Council Opinion of 17 February 2005 on the updated stability programme of Germany, 2004-2008
Date: 2005-02-17
Institutions: Council of the European Union
Subjects: Germany, code of conduct, economic convergence, stability programme

C 136/12

EN

Official Journal of the European Union

3.6.2005

COUNCIL OPINION

of 17 February 2005

on the updated stability programme of Germany, 2004-2008

(2005/C 136/05)

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 surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 17 February 2005 the Council examined the updated stability programme of Germany, which
covers the period 2004-2008. The programme complies broadly with the data requirements of the
revised ‘code of conduct on the content and format of stability and convergence programmes’. The
programme uses mostly rounded figures and mixes incompatible data. However, improvements are
noted in terms of details, e.g. in using ESA 95 as a consistent statistical framework in the parts on
the macroeconomic scenario and the budgetary projections. Accordingly, Germany is invited to
achieve compliance with the data requirements.

The macroeconomic scenario underlying the programme projects real GDP growth at 1.7 % for
2005, practically unchanged from an expected rate of 1.8 % in 2004. Adjusted for substantial
calendar effects, the figures imply, however, an acceleration of growth by ¾ pp. in 2005. In the
final three years covered by the programme, growth is expected to remain flat at 2 % p. a. From the
current perspective, this scenario appears plausible, although the growth forecast for 2005 appears
rather favourable. The programme's projections for inflation are deemed to be on the high side.

On 21 January 2003, the Council decided that an excessive deficit existed in Germany and recom-
mended that this be corrected by 2004 at the latest. However, for reasons detailed in the Communi-
cation from the Commission to the Council and the European Parliament on ‘the situation of
Germany and France in relation to their obligation under the excessive deficit procedure following
the judgement of the Court of Justice’ adopted on 14 December 2004 (2), the Commission concluded
that 2005 should be considered the relevant deadline for the correction of the excessive deficit since
the Council conclusions of November 2003 had produced legal effects until annulled by the Court.
In line with this Communication, the primary aim of the budgetary strategy of the programme is to
bring the deficit below 3 % of GDP by 2005. The programme also targets a continuous decline in
the general government deficit in the subsequent years. The deficit is projected to decline steadily by
½ percentage point of GDP per year as from 2005 to reach a level of a rounded 1½ % of GDP in
2008. According to Commission calculations based on the projections of the programme and the
commonly agreed methodology, the cyclically-adjusted deficit would narrow by slightly less than ½
pp. as from 2005, to around 1 % of GDP in 2008. As in previous updates, the medium-term
budgetary strategy aims at a balance of structural reforms, budgetary consolidation and cyclical
stabilisation.

(1) OJ L 209, 2.8.1997.
(2) Document COM(2004) 813 of 14 December 2004.

3.6.2005

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Official Journal of the European Union

C 136/13

(4)

(5)

(6)

(7)

(8)

Based on current information, the measures announced by the German authorities in November
2004 should be sufficient to reduce the deficit to 2.9 % of GDP in 2005, compared with the deficit
projected at 3.4 % by the Commission services autumn forecast of October 2004. The budgetary
situation remains vulnerable. Correction of the excessive deficit requires effective full implementa-
tion of all the measures envisaged, and of additional measures in case of adverse developments that
could jeopardise the target of a deficit below 3 % of GDP in 2005. In the years after 2005, the
budgetary outcome could be worse than projected in the programme, although the general govern-
ment deficit is likely to remain below 3 % of GDP. In view of the improvement in the cyclically-
adjusted balance towards the end of the programme period by less than 0.5 pp., the adjustment
projected in the update is quite small, despite the implementation of remarkable structural reforms
likely to reduce medium-term expenditures. Moreover, the path of budgetary adjustment seems
rather optimistic towards the programme horizon. In addition, the one-off measures announced in
November 2004 to bring the deficit below 3 % of GDP in 2005 weaken to some extent the
budgetary situation towards the end of the programme period and beyond.

In view of this risk assessment, the budgetary stance in the programme does not seem to provide a
sufficient safety margin against breaching the 3 % deficit threshold with normal macroeconomic
fluctuations before 2008; nor is sufficient to ensure that the Stability and Growth Pact's medium-
term objective of a budgetary position of close to balance is achieved within the programme period.

The debt ratio is estimated to have reached 65½ % of GDP in 2004, above the 60 % of GDP Treaty
reference value. The programme projects the debt ratio to rise to 66 % in 2005 and 2006 and to
decline from 2007 onwards to 65 % of GDP in 2008. However, the evolution of the debt ratio is
likely to be less favourable than projected, given the risks to the budgetary targets mentioned above.

As regards long-term sustainability of public finances, Germany appears to be at some risk.
Germany could be in a relatively favourable position provided that the structural reforms underlying
the programme are actively implemented and the reform efforts are continued to improve further
the long-term sustainability. However, long-term sustainability hinges crucially on the achievement
of the planned budgetary consolidation in the medium-term and on reducing the debt level; both
the federal states and social security systems play a role in this. The already legislated structural
reforms of ‘Agenda 2010’ and in particular the pension reform is likely to reduce the budgetary
impact of ageing, although the expenditure-reducing effect of the ongoing reforms is subject to
uncertainty, in particular for health care.

The economic policies outlined in the 2004 update are partly consistent with the country-specific
broad economic policy guidelines in the area of public finances. In particular, no reduction of the
cyclically-adjusted deficit has occurred in 2004. In addition, the planned medium-term adjustment
in the cyclically adjusted balance from 2007 onwards is below ½ pp. of GDP and, moreover, subject
to risks. It will not lead to a close-to-balance budgetary position over the period covered by the
programme. Germany has implemented important structural reforms, notably concerning the labour
market and pension systems that put the country in a better position to face the consequences of an
ageing population. It remains crucial for Germany to succeed in moving to higher trajectories of
actual and potential growth by mobilising its underutilised employment reserves.

In view of the above assessment, the Council is of the opinion that Germany should:

(i) do the necessary to ensure the correction of the excessive deficit in 2005;

(ii) implement budgetary adjustments in the years beyond 2005 and make the necessary effort in struc-
tural terms to achieve a budgetary position of close to balance by the end of the period covered by the
programme; and

(iii) continue with structural reforms in order to further improve the long-term sustainability of public

finances in particular as regards the health care system.

C 136/14

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Official Journal of the European Union

3.6.2005

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

2008

Real GDP
(% change)

HICP inflation
(%)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2004

COM Oct 2004

SP Jan 2004

SP Dec 2004

COM Oct 2004

SP Jan 2004

SP Dec 2004

COM Oct 2004

SP Jan 2004

SP Dec 2004

COM Oct 2004

SP Jan 2004

SP Dec 2004 (1)

COM Oct 2004

SP Jan 20041

SP Dec 2004

COM Oct 2004

SP Jan 2004

1,8

1,9

1,7

—

1,7

—

-3 ¾

-3,9

-3 ¼

- ½

-0,8

- ¼

-3,0

-3,4

-2,5

65 ½

65,9

65

1,7

1,5

2 ¼

—

1,3

—

-2,9

-2,9

-2 ½

0

0,2

½

-2,4

-2,4

-2,1

66

66,7

65 ½

1 ¾

1,7

2 ¼

—

1,1

—

-2 ½

-2,6

-2

½

0,5

1

-1,9

-2,1

-1,6

66

67,1

65 ½

2

—

2 ¼

—

—

—

-2

—

-1 ½

1 ½

—

1 ½

-1,6

—

-1,4

65 ½

—

65

2

—

—

—

—

—

-1 ½

—

—

2

—

—

-1,3

—

—

65

—

—

Note:
(1) Commission services calculations on the basis of the information in the programme

Sources:
Stability programme (SP); Commission services autumn 2004 economic forecasts (COM) adjusted to include the additional budgetary package
presented in November, cf: Communication from the Commission to the Council: ‘The situation of Germany and France in relation to their obligations
under the excessive deficit procedure following the judgement of the Court of Justice’, 14 December 2004, COM(2004) 813; Commission services
calculations