Council opinion of 10 March 2009 on the updated stability programme of Germany, 2008-2012
Date: 2009-03-10
Institutions: Council of the European Union
Subjects: Germany, budget estimate, economic forecasting, public finance, stability programme

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I

(Resolutions, recommendations and opinions)

OPINIONS

COUNCIL

COUNCIL OPINION

of 10 March 2009

on the updated stability programme of Germany, 2008-2012

(2009/C 66/01)

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 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)

On 10 March 2009, the Council examined the updated stability programme of Germany, which
covers the period 2008 to 2012.

As a heavily export-oriented economy strongly specialised in investment goods, Germany is severely
hit by the global recession. Real GDP growth decelerated sharply in 2008 on the back of lower
export growth. A number of financial institutions, including the Landesbanken, had to bear substantial
losses from the financial crisis. The direct impact of the financial crisis on the economy was,
however, limited by overall sound corporate balance sheets, strong price competitiveness and the fact
that Germany is not experiencing a correction in the housing market. Restoring confidence in the
financial sector, ensuring access to corporate financing, facilitating adjustments in the labour market
to deal with rising unemployment and strengthening domestic demand are key near-term challenges.
Benefiting from successful fiscal consolidation the general government budget was close to balance
in 2007 and 2008. Against this background, Germany adopted two fiscal stimulus packages in
autumn 2008 and January 2009 which aim at bolstering private consumption, boosting private and
public investment, ensuring access to finance, avoiding lay-offs, improving access to training, and
which include measures that support the motor car industry. Revenue shortfalls and higher expendi-
ture implied by these measures as well as by automatic stabilisers will lead to a deficit in public
finances. Moreover, contingent liabilities in the context of large-scale bank rescue operations pose
additional risks to the budget. An effective budgetary framework will help to support fiscal consolida-
tion once the crisis abates.

(1) OJ L 209, 2.8.1997, 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

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(3)

(4)

(5)

(6)

(7)

The macro-economic scenario underlying the January addendum envisages that real GDP growth will
fall from 1,25 % in 2008 to – 2,25 % in 2009 before recovering to 1,25 % from 2010 onward.
Assessed against currently available information (1), this scenario appears to be based on plausible
growth assumptions until 2009 and somewhat favourable assumptions from 2010. In particular the
expected recovery of private consumption in 2010 may prove more subdued, should the economic
crisis lead to a sharper decrease in employment. The macro-economic projections take into account
the stimulus measures adopted, but do not quantify their expected economic impact. The program-
me's projections for inflation appear realistic.

For 2008, the general government deficit is estimated at 0,1 % of GDP in the Commission services'
January 2009 interim forecast, against a target of 0,5 % of GDP set in the December 2007 update of
the programme. This better-than-expected outturn was owed to substantial revenue windfalls which
occurred despite the corporate tax reform and a cut in social contribution rates. Higher direct tax
revenues reflect stronger wage and employment growth and related fiscal drag effects. Part of the
additional revenue was used to finance the reduction in social contribution rates and extra spending.
Expenditure was 0,25 % of GDP higher than planned mainly due to one-off measures in connection
with the bank rescue operations and higher outlays for retirement benefits as a result of ad hoc
changes in the pension adjustment formula.

The target for the general government balance in 2009 is a deficit of 3 % of GDP. This is in line with
the Commission services interim forecast. The widening of the deficit reflects tax revenue losses and
higher expenditure due to automatic stabilisers (around 1,5 % of GDP) and stimulus measures taken
in response to the crisis (around 1,5 % of GDP). The expenditure-to-GDP ratio is expected to increase
by 2,5 percentage points, while the revenue-to-GDP ratio is projected to fall by 0,5 percentage point.
The structural deficit (as recalculated by the Commission's services on the basis of the information
provided in the programme) is estimated to widen by around 1,5 percentage points.

The medium-term budgetary objective (MTO) is to maintain a general government budget close to
balance in structural
terms (cyclically-adjusted net of one-off and other temporary measures).
According to the programme, this implies a structural deficit of 0-0,5 % of GDP. The MTO is not
expected to be reached within the programme period. However, budgetary consolidation is resumed
after the deficit has peaked at 4 % of GDP, above the Treaty reference value, in 2010, to 3 % of GDP
in 2011 and 2,5 % in 2012. The projections in the January addendum are based on a no-policy-
change scenario and imply a mainly expenditure-based consolidation after 2010. The revenue-to-GDP
ratio is expected to fall by 1,5 percentage points over 2008-2010 to 42,5 %, remain at that level
in 2011 and to rebound in 2012 by 0,5 percentage point. The expenditure-to-GDP ratio will increase
by 2,5 percentage points between 2008 and 2010, and is to fall thereafter by 1 percentage point.

The revenue and expenditure developments in 2010 are mainly driven by the fiscal stimulus measures
in response to the crisis. Measures underpinning the consolidation process after 2010 are not speci-
fied. Expiry of certain stimulus measures and the debt repayment fund could support the consolida-
lower nominal GDP growth and the stock-flow adjustments in 2008
tion efforts. Rising deficits,
reflecting primarily bank rescue operations contribute to an increase in the debt-to-GDP ratio by
7 percentage points over the programme period up to 72,5 % of GDP.

The budgetary outcomes are subject to downside risks, in particular from 2010 onwards. First, the
underlying macro-economic assumptions are subject to uncertainty as to the duration, extent and
impact of the financial crisis. They appear to be somewhat favourable especially for 2010 and there-
after, when a swift recovery is projected to bring real GDP growth back to potential. Second, a risk to
the projection is the potential lack of sufficient commitment at all levels of government to exert
expenditure discipline. Third, considerable risks stem from lack of information on the measures envi-
saged to support the planned consolidation after 2010, notably given the permanent nature of a
large part of the fiscal stimulus measures. In view of the negative risks to the deficit targets, the evolu-
ratio may also prove less benign than envisaged. Additional risks to the
tion of

the debt

(1) The assessment notably takes into account the Commission services' January 2009 forecast, but also other information

that has become available since then.

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government accounts relate to direct implications of the financial crisis, in particular to possible
further capital injections and potential bank takeovers (with an impact on the debt, though some
effect on the deficit cannot be excluded) or bank guarantees (only to affect the deficit and the debt if
and when called).

(8)

(9)

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. While the budgetary position in 2008 as estimated in the addendum would
have contributed to partly offsetting the long-term budgetary impact of population ageing, the
contrary would result if the budgetary projections materialise. Moreover, the current ratio of gross
debt to GDP is above the Treaty reference value. Achieving high primary surpluses over the medium
term would contribute to reducing the medium risks to the sustainability of public finances. The
above-mentioned risks from financial sector stabilisation schemes (e.g. recapitalisation, guarantees)
put in place by Germany could have a potential negative impact on the long-term sustainability of
public finances, primarily via their impact on government debt, although some of the cost of the
government support could be recouped in the future.

Despite the overall sound quality of public finances and fiscal rules, there is still room for improve-
ments of Germany's institutional budgetary framework. The Council welcomes the progress towards
establishing a new budgetary rule providing for a limit of 0,35 % of GDP for the federal structural
deficit in normal times and structurally balanced Länder budgets. The rule is to be anchored in the
German Constitution still during the current legislation period and become operational by 2011 with
transition periods for the federal government until 2015 and for the Länder until 2019. Furthermore,
the government plans an overhaul of the federal budgeting and accounting system with a stronger
focus on a performance-based assessment of revenues and expenditures.

(10) With a view to stabilising the financial sector, the German authorities established a Financial Market
Stabilisation Fund operational until end-2009 to provide capital (EUR 80 billion, around 3 % of GDP)
and credit guarantees (EUR 400 billion, around 16 % of GDP). Already in 2007 and 2008 the
German government at the federal and regional level was involved in large-scale bank rescue opera-
tions, providing capital and guarantees. Moreover, in 2008 the German government offered an unlim-
ited guarantee for all private bank deposits. Further initiatives to alleviate bank balance sheets from
troubled assets are under discussion. Resulting contingent liabilities from these rescue measures pose
additional risks to the budget.

(11)

In line with the EERP agreed in December by the European Council, Germany decided on a sizeable
fiscal stimulus for 2009 and 2010 (around 3,5 % of GDP over two years) which is deemed to be an
adequate response to the economic downturn. The measures focus on income support, private and
public investment, avoiding lay-offs and improving training, support to credit-constrained companies
and the automotive industry. They are broadly in line with the EERP, coming targeted and timely,
even though the stimulus is somewhat back-loaded. However, while some of the measures are of
temporary nature, a substantial part of them will be permanent. Thus, the full reversibility of the
measures adopted in response to the crisis is not ensured. However, the envisaged debt repayment
schedule and the new budgetary rule will aid the necessary fiscal consolidation process once the crisis
recedes. The recovery will be supported by structural measures such as innovation support for the
private sector, improved employment services and better broadband access within the framework of
the planned Broadband Strategy. These measures are related to the medium-term reform agenda and
the country-specific recommendations proposed by the Commission on 28 January 2009 under the
Lisbon Strategy for Growth and Jobs. Moreover, temporary changes in the public procurement proce-
dures aim at accelerating infrastructure investment.

(12)

In response to the economic downturn, the overall fiscal stance in 2009 and 2010 is expansionary.
In the latter year, the deficit is expected to exceed the reference value. For 2011, the programme
targets a substantial structural improvement (by 1 percentage point) and a further, albeit smaller step
for 2012. While the pace of deficit reduction is broadly in line with the Stability and Growth Pact, a
sufficient safety margin against breaching the 3 % of GDP deficit limit would not be reached within

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the programme period and the outlined consolidation path is subject to considerable risks. Finally,
the debt ratio is increasing over the programme period, reflecting the expansionary stance in 2009
and 2010 and financial transactions related to the bank rescue operations undertaken.

(13) 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).

that benefiting from earlier consolidation and the achievement of a
The overall conclusion is
close-to-balance position in 2008, Germany was able to introduce a sizeable fiscal stimulus. This is welcome
as it is commensurate with the scale of the economic downturn. Given the sharp deterioration in the global
economic environment and distress in the financial sector, the budgetary strategy is subject to downside
risks. Full reversibility of the short-term measures adopted in response to the crisis is however currently not
ensured. Hence, the implementation of an enhanced medium-term budgetary framework as currently envi-
saged and the strong commitment at all levels of government to adhere to it will be crucial to return to
fiscal consolidation once the crisis has abated. Given increasing public debt, ad hoc changes to the pension
adjustment formula and uncertainty as to the impact of the health-care reform, preserving the achievements
made to improve long-term sustainability is critical.

In view of the above assessment, Germany is invited to:

(i) implement the 2009 and 2010 fiscal policy as planned including stimulus measures in line with the
EERP and within the framework of the SGP, reverse the fiscal stimulus in order to support significant
budgetary consolidation towards the MTO, starting in 2011 at the latest;

(ii) to this end strengthen the institutional fiscal framework by implementing the new budgetary rule as

currently envisaged in order to underpin the necessary consolidation course after 2010;

(iii) give renewed attention to measures strengthening the long-term sustainability of public finances and

ensure that the deviation from the pension adjustment formula in 2008 is reversed as envisaged.

Comparison of key macro-economic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

Output gap (1)
(% of potential GDP)

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

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009 (2)

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

2007

2008

2009

2010

2011

2012

2,5

2,5

2,4

n.a.

2,3

n.a.

2,0

2,2

0,7

7,6

7,6

6,1

1,3

– 2,25

1,25

1,25

1,25

1,3

2,0

n.a.

2,8

n.a.

2,2

2,3

1,1

7,1

7,1

6,1

– 2,3

1,5

n.a.

0,8

n.a.

0,7

1,5

n.a.

1,4

n.a.

n.a.

1,5

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

– 0,9

– 0,7

– 0,7

– 1,0

– 1,0

– 1,2

n.a.

n.a.

0,8

7,0

5,2

6,3

0,5

– 0,1

n.a.

7

5,4

6,3

7

n.a.

6,3

7

n.a.

n.a.

(1) In particular, data on HICP inflation, the breakdown of tax revenue and of government expenditure into intermediate
consumption, social transfers in kind and compensation of employees are not provided in the programme and not all basic
assumptions underlying the macro-economic scenario are spelled out.

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2007

2008

2009

2010

2011

2012

General government
revenue
(% of GDP)

General government
expenditure
(% of GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

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

Structural balance (3)
(% of GDP)

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

44,0

43,9

44

44,2

44,1

44

– 0,2

44

43,7

43

44

43,8

43,5

– 0

43,5

43,5

43

46,5

46,4

43

– 3

42,5

42,3

42,5

46,5

46,4

42

– 4

COM Jan 2009

– 0,2

– 0,1

– 2,9

– 4,2

0

2,6

2,6

3

– 0,5

2,5

2,6

2,5

0

0

0,5

– 1

– 0,1

– 1,3

2,5

3

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

SP Nov 2007

SP Dec 2008

– 1,2

– 1,2

– 2,4

– 3,5

– 2,4

– 2,1

COM Jan 2009

– 1,3

– 1,3

– 2,4

– 3,6

– 0,3

– 0,8

– 0,4

0,0

– 0,9

– 0.8

– 2,5

– 3,4

– 2,4

– 2,1

42,5

n.a.

42

45,5

n.a.

41,5

– 3

n.a.

0,5

0

n.a.

3,5

43

n.a.

n.a.

45,5

n.a.

n.a.

– 2,5

n.a.

n.a.

,5

n.a.

n.a.

n.a.

0,7

n.a.

n.a.

n.a.

0,7

71,5

n.a.

n.a.

n.a.

72,5

n.a.

n.a.

COM Jan 2009

– 1,0

– 0,9

– 2,4

– 3,4

Government gross debt
(% of GDP)

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

– 0,3

– 0,7

– 0,3

0

65,5

65,6

68,5

69,6

70,5

72,3

65,1

65,1

65

63

– 61,5

– 59,5

– 57,5

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 1,1 %, 1,2 %, 0,9 % and 1,0 % respectively in the period 2007-2010.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,3 % of GDP
in 2007 and 0,5 % of GDP in 2008 all deficit-increasing according to the most recent programme and 0,3 % of GDP in 2007, 0,3 %
of GDP in 2008 and 0,1 % of GDP in 2010 all deficit-increasing in the Commission services' January interim forecast.

Source:
Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.