Germany: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, November 26, 2025
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- Published: November 26, 2025
Mission overview
- An IMF mission, led by Kevin Fletcher and comprising Harri Kemp, Mustafa Saiyid, and Preya Sharma, conducted discussions for the 2025 Article IV Consultation with Germany during November 12-25.
- The authorities consented to publication. The statement reflects IMF staff views based on the mission’s preliminary findings and will inform a subsequent staff report for the IMF Executive Board.
Recent economic developments and outlook
- Major shocks and recent performance:
- Energy-price shock in mid-2022 and rapid monetary tightening contributed to two years of negative growth during 2023-24.
- Real GDP is projected to rise by 0.2 percent in 2025.
- The economy began to recover in late 2024, but recovery has been constrained by trade-related headwinds, weak productivity growth, and increasing export competition.
- Labor market and inflation:
- Unemployment rate (ILO definition) increased to 3.9 percent (up from a trough of 3.0 in early 2023).
- Part-time employment has risen.
- Inflation has receded to near 2 percent.
- Near-term projections:
- Real GDP growth is projected to accelerate to around 1 percent in 2026 and 1½ percent in 2027.
- With growth led by domestic demand, the current account balance is expected to decline gradually but remain positive.
- Inflation is expected to stay near the ECB’s target of 2 percent.
- Medium-term constraints and risks:
- Rapid population aging: working-age population projected to decline more sharply than in any other G7 economy over the next five years.
- Subdued productivity growth absent further domestic and EU-level reforms.
- Downside external risks: intensifying geopolitical tensions, escalating trade conflicts, commodity price volatility, corrections in global financial market valuations.
- Domestic downside risks: slower-than-expected productivity growth, weak implementation of public investment plans, persistent labor shortages.
- Upside potential from effective policy responses and structural reforms (e.g., boosting labor supply, accelerating digitalization, cutting red tape, deepening the EU Single Market).
Fiscal policy — findings and recommendations
- Current fiscal stance and projections:
- The deficit is projected to widen to about 4 percent of GDP by 2027, delivering a significant fiscal impulse driven in part by higher public investment and defense spending.
- Debt is projected to rise to around 68 percent of GDP by 2027, remaining the lowest among G7 economies.
- Quality of fiscal easing:
- Additional resources from the debt-brake reform should be directed mainly toward measures that boost longer-term growth (e.g., higher public investment, reducing high effective marginal income tax rates) or national priorities (e.g., defense).
- Avoid fiscally expensive and distortionary measures such as reduced VAT rates for specific sectors.
- Improve efficiency and execution of infrastructure spending by streamlining permitting, centralizing planning services, joint procurement, and digitalization.
- Medium- and long-term fiscal sustainability:
- Adjustment measures will be needed to offset aging-related and defense spending pressures 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 fiscal adjustment options:
- Sectoral spending reviews; cutting environmentally harmful subsidies and tax expenditures; closing inheritance tax loopholes; reducing nonstandard VAT exemptions and special rates; raising property and alcohol excise taxes.
- Pension reforms: indexing pensions-in-payment to inflation rather than wage growth; improve actuarial fairness of early retirement pension deductions to generate savings and boost incentives for longer working lives.
- Greater use of EU-level investment, procurement, and coordination to reduce fiscal costs in areas like energy, innovation, and defense.
- Debt-brake refinement:
- Any refinement should preserve sustainable public finances by eventually bringing all government spending within its constraints while safeguarding public investment and flexibility to respond to shocks countercyclically.
Pro-growth structural reforms — findings and recommendations
- Government priorities:
- Higher public investment and reforms to foster a more dynamic private sector, including more generous investment allowances in the corporate income tax (CIT), reductions in the CIT rate, and reductions in bureaucracy and red tape.
- Labor supply measures:
- Address persistent labor shortages due to population aging by making it easier for women and parents to work full-time (expand access to reliable child- and eldercare).
- Move away from the current joint taxation system while providing additional child allowances to improve work incentives for second earners.
- Simplify the tax and transfer system for lower-income earners by merging multiple benefits and creating more uniform withdrawal rates to reduce high effective marginal tax rates (sometimes in excess of 100 percent).
- Continue efforts to facilitate labor market integration of immigrants.
- Productivity, entrepreneurship, and business environment:
- Support new firm growth and innovation through a more flexible corporate regime for start-ups (possibly in the context of a 28th corporate regime at the EU level) and review of tax incentives that bias debt over equity financing.
- Cut excessive red tape; plans include a one-stop shop to register new firms within 24 hours.
- Suggested strategies: minimize duplicate reporting, rely more on risk-based auditing, accelerate permitting, harmonize regulations across regions and the EU, use regulatory sandboxes, set deadlines after which new objections cannot be brought, and monitor bureaucracy via measures like average times to receive permits.
- Expand digital infrastructure and digital skills (vocational and adult training).
- Deepening EU Single Market and EU-level reforms:
- Lead efforts to harmonize business regulations across the EU (28th corporate regime), integrate capital markets and financial sector oversight (Savings and Investment Union), explore a digital euro, and better integrate energy markets (Energy Union) to reduce energy price levels and volatility.
- Geo-economic resilience:
- Assess and prepare for rising global geo-economic fragmentation by identifying critical dependencies, conducting stress tests of supply-chain disruptions, and developing coping strategies.
- Pursue mutually beneficial cooperation with trading partners on trade and cross-border flows.
Financial sector policies — findings and recommendations
- Sector resilience and performance:
- Banks and insurers are significantly better capitalized and liquid since the global financial crisis.
- Stress tests in 2025 by the EBA/ECB and the Bundesbank indicated strong resilience among the 21 major banks and 1200 smaller institutions, though pockets of weakness exist in adverse scenarios.
- Insurers have a solvency ratio above the euro-area average and have been relatively profitable, benefitting from a normalized yield curve and asset valuation gains.
- Credit quality and sectoral developments:
- Non-performing loans reached 1.9 percent of all loans during Q2 2025, up from 1.7 percent a year earlier, with the pickup mainly due to commercial real estate (CRE) and nonfinancial corporate loans.
- CRE risks may be stabilizing as prices for office and retail space have started to recover.
- Macroprudential settings and recommendations:
- Current macroprudential policy settings are broadly appropriate; the credit gap is slightly negative and weak credit growth mainly reflects weak demand.
- Maintain positive macroprudential capital buffers (e.g., countercyclical capital buffer and sectoral systemic risk buffer) to provide loss-absorbing cushions that can be released in aggregate stress.
- Supervisors should encourage prudence in capital distributions (bonuses, dividends) and ensure adequate investment in technology to counter cyberattacks.
- Continue efforts to diversify banks’ income sources and reduce operational costs; completion of an EU Savings and Investment Union would support cross-border flows and efficiency-enhancing mergers.
- Macroprudential toolkit enhancements:
- Adopt legislation enabling prudential limits on debt-to-income and debt-service-to-income ratios on bank lending, as supported by the Bundesbank, to reduce future macro-financial risks and align with euro-area practice.
- Deploy such limits, along with loan-to-value limits, when the credit cycle becomes more expansionary.
- Transpose macroprudential measures for insurance companies from the Solvency II Review into national law in 2026.
Closing
- The mission thanks the authorities and counterparts for warm hospitality and constructive dialogue.
IMF staff concluding statement, November 26, 2025.