Council opinion

of 27 November 2000

on the updated stability programme of Germany for the period 2000-2004

(2000/C 374/02)

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 27 November 2000 the Council examined Germany's updated stability programme, which covers the period 2000-2004. The Council welcomes the fact that this update makes distinct progress in terms of compliance with the code of conduct.

The Council notes with satisfaction that the budgetary target for the current year is maintained in spite of a slightly worse than expected outcome in 1999. However, the Council notes that this is due also to higher than projected tax revenues. The fact that the projected consolidation path depends heavily on the budgetary developments of levels of government other than the federal one shows the importance of an improved cooperation on government finances at the national level as already emphasised in the Council opinion of 28 February 2000 on the updated stability programme of Germany for the period 1999 to 2003(2).

The Council considers the macroeconomic scenario presented in the programme, which assumes average annual output growth of around 2,5 % between 2001 and 2004, to be realistic. However, the Council recommends that, with a view to making the economy more resilient to external shocks, reforms be implemented which render the labour market more flexible. Furthermore, benefiting from the favourable development of employment, the government should adhere to its announced policy of a further clear reduction of social security contribution rates. The Council notes that the underlying growth scenario presupposes that wage moderation will prevail throughout the programme period. A moderate outcome of the wage negotiation round for the year 2002 will be crucial in this respect.

The updated programme foresees a balanced general government budget by 2004, while the gross debt ratio is expected to decrease to 54,5 % of GDP by the end of the programme period. 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 recognises that the ongoing expenditure restraint has created some room for the planned tax reforms in the year 2001, while also recognising that in this year the decline in the revenue ratio will be higher than the decline in the expenditure ratio. However, with these reforms leading to a clear deterioration in the actual deficit in 2001 and in the structural deficit in years 2001/2002, the Council reiterates its recommendation to implement the reforms with greatest caution so as not to provoke a lasting deterioration in the structural deficit. In this context, it is important that expenditure is kept under strict control.

The Council considers that the objective for the medium-term budgetary position, set for 2002 and subsequent years, will be in conformity with the Stability and Growth Pact.

Moreover, the Council considers that the programme is broadly in line with the recommendations of the broad economic policy guidelines. The Council recommends, however, that, should tax revenues be higher than expected, they be used to reduce the deficit below the targeted level with a view to widening the safety margin in line with the broad economic policy guidelines. Thereby it should be ensured that no further pro-cyclical stimulus is provided to the economy which in turn might pose a threat to price stability.

Regarding government debt, the Council welcomes the fact that, owing to the improved position of government finances, the trend of a rising debt ratio has been broken. In view of the foreseeable challenges associated with the ageing of the German population, continued privatisation efforts at all levels of government would help achieve the programme's medium-term debt objectives. In this context, the Council welcomes the fact that the government will use all of the UMTS proceeds to reduce debt. While welcoming the federal government's plans to use part of the resulting interest savings to increase investment spending, the Council considers that, in light of the non-negligible risks to the budgetary projections, it would be appropriate not to spend all of the resulting interest savings.

The Council welcomes the fact that the tax reforms are inserted in a medium-term oriented comprehensive economic reform strategy. Continued reforms of the pension system and of labour and product markets could further improve the potential growth path not only of Germany, but of the euro-zone as a whole.

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

(2) OJ C 98, 6.4.2000, p. 1.