IMF Executive Board Concludes 2011 Article IV Consultation with Germany

Public Information Notice (PIN) No. 11/87
July 12, 2011

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 2011 Article IV Consultation with Germany is also available.

On July 6, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Germany.1


In the first quarter of 2011 German GDP surpassed its pre-crisis level following growth of 3½ percent in 2010, and employment is higher than before the crisis. Staff projects the economy to expand by a healthy 3 percent in 2011, but growth is expected to slow as the fiscal consolidation takes hold, the output gap closes, and world trade growth decelerates. While Germany escaped the crisis with little permanent damage, its long-term growth prospects remain low (about 1¼ percent annually).

Rising commodity prices will temporarily lift German headline inflation from 1.2 percent in 2010 to 2½ percent in 2011. Core inflation, however, is projected to rise only moderately. Germany’s current account surplus, which rose to about 7½ percent of GDP just before the Great Recession, has since receded to about 5 percent of GDP.

The authorities injected a sizeable fiscal stimulus in 2009–2010 to counteract the economic downturn. With the economic recovery, they are moving towards a gradual consolidation. The pace of the recovery and the consolidation efforts imply that the objective of the European Union’s Stability and Growth Pact (SGP), to bring the deficit below 3 percent of GDP, can be achieved in 2011. The goal of the national fiscal rule, which targets a close-to-zero structural fiscal balance at the Federal level by 2016, is also within reach. The increased primary surplus will help bring down the debt-to-GDP ratio from its current level of over 83 percent of GDP (having been boosted recently by banking sector support) to 73 percent of GDP by 2016.

The banking system’s return to broad stability reflects both the significant policy measures and the economic recovery. The German authorities injected significant capital into banks and provided the safety net of sovereign guarantees to access market financing during the crisis. In 2010 banks have raised their capital ratios and asset quality has also improved. However, pockets of vulnerabilities remain. Banks continue to be highly leveraged and the quality of their capital is low by international standards. Their profitability is also relatively low and expected to remain so.

Executive Board Assessment

Executive Directors welcomed Germany’s impressive recovery buoyed by the strength of the export sector and supportive policies, including a fiscal stimulus and targeted measures to support the labor market and stabilize the financial sector. Directors underscored, however, the importance of structural measures targeting labor, capital, and productivity to raise medium-term potential growth and domestic demand, particularly in the non-tradable sector, which would also support the role of Germany as an international locomotive and contribute to a reduction of global imbalances.

Directors observed that a multi-pronged agenda that tackled long-standing structural issues could raise potential output growth. The implementation of such an approach, whose goal would be to boost labor participation, domestic investment, and productivity, would include tax, education, and innovation policies, complemented by an enhanced provision of risk capital and a more efficient insolvency process.

Directors noted that the government’s fiscal consolidation path, while appropriate, needs to allow room for fostering growth. They observed that, with the output gap closing, lowering the public debt-to-GDP ratio will enhance credibility and support the European SGP. Directors noted, however, that a reassessment of the speed of consolidation may be needed if growth turns out to be significantly weaker than expected. They also observed that the use of fiscal instruments for stimulating growth should stay within the planned consolidation path.

Directors considered that the German financial system has stabilized, although pockets of vulnerability remain. Improved capital ratios imply that the banks could absorb considerable stress. Nonetheless, Directors noted that German banks remain highly leveraged, achieve low profitability, and the large banks remain highly dependent on market funding. While the overall level of direct exposure to spillover risks from elsewhere in Europe is limited, some banks are more exposed than others and indirect effects through banks outside of Germany could have cascading effects. Directors also encouraged a more timely publication of key financial data and enhanced transparency of the regulatory and supervisory regime, the operations of public sector banks, and the deposit insurance schemes.

Directors stressed that actions to limit systemic risk in the financial system are required in a number of areas. First, the legacy of the crisis needs to be addressed, including establishing viable business models for the Landesbanken. Second, the regulatory and supervisory regime should be strengthened through clarification of the content of macro-prudential oversight, the relationship between macro- and micro-prudential regulations, and the necessary information sharing requirements. In this context, ensuring adequate and high-quality bank capitalization is important, especially where systemic risk considerations arise. Third, harmonization of the various deposit insurance schemes would allow for the possibility of the use of their resources for early intervention and help realize synergies with the restructuring fund. Finally, the role of the Sparkassen would need to be considered in the context of an integrated and competitive European financial system.

Germany: Selected Economic Indicators
  2006 2007 2008 2009 2010 2011 1/ 2012 1/

Economic activity and prices

(Change in percent, unless otherwise noted)

  Real GDP

3.6 2.8 0.7 -4.7 3.5 3.2 2.0

  Net exports 2/

1.1 1.6 -0.1 -3.2 1.3 1.2 0.6

  Total domestic demand

2.4 1.3 1.2 -1.9 2.4 2.1 1.5

  Private consumption

1.4 -0.2 0.7 -0.2 0.5 1.3 1.2

  Gross fixed investment

8.0 4.7 2.5 -10.1 6.0 8.2 3.4

  Construction investment

4.9 -0.5 1.2 -1.5 2.9 6.7 3.5

  Gross national saving (percent of GDP)

24.4 26.1 25.2 23.2 23.6 24.1 24.1

  Gross domestic investment (percent of GDP)

18.2 18.7 19.0 17.6 17.9 19.0 19.4

  Labor force 3/

43.2 43.3 43.4 43.3 43.6 43.5 43.6

  Employment 3/

39.0 39.7 40.2 40.2 40.4 40.8 40.9

  Standardized unemployment rate (in percent)

10.2 8.8 7.6 7.7 7.1 6.3 6.2

  Unit labor costs (industry)

-3.9 -1.8 7.6 15.7 -8.1 0.9 2.2

  GDP deflator

0.2 1.7 1.3 1.3 0.7 0.2 1.1

  Harmonized CPI index

1.8 2.3 2.8 0.2 1.2 2.5 1.6

Public finance

(In percent of GDP)

  General government balance 4/

-1.6 0.3 0.1 -3.0 -3.3 -1.9 -1.1

  Structural government balance

-2.2 -0.9 -0.5 -1.0 -2.3 -1.8 -1.3

  General government gross debt

67.6 64.9 66.3 73.4 83.2 82.3 81.0

Money and credit

(Change in percent over 12 months)

  Private sector credit 5/

3.4 3.3 6.6 -0.5 -1.9 -1.0 ...

  M3 6/

4.9 10.7 9.7 -1.5 4.4 4.2 ...

Interest rates

(Period average in percent)

  Three month interbank rate 7/

3.1 4.3 4.6 1.2 0.8 1.1 ...

  Ten-year government bond yield 7/

3.8 4.3 4.1 3.3 2.8 3.2 ...

Balance of payments

(In billions of USD, unless otherwise noted)

  Exports 8/

1,324.9 1,573.6 1,706.9 1,352.3 1,503.3 1,710.4 1,791.1

  Imports 8/

1,163.0 1,339.2 1,461.6 1,173.7 1,308.9 1,528.0 1,622.4

  Trade balance (percent of GDP) 9/

6.3 7.6 6.6 5.3 5.7 5.5 5.1

  Current account balance

182.1 248.3 227.9 186.3 187.7 187.5 182.7

  Current account (percent of GDP)

6.2 7.4 6.2 5.6 5.7 5.1 4.8

Exchange rate

(Period average)

  Euro per US dollar 7/

0.80 0.73 0.73 0.68 0.76 0.69 ...

  Nominal effective rate (1990=100) 7/

114.9 119.7 120.7 122.2 114.9 118.4 ...

  Real effective rate (1990=100) 5/ 10/

100.2 101.5 100.1 105.6 98.5 100.5 ...

Sources: Deutsche Bundesbank; IMF, International Financial Statistics; IMF, World Economic Outlook; and staff projections.

1/ IMF staff estimates and projections.

2/ Contribution to GDP growth.

3/ National accounts definition.

4/ Net lending/borrowing.

5/ Data for 2011 refer to February.

6/ Reflects Germany's contribution to M3 of the euro area. Data for 2011 refer to March.

7/ Data for 2011 refer to April.

8/ Goods and services.

9/ Trade in goods, including supplementary trade items.

10/ Based on relative normalized unit labor cost in manufacturing.

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. An explanation of any qualifiers used in summings up can be found here:


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