Council opinion of 12 February 2008 on the updated stability programme of Germany, 2007-2011
Date: 2008-02-12
Institutions: Council of the European Union
Subjects: Germany, budget estimate, economic forecasting, public finance, stability programme

C 49/12

EN

Official Journal of the European Union

22.2.2008

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Germany, 2007-2011

(2008/C 49/04)

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 particular
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)

(4)

On 12 February 2008, the Council examined the updated stability programme of Germany, which
covers the period 2007 to 2011.

Economic growth in Germany was significantly stronger in 2006 and 2007 compared with the first
half of the decade. Sustained wage restraint as well as structural reforms helped to regain competitive-
ness and stimulate employment growth. The marked improvement on the labour market supports the
projection of a steady recovery of domestic demand, helping to balance an expected lower growth
contribution from net external demand.

The speed of budgetary consolidation has been remarkable. The general government balance swung
from a deficit of almost 3,5 % of GDP in 2005 to a small surplus in 2007. Similarly, the structural
deficit was reduced by 2,5 percentage points of GDP between 2005 and 2007. The control of
government expenditure was key in the consolidation, with a reduction from almost 47 % of GDP in
2005 to below 44 % in 2007. This owes to the consolidation measures adopted since 2005, but also
to the fact that unexpectedly high tax revenues were not spent, but used for deficit reduction.

The macroeconomic scenario underlying the programme envisages that real GDP growth will slow
down from 2,4 % in 2007 to 2 % in 2008 and 1,5 % on average over the rest of the programme
period. Judging from currently available information (2), this growth scenario appears plausible until
2008 and cautious thereafter. GDP growth would remain below potential in 2009-2011, yet employ-
ment is projected to be continuously increasing. Wage increases are forecast to remain moderate and
would thus not lead to inflationary pressure. The trend improvement in price competitiveness
observed over the last decade would, however, come to an end.

For 2007, the updated programme foresees the budget in balance, broadly in line with the Commis-
sion services' autumn 2007 forecast, which projects a surplus of 0,1 % of GDP, against a target of a
deficit at 1,5 % of GDP set in the previous update of the stability programme. The marked budgetary
improvement over the target resulted from a base effect due to a lower-than-projected 2006 deficit, a
stronger cyclical effect and a tighter fiscal stance. Budgetary implementation in 2007 was in line with
the policy advice from the Council in its opinion of 27 February 2007 on the previous update of the
stability programme (3). The Council notes that, since unexpected tax revenues were fully used for
deficit reduction, budgetary implementation was also consistent with the April 2007 Eurogroup
orientations for budgetary policies.

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of
the Autumn 2007 implementation report of the national reform programme. Recent indicators would however point to
somewhat lower growth in 2008.

(3) OJ C 70, 27.3.2007, p. 5.

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C 49/13

(5)

(6)

(7)

(8)

The main goal of the medium-term budgetary strategy is to ensure the long-term sustainability of
public finances. To achieve this, the programme proposes to continue budgetary consolidation, while
improving the conditions for growth and employment. The medium-term objective (MTO), which is a
balanced position in structural terms (i.e. the cyclically-adjusted balance net of one-off and other
temporary measures), was broadly reached in 2007. The programme projects the structural balance
to weaken somewhat in 2008 and then to improve subsequently, eventually achieving the MTO again
in 2010 and a structural surplus by 2011 (calculated according to the commonly agreed
methodology). The previous programme did not foresee achieving the MTO within the programme
period. Moreover, economic conditions are assumed to support the move of the general government
accounts into small surplus. The improvement in the primary balance follows the same pattern, with
the surplus reaching 3,5 % of GDP by 2011. The envisaged consolidation is entirely expenditure-
based. This would more than offset the drop in revenue due mainly to the company tax reform and
the cut of unemployment insurance contribution rate in 2008. Indeed, the expenditure ratio would
fall by 2,5 percentage points to 41,5 % of GDP by 2011, which is planned to be achieved mostly
through restraint in social spending. Government gross debt, estimated to decline to 65 % of GDP in
2007, still above the 60 % of GDP Treaty reference value,
is projected to decline further by
7,5 percentage points over the programme period.

The risks to the budgetary projections in the programme appear balanced. The macroeconomic
outlook is plausible in 2008 and cautious thereafter. Also, over the last two years, the actual
budgetary situation turned out better than targeted. The programme seems to assume structural
improvements from labour market reforms to be continuing over the programme period. Since no
further reforms are planned, the envisaged budgetary outcome requires continued commitment to
maintain firm control over expenditure. Likewise, the risks to the projected evolution of the debt ratio
appear to be balanced.

In view of this risk assessment, the budgetary stance in the programme seems sufficient to return to
the MTO by 2010, as envisaged in the programme. A sufficient safety margin against breaching the
3 % of GDP deficit
threshold with normal macroeconomic fluctuations would be provided
throughout the programme period. However, the planned fiscal loosening by around 0,5 % of GDP
implies also a divergence from the MTO only in 2008. Therefore, the fiscal policy stance reflected in
the programme may not be fully in line with the Stability and Growth Pact. The Council notes that
the budgetary plans for 2008 remain consistent with the April 2007 Eurogroup orientations for
budgetary policies. Finally, taking into account the risks to the debt projections mentioned above, the
debt ratio seems to be sufficiently diminishing towards the reference value over the programme
period.

Germany appears to be at medium risk with regard to the sustainability of public finances. The
long-term budgetary impact of ageing is close to the EU average, with pension expenditure showing a
somewhat more limited increase than in many other countries, as a result of the pension reforms
already enacted. The recent pension reform (2007) will gradually increase the statutory retirement age
to 67 years, from 2012 onwards, which should further reduce the expected increase in age-related
expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the
starting position of
the previous programme, contributes to offsetting the projected long-term
budgetary impact of population ageing. However, this is not sufficient to fully cover future spending
pressures. Maintaining high primary surpluses over the medium term and bringing the debt ratio
below the Treaty reference value would contribute to reducing risks to the sustainability of public
finances.

(9) While the stability programme does not specify the direct budgetary impact of the Autumn 2007
implementation report of the national reform programme, the budgetary strategies outlined in both
documents seem consistent. Principal measures with a direct budgetary impact put forth in the NRP
implementation report are mentioned in the stability programme, for example the company tax
reform, the increase in the statutory retirement age, the social contribution rate cut, childcare facilities
and the second stage of the reform of the federal system with a review of the fiscal relations between
levels of government in order to ensure budgetary discipline.

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Official Journal of the European Union

22.2.2008

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad
economic policy guidelines included in the integrated guidelines and the guidelines for euro area
Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

(11) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme has some gaps in the required and optional data (1).

The overall conclusion is that, benefiting from continued strong growth, Germany has used unexpected
revenues for deficit reduction and therefore broadly achieved its medium-term objective in 2007, much
earlier than envisaged in the previous programme, a result to be commended. In 2008, however, public
finances could relapse into a structural deficit. The budgetary strategy foresees a gradual return to the
medium-term objective thereafter, based on sustained expenditure restraint. The risks attached to the
budgetary projections are neutral; while the underlying macro-economic scenario after 2008 is prudent, the
envisaged budgetary outcome requires continued commitment to maintain firm control over expenditure.
Germany is at medium risk as regards the sustainability of public finances.

In view of the above assessment Germany is invited to:

(i) preserve the positive results achieved in 2007 by maintaining firm control over expenditures in line

with programme targets and by using unexpected extra revenues for debt reduction;

(ii) improve the long-term sustainability of public finances, by continuing to implement the growth- and
employment-promoting economic reforms enacted and by underpinning the achieved fiscal consolida-
tion with a strengthening of budgetary institutions, in particular through the ongoing revision of federal
fiscal relations.

The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations
for fiscal policies.

Real GDP
(% change)

HICP inflation
(%)

Output gap (1)
(% of potential GDP)

Comparison of key macroeconomic and budgetary projections

SP Dec 2007

COM Nov 2007

SP Nov 2006

2006

2007

2008

2009

2010

2011

2,9

2,9

2,3

2,4

2,5

1,4

2

2,1

1,5

2,2

1,5

n.a.

1,75

1,75

1,75

1,5

n.a.

n.a.

SP Dec 2007

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

COM Nov 2007

SP Nov 2006

SP Dec 2007

COM Nov 2007 (2)

1,8

n.a.

– 0,2

– 0,5

2,2

n.a.

0,7

0,3

2

n.a.

1,1

0,6

1,8

n.a.

0,8

0,9

SP Nov 2006

– 0,3

– 0,3

– 0,2

0

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

SP Dec 2007

COM Nov 2007

SP Nov 2006

5,2

5,2

n.a.

6,1

5,8

n.a.

6,1

5,8

n.a.

6,3

6,1

n.a.

(1) In particular, data on HICP inflation and total social transfers are not provided in the programme and not all basic assump-

tions underlying the macroeconomic scenario are spelled out.

n.a.

n.a.

n.a.

n.a.

0,5

– 0,1

n.a.

0

6,3

n.a.

n.a.

n.a.

n.a.

6,3

n.a.

n.a.

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Official Journal of the European Union

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2006

2007

2008

2009

2010

2011

General government
balance
(% of GDP)

SP Dec 2007

COM Nov 2007

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

SP Nov 2006

SP Dec 2007

COM Nov 2007

SP Nov 2006

SP Dec 2007

SP Nov 2006

SP Dec 2007

– 1,6

– 1,6

0

0,1

– 0,5

– 0,1

– 2,1

– 1,5

– 1,5

1,2

1,2

0,5

3

2,8

1

2,5

2,6

1

0

0,2

– 1

2,5

2,8

1,5

– 1,5

– 0,3

– 0,8

– 0,4

0,5

n.a.

– 0,5

3

n.a.

2

0

– 2,0

– 1,5

– 1,5

– 1,0

– 0,6

– 1,5

– 0,3

– 0,7

– 0,3

COM Nov 2007

– 1,3

– 0,1

– 0,4

– 0,2

n.a.

COM Nov 2007

– 1,3

0,0

– 0,4

– 0,2

SP Nov 2006

SP Dec 2007

COM Nov 2007

SP Nov 2006

– 2

67,5

67,5

68

– 1,5

– 1,5

65

64,7

67

63

62,6

66,5

– 1

61,5

60,3

65,5

0

n.a.

– 0,6

59,5

n.a.

64,5

0,5

n.a.

n.a.

3,5

n.a.

n.a.

0,7

n.a.

n.a.

0,7

n.a.

n.a.

57,5

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the informa-

tion in the programmes.

(2) Based on estimated potential growth of 1,2 %, 1,6 %, 1,8 % and 1,9 % respectively in the period 2006-2009.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,1 % of GDP
in 2008 and 2009; all deficit-increasing, according to the most recent programme; and 0,1 % of GDP in 2007 and 2009; all deficit-
increasing, according to the Commission services' autumn forecast.

Sources:
Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.