COUNCIL OPINION

of 15 March 1999

on the stability programme of Germany, 1998 to 2002

(1999/C 124/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(1) and (2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 15 March 1999 the Council examined the stability programme for Germany which covers the period 1998 to 2002. The Council notes with satisfaction that the German authorities have been able to present the stability programme within the agreed deadlines, despite the short period available since the institution of the government at the end of October 1998. Due to these circumstances the information provided in the stability programme is not in all respects as detailed as would have been desirable, in particular regarding the quantitative effects of the envisaged budgetary measures or the detailed components of the general government budget balance. The Council welcomes the commitment of the German authorities to provide this additional information by the next update of the stability programme.

The Council is aware that fiscal policy in Germany is still burdened by the consequences of reunification. The programme foresees a decline in the general government budget deficit to 1 % of GDP by 2002, while the gross debt ratio is expected to decrease to 59,5 % of GDP over the same period. The Council notes that the programme builds on the significant budgetary consolidation in the run-up to monetary union as well as the achievement of a further decline in the government deficit below the budget target to 2,0 % of GDP in 1998.

The programme is based upon a macroeconomic forecast forecast expecting output to grow by 2 % in 1999 and by 2,5 % per year during 2000 to 2002, implying average growth slightly above trend. The Council considers that the scenario for growth appears realistic but notes that it is subject to downside risks. In particular, in the event of a continuation of the current international slowdown output growth in 1999 could be lower than expected; in the medium term, growth prospects and unemployment are closely linked. The Council welcomes that the stability programme aims at a marked reduction in unemployment and stresses the importance of moderate wage developments and structural policies in the fight against unemployment within a framework of policies for sustained growth.

The Council considers it appropriate that the budgetary consolidation envisaged in the programme is achieved by a decrease in the expenditure ratio which is only partially offset by a decline in the revenue ratio. The Council welcomes, in particular, the envisaged approach of controlling government expenditure by limiting its overall nominal increase to 2 % per year, which is 2 percentage points lower than the expected nominal GDP growth. The Council also notes with satisfaction that the planned tax reform provides for a net tax relief, which is expected to reinforce the employment generating capacity of the economy.

The Council acknowledges that the envisaged medium-term deficit objective of 1 % of GDP would be sufficient to allow in a normal cyclical downturn the automatic stabilisers to work without any large risk of breaching the 3 % of GDP reference value. In this sense the Council concludes that the medium-term deficit target of the programme is in line with the provisions of the Stability and Growth Pact.

The Council notes that the overall objective of a reduction in the general government deficit by 1,1 % of GDP and in the gross debt ratio by 1,5 % of GDP between 1998 and 2002 appears modest. The consolidation efforts are largely concentrated towards the end of the period: due to the temporary weakening of the macroeconomic situation in 1999, hardly any improvement is planned for 1999 and 2000. The Council considers that the German authorities should aim to reduce the deficit beyond the projected level at the end of the programme period when growth is projected to have picked up. The recent ruling of the German Constitutional Court, requiring the indroduction of tax allowances for the children of married couples, constitutes a clear example of the existence of budgetary risk over and above those related to the conjunctural situation. An explicit commitment by the German government to counter such risks would be desirable in view of the minimal position aimed for. In addition, the Council considers that the German government should take any measures necessary to avoid a renewed increase in the government debt ratio and that it would be desirable to go beyond the 1 % deficit level in 2002, particularly if economic growth is higher than expected.

The Council notes that the successful implementation of the stability programme hinges on close coordination of actions at all levels of government; it encourges the authorities in Germany to pay due regard to this callenge.

The Council notes that the programme envisages a restructuring of the budget in favour of government investment but intends to keep overall investment spending as a percentage of GDP unchaged at its current lowel level. The Council encourages the German Government to give further attention to investment without, however, jeopardising the budgetary targets of the programme.

The Council welcomes the reform measures announced in the programme, in particular in the domains of the pension and health systems and in public administration, which are key to sustainable public finances and employment growth, but considers that they ough to be supported by further supply oriented policy measures. A determined implementation of the reforms, in combination with measures aimed at increasing the flexibility of product and labour markets, as recommended by the Broad Economic Policy Guidelines and envisaged in the German structural progress report for the Cardiff process, would be conducive to the achievement of the objectives of the stability programme.

(1) OJ L 209, 2.8.1997, p. 1.