Council Opinion

of 12 February 2002

on the updated stability programme for Germany, 2001-2005

(2002/C 51/01)

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 12 February 2002 the Council examined the updated stability programme for Germany which covers the period 2001-2005. 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 converge programmes"(2), although there is some need for improvement, notably regarding the use of rounding.

The Council notes that the estimated deficit outcome for 2001 (2,6 % of GDP) is clearly higher than projected in the October 2000 update (1,5 % of GDP). The Council acknowledges that this important nominal divergence can be explained by the weakening in growth, with 2001 GDP growth more than two points below the projections of the October 2000 update of the programme. While the federal government implemented the budget as planned, the Council notes that the deficit outcome of other levels of government, including social security, is higher than estimated.

The baseline macroeconomic scenario of the updated programme expects annual output growth of 1,25 % in 2002; for the period 2003-2005 annual average output growth is estimated to accelerate to some 2,5 %; the general government finances are expected to improve from a deficit of 2,5 % of GDP in 2001 to a balanced position in 2004 and 2005. The Council notes that with the presentation of the annual economic report on 30 January 2002, the German authorities now consider the alternative scenario contained in the programme to be realistic. It is in line with the Commission autumn forecast for 2001 and 2002. For the years 2003 to 2005 it assumes an annual growth rate of 2,25 % on average. The Council concurs that this lower-growth scenario is plausible. Even this scenario is conditioned on a favourable external and internal environment, notably the expected pick-up of world economic growth, continued wage moderation and enhanced structural reform efforts, especially in the labour market.

The Council considers that, if growth turns out lower than expected, there is a risk that the general government deficit in 2002 comes even closer to the 3 % of GDP reference value than in 2001. Therefore, the Council welcomes the German Government's determination to ensure that the 3 % of GDP reference value will not be breached. To this end, the government intends to closely monitor budgetary developments at all levels of government in 2002, including the States (Länder) and the social security system; and to implement the budgetary plans for this year carefully in order to avoid any further deterioration in the deficit. It is also prepared to find the most appropriate ways to counter any shortfall; and to avoid any measures likely to lead to a further deterioration in the government deficit.

The German Government has confirmed its intention to take all appropriate measures to reach a close to balance budget position by 2004, in accordance with previous commitments, so as to comply with the requirements of the stability and growth pact from that year onwards. This may require, once the economic recovery is established, discretionary measures in addition to those included in the 2001 updated stability programme.

Sound public finances should be supported by the decisive implementation of structural reforms geared at improving the growth potential of Germany, in particular in the labour market and in social security and benefit systems. This is all the more important as the German economy is still burdened with the financing of the reunification process, and, despite its large size, remains highly vulnerable to external shocks.

The Council urges the German authorities to ensure strict budgetary implementation at all levels of government. As shown once again by the budgetary outcomes for 2001, this will be crucial to attain the projected deficit targets. While the Council welcomes the recently implemented change to the law on budgetary principles, stating that all levels of government should contribute to the achievement of the medium-term budgetary targets, the mechanism enshrined therein is not yet sufficient to guarantee compliance with mutually agreed objectives by all levels of government. The Council therefore welcomes the intention of the federal government, through agreements with the regional authorities, to make every effort to ensure that the abovementioned budgetary objectives are met.

The Council notes with satisfaction that the German authorities will continue in their efforts to bring the debt level down below the Treaty's reference value. However, in view of the significant pressures for increased public spending due to an ageing population, the slow decline in the debt ratio remains a source of concern given the need to ensure the sustainability of public finances. If debt reduction is to make a noticeable contribution towards meeting the budgetary cost of ageing populations, a balanced budget position must be reached as soon as possible. In addition to intensified budgetary consolidation efforts the recently implemented reform of the pension system is a step in the right direction. This needs to be complemented by structural reforms geared towards a rise in labour market participation rates, particularly of women and older workers. Such measures should be enacted as soon as possible, given that the budgetary impact of ageing populations will take hold soon.

The 2001 update does not contain projections on the long-term sustainability of public finances in line with the revised code of conduct. The programme provides detail on the recent pension reform. While these reforms are a step in the right direction, further reforms may be needed in the future. Raising employment rates, especially amongst women and older workers, will form a key part of any overall strategy to prepare for ageing populations. The key challenge facing Germany is to achieve a position of budget balance and thereafter to sustain it over the very long-run.

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

(2) Revised opinion of the economic and financial Committee on the content and format of stability and converge programmes, endorsed by the Ecofin Council on 10.7.2001.