Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Germanyand delivering a Council opinionon the updated Stability Programme of Germany, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: Germany, budget deficit, economic policy, employment policy, job access

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 807 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Germany 

and delivering a Council opinion 

on the updated Stability Programme of Germany, 2011-2014 

{SEC(2011) 714 final} 

EN 

   EN 

 
 
 
 
  
 
 
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Germany 

and delivering a Council opinion 

on the updated Stability Programme of Germany, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and 148(4) thereof, 

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 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and on 21 
October  2010,l  adopted  a  decision  on  guidelines  for  the  employment  policies  of  the 
Member States3, which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

1 
2 
3  

OJ L 209, 2.8.1997, p. 1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

EN 

2 

   EN 

 
 
 
 
                                                 
(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes. 

On 27 April 2011, Germany submitted its updated Stability Programme covering the 
period 2011-2015 and on 7 April 2011 its 2011 National Reform Programme. In order 
to  take  account  of  the  interlinkages,  the  two  programmes  have  been  assessed  at  the 
same time.  

The  German  economy  entered  the  crisis  in  a  relatively  solid  position.  However,  the 
slump  in  world  trade  resulted  in  a  collapse  of  exports  and  investment  in  2009,  such 
that real GDP contracted by an unprecedented 4.7%. Nevertheless, after a small rise, 
unemployment  has  been  falling  again  since  late  2009.  The  resilience  of  the  labour 
market  reflects  the  beneficial  effects  of  past  reforms  to  reduce  hours  worked  and  of 
subsidies  for  short-time  work.  The  economy  has  rebounded  strongly  from  the 
recession,  with  real  GDP  rising  by  3.6%  in  2010.  Exports  have  largely  reversed  the 
massive decline recorded in 2009 and paved the way for a more broad-based recovery 
also  leading  to  a  diminishing  current  account  surplus.  The  economy  has  further 
improved  its  competitiveness  vis-à-vis  most  of  the  euro  area  members.  The  general 
government  budget  went  from  being  in  balance  to  a  deficit  of  3%  of  GDP  in  2009, 
driven  by  fully  operating  automatic  stabilisers  and  discretionary  measures  to  counter 
the economic downturn. The economic recovery helped to contain the deficit in 2010 
(3.3% of GDP) despite ongoing sizeable fiscal stimulus and financial market support 
measures. 

Based  on  the  assessment  of  the  updated  Stability  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underlying  the  stability  programme  is  cautious  for  2011  and  plausible 
thereafter,  also  as  assessed  against  the  Commission's  Spring  2011  forecast.  The 
programme  projects  real  GDP  to  grow  by  2.3%  in  2011,  before  slowing  to  1.8%  in 
2012 and to an average of 1.5% in 2013-15. The programme plans to bring the deficit 
below the 3% GDP reference value already in 2011, two years ahead of the deadline 
established  by  the  Council,  and  to  make  further  progress  towards  achieving  the 
medium-term  objective  (MTO)  –  a  deficit  of  0.5%  of  GDP  in  structural  terms  –  in 
2014.  Following  the  expected  correction  of  the  excessive  deficit,  the  pace  of 
adjustment  towards  the  MTO  under  the  programme  falls  below  the  0.5%  of  GDP 
benchmark  in  2013  and  2014.  While  the  debt-to-GDP  ratio  rose  by  almost  10 

EN 

3 

   EN 

 
percentage points in 20104, it is projected to start falling as of 2011 and should reach 
75.5% of GDP by 2015, thus remaining above the Treaty reference value. The risks to 
the  budgetary  projection  appear  broadly  balanced  for  2011,  but  the  outcomes 
thereafter could be weaker than expected, since some savings might not materialise as 
envisaged. Certain measures are still subject to debate (e.g. energy and financial taxes) 
and  others  remain 
in  public 
administration).  Moreover,  further  financial  market  support  measures  cannot  be 
excluded.  

to  be  specified  (e.g.  efficiency 

improvements 

(9) 

Since  the  recent  reform  of  the  health-care  system  introduced  measures  to  curb 
spending increases mainly in 2011 and 2012, further steps to enhance the efficiency of 
public  spending  on  health-care  and  long-term  care,  would  support  the  envisaged 
consolidation  path.  At  the  same  time,  maintaining  a  largely  growth-oriented 
consolidation course, including by ensuring adequate expenditure on education, would 
help to strengthen the long-term growth potential. 

(10)  While  the  German  fiscal  framework  has  been  considerably  strengthened  through  the 
introduction  of  a  constitutional  budgetary  rule,  the  creation  of  the  Stability  Council 
and  the  early  warning  system  to  prevent  budgetary  distress,  the  budgetary  rule  still 
needs to be fully implemented at Länder level. Further strengthening of the associated 
monitoring and sanctioning mechanism would also enhance the overall credibility of 
the public finances. 

(11)  The  crisis  revealed  serious  vulnerabilities  in  the  banking  sector.  Heavy  losses  and 
write-downs  from  international  investments  in  subprime  loans  and  structured  assets 
weakened  the  capital  base  of  some  banks  and  led  to  the  need  for  substantial  state 
interventions.  The crisis also exposed  the weaknesses  of some Landesbanken, which 
had already been suffering from a lack of effective risk management structures and the 
absence  of  a  viable  business  model  before  the  crisis.  Further  reform  of  the  banking 
sector, including restructuring of the Landesbanken in need of a viable and adequately 
funded  business  model  and  strengthening  of  the  regulatory  and  supervisory 
framework, would help preserve the stability of the financial sector and also ensure a 
more efficient allocation of domestic savings as a means of underpinning demand and 
investment.  

(12)  The growth potential and structural competitiveness of the German economy depend 
to a large extent on a well-trained, skilled workforce, but labour supply shortages may 
become pressing given demographic developments. This underlines the importance of 
fully  utilising  the  labour  force  potential  by  removing  obstacles  to  labour  market 
participation  for  particular  groups  (older  workers,  women,  the  low-skilled,  non-EU 
nationals)  and  the  further  development  of  human  capital.  Addressing  the  tax  wedge, 
which remains high especially for low and middle incomes, would improve incentives 
to work while allowing wage increases to be translated to a greater extent into higher 
disposable incomes and domestic demand. Reducing the high marginal income tax rate 
for  second  earners  due  to  the  joint  income  taxation  of  couples  by  shifting  towards  a 
system of individual taxation could help reduce the incidence of part-time employment 

4 

The jump in 2010 was largely related to the fact that two troubled banks transferred impaired assets to 
their respective "bad-banks", which are classified under the government sector. In line with the Eurostat 
guidance on accounting rules for financial defeasance structures, the corresponding liabilities of "bad-
banks" had a direct impact on the debt level. 

EN 

4 

   EN 

 
                                                 
in  favour  of  full-time  work.  Further  increasing  the  availability  of  childcare  facilities 
would in particular also help improve the still low full-time labour force participation 
of  women.  Moreover,  increasing  the  number  of  persons  with  vocational  training 
qualifications could enhance the labour market prospects of low-skilled workers. 

(13)  Germany  has  recently  taken  far-reaching  decisions  on  its  future  energy  mix.  The 
implementation  of  the  Energy  Concept  will  imply  a  fundamental  transformation  in 
energy supply and have implications for energy prices and the competitiveness of the 
economy in the medium to long term. Cost-effectiveness should therefore be the key 
guiding  principle  for  the  implementation  of  the  Energy  Concept,  based  on  efficient 
energy consumption, cost-effective support schemes and adequate electricity grids for 
renewable energy and competitive energy markets. 

(14)  Boosting  competition  in  the  service  sector  would  foster  productivity  growth  and 
support  domestic  demand.  More  dynamic  growth  of  the  service  sector  could  also 
contribute to broadening the base for supply and demand growth in Germany. Despite 
considerable  progress  in  recent  years  through  the  implementation  of  the  Services 
Directive, there appears to be scope to further reduce barriers to the entry and exit of 
firms, notably by further simplifying the license and permit system. The regulation of 
certain  professional  services  (e.g.  engineers,  architects,  pharmacists  and  lawyers) 
seems  to  be  more  stringent  compared  with  other  countries  and  entry  and  regulatory 
barriers  for  crafts  also  appear  high.  With  regard  to  network  industry  services, 
competition  in  the  railway  sector  in  particular  is  still  impeded.  Here,  effective 
unbundling of infrastructure management and transport services, as a prerequisite for a 
competitive market, is still delayed. Strengthening the supervisory role of the Federal 
Network  Agency,  the  abolition  of  cross-subsidisation  between  the  network  operator 
and  rail  service  providers  and  the  opening  of  sales  and  ticket  infrastructure  to 
competitors would foster competition in the short run.  

(15)  Further reforms to improve the accessibility and quality of the education and training 
system  will  be  key  to  ensuring  an  adequately  skilled  labour  supply,  also  in  view  of 
demographic  developments.  Shortages  of  medium-  and  high-skilled  labour  in 
particular  are  forecast,  especially  as  regards  mathematics,  science  and  technology 
subjects. The educational attainment rates of young people in Germany, at both upper 
secondary and tertiary level, are below the EU average. Increasing the availability of 
pre-school  education  and  all-day  schools  and  easing  the  transition  between  different 
strands of the school system may improve educational outcomes.  

(16)  Germany has made a number of commitments under the Euro Plus Pact5. On the fiscal 
side, the commitments call for the excessive deficit to be corrected already in 2011 and 
for the targets under the national budgetary rule to be achieved by  a wide  margin in 
2011-2012. To reinforce financial stability, measures include efficient regulation and 
supervision  of  the  capital  market.  Employment  measures  focus  on  labour  market 
participation  (reform  of  active  labour  market  instruments,  improved  integration  of 
professionals  with  foreign  qualifications  and  integration  of  migrants)  and  education 
(Basic  Education  Pact).  The  competitiveness  measures  focus  on  network  industries, 
energy and the service sector (i.e. market transparency agency for the electricity and 
gas  sector,  a  programme  on  electromobility,  and  increased  funding  of  transport 

5 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 714. 

EN 

5 

   EN 

 
                                                 
infrastructure)  as  well  as  on  education  (i.e.  Initiative  for  Excellence  to  promote 
graduate schools and funding of the University Pact). These commitments refer to the 
four areas of the Pact. They largely reflect the broader reform agenda outlined in the 
Stability  and  National  Reform  Programmes.  However,  several  policy  areas  remain 
unaddressed  in  the  Pact  commitments  (e.g.  restructuring  of  Landesbanken  or  the  tax 
wedge on labour) or are only touched upon (opening the services sector and network 
industries  to  greater  competition).  The  Euro  Plus  Pact  commitments  have  been 
assessed and taken into account in the recommendations. 

(17)  The  Commission  has  assessed  Germany's  Stability  Programme  and  National  Reform 
Programme, including its Euro Plus Pact commitments6. It has taken into account not 
only their relevance for sustainable fiscal and socio-economic policy in Germany but 
also  their  conformity  with  EU  rules  and  guidance,  given  the  need  to  reinforce  the 
overall economic governance of the European Union by providing EU-level input for 
future  national  decisions.  In  this  light,  the  Commission  considers  that  the  German 
budgetary strategy should be implemented as envisaged, while maintaining a growth-
friendly  consolidation  course.  Further  steps  in  2011-12  should  focus  on  ensuring  the 
stability of the financial system (e.g. through restructuring of the Landesbanken) and 
the  strengthening  of  domestic  sources  for  growth,  by  increasing  labour  market 
participation  through  a  reduction  of  the  tax  wedge  on  labour,  improving  the 
accessibility and quality of education, and opening up the services sector, trades and 
professions and the network industries to greater competition.  

(18) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under  Article  126(7)  of  the  Treaty  on  the  Functioning  of  the  European  Union  of  2 
December  2009,  the  Council  has  examined  the  2011  update  of  the  Stability 
Programme  of  Germany  and 
its 
recommendation  under  (1)  set  out  below.  Taking  into  account  the  European  Council 
conclusions  of  25  March  2011,  the  Council  has  examined  the  National  Reform 
Programme of Germany, 

its  opinion7 

in  particular 

is  reflected 

in 

HEREBY RECOMMENDS that Germany should take action within the period 2011-2012 to: 

(1) 

(2) 

(3) 

Implement  the  budgetary  strategy  for  the  year  2012  and  beyond  as  envisaged. 
Complete  the  implementation  of  the  budgetary  rule  at  the  Länder  level  and  further 
strengthen  the  corresponding  monitoring  and  sanctioning  mechanism.  Maintain  a 
growth-friendly  consolidation  course,  in  particular  by  safeguarding  adequate 
expenditure on education and by further enhancing the efficiency of public spending 
on health-care and long-term care. 

Address  the  structural  weaknesses  in  the  financial  sector,  in  particular  by 
restructuring Landesbanken in need of an adequately funded viable business model.  

Enhance  participation  in  the  labour  market  by  improving  equitable  access  to 
education and training systems and by reducing the high tax wedge for the low-paid 
in a budgetary neutral way. Increase the number of fulltime childcare  facilities and 
all-day schools, and remove tax disincentives for second income earners to work.  

6 
7 

SEC(2011) 714. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

EN 

6 

   EN 

 
                                                 
(4) 

Remove  unjustified  restrictions  on  certain  professional  services  and  on  the  craft 
sector. To improve competition in network industries, strengthen the supervisory role 
of  the  Federal  Network  Agency  in  the  rail  sector;  and,  in  the  context  of  the 
announced  national  Energy  Concept,  focus  on  improving  the  long-term  cost-
effectiveness of the Renewable Energy Act, ensuring the effective independence of 
energy production and transmission, and improving cross-border interconnections.  

Done at Brussels, 

For the Council 
The President 

EN 

7 

   EN