Council opinion

of 21 January 2003

on the updated stability programme for Germany, 2002 to 2006

(2003/C 26/01)

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(3) thereof;

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 21 January 2003 the Council examined the updated stability programme for Germany, which covers the period 2002 to 2006. The updated programme projects general government finances to improve from a deficit of 33/4 % of GDP in 2002 to a balanced position in 2006. Government gross debt is expected to decrease from 61 % of GDP in 2002 to 571/2 % in 2006.

The Council notes that the new update broadly complies with the requirements of the revised "code of conduct on the content and format of stability and convergence programmes", although there is still some need for improvement, notably concerning the degree of precision of the quantitative information provided. While the deficit targets set in the Broad Economic Policy guidelines (BEPGs) have not been achieved, the adjustment path planned in the programme is broadly consistent with the Broad Economic Policy Guidelines (BEPG).

The Council notes that the projected deficit outcome for 2002 (33/4 % of GDP) is clearly higher than projected in the lower-growth scenario of the December 2001 update (21/2 % of GDP). The Council regrets that it has proved not to be possible for the German authorities to fulfil their commitment of 12 February 2002 and the BEPG Recommendation for 2002 not to breach the 3 % of GDP reference value for the general government deficit in 2002. The Council notes that the rise in the nominal deficit from 2001 to 2002 cannot be explained only by the unexpected slowdown in growth, and that there have once more been expenditure overruns in the health sector which contributed to a deterioration of the underlying balance.

The Council decided on 21 January that an excessive deficit exists in Germany and issued a recommendation to Germany according to Article 104(7) of the Treaty. According to this recommendation: (i) the German Government should put an end to the excessive deficit situation as rapidly as possible in accordance with Article 3(4) of Council Regulation (EC) No 1467/97; (ii) the German authorities should implement with resolve their budgetary plans for 2003 which, on the basis of a GDP growth projection of 11/2 % in 2003, aim at reducing the general government deficit in 2003 to 23/4 % of GDP. In addition, the Council noted the commitment of the German authorities to ensure that the momentum of budgetary consolidation is maintained throughout the period covered by the updated stability programme, namely through a reduction of the underlying budgetary deficit by more than 0,5 % of GDP per year which in turn requires the introduction of structural reforms.

The Council notes that in the light of the weakening of economic indicators in recent months, the 11/2 % growth rate expected for 2003 appears optimistic. It requires an early restoration of economic confidence, not least through implementation of a consistent budgetary adjustment programme. Furthermore, the average growth rates of 21/4 % assumed for the years 2004 to 2006 are above the estimated long-term growth potential of the German economy, which reflects the programme assumption that the output gap will be closed.

However, the level of growth potential in Germany is currently low. It is in the hands of the German Government to raise it significantly through coherent reforms, notably of the labour market. The Council strongly urges the German Government to undertake the necessary steps.

The Council considers that there is a non-negligible risk that the general government deficit in 2003 may again exceed the 3 % of GDP reference value. Therefore, the German authorities should ensure a rigorous budgetary execution and a thorough implementation of the measures announced in the budget for 2003.

The Council acknowledges the projected improvement in the underlying balance by more than 0,5 % of GDP per year up to the new programme's horizon, with the exception of 2005 due to the introduction of tax reforms; it notes that in underlying terms the government accounts would at least be close to balance by 2006. It is recalled, however that this adjustment path hinges on the full implementation of the announced measures, the respect of agreed expenditure targets for 2003 and 2004 and an agreement on ambitious expenditure targets for 2005 and 2006. The Council urges the German authorities to ensure that the implementation of the next steps of tax reform in 2004 and 2005 is compatible with a continuous adjustment path towards overall budget balance.

The Council notes that this should lead to a balanced budget by 2006, although this is two years later than planned in last year's update of the stability programme. The Council welcomes the confirmation of the 2006 target by the German Finanzplanungsrat (financial planning council) of 27 November 2002. It urges the federal and regional authorities to agree on ambitious expenditure targets for 2005 and 2006 and to ensure strict budgetary implementation at all levels of government. As shown by budgetary developments in the past, this will be crucial in order to attain the projected deficit targets, especially once growth recovers. While the Council welcomes the recent (advanced) implementation of the revised /law on budgetary procedures (Haushaltsgrundsätzegesetz), the Council reiterates its view that the mechanism enshrined therein is not yet sufficient to guarantee compliance with mutually agreed objectives by all levels of government.

The Council takes note of the German authorities' intentions to bring the debt level down below the Treaty's reference value by 2005 but notes that these intentions are subject to a number of risks. Therefore the development of the debt ratio remains a source of concern given the need to ensure the sustainability of public finances. On the basis of current policies, the risk of unsustainable public finances in light of ageing populations cannot be excluded. If debt reduction is to make a noticeable contribution towards meeting the budgetary cost of ageing populations, then reaching a balanced budget position by 2006 is essential; this should be part of an ambitious three-pronged strategy to meet the long-term budgetary consequences of ageing and may have to include the running of surpluses. Running sound public finances over the long run will allow to achieve a significant reduction in the debt ratio prior to the budgetary impact of ageing populations taking hold.

The Council considers it to be indispensable that fiscal consolidation, in order to prove sustainable, should be underpinned by far-reaching reforms to raise Germany's very low growth potential. The Council stresses again that the German economy, despite its large size, remains highly vulnerable to external shocks and unable to generate an endogenous and durable growth process. While acknowledging that this still partially reflects the economic consequences of German unification, the Council reiterates the need for urgent reforms not only in the labour market, but also in social security and benefit systems in general, and for a reduction in the regulatory burden of the economy.

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