Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Germany and delivering a Council opinion on the 2016 stability programme of Germany
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Germany, budgetary equilibrium, competition policy, economic policy, economic reform, employment policy, public investment, retirement conditions, stability programme, tax system

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 326 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Germany  and delivering a Council opinion on the 2016 stability programme of Germany  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Germany 

and delivering a Council opinion on the 2016 stability programme of Germany 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 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(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Germany as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 326 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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(2) 

(3) 

(4) 

(5) 

a  Council  recommendation  on  the  economic  policy  of  the  euro  area7.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  Germany  should  ensure  the  full  and  timely  implementation  of  the 
recommendation. 
The  country  report  for  Germany8  was  published  on  26  February  2016.  It  assessed 
Germany’s progress in addressing the country-specific recommendations adopted by 
the  Council  on  14  July  2015  and  Germany's  progress  towards  its  national  Europe 
2020 targets. It also included the in-depth review under Article 5 of Regulation (EU) 
No  1176/2011.  On  8  March  2016,  the  Commission  adopted  a  Communication9 
presenting the results of the in-depth review. The Commission’s analysis leads it to 
conclude that Germany is experiencing macroeconomic imbalances. In particular, the 
large  and  persistent  current  account  surplus  reflects  excess  savings  and  subdued 
investment  in  both  the  private  and  public  sectors.  Weak  domestic  investment 
hampers  potential  growth  and  strong  reliance  on  external  demand  entails 
macroeconomic risks  in  a  context of subdued  foreign demand. The current account 
surplus also has, given its size, adverse implications for the economic performance of 
the  euro  area.  Addressing  it  through  increased  investment  would  raise  Germany’s 
growth potential and help sustain the recovery in the euro area. 

On  15  April  2016,  Germany  submitted  its  2016  stability  programme  and  on  
29 April 2016 it submitted its national reform programme. To take account of their 
interlinkages, the two programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance10. 

in 

Germany  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject  to  the  debt  rule.  In  its  2016  stability  programme,  the  government  plans  a 
balanced  budgetary  position  in  headline  terms  over  2016-2020.  The  medium-term 
budgetary objective — a structural deficit of 0.5 % of GDP — continues to be met 
with  a  margin  throughout  the  programme  period.  According  to  the  stability 
programme,  the  government  debt-to-GDP  ratio  is  expected  to  gradually  decline  to 
59½%  in  2020.  The  macroeconomic  scenario  underpinning  these  budgetary 
projections,  which  has  not  been  endorsed  by  an  independent  body,  is  plausible. 
Based on the Commission 2016 spring forecast, the structural balance is forecast to 
register  a  surplus  of  0.4  %  of  GDP  in  2016  and  in  2017,  above  the  medium-term 
budgetary  objective.  Possible  future  deviations,  including  to  accommodate  public 

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COM(2015) 692 final. 
SWD(2016) 75 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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(7) 

investment  needs,  would  be  assessed  against  the  requirement  to  maintain  the 
structural balance at the medium-term budgetary objective. Gross debt is forecast to 
remain  on  a  firm  downward  path  beyond  the  requirements  of  the  debt  rule.  This 
creates  scope  to  boost  public  investment.  Based  on  its  assessment  of  the  stability 
programme  and  taking  into  account  the  Commission  2016  spring  forecast,  the 
Council is of the opinion that Germany is expected to comply with the provisions of 
the Stability and Growth Pact. 

Although  the  federal  government  has  adopted  several  measures  to  increase 
infrastructure investment in the years to come, these funds still do not appear to bring 
about  a  sustainable  upward  trend  in  public  investment  and  to  meet  infrastructure 
investment  requirements.  Overall  education  and  research  expenditure  has  increased 
only slightly in recent years and may have fallen short of the national target of 10 % 
of  GDP  in  2015.  Continued  investment  in  education,  research  and  innovation  is 
essential for securing Germany’s competitive position in the future. As the budget is 
expected  to  remain  balanced  in  headline  and  structural  terms  in  2016-2017,  there 
continues  to  be  sufficient  fiscal  space  for  higher  public  investment,  without 
breaching  the  rules  of  the  Stability  and  Growth  Pact  and  the  national  debt  brake. 
Reforming  the  pension  system  would  contribute  to  ensuring  the  long-term 
sustainability of public finances. The current design of fiscal equalisation is complex 
and tends to reduce incentives to improve revenue in individual Länder. The ongoing 
review  of  federal  fiscal  relations  provides  an  opportunity  to  strengthen  the 
framework,  including  by  ensuring  sufficient  public  investment  at  all  levels  of 
government, especially for municipalities. The current compromise proposal agreed 
among the Länder would involve simplified horizontal fiscal equalisation. However, 
it  remains  vague  in  terms  of  further  disentangling  spending  competencies  and  falls 
short  of  increasing  revenue  autonomy.  At  the  same  time,  alternative  instruments  to 
traditional state funding of transport infrastructure, including through public-private 
partnerships,  are  used  only  to  a  limited  extent.  Moreover,  complex  planning 
responsibilities  across  the  different  levels  of  government,  bottlenecks  linked  to 
administrative  capacity  and  complicated  approval  procedures  are  all  barriers  to 
investment.  A  more  efficient  use  of  public  procurement  could  also  have  a  positive 
impact on investment, since the volume of procurement tenders published EU-wide 
remains far below the EU average. 

The  complexity  of  the  corporate  tax  system  remains  a  hindrance  to  private  sector 
investment  and  the  overall  income  tax  burden  on  corporations,  including  the  local 
trade tax (Gewerbesteuer) and the solidarity surcharge, remains high. Inefficiencies 
arise from the local trade tax due  to the inclusion of non-profit elements in  the tax 
base.  The  tax  system  favours  debt  financing  over  equity  financing,  the  relevant 
indicator on the 'debt bias' being the eighth highest in the EU in 2015. The share of 
relatively growth-friendly consumption taxes and recurrent taxes on property in total 
taxation  remained  stable  between  2007  and  2014  at  around  28-29  %,  which  is  low 
compared  with  an  average  of  around  32-33  %  in  the  EU.  Moreover,  the  trend  of 
increasing  real  estate  transfer  taxes  has  continued,  instead  of  relying  more  on  less 
distortive  recurrent  property  taxes.  Steps  taken  to  modernise  the  tax  administration 
were  limited  to  the  federal  government's  adoption  of  legislation  to  simplify  tax 
administration  procedures.  An  automatic  exchange  of  tax  data  between  the  tax 
administrations of the 16 Länder, which could improve the efficiency of tax audits, 
still does not exist. Overall, structural shortcomings and delayed modernisation result 
in  the  relative  underperformance  of  the  tax  administration  and  inefficiencies  in  tax 
collection.  

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(8) 

(9) 

(10) 

(11) 

Financing  conditions  in  Germany  are  generally  favourable.  However,  the  venture 
capital  market  remains  underdeveloped  in  international  comparison  and  tax-related 
framework  conditions  may  limit  its  size.  Improving  access  to  venture  capital  is  an 
important factor in stimulating entrepreneurial activity, including in high-tech sectors 
and knowledge-intensive services. The German government has launched a range of 
measures  to  improve  conditions  for  venture  capital  and  further  measures  are  under 
discussion.  Additionally,  a  review  of  the  regulatory  framework  for  venture  capital 
could contribute to stimulating private investment, including from foreign investors. 

Policy  action  to  stimulate  competition  in  the  service  sectors,  especially  in 
professional services, has been limited. Germany is among the Member States with 
high  regulatory  barriers  in  services.  Restrictive  product  market  regulations  affect 
prices  and  productivity.  Low  labour  productivity  and  high  mark-ups  indicate  that 
Germany  has  considerable  scope  to  improve  the  performance  of  professional 
services.  Problems  in  business  services  stem  from  authorisation  requirements, 
restrictions  on  multidisciplinary  activities,  insurance  requirements  and  fixed  tariffs. 
Legal  form  and  shareholding  requirements  are  also  still  imposed.  The  action  plan 
submitted by Germany as a result of the mutual evaluation on access to and practice 
of regulated professions proposes only a limited number of actions, whereas there is 
clear scope for more ambitious proposals.  

Although  the  overall  labour  market  performance  is  very  strong,  in  particular  with 
unemployment  at  historically  low  levels,  ageing-related  labour  and  skills  shortages 
are  looming,  calling  for  full  use  of  the  existing  labour  force.  As  these  trends 
challenge not only the labour market, but also the sustainability and adequacy of the 
pension  system,  stronger  incentives  for  later  retirement  appear  indispensable.  The 
risk  of  old-age  poverty  is  expected  to  increase  and  the  replacement  rate  of  the 
statutory  pension  scheme  is  being  gradually  reduced,  while  rates  of  enrolment  in 
second or third-pillar pension schemes are too low to alleviate this risk significantly. 
The number of beneficiaries receiving a means-tested minimum income for retirees 
nearly  doubled  between  2003  and  2014.  However,  proposals  to  improve  incentives 
for later retirement (Flexi-Rente) have not yet been formalised. It remains to be seen 
how  effective  they  can  be  in  counteracting  the  incentives  for  early  retirement 
introduced in 2014.  

The labour market potential of certain groups, especially women and people with a 
migrant  background,  remains  under-utilised  and  work  disincentives,  especially  for 
second earners, remain in place. Specific characteristics of the tax system and health 
insurance discourage second earners from taking up a job or increasing the number 
of hours worked. This contributes to a low proportion of women working  full-time 
and  one  of  the  lowest  numbers  of  hours  worked  on  average  by  women  in  the  EU, 
despite  a  high  female  employment  rate.  Although  there  has  been  a  slight  transition 
from mini-jobs to standard employment as a by-product of introducing the minimum 
wage, the former still account for about seven million employees. The exemption of 
mini-jobs  from  personal  income  tax  –  and  in  many  cases  from  all  employee  social 
contributions – discourages workers from moving into jobs with earnings above the 
mini-job threshold of EUR 450 per month. This disincentive is in many cases even 
stronger  for  spouses  subject  to  joint  income  taxation.  The  positive  impact  on 
households’ incomes and consumption from the slight increase in several allowances 
and  the  compensation  of  fiscal  drag  might  be  largely  offset  by  higher  social 
contributions  from employees. The tax wedge at the level  of the minimum  wage is 
high  in  comparison  with  other  Member  States,  resulting  in  lower  incomes  at  the 

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bottom end of the wage scale. Reducing employees’ social security contributions or 
the personal income tax, including by targeted allowances or refunds, would reduce 
this  tax  wedge,  increasing  in  turn  the  disposable  income  of  low  wage  earners  and 
thereby increasing consumption possibilities.  

The high influx of refugees experienced in the past year has a number of social and 
economic consequences for Germany. While in the short run, the inflow of refugees 
is  set  to  increase  public  expenditure  and  to  create  additional  domestic  demand, 
thereby raising GDP, the medium-term effect on employment and growth hinges on 
refugees’ successful labour  market and social integration, including  via educational 
support. This issue is high on the political agenda both at the EU and Member State 
level  and  will  be  monitored  and  analysed  closely,  including  in  the  2017  country 
report.  

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Germany’s economic policy and published it in the 2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to Germany 
in  previous years.  It has taken into account  not only  their relevance for sustainable 
fiscal  and  socio-economic  policy  in  Germany  but  also  their  compliance  with  EU 
rules and guidance, given the need to strengthen the overall economic governance of 
the European Union by providing EU-level input into future national decisions. The 
recommendations under the European Semester are reflected in recommendations 1 
to 3 below. 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and  is  of  the  opinion11  that  Germany  is  expected  to  comply  with  the  Stability  and 
Growth Pact. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1 to 3 below. 

(12) 

(13) 

(14) 

(15) 

HEREBY RECOMMENDS that Germany take action in 2016 and 2017 to: 

1.  

2.  

3. 

Achieve a sustained upward trend in public investment, especially in infrastructure, 
education,  research  and  innovation,  by  using  the  available  fiscal  space  and 
prioritising  expenditure.  Improve  the  design  of  federal  fiscal  relations,  also  with  a 
view  to  addressing  the  persistent  public  under-investment,  especially  at  municipal 
level.  

Reduce inefficiencies in the tax system, in particular by reviewing corporate taxation 
and  the  local  trade  tax,  modernise  the  tax  administration  and  review  the  regulatory 
framework  for  venture  capital.  Step  up  measures  to  stimulate  competition  in  the 
services sector, in particular in business services and regulated professions. 

Increase incentives for later retirement and reduce disincentives to work for second 
earners. Reduce the high tax wedge for low wage earners and facilitate the transition 
from mini jobs to standard employment. 

11 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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Done at Brussels, 

For the Council 
The President 

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