IMF Executive Board Concludes 2008 Article IV Consultation with Germany

Public Information Notice (PIN) No. 09/05
January 22, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Germany is also available.

On January 14, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Germany.1


After robust growth in 2006 and 2007, real GDP slowed in 2008 and is now set to decline sharply. World demand is decelerating and confidence indicators are deteriorating. Financial market stress has spilled over into sentiment and the real economy. The German consumer's conservatism under the current uncertain conditions will amplify the export slowdown and investment decisions are likely to be postponed. In 2008, GDP is projected to grow at 1.3 percent. An economic contraction of 2½ percent is projected for 2009, followed by a slow recovery in 2010. The risks remain tilted to the downside.

The financial market turbulence has exposed vulnerabilities in the German financial system. Already in summer 2007, the failure of IKB and Sachsen LB required government intervention. In the aftermath of the failure of Lehman Brothers in Fall 2008, confidence in the system was again threatened by the liquidity rollover requirements at Hypo Real Estate. A public commitment to protect household deposits provided initial stability. This was followed by a comprehensive package in mid-October 2008 to support market liquidity and bank capitalization as part of a globally-coordinated effort.

Fiscal consolidation in recent years along with growth in incomes and employment during 2007 supported a balanced budget in 2008. In 2009 and 2010, however, the deficit is expected to widen with a weakening economy and labor market. The authorities' stimulus package is expected to provide a needed impulse to domestic demand, but will also increase the deficit. To address concerns with regard to long-term fiscal sustainability, the authorities aim to introduce a deficit rule that would constrain the structural fiscal balance to about zero. But more ambitious plans for fiscal federalism reform have been postponed until 2019.

Executive Board Assessment

Executive Directors noted that, in the past three months, Germany has come under heightened pressure from the global economic and financial turmoil, reflecting the economy's high degree of openness and integration with the world economy. With the sharp drop in world trade and continuing weakness in domestic demand, Germany faces the prospect of a sizeable, and possibly extended, economic downturn. Corporate and financial sector stresses in the German economy—thus far relatively dissociated from each other—risk becoming more intertwined in the period ahead. Against this background, Directors welcomed the recent initiatives by the German authorities to strengthen significantly the financial safety net and to give valuable economic stimulus. They recognized that the fundamentals of the German economy remain strong, and applauded the sustained fiscal prudence of the last few years that has created the needed room for a sizeable fiscal boost to the economy.

Directors welcomed the German authorities' continuing priority to maintaining financial stability and stabilizing the real economy. Global policy actions and measures to contain the risk of a costly global self-reinforcing slump should preferably be coordinated regionally and internationally for maximum effect. Germany has a special leadership role to play in this process, given the size of its economy and the substantial spillovers into and from Germany.

Directors noted that the global financial crisis has highlighted important vulnerabilities of the German financial system, which could be intensified by the economic slowdown in Germany. They welcomed the authorities' decisive response, noting in particular the creation of the Financial Market Stabilization Fund (FMSF) as vital to shielding the financial sector. A number of guarantees have been issued, which will help banks meet their short-term funding needs. Directors also welcomed the efforts to buttress capital positions. Given the low level of capital in several banks, further recapitalization may be desirable in view of expected asset quality deterioration. Directors also recommended that the agency administering the FMSF use its authority more broadly for enhancing the soundness of the financial sector. In particular, Directors called for a proactive restructuring and downsizing of the Landesbanken, which are a continuing drain on public finances and a threat to financial stability.

Directors called for strengthened deposit insurance, a critical element of the financial safety net, given the risks associated with the existing multiple protection schemes that have typically relied on ex post burden-sharing. A base layer of mandatory deposit insurance-ex ante funded by contributions from all banks-would provide unified terms of protection for depositors and reduce incentives to shift deposits among the existing schemes. The evolving European Union rules should provide guidance on coverage limits.

Directors observed that the case for a tighter bank regulatory and supervisory process has become more compelling. To respond promptly to problem situations, the authorities were encouraged to place greater reliance on timely supervisory assessments independently of the banks' annual external audit cycle, and to link prudential regulation and supervision to a system of macro-surveillance and stability analysis. In this context, greater consolidation of regulatory and supervisory resources could yield significant benefits.

Directors welcomed the authorities' conjunctural fiscal stimulus packages in the past four months aimed at supporting domestic demand and guarding against cumulating the drop in consumer and business confidence. They considered these packages timely. Directors welcomed in particular the significant impetus offered by the latest package. Among the components of the package, they noted that the accelerated reduction in social security contributions and the step up of spending on infrastructure projects are well-targeted and likely to provide both short-term stimulus and lasting benefits. Directors acknowledged the complexity of judging precisely the degree of optimal fiscal impulse when the global situation is in rapid flux, often in unexpected ways. In view of the sizeable recent deterioration in economic prospects and given Germany's fundamentally strong fiscal position, a number of Directors would have favored an even more proactive stimulus. A number of others, however, supported the authorities' considered approach of maintaining equal emphasis on discretionary measures to spur the economy and adhering to fiscal prudence. All Directors welcomed the authorities' reiteration of their commitment to medium-term fiscal sustainability, which will be crucial for ensuring the long-term credibility of public finances in accordance with the Stability and Growth Pact.

Directors noted that trends in healthcare costs and debt accumulation by the states remain a concern. Further rationalization of pharmaceutical expenditures and strengthened efficiency-enhancing competition remain attractive avenues for containing healthcare costs. Directors noted the possible benefits from more state tax autonomy and a redesign of supplementary federal grants to improve states' incentives for fiscal discipline. They welcomed the proposed fiscal rule limiting the structural budget balance to close to zero, and recommended that it be applied also to the states.

Germany: Selected Economic Indicators



2004 2005 2006 2007 20081/


Economic activity and prices

(Change in percent, unless otherwise noted)

Real GDP

1.2 0.8 3.0 2.5 1.3

Net exports 2/

1.4 0.7 1.0 1.4 -0.2

Total domestic demand

-0.1 0.0 2.1 1.1 1.6

Private consumption

0.1 0.2 1.0 -0.4 0.0

Gross fixed investment

-0.3 1.1 7.7 4.3 4.1

Construction investment

-3.9 -3.0 5.0 1.8 2.7

Gross national saving (percent of GDP)

21.8 22.1 23.7 25.9 25.0

Gross domestic investment (percent of GDP)

17.1 16.9 17.6 18.3 19.0

Labor force 3/

43.0 43.3 43.2 43.3 43.4

Employment 3/

38.8 38.8 39.0 39.7 40.3

Standardized unemployment rate (in percent)

9.2 10.6 9.8 8.4 7.3

Unit labor costs (industry; hourly data)

-3.1 -4.2 -4.0 -3.1 -1.2

GDP deflator

1.0 0.7 0.5 1.8 1.4

Harmonized CPI index

1.8 1.9 1.8 2.3 2.8

Public finance

(In percent of GDP)

General government balance 4/

-3.8 -3.3 -1.5 -0.2 -0.1

Structural government balance

-2.6 -2.3 -1.2 -0.3 -0.3

General government gross debt

64.7 66.4 66.0 65.0 68.7

Money and credit

(Change in percent over 12 months)

Private sector credit 5/

-0.2 2.2 3.5 3.2 6.6

M3 5/

2.2 5.2 4.9 10.6 11.1

Interest rates

(In percent )

Three-month money market rate 6/

2.1 2.1 3.7 4.8 3.4

Ten-year government bond yield 6/

4.1 3.6 3.8 4.3 3.2

Balance of payments

(In billions of euros, unless otherwise noted)

Exports 7/

850.3 924.6 1,056.3 1,148.6 1,206.6

Imports 7/

739.9 805.1 925.5 975.6 1,047.6

Trade balance (percent of GDP)

6.3 6.4 6.3 7.8 7.1

Current account balance

102.9 116.6 141.5 184.2 149.4

Current account (percent of GDP)

4.7 5.2 6.1 7.6 6.0

Exchange rate

(Period average)

Euro per U.S. dollar 6/

0.80 0.80 0.80 0.73 0.74

Nominal effective rate (1990=100) 6/

115.7 114.7 114.9 119.7 115.8

Real effective rate (1990=100) 8/

105.5 102.2 99.1 97.9 95.1

Sources: Deutsche Bundesbank; IMF, International Financial Statistics; IMF, World Economic Outlook; and staff projections.
1/ 2008 estimated, unless otherwise indicated.
2/ Contribution to GDP growth.
3/ Domestic definition on a national accounts basis; according to new integrated system of economic accounts (ESA95).
4/ On a national accounts basis; according to new integrated system of economic accounts (ESA95).
5/ Data for 2008 refer to November. M3 refers to Germany's contribution in the euro area.
6/ Data for 2008 refer to December.
7/ Goods and services.
8/ Based on relative normalized unit labor cost in manufacturing. Data for 2008 refer to December.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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