Council opinion of 9 March 2004 on the updated Stability Programme of Germany, 2003 to 2007
Date: 2004-03-09
Institutions: Council of the European Union
Subjects: Germany, stability programme

C 68/2

EN

Official Journal of the European Union

18.3.2004

The economic policies as reflected in the updated programme
are largely consistent with the recommendations of the Broad
Economic Policy Guidelines, specifically those with budgetary
implications. However, concerning the recommendations to

address the challenge of ensuring the long-term sustainability
of public finances in the face of population ageing, although a
number of positive measures have recently been adopted, no
steps to implement a major pension reform have been taken.

COUNCIL OPINION

of 9 March 2004

on the updated Stability Programme of Germany, 2003 to 2007

(2004/C 68/02)

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 9 March 2004 the Council examined the 2003 update of
the stability programme of Germany, which covers the period
2003 to 2007. The update was submitted on 5 December
2003;
responding to political developments an addendum
was submitted on 29 January 2004. The updated programme
largely complies with the requirements of the revised ‘Code of
and format of
conduct’ on the
and
content
convergence programmes,
although a greater degree of
precision of the data provided would have been desirable.

stability

On 21 January 2003, on the basis of a Commission Recom-
mendation, the Council decided in accordance with Article
104(6) EC that an excessive deficit existed in Germany and
issued a recommendation based on Article 104(7) EC recom-
mending ‘the German government to put an end to the present
excessive deficit situation as rapidly as possible in accordance
with Article 3(4) of Council Regulation (EC) No 1467/97’. On
18 November 2003, the Commission adopted two recommen-
dations on the basis of Articles 104(8) and 104(9) respectively,
the measures taken by
for the Council 1.

to decide that

(1) OJ L 209, 2.8.1997.

Germany in response to the recommendation of 21 January
2003 had proved inadequate to bring the excessive deficit to
an end; and 2. to give notice to Germany to take the necessary
measures to bring the government deficit below 3 % of GDP in
2005. On 25 November 2003, the Council did not adopt the
two Commission recommendations, but adopted instead a set
of conclusions
the
taking note, among other
commitments made by Germany to achieve a reduction of
the cyclically-adjusted deficit by 0,6 % and at least 0,5 % of
GDP in 2004 and 2005, respectively, so as to ensure that
the general government deficit is brought below 3 % of GDP.

things, of

states

revised its

that
fiscal policy targets

the German
The 2003 updated programme
government
in 2003 in
response to almost three years of persistent stagnation. The
budgetary strategy adopted in previous updates had been to
limit expenditure, flanked by structural measures to improve
the functioning of the labour market, strengthen social security
finances and broaden tax bases. While these objectives are
confirmed in the strategy contained in the 2003 update, the
aim of supporting business activity by fiscal policy has been
emphasised. Fiscal consolidation over and above the proposed
measures is regarded by the German authorities as putting the
that
cyclical upturn at
to budgetary
achieving a balanced budget remains central
policy but does not contain a target date.

risk. The 2003 update reiterates

Following the protracted stagnation over the last three years,
the 2003 update projects real GDP growth to resume from an
estimated – 0,1 % in 2003 to 1,7 % in 2004. In the period
2005 to 2007, growth is estimated to average 2,25 %.
Employment
is expected to pick up from zero growth
expected in 2004 to an average growth of 0,75 % from
2005 to 2007. The GDP deflator is forecast at 1 % for 2004
and to stay at an average of 1 % from 2005 to 2007.

The growth outlook for 2004 appears realistic and is close to
the Commission Autumn 2003 projection of 1,6 % for 2004.
However, the update is optimistic regarding the outlook for
2005 and subsequent years, with real growth of 2,25 %,
projected to continue to 2007. This
is attributed to an
expected rise in potential output, the underlying assumption

18.3.2004

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Official Journal of the European Union

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real

being that the structural reforms — some implemented in
2003 and some forthcoming in 2004 and 2005 — will have
an early and substantial positive impact. By contrast,
the
growth of 1,8 % in 2005.
Commission forecasts
the data provided in the
Moreover, on the basis of
addendum to the update,
the commonly agreed method
results in an estimate for potential growth of 1,5 % on
increase
average between 2005 and 2007 with a slight
towards
the
in the deficit depicted in the
medium-term improvement
update is thus based on an output gap closing over time and
the assumption of an upward shift of potential output.
However, more cautious macro-economic assumptions would
have been desirable for the pursuit of a successful
fiscal
consolidation strategy.

the period. The

scenario for

end of

the

For 2003, the update estimates a deficit of 4,0 % of GDP; the
preliminary statistical revision of February estimated it at 3,9 %
of GDP. The update targets a general government deficit of
3,25 % of GDP in 2004 and of 2,5 % for 2005. The update
thus foresees the excessive deficit to be corrected by 2005 in
line with the Council conclusions of 25 November 2003. In
cyclically-adjusted terms, based on calculations by
the
the budget balance would improve by 0,7
Commission,
percentage points in 2004 and by 0,4 percentage points in
2005. One-time revenue risks
the
relative size of the adjustment steps.

in 2004 might alter

central

to correct

this objective

achievement of

However, in the update and its addendum Germany confirms
its commitment of 25 November to correct
the excessive
deficit by 2005 and, if necessary, to take additional measures
to that effect. Indeed, under less favourable macro-economic
the adjustment path in the
and budgetary assumptions,
the excessive
programme may be insufficient
deficit
is
in 2005. The
surrounded by several risks: 1. GDP growth in 2005 may be
below the
the updated programme.
According to the sensitivity analysis performed in the update,
under the assumption of a shortfall in nominal growth by half
a percentage point in 2004 and in 2005, the headline deficit
would lie only marginally below 3 % of GDP in 2005; 2. The
achievement of the expenditure targets for 2004 and 2005 are
uncertain even with growth as expected in the update's central
scenario and require full implementation and efficiency of the
measures
to risk are notably unem-
ployment-related outlays and expenditures on pensions and
health, which may turn out higher than foreseen.

introduced. Subject

scenario of

The budgetary stance in the update is insufficient to ensure that
the Stability and Growth Pact's medium-term objective of a

budgetary position close to balance or in surplus is achieved
within the programme period. For 2006 and 2007 the
projections, rounded to the nearest half of a percent in the
update, are for headline deficits of 2 % and 1,5 % of GDP,
cyclically-adjusted
respectively. The
deficit for 2006 and 2007 appears to be rather less than 0,5
percentage point annually. A budgetary position providing a
sufficient safety margin to avoid breaching the 3 % of GDP
deficit
threshold under normal macro-economic conditions
would be reached by 2006.

improvement

in the

The debt ratio is projected to start declining only in 2007 and
to remain above the Treaty 60 % of GDP reference value
the period covered by the programme. The
throughout
evolution of the debt ratio risks being less favourable than
the medium-term
projected, given the uncertainty about
growth rate and the actual achievement of
the planned
deficit reductions.

Germany has recently passed reforms that adjust the pension
system and, to a lesser extent, the health sector, to demo-
graphic change. While Germany is in a considerably better
position than before to meet the budgetary costs of population
ageing, risks of imbalances in the long term cannot be ruled
out. According to Commission quantitative indicators on the
basis of current policies, demographic change would result in
the debt-to-GDP ratio remaining broadly constant above 60 %
of GDP over the next 20 years and increasing substantially
thereafter. Securing an adequate primary surplus is essential
to ensure that public finances are on sustainable footing.

The economic policies as reflected in the 2003 update are
partly consistent with the recommendations in the Broad
Economic Policy Guidelines, specifically those with budgetary
implications. Although Germany had implemented consoli-
dation measures of the requested size equalling 1 % of GDP,
they have proved inadequate to put an end to the excessive
deficit situation by 2004. Efforts at budgetary consolidation are
underpinned by the ‘Agenda 2010’, an ambitious reform
programme presented in 2003 with the aim of boosting
growth in the medium-term. Implementation began in 2003
and is foreseen to continue over the next years. Germany
should
consolidation
that
continues in the years after 2005, namely through a steady
reduction in the cyclically adjusted budgetary deficit by at
least 0,5 percentage points of GDP per year or more if
necessary to achieve the medium-term position of government
finances close to balance or in surplus and bring back the debt
ratio to a declining path.

budgetary

therefore

ensure