. 1957.
  - Long-run Growth in German, IMF Country Report No. 06/17.
  - The Performance of Germany’s Non-Financial Corporate Sector – An International Perspective, IMF Country Report No. 06/17.
  - After the Crisis: Lower Consumption Growth but Narrower Global Imbalances? IMF Working Paper No. 10/11.
  - The Crisis Impact on Potential Growth in Germany: The Nature of the Shock Matters, forthcoming.
  - Current Account Imbalances: How much can structural policies help reduce Germany's surplus, forthcoming.
- Inflation (selected)
  - Inflation Smoothing and the Modest Effect of VAT in Germany, IMF Working Paper No. 08/175.
  - Simulating Inflation Forecasting in Real-Time: How Useful Is a Simple Phillips Curve in Germany, the U.K., and the U.S.? IMF Working Paper No. 10/52.
- Fiscal Policy and Entitlement Programs (selected)
  - Tax Reform and Debt Sustainability in Germany: An Assessment Using the Global Fiscal Model, IMF Country Report No. 06/436.
  - Business Tax Reform, IMF Country Report No. 06/436.
  - Why is Germany’s Deficit so Large? IMF Country Report No. 06/17.
  - A Preliminary Public Sector Balance Sheet for Germany, IMF Country Report No. 06/17.
  - Germany: A Long-Run Fiscal Scenario Based on Current Policies, IMF Country Report No. 06/17.
- Labor Markets (selected)
  - The Employment Effects of Labor and Product Markets Deregulation and their Implications for Structural Reform, CESifo Working Paper No 1709, May 2006.
  - Employment, Unemployment, and Labor Supply in Germany, IMF Country Report No. 04/340.
  - The Unbearable Stability of the German Wage Structure: Evidence and Interpretation, IMF Staff Papers, August 2004.
- The Financial System (selected)
  - Landesbanken: A Measure of the Costs for Taxpayers, IMF Country Report No. 06/436.
  - The German Banking Sector: Credit Decline, Soundness and Efficiency, IMF Country Report No. 06/17.
  - Germany’s Three-Pillar Banking System, IMF Occasional Paper 233 (2004).
  - Germany’s Financial System: International Linkages and the Transmission of Financial Shocks, IMF Country Report No. 03/342.
- Corporate Governance
  - Germany’s Corporate Governance Reforms: Has the System Become Flexible Enough? IMF Working Paper No. 08/179.

*Prepared by the European Department; Staff Report for the 2011 Article IV Consultation—Informational Annex; June 9, 2011.*

### ANNEX II. GERMANY: STATISTICAL ISSUES

### ANNEX II. GERMANY: STATISTICAL ISSUES

### Data provision and dissemination
- Germany has a full range of statistical publications and subscribes to the Fund’s Special Data Dissemination Standard (SDDS).
- A ROSC Data Module report was published in January 2006.
- The authorities make substantial use of the Internet to facilitate on-line access to data and press information.
- Germany adopted the European System of Integrated Economic Accounts 1995 (ESA95) in 1999.
- Germany publishes—through Eurostat—general government revenue, expenditure, and balance on an accrual basis on a quarterly basis (ESA95) and submits annual data for publication in the Government Financial Statistics Yearbook, in GFSM 2001 format.
- Monthly data are only disseminated on a cash-basis.

### Methodological coverage and soundness
- The 2005 ROSC Data Module mission found that macroeconomic statistics generally follow internationally accepted standards and guidelines on:
  - concepts and definitions,
  - scope,
  - classification and sectorization,
  - basis for recording.
- Specific methodological shortcomings identified:
  - The sources for estimating value added for a few categories of service industries could be improved.
  - A direct source for quarterly changes in inventories is lacking.
  - There is no systematic, proactive process to monitor the ongoing representativeness of the samples of local units and products between rebases of the producer price index.

### Accuracy, reliability, and supporting systems
- Comprehensive data reporting systems support the accuracy and reliability of the government finance and balance of payments statistics.
- Although explanatory documentation exists, differences between the general government data in the ESA95 classification and the general government cash data on an administrative basis are impairing fiscal analysis.

### Financial soundness indicators (FSIs)
- Germany has been participating in the FSIs project since its inception.
- Annual data for most of the 40 FSIs are posted on the FSI website with effect from 2005.
- Quarterly FSI data are posted with effect from the fourth quarter of 2008.
- The last data available (in the source) relate to the third quarter of 2010, suggesting that timeliness needs some improvement.

### Table of Common Indicators: reporting and data-quality assessments (selected items, as of May 24, 2011)
- Exchange Rates
  - Date of latest observation: 05/24/2011
  - Date received: 05/24/2011
  - Frequency of Data/Reporting/Publication: D / D / D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: April 11
  - Date received: May 11
  - Frequency of Data/Reporting/Publication: M / M / M
- Reserve/Base Money
  - Date of latest observation: April 11
  - Date received: May 11
  - Frequency: M / M / M
- Broad Money
  - Date of latest observation: April 11
  - Date received: May 11
  - Frequency: M / M / M
- Central Bank Balance Sheet
  - Date of latest observation: April 11
  - Date received: May 11
  - Frequency: M / M / M
- Consolidated Balance Sheet of the Banking System
  - Date of latest observation: March 11
  - Date received: May 11
  - Frequency: M / M / M
- Interest Rates
  - Date of latest observation: May 11
  - Date received: May 11
  - Frequency: M / M / M
- Consumer Price Index
  - Date of latest observation: April 11
  - Date received: May 11
  - Frequency: M / M / M
- Revenue, Expenditure, Balance and Composition of Financing – General Government (ESA95)
  - Date of latest observation: Q4 10
  - Date received: May 11
  - Frequency: Q / Q / Q
  - Data Quality – Methodological soundness: LO, LO, LO, O (for corresponding dataset)
  - Data Quality – Accuracy and reliability: O, O, O, O, O (for corresponding dataset)
- Revenue, Expenditure, Balance and Composition of Financing – Central Government (cash basis)
  - Date of latest observation: April 11
  - Date received: May 11
  - Frequency: M / M / M
- Stocks of General Government and Government-Guaranteed Debt
  - Date of latest observation: December 10
  - Date received: May 11
  - Frequency: A / A / A
- External Current Account Balance
  - Date of latest observation: March 11
  - Date received: May 11
  - Frequency: M / M / M
  - Data Quality – Methodological soundness: O, O, LO, O (for corresponding dataset)
  - Data Quality – Accuracy and reliability: O, O, O, O, O (for corresponding dataset)
- Exports and Imports of Goods and Services
  - Date of latest observation: March 11
  - Date received: May 11
  - Frequency: M / M / M
- GDP/GNP
  - Date of latest observation: Q1 11
  - Date received: May 11
  - Frequency: Q / Q / Q
  - Data Quality – Methodological soundness: O, O, O, O
  - Data Quality – Accuracy and reliability: LO, O, O, O, O
- Gross External Debt
  - Date of latest observation: December 10
  - Date received: May 11
  - Frequency: Q / Q / Q
- International Investment Position
  - Date of latest observation: December 10
  - Date received: May 11
  - Frequency: Q / Q / Q

Notes provided in the table (verbatim):
- 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.
- 3 Foreign, domestic bank, and domestic nonbank financing.
- 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5 Including currency and maturity composition.
- 6 Includes external gross financial asset and liability positions vis-a-vis nonresidents.
- 7 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
- 8 Reflects the assessment provided in the data ROSC (published on January 18, 2006, and based on the findings of the mission that took place during July 5–20, 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning methodological soundness, namely, (i) concepts and definitions, (ii) scope, (iii) classification/sectorization, and (iv) basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).
- 9 Same as footnote 8, except referring to international standards concerning accuracy and reliability, namely, (i) source data, (ii) assessment of source data, (iii) statistical techniques, (iv) assessment and validation of intermediate data and statistical outputs, and (v) revision studies.

### Implications and recommended statistical priorities (implied by the assessment)
- Improve sources for estimating value added in specific service industry categories.
- Develop a direct source or methodology for quarterly changes in inventories to enhance GDP cycle indicators.
- Establish a systematic, proactive process to monitor representativeness of samples of local units and products between producer price index rebases.
- Address differences between ESA95-based general government data and administrative cash-based general government data to improve fiscal analysis.
- Enhance timeliness of FSI publication (latest available data in the source: third quarter of 2010).

*Source: ANNEX II. GERMANY: STATISTICAL ISSUES, IMF staff report materials (as provided in the content unit).*

### 2011.  My  authorities  are  well  aware  of  the  positive  spill-over  effects  that  strict  budget

### _cr11168 - 2011.  My authorities are well aware of the positive spill-over effects that strict budget

### Germany’s international role
- Authorities agree Germany can best contribute to global economic growth and financial stability by safeguarding internal stability through sound public finances, a fiscal and economic framework conducive to growth, and a stable and sound financial system.
- Germany’s current account surplus:
  - "saw a significant reduction since 2008."
  - Trend "might continue as projected in the staff report and the recent WEO update."
- External account drivers:
  - Largely explained by "a multitude of private business decisions in Germany and abroad" and "is not the result of targeted policy measures."
  - Attempts to single out areas for policy action may be counterproductive.
- Wage policy and competitiveness:
  - Raising wages in Germany "as a means to reduce German competitiveness would neither be an analytically nor a pragmatically sound approach."
- Domestic investment and external account:
  - Increasing investment will "generate additional demand in the first round."
  - Strengthening Germany’s potential output "might also foster international competitiveness and increase exports."
- Contribution to other countries’ growth:
  - Staff assessment "somewhat appears to play down the country’s contribution to growth in other countries."
  - Private consumption resilience:
    - "Private consumption in Germany proved to be very resilient during the global crisis with a reduction of only 0.2 percent in 2009."
  - Automatic stabilizers and targeted labor market measures helped stabilize household incomes and sustain domestic demand throughout the global crisis.
- Current upswing contributions:
  - "Since there are no major imbalances in the real economy and in view of very buoyant labor market developments, domestic demand and private consumption are making major contributions to growth in the current upswing."
  - "The contribution to growth from domestic demand was twice that from net exports in the first quarter of 2011."
  - Germany’s relative contribution to sustainable growth may be larger than indicated by staff-calculated “autonomous” impulses, including trade linkages and positive spill-over from German FDI, notably in CEE countries.
- Policy stance:
  - Authorities "share the staff’s view that domestic demand could be further strengthened through the implementation of continued growth-enhancing structural reforms."

### A fiscal and economic framework conducive to growth
- Labor market and taxes:
  - Staff emphasizes "the declining structural unemployment rate following significant labor market reforms earlier in the last decade" and that "higher labor market participation should be a policy priority."
  - Authorities will consider lowering personal income tax rates to narrow the tax wedge, "in particular for lower and medium incomes," subject to fiscal consolidation needs.
  - Labor market participation also depends on infrastructure, including availability of child care facilities; important steps have already been taken, including improving the educational system.
- Corporate taxation:
  - Germany implemented measures over the past decade that "significantly decreased the rates of those taxes considered the most damaging for growth," including lowering personal income tax rates and the lowering of the corporate income tax (Körperschaftsteuer) as part of the 2008 corporate tax reform.
  - Authorities agree in principle with staff recommendation to reform municipal financing by replacing the locally set trade tax, but "a respective reform proposal did not find the majority across municipalities."
  - Authorities rejected staff’s suggestion of introducing a tax allowance for tax equity because evidence suggests "a 25 percent decrease of corporate income tax revenues in the event of the introduction of such measure."
- Structural measures and productivity:
  - Authorities "fully agree with the importance of further implementing structural measures with a view to improve productivity growth, in particular in the service sector."
  - Caution on cross-country productivity comparisons: "due regard should be paid to the limitation in comparing measures of productivity across countries which are often subject to specific classification and sometimes ad-hoc assumptions which differ across countries."

### Financial sector
- FSAP and supervisory framework:
  - Authorities "broadly agree with the staff’s thorough analysis of the German financial sector" and will use recommendations to reflect on and adjust current structures and practices where appropriate.
  - Assessment shows Germany’s generally high level of compliance with supervisory core principles.
  - Most remaining banking sector deficiencies "will be dealt with in preparations for and the implementation of Basel III/European Capital Requirement Directive IV."
- Insurance sector and Solvency II:
  - "In the light of the introduction of Solvency II in 2013, there is the need to continue to further enhance supervisory capacity" particularly for BaFin, especially for on-site supervision.
  - BaFin continues to strengthen its group-wide supervision in the insurance and reinsurance sector.
- Macroprudential supervision and legislation:
  - Authorities share staff recommendation to strengthen macroprudential supervision.
  - A "10-point plan to reform the financial markets supervision structure envisages expanding the Bundesbank's mandate in macroprudential supervision, and respective legislation is under preparation."
- Deposit insurance:
  - Deposit insurance system "will continue to be a credible and efficient pillar of financial stability."
  - Unifying schemes "will not per se increase the credibility and resilience" and is not required by BCBS/IADI core principles nor the current EU Directive.
  - For the statutory deposit guarantee scheme a legally binding deposit guarantee of EUR 100,000 as well as significant prefunding is in place.
  - Any further reforms, including harmonized funding requirements, "will be in line with the respective EU directive, which is currently under discussion."
- Stress tests:
  - Authorities "share most of the conclusions of the stress testing results."
  - Most of the Fund’s suggestions on improving Bundesbank stress tests "have already been implemented."
  - Authorities note elements for perspective:
    - FSSA projects profitability of the cooperative sector at "2 percent in 2015"; authorities view "such a decline in profitability seems unlikely," noting that in 2008 return on equity (after tax) was "4 percent," and in 2007 and 2009 "above 5 percent" for this sector.
    - Capital shortfall appears at least partly due to "rising capital requirements of Basel III rather than of the stress scenarios."
    - Fund’s estimate of core Tier 1 capital "seems significantly lower by around 2 percentage points than my authorities’ estimates."
- Savings and cooperative banks:
  - These banks "have proven to be resilient during the financial crisis and thereafter" and benefit from a large share of stable deposits and domestic orientation.
  - Regarding private capital admissibility for savings banks, authorities note savings banks aim at public goods, particularly delivering banking services to a wide range of customers.
- Landesbanken sector:
  - "Existing weaknesses in the Landesbanken sector are being addressed."
  - Ongoing consolidation has led to progress in lowering risk-taking and de-leveraging, but "profitability remains rather low and the capital structure has to be adjusted to the upcoming Basel III regulation."
  - Landesbanken provide important services as central institutions for the savings banks, even as they adjust their business models.

*Source: _cr11168 - 2011.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11168.pdf_