COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Germany, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 71 final   COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2017 Including an In-Depth Review on the prevention and correction of macroeconomic  imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}   
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Summary of the main findings from the MIP in-depth review 

4. 

Reform priorities 

4.1.  Public finances, fiscal frameworks and taxation*  

4.2. 

Financial sector 

4.3. 

Labour market, education and social policies 

4.4. 

Investment 

4.5. 

Sectoral policies 

4.6.  Public administration 

A.  Overview table 

B.  MIP Scoreboard 

C. 

Standard tables 

References 

LIST OF TABLES 

1.1. 

1.2. 

1.3. 

2.1. 

External balance of goods and services by type of activity 

Import content of outputs/products 

Key economic, financial and social indicators – Germany 

Summary table on 2016 CSR assessment 

3.1.  MIP assessment matrix – Germany 

4.1.1.  Budgetary projections for Germany compared to European and national deficit ceilings 

4.2.1.  Financial soundness indicators, all banks in Germany 

4.5.1.  Broadband availability (2016) 

B.1. 

The MIP Scoreboard for Germany 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (continued) 

C.4. 

Product market performance and policy indicators 

1 

4 

12 

15 

21 

21 

25 

30 

37 

45 

51 

53 

60 

61 

66 

9 

9 

11 

13 

20 

21 

25 

50 

60 

61 

62 

63 

64 

 
 
 
C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

1.9. 

Demand components of GDP growth 

Investment in machinery and equipment 

Investment in other assets 

Employees, hours worked and hours worked per employee (total economy) 

Contributions to headline inflation 

Sectoral net lending and current account balance 

Determinants of household disposable income 

Current account and component balances 

External balance of goods and services 

1.10.  Goods balance vis-à-vis the rest of the euro area 

1.11. 

Fiscal and debt developments 

4.2.1.  House price trends in Germany 

4.2.2.  Price-to-income and price-to-rent ratios 

4.2.3.  Rents versus house prices 

4.2.4.  Building permits and construction work completed for dwellings 

4.2.5.  Structure of housing investment 

4.3.1. 

Labour force indicators 

4.3.2.  Employment rate difference between tertiary educated nationals and third country 

citizens (2015) 

4.3.3.  PISA performance in science (2015) 

4.4.1. 

Investment gap with respect to the euro area 

4.4.2.  Determinants of the savings-investment balance of non-financial corporations 

4.4.3.  Net capital stock by type of economic activity 

4.5.1.  Business enterprise expenditure on R&D by economic activity (2014) 

4.5.2.  Venture capital investments in German companies 

4.5.3.  Restrictiveness indicator (2016) 

4.5.4. 

Trends in track access charges 

4.5.5.  Share of fibre connections as a proportion of total fixed broadband (2015) 

LIST OF BOXES 

2.1. 

3.1. 

Contribution of the EU budget to structural change 

Euro area spillovers 

4.1.1.  Scenarios for labour taxation reforms: distributional and fiscal effects 

4.3.1.  Refugee integration 

4.4.1. 

Investment challenges and reforms in Germany 

4.4.2.  Reducing the debt bias and improving the investment-friendliness of corporate taxation 

65 

4 

4 

5 

5 

6 

7 

7 

8 

8 

9 

10 

26 

27 

27 

28 

29 

30 

31 

35 

37 

37 

38 

45 

46 

47 

48 

50 

14 

18 

24 

32 

39 

41 

 
 
 
 
4.4.3.  Main elements of the reform of federal fiscal relations 

4.6.1.  Selected highlights 

44 

52 

 
 
 
EXECUTIVE SUMMARY 

This  report  assesses  Germany’s  economy  in  the 
light  of 
the  European  Commission’s  Annual 
Growth  Survey  published  on  16 November  2016. 
In the survey the Commission calls on EU Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy  –  boosting  investment,  pursuing  structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing social fairness to deliver more inclusive 
growth.  At 
the  Commission 
published the Alert Mechanism Report (AMR) that 
initiated  the  sixth  round  of  the  macroeconomic 
imbalance  procedure.  The  in-depth  review,  which 
the  2017  AMR  concluded  should  be  undertaken 
for  the  German  economy,  is  presented  in  this 
report. 

the  same 

time, 

Economic  growth  was  robust  in  2014-2016, 
driven  by  domestic  demand.  Real  GDP  growth 
stood at 1.7 % in 2015 and 1.9 % in 2016. Private 
consumption in 2016 grew for the second time in a 
row  by  2.0 %,  supported  by  a  substantial  rise  in 
real  disposable  income.  The  unemployment  rate 
fell  to  a  post-reunification  low  of  3.9 %  by  the 
fourth  quarter  of  2016,  despite  a  growing 
workforce. 

Business  investment  activity  has  been  uneven 
and  is  expected  to  pick  up  only  moderately  in 
the  near  future.  Germany’s  investment  ratio  has 
remained  at  around  20 %  of  GDP.  While  housing 
investment has been on an upward trend since the 
crisis,  non-residential  construction  investment  has 
stayed  relatively  flat.  Importantly,  investment  in 
machinery and equipment has remained restrained 
and  has  still  not  caught  up  with  pre-crisis  levels. 
This  is  despite  supportive  financing  conditions, 
strong  corporate  profits  and  continued  export 
growth 
type  of 
investment.  Overall, 
investment 
growth  has  resulted  a  much  slower  expansion  of 
the  capital  stock  and  a  relatively  low  contribution 
of  capital  accumulation 
to  potential  growth 
compared with other large advanced economies. 

that  traditionally  drives 

this  subdued 

this 

It  appears  likely  that  Germany’s  economic 
growth  momentum  will  be  maintained.  With 
energy  prices  no  longer  declining,  real  household 
consumption  is  forecast  to  slow  down  somewhat, 
but  to  remain  relatively  strong  owing  to  rising 
employment  and  real  labour  income.  The  latter 
will  also  be  boosted  by  an  increase  in  the 

1 

minimum  wage in  2017.  Financing  conditions  are 
expected  to  remain  supportive  of  investment. 
Bolstered  by  domestic  demand,  GDP  is  expected 
to  grow  by  1.6 %  in  2017  –  slowing  significantly 
on account of a fall in the number of working days 
– and by 1.8 % in 2018. 

increased 

However,  major  factors  behind  restrained 
domestic  investment  are  still  in  place,  which 
have 
savings-investment 
the 
imbalance  and  contributed  to  the  current 
account surplus. These relate mainly to continued 
subdued  growth  in  domestic  and  EU  markets  and 
the  higher  rates  of  return  for  capacity  expansion 
abroad.  A  high  degree  of  uncertainty,  including 
with  regard  to  technological  change,  adds  to 
companies’  reticence  to  invest.  Obstacles  to  more 
investment  also  result  from 
dynamic  private 
restrictions 
some 
the 
sector, 
taxation  features  and 
unfavourable  corporate 
transport,  energy  and 
in 
delayed 
telecommunications  infrastructure.  Recent  efforts 
to  facilitate  and  stimulate  public  investment, 
notably at municipal level, have so far had limited 
effects.  

investment 

services 

in 

Public  finances  remain  in  a  sound  position. 
General  government  budget 
surpluses  were 
recorded in 2015 and 2016. The budget is expected 
to  remain  in  surplus  in  headline  and  structural 
terms  in  2017  and  2018,  and  the  gross  debt-to-
GDP ratio is set to decrease further. 

Due  to  its  economic  importance  and  strong 
integration  in  the  value  chains  in  the  EU, 
Germany  is  a  source  of  potential  spillovers  to 
other  Member  States.  Further  strengthened 
including  higher  public 
domestic  demand, 
investment,  would  increase  Germany’s  actual  and 
potential growth, and would also stimulate demand 
and GDP growth in other EU countries, including 
those  with  deleveraging  needs.  It  would  have  a 
positive  impact  on  average  inflation,  not  least  in 
the  context  of  the  current  expansionary  monetary 
policy.  

the 

2016 

Overall, Germany has made limited progress in 
addressing 
country-specific 
recommendations. Some progress has been made 
towards  achieving  a  sustainable  upward  trend  in 
is  notably  done  by 
public 
increased 
investment  and  by 
improving  the  design  of  federal  fiscal  relations  in 

investment.  This 
infrastructure 

 
 
Executive summary 

domestic demand-driven growth. The trade and 
current  account  surpluses  are  expected  to 
remain  at  historically  high  levels  and  to  fall 
only  gradually  over  the  medium  term  as 
domestic demand strengthens further. 

  Germany  is  emerging  only  slowly  from  a 
decade  of  weak  public  investment  following 
the  post-unification  boom.  Recent  measures 
aimed  at  increasing  infrastructure  investment 
have not yet resulted in a clear upward trend in 
public  investment  as  a  proportion  of  GDP. 
Moreover, net investment remained negative at 
municipal  level  until  2015.  The  favourable 
budgetary  position  indicates  available  fiscal 
space, inter alia for providing additional funds 
– in addition to what has been provided so far – 
to  increase  public  investment  at  all  levels  of 
government.  

  Taxation  still  tends  to 

impede  private 
investment.  Household 
consumption  and 
income  and  consumption  continue 
to  be 
restrained  by  the  high  tax  wedge  on  labour, 
especially  for  low-wage  earners.  Measures 
taken to adjust personal income tax rates and to 
compensate  for  fiscal  drag  can  be  expected  to 
have only a limited impact on lowering the tax 
wedge. Corporate taxation continues to be high 
overall,  and  there  is  still  inefficiency  in  tax 
administration. 

  Various  challenges  will 

impact  on  the 
economy’s  future  growth  potential.  The 
expected impact of the ageing society, shifts in 
technology, in particular the digital revolution, 
and – partially policy driven – demand change, 
including  in  the  energy  and  transport  sector, 
have  major  implications  for  the  economy’s 
production capacity and productivity. Tackling 
these  challenges  is  a  prerequisite  to  maintain 
Germany’s  high  living  standards  and  to  cope 
with increasing globalisation and digitisation. 

the  digital 

  In  the  financial  sector,  improving  efficiency 
and  profitability  remains  the  biggest  challenge 
for German banks, which is further accentuated 
by 
transformation  of  financial 
services. Although the German housing market 
is  currently  buoyant,  available  data  suggests 
that  it  does  not  constitute  a  risk  to  financial 
investment  has 
stability.  Venture  capital 

support  of  higher 
accelerated  public 
and 
investment  at  all  levels  of  government.  At  the 
same  time,  progress  has  remained  limited  on 
increasing  public  expenditure  on  education, 
research and innovation. Limited progress has also 
been  made  in  reducing  inefficiencies  in  the  tax 
system,  modernising 
tax  administration,  and 
stimulating  competition  in  the  services  sector. 
Some  progress  has  been  made  in  reviewing  the 
regulatory  framework  for  venture  capital.  Limited 
progress  has  been  made  in  increasing  incentives 
for  later  retirement  and  reducing  the  high  tax 
wedge for low-wage earners. No progress has been 
made in reducing disincentives to work for second 
earners  and  facilitating  the  transition  from  mini-
jobs to standard employment. 

leaving  and  poverty, 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Germany  is 
performing well on the employment rate, reducing 
increasing 
early  school 
tertiary  education  attainment, 
in 
research and development (R&D), and the share of 
renewable  energy.  On  the  other  hand,  uncertainty 
remains  in  terms  of  achieving  greenhouse  gas 
emissions and energy efficiency targets. 

investment 

findings  of 

The  main 
review 
contained  in  this  report,  and  the  related  policy 
challenges, are as follows: 

in-depth 

the 

in  2016  and 

  The  persistently  high  current  account 
is 
further 
surplus  grew 
projected to remain above 8 % of GDP until 
2018.  The  German  current  account  and  trade 
surpluses  make  up  about  three  quarters  of  the 
euro  area surpluses  and  are  the  highest among 
large advanced economies. Falling prices of oil 
and other raw materials and the depreciation of 
the  euro  explain  a  substantial  part  of  this 
increase in 2015-2016. Yet, the high level and 
persistence of the surpluses reflect an excess of 
savings over investment relating to a number of 
structural, regulatory and fiscal factors. 

  Private  domestic  investment  continues  to 
face  headwinds.  These  are  owing  to  sluggish 
growth 
increased 
in  domestic  markets, 
geopolitical  uncertainty  and  inefficiencies  in 
system  and  business 
corporate 
environment. By contrast, private consumption 
is at the root of the ongoing shift towards more 

taxation 

2 

 
 
Executive summary 

has remained broadly stable, various indicators 
of relative poverty and social exclusion are on 
the increase. Pension adequacy is also expected 
to further deteriorate. 

and 

seekers 

integrate 

  Immigration  in  recent  years  is  both  a  key 
challenge  and  an  opportunity.  Germany  has 
made  considerable  efforts  to  accommodate 
asylum 
refugees. 
However,  people  with  a  migrant  background 
generally  continue  to  be  less  integrated  in  the 
labour market. The employment rate of non-EU 
nationals  is  only  at  the  EU  average  and 
significantly  below  the  employment  rate  of 
German  nationals.  There  are  still  institutional 
barriers to the recognition of qualifications, and 
the  achievement  gap  in  education  between 
immigrants and non-immigrants remains wide. 
On  the  other  hand,  immigrants  are  currently 
setting up almost half of all new businesses. 

  Sizeable  investment  is  still  needed  to  adapt 
electricity  networks  to  the  increasing  share 
of  renewable  energy.  Planned  investment  in 
internal electricity infrastructure is significantly 
delayed, owing partly to public opposition. The 
political  decision  in  favour  of  underground 
cables  may  accelerate  investment,  though  at  a 
considerably  higher  cost.  Covering  the  rising 
level  of  weather-dependent  renewable  energy 
power 
flows  also  hinges  on  significant 
investment  in  electricity  distribution  networks. 
Moreover,  the  lack  of  sufficient  cross-border 
interconnections  is  still  constraining  the  trade 
in  electricity  with  neighbouring  countries  and 
impairing the security of supply.  

in 

  There  are  barriers  to  reaping  the  full 
benefits  of  digitisation.  Germany  is  lagging 
the  availability  of  high-speed 
behind 
broadband  connections, 
in 
semi-urban and rural regions. Computers usage 
by  young  Germans  is  comparatively  low  and 
many 
access. 
Performance in digital public services is below 
average. 

in  particular 

broadband 

schools 

lack 

increased, 
underdeveloped by international standards.  

the  market 

but 

is 

still 

  The  strong  labour  market  performance  has 
only  been  partly  mirrored 
in  full-time 
employment  and  wage  growth.  Employment 
has  continued  to  rise  and  unemployment  has 
fallen  to  historically  low  levels.  This  reflects 
the  supportive  economic  situation,  but  also 
results  from  a  well-performing  apprenticeship 
system,  company-internal  flexibility  and  a 
culture  of  co-determination.  However, 
the 
increase in employment has been partly due to 
an  increase  of  part-time  work,  in  particular 
among women. The labour market potential of 
certain  groups 
and 
in  place, 
disincentives 
particularly  for  second  earners.  Challenges  for 
the  labour  market,  social  policy  and  the 
education  system  in  the  medium  to  long  term 
result  from  a  shrinking  and  ageing  population 
that  may  lead  to  labour  and  skills  shortages. 
Wage growth remains moderate. 

remains  underused 
remain 

to  work 

  Private 

(SMEs) 

investment  appears  particularly 
restrained  in  certain  sectors,  pointing  to 
specific  investment  barriers.  While  large 
technology-intensive corporations are investing 
strongly  in  equipment  and  knowledge,  the 
services  sector  and  small  and-medium-sized 
enterprises 
lagging  behind 
compared to other advanced economies. There 
is  also  evidence  that  the  share  of  SMEs 
investing in R&D has been gradually declining 
in  recent  years.  A  high  level  of  regulatory 
restrictiveness in the services sector, notably in 
business  services,  affects  business  dynamics 
and  investment  in  this  sector,  but  also  has 
repercussions on the manufacturing industry.  

are 

Other key economic issues analysed in this report 
facing 
which  point 
Germany’s economy are as follows:  

to  particular  challenges 

  Not  all  members  of  society  have  benefited 
equally  from  the  overall  positive  economic 
and labour market developments of the last 
few years. After a period of increases, income 
inequality  moderated  only  recently.  Moreover, 
the  good  labour  market  performance  of  recent 
years  has  not  led  to  a  decline  in  the  risk  of 
poverty.  Although  severe  material  deprivation 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

capacity  in  2017  and  2018.  However,  uncertainty 
on  the  outcome  of  the  ‘Brexit’  negotiations,  the 
trade  policy  stance  of  the  new  US  administration, 
cyclical  trends  in  the  Chinese  economy  and 
geopolitical risks could weigh on foreign trade and 
investment  prospects.  On  the  other  hand,  the 
depreciating  euro  will  improve  German  price 
competitiveness in non-EU markets. 

Graph 1.2: 

Investment in machinery and equipment 

GDP growth 

Economic growth strengthened further in 2016. 
GDP increased by 1.9 % from 1.7 % in 2015. This 
is the highest growth rate since 2011 and is about 
0.5 pps above the long-term average. Growth was 
mainly driven by private consumption (Graph 1.1), 
which  for  the  second  time  in  a  row  increased 
strongly  at  2 %  or  1  pp.  above  its  long-term 
growth.  Public  consumption  and 
investment 
accelerated  markedly,  driven  importantly,  but  not 
exclusively,  by  expenditure  on  refugees.  Private 
investment  growth  was  mainly  driven  by  very 
dynamic housing investment. 

Graph 1.1:  Demand components of GDP growth 

Note: Chain-linked volumes, reference year 2010 
Source: European Commission 

Investment 

Business and infrastructure  investment activity 
remains  subdued  and  is  likely  to  increase  only 
moderately  in  the  near  future.  Machinery  and 
equipment  investment  has  not  yet  recovered  from 
the  setback  during  the  financial  market  crisis  of 
2008-2009.  It  suffered  a  much  more  pronounced 
setback  than  after  the  bursting  of  the  internet 
bubble  and  has  been  recovering  much  more 
slowly,  with 
two  setbacks 
corresponding  to  about  2 %  of  GDP  (Graph 1.2). 
Non-residential  construction  investment  has  been 
largely 
than  a  decade 
for  more 
(Graph 1.3). This possibly still rests on the massive 
post-unification 
investment  effort,  but  also 
gradually  exposes  capacity  shortages  in  essential 
infrastructure  and  negative  net  investment  at 
municipal 
level  (see  Section  4.4)  (European 
Commission, 2014). 

the  sum  of 

stagnant 

the 

(1)Note: GDP growth and contributions to annual growth 
Source: European Commission 

Economic  growth  momentum  is  expected  to  be 
maintained,  though  export  and 
investment 
prospects are subject to sizeable downside risks. 
With  energy  prices  no  longer  declining,  real 
household  consumption  is  forecast  to  slow  down 
somewhat, but to remain relatively strong thanks to 
the  continued  rise  in  employment  and  real  labour 
incomes.  The  latter  will  also  be  supported  by  an 
the  minimum  wage  next  year. 
increase 
Financing  conditions  are  expected 
to  remain 
supportive  of  investment.  Further  boosted  by 
domestic demand, the growth rate is expected to be 
1.6 %  for  2017  –  slowing  largely  on  account  of 
fewer work days – and 1.8 % for 2018. All in all, 
the  output  gap  has  essentially  closed  and  the 
economy  is  expected  to  operate  at  close  to  full 

in 

4 

-3-2-1012345101112131415161718%, percentage pointsOutput gapInventoriesNet exportsGross fixed capital formationGovernment consumptionPrivate consumptionGDPForecast100120140160180200220949698000204060810121416billionEUR 
 
 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

Graph 1.3: 

Investment in other assets 

and  hours  worked  per  employee  have  been  on  a 
downward trend for some time (Graph 1.4).  

Graph 1.4: 

Employees, hours worked and hours worked 
per employee (total economy) 

Note: Chain-linked volumes, reference year 2010 
Source: European Commission 

investment 

Despite  increases  in  2015  and  2016,  public 
investment  is  still  relatively  low.  Following  an 
increase  of  4.9 %  in  2015,  public  investment 
strengthened further in 2016, rising to about 6.9 % 
in  nominal  and  5.8 %  in  real  terms.  This  was 
in  machinery  and 
driven  by  strong  growth 
equipment 
construction 
and 
investment.  However,  at  2.2 %  of  GDP  in  2016, 
overall  public  investment  has  remained  largely 
constant  in  recent  years  and  is  still  relatively  low 
compared  with  the  euro  area  (2.8 %  of  GDP 
without  Germany),  despite  a  downward  euro  area 
trend  since  2009.  These  developments  may  be 
partly  explained  by  various  factors 
that  are 
country-specific  to  Germany  (see  Section  4.4).  A 
public  investment  backlog  persists  in  particular  at 
municipal  level,  where  net  investment  remained 
negative in 2015. 

Labour market 

Unemployment  has  again  reached  record  lows 
and  employment  record  highs,  though  this  is 
not  reflected  to  the  same  extent  in  full-time 
employment.  The  unemployment  rate  declined  to 
a  historic  low  of  3.9 %  by  the  fourth  quarter  of 
2016  (down  from  4.6 %  in  2015),  whereas  the 
employment  rate  of  the  population  aged  20-64 
increased  to  78.9 %  by  the  third  quarter  of  2016. 
the  crisis  employment  has 
However,  since 
increased  more  strongly  than  total  hours  worked, 

Source: Destatis 

Wage  developments  have  benefited  only  to  a 
limited  extent  from  the  strong  labour  market 
performance. Due to undershooting inflation, real 
wages (1)  increased  by  1.9 %  in  2016.  This  is 
welcome  in  view  of  the  strong  labour  market 
performance  and  the  need  to  strengthen  domestic 
sources of growth, while the social partners do not 
appear to be making full use of the existing scope 
for 
(European 
Commission, 2016a). 

sustained  wage 

increases 

The population in Germany has been increasing 
in  recent  years,  with  immigration  peaking  in 
2015.  While  the  population  in  Germany  shrank 
between  2002  and  2010,  this  trend  has  reversed 
over the last six years, with cumulative positive net 
immigration  of  2.9  million  people.  In  2015,  2.1 
million  people  migrated  to  Germany,  while  1 
million  emigrated  resulting  in  a  net  migration  of 
1.1 million people (1.4 % of total population), the 
highest  annual  inflow  since  the  1950s.  Following 
the  EU-Turkey  agreement  and  the  closing  of  the 
Balkans-route,  the  inflow  of  asylum  seekers  fell 
sharply  from  around  890 000  in  2015  to  around 
280 000 in 2016 (Federal Ministry of the Interior, 
2016). 

(1)  Wages and salaries per employee deflated with the private 

consumption deflator. 

5 

40608010012014016018091939597990103050709111315billionEURHousingNon-residential constructionOther assets90929496981001021041061081100001020304050607080910111213141516Index, 2000=100Employees (incl. self-employed)Hours worked per employeeHours worked (total) 
 
 
                                                           
1. Economic situation and outlook 

the reduction in the top income tax rate from 53 % 
in  2000  to  42 %  in  2004,  the  flat  rate  taxation  of 
capital gains since 2009 and the increases in social 
contributions  since  the  beginning  of  the  1990s 
have all contributed to making the tax system less 
progressive  and  possibly 
income 
rising 
inequality (European Commission, 2014).  

to 

Inflation 

Core  and  headline  inflation  are  set  to  pick  up. 
Headline  inflation  has  shot  up  to  1.7 %  y-o-y  in 
December  on  the  back  of  a  base  effect  and  rising 
energy  prices  (Graph  1.5).  After  averaging  1 % 
over most of 2015-2016 core inflation increased to 
1.5 % in December 2016. With the increase in oil 
prices, headline inflation is projected to pick up in 
2017 (1.9 %). Firming domestic demand and wage 
growth  should  ensure  that  core  inflation  rises  in 
both 2017 and 2018. 

Graph 1.5:  Contributions to headline inflation 

Source: European Commission 

Sectoral balances 

The  current  account  surplus  has  increased 
further  in  2015  and  2016,  reaching  a  new 
historical high of 8.7 % of GDP. When analysed 
from the perspective of domestic economy, further 
current account widening was driven by the excess 
of  national  savings  to  investment  (Graph  1.6). 
Although 
up 
significantly  in  2015,  it  remains  below  GDP 
growth  and  the  trend  of  net  financial  asset 
accumulation  by  the  private  sector  has  continued. 

borrowing 

private 

picked 

Social developments 

Despite  overall  positive  economic  and  labour 
market  developments  in  the  last  few  years, 
income inequality has increased and moderated 
only  recently,  while  wealth  inequality  remains 
among  the  highest  in  the  euro  area.  Income 
inequality  according  to  the  S80 /S20 indicator (2) 
rose  until  2007  to  4.8  in  the  wake  of  an 
unfavourable  labour  market  and  the  increasing 
weight  of  capital  income  compared  to  labour 
income. It fell to 4.3 in 2012 and rose again to 5.1 
in  2014.  While  remaining  slightly  below  the  EU 
average,  this  was  the  highest  recorded  level.  The 
same  pattern  can  be  observed  with  the  Gini 
index. (3)  The  larger  low-wage  sector  has  created 
new  employment  possibilities  but  also  tends  to 
accentuate  wage  inequality  and  in-work  poverty. 
Low  upward  mobility  due  to  a  relatively  strong 
link  between  socioeconomic  background  and 
education  outcomes  also  contributes  to  inequality 
(Section 4.3). In 2015, inequality according to the 
S80 /S20 indicator 
to  4.8,  which 
fell  again 
however  remains  above  the  long-term  average. 
While  both  the  distribution  of  wealth  and  the 
composition  of  household  wealth  have  remained 
stable  over  time,  wealth  is  distributed  relatively 
unequally  compared  to  other  European  countries, 
owing  partly  to  low  rates  of  home  ownership 
(Deutsche  Bundesbank,  2016a).  Net  wealth 
inequality  was  among  the  highest  in  the  EU 
(European Central Bank, 2016a). . 

In  addition,  the  effectiveness  of  redistribution 
policies in reducing both inequality and poverty 
has  declined.  In  2008-2014,  Germany  stood  out 
for 
large  poverty-increasing  policy  effects, 
reflecting  the  fact  that  levels  of  means-tested 
benefits  fell  in  real  terms  and  relative  to  market 
income growth (European Commission, 2016b). A 
number of previous changes in taxation and social 
contributions  may  also  have  played  a  role  in 
reducing 
redistribution 
policies. The suspension of the wealth tax in 1997, 

the  effectiveness  of 

(2)  The  S80/S20  indicator  –  or  income  quintile  share  – 
measures the disposable equivalised incomes of the richest 
20 % of households as a ratio of the poorest 20 %. The EU 
average was 5.2 for 2015 data, meaning the richest fifth of 
households have 5.2 times  as  much income as the poorest 
fifth. 

(3)  The  Gini  coefficient  of  equivalised  disposable  income 
takes values between 0 and 1 and is a measure for equal or 
unequal distribution with higher values indicating a higher 
degree of inequality. 

6 

-1.5-1.0-0.50.00.51.01.52.02.53.010Q111Q112Q113Q114Q115Q116Q1y-o-y % changeServicesProcessed food incl.alcohol, tobaccoUnprocessed foodNon-energy industrial goodsEnergyHICP all items 
                                                           
 
1. Economic situation and outlook 

Nominal  corporate  investment  fell  in  2015  and 
most likely also fell in 2016. Meanwhile, corporate 
savings  increased  as  a  share  of  GDP.  As  a  result, 
corporations, whose indebtedness is, on aggregate, 
already  the  lowest  in  the  euro  area,  continued 
deleveraging.  This  was  the  biggest  contributing 
factor to the widening of the savings surplus. The 
household savings rate rose further in 2015 and is 
estimated  at  17.1 %  for  2016,  one  of  the  highest 
household  savings  rates  in  the  euro  area  (average 
at 12.5 % in 2015). In 2015, household investment 
growth  continued  to  lag  behind  savings  growth, 
while  in  2016  housing  investment  picked  up  and 
the  net  lending  position  of  households  weakened 
marginally. 

Graph 1.6: 

Sectoral net lending and current account 
balance 

especially  demand 

been  deteriorating, 
and 
financing  factors.  As  a  result,  original  investment 
plans have been carried out only partially, leaving 
earmarked funding unused. 

The  consumption  share  of  GDP  remains 
relatively  low  as  the  household  sector  has 
tended  to  stabilise  saving.  The  share  of  labour 
income  has  increased  since  2011,  but  so  have  the 
shares of income tax and social security deductions 
(Graph  1.7).  The  share  of  property  income  has 
been  falling  as  a  result  of  less  generous  dividend 
pay-outs  by  corporations.  The  saving  rate  has 
nevertheless  remained  stable,  while  consumption 
has declined in parallel with household disposable 
income  as  a  proportion  of  GDP.  This  has  not 
prevented  an  increase  in  real  consumption  as 
purchasing  power  was  boosted  by  low  inflation. 
Even so, the consumption share of GDP (53.5% in 
2016) remains low from an historical perspective. 

Graph 1.7:  Determinants of household disposable income 

Source: European Commission 

excess 

economy-wide 

The  deleveraging  of  non-financial  corporations 
combined  with  investment  restraint  is  a  key 
driver  of 
savings. 
Companies have been raising their equity ratio and 
striving  to  rebuild  their  financial  autonomy  by 
scaling  down  debt  and  squeezing  dividend  pay-
outs  to  owners  (see  Section  4.4).  This  has  dented 
household  incomes  and  the  private  consumption 
share  of  GDP,  while  the  percentage  of  household 
savings  in  GDP  has  remained  stable.  At  the  same 
time, the GDP share of investment by nonfinancial 
corporations  has  remained  low  for  over  a  decade 
despite  the  accumulation  of  financial  buffers  and 
favourable  financing  conditions.  Since  the  swift 
improvement  in  2010-2011,  the  assessment  of  the 
investment  climate  by  enterprises  has  generally 

Note: Contribution to cumulated change in disposable 
income since 2000 
Source: European Commission 

7 

-8-6-4-202468101200010203040506070809101112131415161718% of GDPHouseholdsGeneral governmentFinancial corporationsNon-financial corporationsSurplus savings/current account balanceForecast-5-4-3-2-10123010203040506070809101112131415% of GDPWages and salariesNet property incomeTaxes and soc. contributionsDisp. income 
 
 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

Graph 1.8:  Current account and component balances 

Graph 1.9: 

External balance of goods and services 

Note: four quarter moving average 
Source: Bundesbank, European Commission 

External position 

The  current  account  surplus  has  edged  up 
further  from  a  historically  high  level  and  is 
expected  to  decline  only  slowly  in  the  coming 
years. In 2016, it increased to 8.7 % of GDP, from 
8.5 %  in  2015  and  7.5 %  in  2014.  The  trade 
surplus  is  behind  the  level  and  dynamics  of  the 
current  account  surplus  (Graph  1.8).  It  has 
increased to 8.9 %, from 8.7 % in 2015 and 7.7 % 
in  2014.  Terms-of-trade  effects,  largely  due  to 
cheaper  energy  and  other  commodity  prices,  have 
accounted  almost  entirely (4)  for  the  widening  of 
the  trade  balance  by  2  pps  of  GDP  since  2013 
(Graph 1.9). Over  the  course  of 2017,  exports  are 
forecast  to  pick  up  again  as  foreign  demand  is 
expected  to  increase,  if  significant  downside  risks 
are  disregarded.  Improved  income  expectations 
should  spur  domestic  demand  and  import  growth. 
Overall,  net  trade  is  therefore  expected  to  detract 
slightly  from  growth  over  this  year  and  next.  The 
positive  terms-of-trade  effects  from  low  oil  prices 
are  also  set  to  fade.  As  a  result,  Germany’s  trade 
surplus  could  start  to  narrow.  Nevertheless,  the 
current account surplus is expected to remain very 
high  and  to  decline  only  gradually  over  the 
medium term. 

(1) Four quarter moving averages 
(2) Data according to European System of Accounts 2010 
(3) Price adjusted balances based on chain-linked volumes 
with reference year 2010 
Source: European Commission 

The  narrowing  of  the  current  account  surplus 
with  respect  to  rest  of  the  euro  area  observed 
since 2008 halted and started to reverse in 2014. 
The  reversal  mostly  affected  the  Netherlands, 
Belgium  and  Luxembourg  and  was  probably 
linked  to  price  effects  in  the  trade  in  petroleum 
products  and  other  fuels  (Graph  1.10).  The 
countries  with  deleveraging  pressures  like  Italy, 
Spain and Portugal have been less affected by this 
reversal,  as 
these 
imports  originating 
countries have grown roughly in line with German 
GDP. In the first three quarters of 2016, the year-
on-year  real  growth  of  imports  originating  from 
the euro area was higher than that of imports from 
outside the EU. 

from 

Germany’s widening current account surplus in 
recent years has been driven by surpluses vis-à-
vis  non-euro  area  countries.  Although  widening 
again  since  2014,  the  share  of  the  surplus  in 
relation  to  the  rest  of  euro  area  has  remained 
roughly stable at 20 % of the total in 2013-2016. In 
the  pre-crisis  period  2005-2009, 
this  share 
averaged 60 %. 

(4)  The  effect  of  the  depreciation  of  the  euro  have  been 
assumed 
the  high  non-price 
competitiveness of German export (European Commission 
2016a). 

limited  due 

to  be 

to 

8 

-5-3-113579110506070809101112131415161718% of GDPPrimary income, non-euro areaPrimary income, euro areaGoods, non-euro areaGoods, euro areaSecondary income, non-euro areaSecondary income, euro areaServices, non-euro areaServices, euro areaCurrent accountForecast012301234567890910111213141516% of GDP% of GDPTotal at current pricesTotal price adjustedEA at current prices (rhs)EA price adjusted (rhs) 
 
 
 
 
 
 
 
 
 
                                                           
 
 
1. Economic situation and outlook 

Graph 1.10:  Goods balance vis-à-vis the rest of the euro 

area 

share  of  import  content  in  gross  output  and 
domestic  demand  has  been  stable  or  rising  across 
all  major  sectors  and  demand  categories  over  the 
last decade (Table 1.2).  

Table 1.1: 

External balance of goods and services by 
type of activity 

Note: four quarter moving average 
Source: Bundesbank, European Commission 

Source: Stehrer et al., 2016, European Commission 

Germany remains the most open large economy 
in  the  world  with  respect  to  both  exports  and 
imports.  German  exports  of  goods  correspond  to 
about 47 % of its GDP. This compares to 44 % for 
the  EU,  46 %  for  the  euro  area,  about  30 %  for 
France, Spain, Italy, the UK or Russia and as little 
as 18 % for Japan and 12 % for the US. However, 
what  holds  for  exports  also  holds  –  albeit  to  a 
lesser  extent  –  for  imports,  which  correspond  to 
about 40 % of GDP for Germany, the EU and the 
euro area, about 30 % for Spain, France, Italy and 
the UK, 21 % for Russia, 18 % for Japan and 15 % 
for the US. 

have 

industries 

German 
consistently 
maintained  positive  external  balances  of  goods 
and  services.  In  manufacturing,  for  instance,  the 
share  of  exported  output  rose  from  47  to  56 % 
between  2005  and  2014,  which  is  about  10  pps 
more  than  for  the  economy  as  a  whole.  The  key 
sectors  driving  this  surplus  are  machine-building, 
accounting  for  almost  half  of  the  current  account 
(Table  1.1).  Market 
surplus,  and  chemicals 
services 
increasingly 
become 
have 
internationalised.  Germany’s  integration  in  the 
global  value  chain  is  a  structural  feature  of  its 
economy  which  is  also  showing  up  in  the  export 
content  of  imports.  Together  with  the  US  and 
China,  Germany  is  one  of  the  few  economies 
whose  imported  final  products  contain  more  than 
10 %  domestic  input,  due  to  their  key  position  in 
the  global  technology  chains.  Nevertheless,  the 

also 

Table 1.2: 

Import content of outputs/products 

Note: % imported inputs in value of output/products 
Source: Stehrer et al., 2016, European Commission 

Public finances 

The  fiscal  situation  remains  favourable  and 
fiscal  space  available.  The  general  government 
budget  surplus  amounted 
to  0.6 %  of  gross 
domestic  product  in  2016.  In  2017-2018,  total 
revenue is expected to stay flat as a percentage of 
GDP, although increases in the minimum personal 
income tax allowance and child allowances and an 
adjustment  of  income  tax  brackets  (to  offset  the 
impact  of  fiscal  drag)  will  weigh  on  revenue 
growth. At the same time, expenditure continues to 
benefit  from  declining  interest  expenditure.  Real 
public investment is expected to grow slightly as a 
result  of 
for 
investment  and  social  housing. 
infrastructure 
Overall,  the  headline  balance,  though  decreasing, 
is  expected  to  remain  in  surplus  over  the  forecast 

earmarked 

additional 

funds 

9 

1.52.02.53.03.54.04.55.0080910111213141516% of GDPeuro area excl. BE, NL, LUeuro area% of GDP20052014Total5.96.7Surplus sectors6.88.0Manufacturing5.46.1of whichAutomotive industry1.41.6Other equipment2.22.4Chemicals0.81.0Services0.60.9of which market services0.91.2Deficit sectors-0.9-1.4of whichEnergy-0.2-0.5Construction-0.2-0.3Non-market services-0.3-0.3051014Private consumption10.611.212.3Public consumption2.62.81.6Gross fixed capital formation18.921.021.6Construction9.511.412.2Machinery and equipment and other26.729.730.8Domestic demand11.211.912.4Exports16.519.320.1Gross output9.711.312.0Manufacturing18.922.523.6Services4.24.75.0 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

period.  The  structural  surplus  is  projected  at 
around  0.4 %  of  GDP  in  2017  and  0.3 %  of  GDP 
in  2018,  hence  about  1  percentage  point  of  GDP 
above  the  medium-term  objective  of  a  structural 
deficit  of  0.5 %  of  GDP.  The  gross  debt-to-GDP 
ratio  is  set  to  fall  from  71.2 %  in  2015  to  around 
63 % in 2018 (Graph 1.11).  

Graph 1.11:  Fiscal and debt developments 

Source: European Commission 

10 

0102030405060708090-6-4-202468101214010203040506070809101112131415161718% of GDP% of GDPGrowth impactStock-flow adjustmentsNet lendingChange in debt-to-GDP ratioDebt-to-GDP ratio (rhs)Forecast 
 
 
 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

Table 1.3: 

Key economic, financial and social indicators – Germany 

(1) Sum of portfolio debt instruments, other investment and reserve assets. 
(2) Domestic banking groups and standalone banks. 
(3) Domestic banking groups and standalone banks, foreign-controlled (EU and non-EU) subsidiaries and foreign-controlled 
(EU and non-EU) branches. 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission, ECB 

11 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)2.0-5.64.13.70.50.51.61.71.91.61.8Private consumption (y-o-y)0.70.20.41.41.30.70.92.02.01.61.7Public consumption (y-o-y)1.13.01.30.91.11.21.22.74.23.02.8Gross fixed capital formation (y-o-y)2.8-10.15.47.2-0.7-1.13.41.72.52.12.5Exports of goods and services (y-o-y)8.3-14.314.58.32.81.94.15.22.52.93.2Imports of goods and services (y-o-y) 6.7-9.612.97.0-0.13.14.05.53.44.14.3Output gap-0.1-4.8-2.00.80.5-0.4-0.3-0.1-0.1-0.10.1Potential growth (y-o-y)1.30.81.10.80.81.41.41.51.91.71.6Contribution to GDP growth:Domestic demand (y-o-y)1.1-1.41.52.30.80.41.42.02.41.92.0Inventories (y-o-y)-0.1-1.61.30.4-1.60.5-0.1-0.5-0.40.00.0Net exports (y-o-y)0.9-2.61.30.91.3-0.40.30.2-0.1-0.2-0.2Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.10.10.2-0.2-0.10.50.40.50.80.50.3Capital accumulation (y-o-y)0.30.10.20.30.30.20.30.30.30.30.4Total factor productivity (y-o-y)0.80.60.70.70.70.70.70.80.80.80.9Current account balance (% of GDP), balance of payments5.45.75.66.17.06.77.38.3...Trade balance (% of GDP), balance of payments5.64.95.24.86.16.06.57.5...Terms of trade of goods and services (y-o-y)-0.94.6-2.3-2.7-0.21.11.32.61.6-0.20.0Capital account balance (% of GDP)-0.1-0.10.00.10.00.00.00.0...Net international investment position (% of GDP)14.925.025.723.228.033.840.248.7...Net marketable external debt (% of GDP) (1)8.2*20.1*19.8*17.1*13.319.220.824.6...Gross marketable external debt (% of GDP) (1)126.3135.7142.9143.8143.1126.9131.1125.2...Export performance vs. advanced countries (% change over 5 years)13.11.2-0.2-0.9-6.6-4.1-2.0-0.95...Export market share, goods and services (y-o-y)-0.9-1.3-6.2-2.0-4.31.52.10.0...Net FDI flows (% of GDP)1.71.31.80.31.00.82.71.9...Savings rate of households (net saving as percentage of net disposable income)10.210.010.09.69.39.09.49.7...Private credit flow, consolidated (% of GDP)0.3-0.90.01.61.31.70.23.0...Private sector debt, consolidated (% of GDP)114.2113.1106.6102.7102.1102.899.599.0...of which household debt, consolidated (% of GDP)64.361.759.056.956.355.454.253.5...of which non-financial corporate debt, consolidated (% of GDP)49.851.447.645.845.847.445.345.5...Corporations, net lending (+) or net borrowing (-) (% of GDP)1.42.94.32.32.22.22.32.73.43.53.9Corporations, gross operating surplus (% of GDP)26.925.226.325.924.924.725.025.025.225.125.3Households, net lending (+) or net borrowing (-) (% of GDP)5.76.25.84.74.94.84.95.04.94.74.2Deflated house price index (y-o-y)-1.61.2-0.91.42.02.02.24.1...Residential investment (% of GDP)5.15.15.25.65.85.85.95.96.0..GDP deflator (y-o-y)0.91.80.81.11.52.01.82.01.41.81.6Harmonised index of consumer prices (HICP, y-o-y)2.10.21.12.52.11.60.80.10.41.91.5Nominal compensation per employee (y-o-y)0.90.22.63.02.51.82.82.42.32.72.8Labour productivity (real, person employed, y-o-y)1.1-5.73.82.3-0.7-0.10.80.80.9..Unit labour costs (ULC, whole economy, y-o-y)-0.26.3-1.20.73.21.92.01.61.51.81.7Real unit labour costs (y-o-y)-1.14.4-1.9-0.41.60.00.2-0.30.00.00.0Real effective exchange rate (ULC, y-o-y)-1.64.2-4.6-0.3-1.14.12.0-2.91.30.9-0.1Real effective exchange rate (HICP, y-o-y)0.11.0-5.2-0.7-3.32.10.8-4.31.6-1.0.Tax rate for a single person earning the average wage (%)42.241.339.239.939.839.439.539.7...Tax rate for a single person earning 50% of the average wage (%)31.8*31.130.431.231.130.830.831.0...Total Financial sector liabilities, non-consolidated (y-o-y)5.5-4.8-0.32.63.7-5.65.62.5...Tier 1 ratio (%) (2).10.211.311.613.815.214.615.3...Return on equity (%) (3).-2.72.32.31.31.32.51.7...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).2.72.41.61.71.82.52.0...Unemployment rate9.57.67.05.85.45.25.04.64.14.14.1Long-term unemployment rate (% of active population)5.23.53.32.82.42.32.22.0...Youth unemployment rate (% of active population in the same age group)13.011.19.88.58.07.87.77.27.0..Activity rate (15-64 year-olds)74.576.376.777.377.277.677.777.6...People at risk of poverty or social exclusion (% total population)19.820.019.719.919.620.320.620.0...Persons living in households with very low work intensity (% of total population aged below 60)12.210.911.211.29.99.910.09.8...General government balance (% of GDP)-1.8-3.2-4.2-1.00.0-0.20.30.70.60.40.4Tax-to-GDP ratio (%)38.839.638.238.739.339.639.740.040.240.240.3Structural budget balance (% of GDP)..-1.9-1.2-0.20.10.70.70.70.40.3General government gross debt (% of GDP)65.372.481.078.379.977.574.971.268.265.562.9forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

to 

initiatives 

review  business 

of  GDP  has  remained  largely  stable  in  recent 
years.  Only  limited  progress  has  been  made  on 
CSRs 2  and  3.  While  some  simplification  in 
certain  areas  of  taxation  and  better  conditions  for 
venture  capital  can  be  expected,  there  have  been 
no 
taxation. 
Moreover,  a  strategy  to  substantially  improve 
competition  in  the  services  sector,  beyond  minor 
adjustments,  is  lacking.  The  measures  taken  or 
announced to make the transition of older workers 
into retirement more flexible and to adjust personal 
income  tax  rates  and  allowances  can  be  expected 
to  have  only  a  limited  impact  on  improving 
incentives to work. 

In 

(5) 

the 

recent  years, 

implementation  of 

Progress  with 
the 
recommendations  addressed  to  Germany  in 
2016 has to be seen in a longer term perspective 
since the introduction of the European Semester 
in  2011. 
the  Federal 
Government  has  taken  a  number  of  measures  to 
strengthen  its  own  investment  spending  and  to 
support  public  investment  at  the  level  of  federal 
states and municipalities. However, this has not yet 
produced  a  clear  upward  trend  in  the  public 
investment-to-GDP  ratio  at  general  government 
level  (see  Section  4.4).  Public  spending  on 
education  and  R&D  as  a  proportion  of  GDP  at 
general  government  level  has  remained  stable  in 
recent  years.  Multiannual  progress  has  been 
limited  in  other  policy  fields.  Reform  efforts  to 
improve  the  efficiency  of  the  tax  system  and 
modernise 
remained 
tax  administration  have 
limited  in  scope,  and  no  measures  have  yet  been 
review  corporate 
taken 
taxation and the local trade tax. To date, there is no 
strategy  to  substantially  modernise  the  regulated 
professions  and  to  strengthen  competition  in  the 
services  sector  beyond  minor  adjustments.  First 
steps  have  been  taken  to  improve  incentives  to 
retire later after the pension reform 2014 facilitated 
earlier retirement. Measures to reduce the high tax 
wedge  for  low-wage  earners  have  been  limited  to 
the  regular  adjustments  of  the  minimum  personal 
income tax allowances and tax rates to account for 
changes  in  the  subsistence  level  or  the  impact  of 
fiscal drag. To date, no initiatives have been taken 
in 
regarding  second  earners  and  mini-jobs, 
particular  with  a  view  to  incentivising  women  to 
take up full-time jobs. 

to  comprehensively 

the 

Overall, Germany has made limited progress in 
addressing 
country-specific 
2016 
recommendations (CSRs). (6) Some progress has 
been made in increasing public investment  in line 
with  CSR 1.  The  Federal  Government  has  further 
relieved federal states and municipalities of social 
expenditure, and a reform of federal fiscal relations 
has  been  agreed  (Box  4.4.3).  At  the  same  time, 
education and research expenditure as a proportion 

(5)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see Section 4. 

(6)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact (SGP). 

12 

 
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2016 CSR assessment 

Source: European Commission 

13 

  Germany Overall assessment of progress with 2016 CSRs:  Limited CSR 1: Achieve a sustained upward trend in public investment, especially in infrastructure, education, research and innovation, while respecting the medium term objective. Improve the design of federal fiscal relations with a view to increasing public investment, especially at municipal level. (MIP relevant) Some progress  Some progress in increasing infrastructure investment.  Limited progress in raising public expenditure on education.  Limited progress in increasing public expenditure on research and innovation.  Some progress in improving the conditions for public investment at all levels of government. CSR 2: 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. (MIP relevant) Limited progress  Limited progress in reducing inefficiencies in the tax system.  Limited progress in modernising the tax administration.  Some progress in reviewing the regulatory framework for venture capital.  Limited progress in stimulating competition in the services sector. CSR 3: 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. (MIP relevant) Limited progress   Limited progress in increasing incentives for later retirement.  No progress in reducing disincentives to work for second earners.  Limited progress in reducing the high tax wedge for low wage earners.  No progress in facilitating the transition from mini-jobs to standard employment.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

14 

Box 2.1: Contribution of the EU budget to structural changeGermany is a beneficiary of European Structural and Investment Funds (ESI Funds) support and will receive up to EUR 27.9 billion for the period 2014-2020. This is equivalent to 4 % of national public investment. (1) Of the EU financing EUR 1.2 billion is planned to be delivered via financial instruments (an increase by 18 % in comparison with the 2007-2013). By 31 December 2016, an estimated EUR 10.1 billion, which represents about 36 % of the total allocation for ESI Funds, have already been allocated to concrete projects. Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility (CEF) and other directly managed EU funds is additional to the ESI Funds. By end 2016, Germany has signed agreements for EUR 1.9 billion for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 3.1 billion, which is expected to trigger over EUR 15 billion in total investments (as of end 2016). All necessary reforms and strategies have been put in place in order to fulfil ex-ante conditionalities (2) in those areas which benefit from the Funds in order to ensure successful investments. All relevant CSRs were taken into account when designing the 2014-2020 programmes. These included in particular increased investments in R&D and measures to enhance participation and integration in the labour market, especially for the long-term unemployed. The ESI Funds play a role in strengthening job creation, boosting a strong Research and Innovation environment in order to enhance the cooperation between research institutions and enterprises, increase firms' ability to bring their products to market and further improve innovation.  The funds also support local and regional development. https://cohesiondata.ec.europa.eu/countries/DE                                                            (1) National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries. (2) At the adoption of programmes, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and investment conditions for the majority of areas of public investments. For Members States that do not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.  
 
 
 
 
 
 
 
 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

The  Alert  Mechanism  Report  2017  called  for 
further in-depth analysis to monitor progress in 
unwinding the imbalances identified in the 2016 
macroeconomic  imbalance  procedure  (MIP). 
The  macroeconomic 
to 
Germany’s  very  large  and  increasing  current 
account  surplus  and  strong  reliance  on  external 
demand, which expose growth risks and underline 
the  need  for  continued  rebalancing 
towards 
domestic sources. 

imbalances 

relate 

Analysis integrated into this report provides an 
in-depth  review  (IDR)  of  how  the  imbalances 
identified  have  developed.  In  particular  IDR 
the  following 
is  found 
relevant  analysis 
Sections:  public  finances,  fiscal  frameworks  and 
taxation  in  Section  4.1,  issues  relating  to  the 
banking sector and housing market in Section 4.2, 
labour  market,  education  and  social  policies  in 
Section 4.3, investment in Section 4.4, and sectoral 
policies in Section 4.5. 

in 

3.1. Imbalances and their gravity  

The very large current account surplus reflects 
not  only  the  successful  export  orientation  of 
Germany’s  manufacturing  sector,  but  also  an 
accumulated  excess  of  national  savings  to 
investment. In principle, a current account surplus 
is  in  line  with  the  structural  characteristics  of  the 
German  economy.  However,  the  pace  at  which  it 
has been accumulated and its persistence cannot be 
explained by fundamental factors alone. (7) Rather, 
the  surplus  is  the  result  of  the  interplay  between 
various  domestic  and  external  factors, including 
the  two  negative  private  investment  shocks  after 
the bursting of the internet and the financial market 
bubbles  and,  more  recently,  a  significant  positive 
terms-of-trade effect despite the depreciation of the 
euro.  (8)  These  factors  have  over  time  pushed  up 

(7)  European  Commission  (2014),  European  Commission 
(2016a)  and  IMF  (2016)  among  others  can  only  partly 
explain the high level of the current account by models that 
try  to  identify  fundamental  factors, such  as  manufacturing 
intensity and ageing. 

(8)  See  European  Commission  (2014)  for  an  overview  of 
various external factors that contributed to Germany’s high 
current  account  surplus.  In  particular,  the  increase  in  the 
the 
German  current  account  surplus  coincided  with 
introduction  of  the  euro,  which  reduced  sovereign  risk 
premia across the euro area. It has also been supported by 
the  increase  in  the  size  of  the  single  market  due  to  EU 

the  same 

net  savings  across  all  sectors  of  the  economy, 
time  restraining  private 
while  at 
consumption  and  private  and  public  investment. 
Overcoming investment weakness is also seen as a 
key factor in boosting potential GDP in Germany, 
thereby  preparing  the  economy  for  demographic 
change.  

low 

investment 

construction 

Private  investment  has  remained  restrained 
interest  rate  environment. 
despite  the 
Private investment constitutes around 90 % of total 
investment.  Although  private 
investment  has 
largely  bounced  back  to  pre-crisis  levels  after 
2009,  investment  in  machinery  and  equipment,  in 
particular,  has  not  matched  pre-crisis  growth  and 
non-residential 
has 
stagnated  after  years  of  decline  prior  to  the  crisis 
(see  Graphs  1.2  and  1.3).  Uncertainty  over 
to 
business  prospects  may  have  contributed 
investment  restraint  in  recent  years.  However,  a 
more  forceful  pick-up  could  still  have  been 
possible in view of favourable financing conditions 
and  low  interest  rates.  This  suggests  it  may  be 
useful  to  review  potential  obstacles  to  private 
includes 
investment  beyond  uncertainty.  This 
inefficiency 
the 
corporate 
administrative burden, the underdeveloped venture 
capital  market,  regulatory  restrictiveness  in  the 
services  sector,  and  implementation  delays  in 
electricity and broadband infrastructure projects. 

taxation, 

in 

Public 
investment  has  been  subdued  and 
consistently  below  the  euro  area  average  for  a 
long  time.  This  reflects  a  gradual  scaling  back  of 
investment in maintenance and expansion of public 
infrastructure.  It  is  also  partly  a  reaction  to  the 
post-unification 
in  eastern 
Germany  and  the  consolidation  needs  in  western 
Germany, notably at municipal level. The 2014 in-
depth review identified an additional annual public 
investment requirement of ½ to 1 % of GDP (about 
EUR  15-30  billion)  over  the  coming  years  to 

investment  boom 

enlargement  and  the  expansion  in  world  trade,  with  the 
German  manufacturing  sector  successfully  reaping  the 
benefits  of  globalisation  through  global  value  chains  both 
on the export and the import side.  Although these reasons 
go  some  way  to  explaining  the  strength  of  Germany’s 
exports,  the  relatively  subdued  import  growth  has  also 
contributed  to  the  size  and  persistence  of  the  country’s 
trade surplus. 

15 

 
 
                                                           
                                                                                   
3. Summary of the main findings from the MIP in-depth review 

venture capital, limited progress has been made in 
improving the efficiency of corporate taxation and 
stimulating competition in the services sector. 

ratio. 

investment-to-GDP 

There  is  still  no  clear  upward  trend  in  the 
public 
Public 
investment  as  a  proportion  of  GDP  has  remained 
largely constant and is below the euro area average 
(see  Section  4.4).  This  is  despite  the  measures 
taken over the last few years and strong increases 
in  public  investment  at  general  government  level 
in  2015  and  2016.  Net  investment  remained 
negative  at  municipal  level  in  2015.  Additional 
measures  were  taken  in  2016  which  should 
increase the scope for public investment, including 
at  federal  state  and  municipal  level,  such  as  a 
reform  of  federal  fiscal  relations.  A  planned 
federal  transport  infrastructure  company  and  an 
infrastructure  investment  consulting  service  for 
municipalities  could  help  break  down  important 
barriers  to  public  investment  (see  Section  4.4). 
This could also contribute to wider benefits of EU 
funding instruments.  

low 

interest 

to  save 

instead  of 

levels.  The 

While  the  recovery  in  private  consumption has 
continued,  household  savings  have  reached 
record  high 
rate 
environment  may  have  exacerbated  households’ 
incentivising 
propensity 
investment  or  consumption.  Real  wages  increased 
more  dynamically 
in  2016,  but  this  reflects 
undershooting inflation rather than more ambitious 
wage  agreements.  Moreover,  an  increase  in  the 
wage share has been offset by higher income taxes 
and  social  contributions.  In  fact,  tax  revenue  as  a 
proportion  of  GDP  has  increased  owing  to  the 
favourable  economic  and  labour  market  situation 
(see Section 4.1). Measures to limit the tax burden 
on 
remained  modest,  while 
disincentives  to  increase  hours  worked  remain  in 
place for second earners and mini-job holders. 

labour  have 

3.3. Overall assessment  

Germany  runs  a  persistently  large  current 
account  surplus,  which  reflects  an  excess  of 
saving  over  investment,  but  also  a  highly 
competitive  manufacturing  sector.  The  size  and 
persistence  of  the  surplus  can  only  be  partly 
explained  by  the  industrial  structure  and  other 
characteristics  of  the  German  economy.  In  fact, 
subdued  investment  and  private  consumption, 
resulting  in  an  excess  of  saving  over  investment, 

maintain  and  modernise  Germany’s  public 
infrastructure  and  remove  specific  bottlenecks. 
(European  Commission,  2014)  The  design  of 
federal  fiscal  relations  may  have  contributed  to 
protracted 
at 
municipal  level,  where  net  investment  has  been 
markedly negative over several years until 2015. 

underinvestment, 

especially 

Sluggish  consumption  growth  also  contributed 
to  subdued  domestic  demand  and  the  building 
up of  the  external  surplus. High unemployment, 
a long period of wage moderation and a fall in the 
total  number  of  hours  worked  in  the  first  half  of 
the  2000s  resulted  in  low  growth  in  disposable 
incomes. Wage growth has accelerated since 2008, 
but  not  to  the  extent  the  tightening  labour  market 
situation  and  unit  labour  costs  in  relation  to  the 
euro  area  average  would  suggest.  In  addition, 
disincentives  to  work  for  certain  groups  are 
reducing  labour  supply,  disposable  income  and 
consumption  opportunities.  These  include  a  high 
tax  wedge,  especially  for  low  wage  earners, 
disincentives  for  second  earners 
increase 
working  hours  and  the favourable fiscal  treatment 
of mini-jobs. 

to 

3.2. Evolution, prospects, and policy responses 

The  current  account  surplus  has  continued  to 
grow and is likely to remain high. While terms-
of-trade effects account for a significant part of the 
recent  increase  in  the  external  surplus,  economy 
in  a  further 
wide  deleveraging  has  resulted 
widening  of 
the  domestic  saving-investment 
balance. The current account surplus is expected to 
remain very high, above the MIP threshold, and to 
decline only gradually over the medium term (see 
Section 1). 

The  private 
investment-to-GDP  ratio  has 
remained unchanged. Non-financial corporations 
have  continued  accumulating  equity  buffers  and 
scaling  down  debt  financing.  They  have  not  used 
the  additional  savings  or  tapped  the  liquid  bank 
credit  market  to  increase  domestic  investment 
spending,  which  has  grown  more  slowly  than 
before  the  crisis.  The  continued  weakness  of 
business  investment  in  recent  years  remains  at 
odds with highly  supportive  conditions for  capital 
formation,  such  as  healthy  corporate  balance 
sheets,  very  low  interest  rates  and  a  stronger 
cyclical  position.  While  some  steps  have  been 
taken  to  improve  the  regulatory  framework  for 

16 

 
3. Summary of the main findings from the MIP in-depth review 

position of the federal states and municipalities, it 
still  remains  to  be  seen  to  what  extent  this 
additional  fiscal  space  will  actually  be  used  for 
additional  public  investment.  A  federal  transport 
infrastructure  company  can  be  expected 
to 
accelerate  public  investment.  On  the  other  hand, 
the  reform  falls  short  of  increasing  the  tax 
autonomy  of  the  federal  states  and  municipalities, 
which  could  have  further  increased  the  scope  for 
public investment. Efforts to improve the business 
environment for private investment have remained 
limited.  The  same  holds  for  efforts  to  reduce  the 
low-wage  earners  and 
high 
disincentives  to  work  for  second  earners  with  a 
view  to  supporting,  labour  market  participation, 
disposable income and consumption. 

tax  wedge  for 

have  also  contributed  to  the  build-up  of  the 
external  surplus.  This  can  be  partly  explained  by 
necessary adjustments in the aftermath of the post-
including  prolonged  wage 
unification  boom, 
moderation, labour market reforms and significant 
scaling  back  of  construction  activity.  By  contrast, 
private  consumption  is  at  the  root  of  the  ongoing 
shift towards more domestic demand-driven robust 
growth.  At  the  same  time,  consumption  and 
investment  have  remained  at  relatively  low  levels 
in  light  of  the  favourable  cyclical,  labour  market 
and 
infrastructure 
investment needs.  

financing  conditions  and 

the 

favourable 

investment  also 
Continued  relatively  weak 
undermines  Germany’s 
growth 
future 
potential.  Private  consumption  has  strengthened 
somewhat and is expected to continue doing so. At 
the  same  time,  private  investment  has  remained 
restrained,  despite 
financing 
conditions.  Public  investment  has  picked  up, 
though budget projections indicate scope under EU 
and  national  fiscal  rules  for  increasing  public 
investment  further.  Persistently  low  investment 
could  hamper  Germany’s  economic  growth  in  the 
long term. Stronger capital accumulation would be 
needed  to  increase  potential  growth  in  the  future, 
especially 
immigration  slows  down  and 
population ageing intensifies. 

if 

Given  the  German  economy’s  size  and  strong 
trade and financial linkages with the rest of the 
euro  area,  further  strengthening  its  domestic 
demand  would  also  lend  support  to  the  euro 
area  aggregate  demand  and  inflation.  Existing 
economic challenges for the German economy also 
have  wider  implications  for  the  euro  area.  This  is 
of particular relevance in a context of low growth 
and  low  core  inflation.  Even  more  dynamic 
domestic  demand  in  Germany  could  help  firm  up 
the ongoing euro area recovery, overcome the risk 
of  a  ‘low  growth,  low  inflation’  trap  and  ease 
deleveraging  needs  faced  by  highly  indebted 
Member  States.  For  illustrative  purposes,  the 
effects  of  an  increase  in  public  investment  and  a 
reduction  in  the  personal  income  tax  on  domestic 
and foreign GDP are presented in Box 3.1.  

Overall,  the  policy  response  to  address  the 
limited. 
imbalances  has  so 
Although relieving municipalities of certain social 
spending  obligations  and  the  agreed  reform  of 
federal  fiscal  relations  will  strengthen  the  fiscal 

far  remained 

17 

 
 
 
 
 
 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

(Continued on the next page) 

18 

 Box 3.1: Euro area spilloversThe very large size and the close economic and financial integration of the German economy with the rest of the EU make it a potentially important source of spill-overs to other Member States along the trade and financial channels. The three Member States most exposed to Germany via gross trade channels are the Czech Republic, Hungary and Slovakia although six other Member States show large trade exposures worth more than 10 % of domestic GDP. (1) Overall, Germany-bound gross exports are worth approximately 6 % of GDP of the rest of the euro area (EA). Excluding Luxembourg, financial exposures to Germany are particularly large for Ireland and the Netherlands, where they are worth more than 60 % and 70 % of local GDP, respectively. (2) Overall, the euro area shows total financial exposures to Germany worth more than 25 % of GDP, mostly through the form of debt. Based on the European Commission’s QUEST (3) model, this box compares the effect of an increase in public investment and a reduction in personal income tax on domestic and foreign economic activity. For illustrative purposes, both these fiscal shocks are normalised at 1 % of GDP, remain active for 10 years and are afterwards gradually decreasing. On impact, this implies an increase of public investment by about 50 % in the investment scenario and an increase in disposable income of about EUR 30 billion in the tax scenario. There are no compensating fiscal measures over the same period. Furthermore, to mimic a monetary policy that is constrained at the zero lower bound, the scenarios assume unchanged monetary policy rates in the first two years despite the demand stimulus. The domestic GDP multiplier is larger in the investment scenario than in the tax scenario (Graph 1). Increasing investment raises real GDP in Germany by 1 % on impact. As investment is productive, the GDP multiplier increases over time, stimulating private investment as well as employment and wage growth. (4) In turn, the tax reduction raises real GDP by 0.2 % on impact. Consumption smoothing implies that higher household disposable income is only partially spent, leading to a lower domestic demand increase on impact and lower GDP multiplier over time. The lower tax wedge on labour triggers higher employment and aggregate supply and increases the tax multiplier, and an assumed delayed decline in prices. (5) Spillovers to other euro area countries are larger in the event of an investment increase. Stronger German import demand increases real GDP by around 0.4 % in the Netherlands, France, Italy, Spain, and the rest of the euro area, when high investment efficiency and no monetary reaction for two years is assumed. This goes hand in hand with a decrease in the German current account balance, while the current account balance of other euro area Member States increases on impact and before converging towards zero. In addition, the effect on inflation is positive, thus causing a stronger impact on nominal GDP. In turn, the tax scenario triggers slightly negative spillovers. The smaller immediate effect on domestic demand implies lower import growth than in the public investment scenario, while an increase in German cost competitiveness due to lower wage claims and labour costs contributes negatively to the export performance and, thus, GDP in other euro area countries. Consequently, the decrease in the current account balance is smaller. The effect on inflation is negative. (6)                                                            (1) Based on UN data for 2014. (2) European Commission bilateral data for 2014 covering all economic sectors, based on Hobza and Zeugner (2014). (3) Detailed information on the QUEST model and applications are available at: http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm. (4) The investment shock raises the stock of public capital that enters the production function of the economy. The parameter determining the productivity of public capital in the production function is set to estimates for the productivity impact of public infrastructure. A detailed discussion can be found in in't Veld (2016). (5) The domestic GDP multiplier of the tax decrease would be larger if the measure explicitly targeted low-wage earners. It would decrease the impact of consumption smoothing as low-wage earners have a high propensity to consume. If the increase in disposable income is spend fully, the domestic GDP multiplier increases to 0.6 % on impact. At the same time, it would reduce the current account balance more significantly due to stronger import demand. (6) While the analysis of this box focuses on stand-alone scenarios for Germany, estimations based on the QUEST model suggest a higher GDP multiplier if the current scenarios were complemented by the simultaneous implementation of structural reforms in other EU Member States (see Varga and in’t Veld, 2014), pointing also to the importance of inward spillovers to Germany from the rest of EU.  
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Box (continued) 

19 

  Graph 1: Fiscal expansion in Germany with monetary accommodation  Source: European Commission Increasing interest rates in response to rising demand and higher inflation affects the size of fiscal shocks. The short-to-medium term domestic GDP multiplier in the investment scenario decreases, as interest sensitive private demand is crowded out. Spillovers are also reduced due to lower import demand and a negative response of interest-sensitive demand in other euro area countries. In turn, the domestic GDP multiplier in the tax scenario increases slightly. The monetary policy rate is reduced by wage moderation and falling prices, stimulating interest-sensitive private demand in all euro area countries. Spillovers move from slightly negative to zero. 00.511.522.5012345678910%Yeara1) Investment  increase: real GDPDENLFRITESRest of the EA-0.3-0.25-0.2-0.15-0.1-0.0500.050.10.150.2012345678910% of GDPYeara2) Investment increase: current account balanceDENLFRITESRest of the EA-0.500.511.522.5012345678910%Yearb1) Tax decrease: real GDPDENLFRITESRest of the EA-0.3-0.25-0.2-0.15-0.1-0.0500.050.10.150.2012345678910% of GDPYearb2) Tax decrease: current account balanceDENLFRITESRest of the EA 
 
 
 
 
 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.1: 

MIP assessment matrix – Germany 

(*) The first column summarises ‘gravity’ issues which aim at providing an order of magnitude of the level of imbalances. The 
second column reports findings concerning the ‘evolution and prospects’ of imbalances. The third column reports recent and 
planned measures to address these. Findings are reported for each source of imbalance and adjustment issue. The final three 
paragraphs of the matrix summarise the overall challenges in terms of their gravity, developments and prospects and policy 
response. 
Source:  European Commission 

20 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External balance Germany has a persistently large current account surplus, which reached close to 9 % of GDP in 2016. Accumulated surpluses have resulted in a large positive net international investment position, which reached 48.7 % of GDP in 2016. The surplus reflects saving and deleveraging by all sectors of the economy: households, firms, and the public sector. High corporate savings and low investment have contributed most significantly to the widening of the savings surplus in recent years. While euro area partners benefit from supply chain integration with Germany, weak domestic investment and the reliance on weakening external demand pose risks to Germany’s potential growth and amplify the euro area demand shortfall. As deleveraging pressures still weigh on EU growth, strengthening domestic demand in Germany would benefit both Germany and its euro area and EU partners in particular now in view of the zero lower bound at which monetary policy operates (see Section 3.3). The German surplus is projected to persist at more than 8 % of GDP in the medium term. Low energy prices and exchange rate developments partly explain the further increase in 2014-2016, in particular a decline in the import ratio (see Section 1). The uncertain external environment and a still fragile euro area recovery point to continuing risks concerning the implications of existing German imbalances for euro area growth.  Real private consumption has strengthened, by 1.1 % in 2015, but declined as a share of GDP. The low interest rates have not translated into significant changes in household consumption patterns, but rather reinforced the propensity to save. An extended period of dynamic wage growth would support private consumption, provided it also translates fully into disposable income. At its current level, investment contributes little to potential growth. Private sector investment remains sluggish at 17.8 % of GDP. Investment in equipment is weak and remains below pre-crisis levels despite supportive growth and funding conditions, including a strengthening equity position. Public investment picked up in 2015 and 2016, but the public capital stock is still declining. Until 2015, there has been no reversal of the markedly negative net investment at municipal level. Current federal fiscal relations have not ensured adequate public investment at the level of municipalities. The policy response so far has remained limited. Important steps have been taken to increase public investment, but they have not yet resulted in a clear upward trend in the public investment-to-GDP ratio (see Section 4.4). Germany has used its available fiscal space only to a limited extent and has not taken advantage of exceptionally favourable financing conditions to meet its investment needs and improve conditions for private investment (see Section 4.1). Relieving municipalities of social expenditure obligations will increase their scope for public investment. The additional revenue of 0.3 % of GDP allocated to the federal states as part of the agreed reform of federal fiscal relations could also facilitate public investment at all government levels. A consulting service for municipalities may alleviate administrative constraints on public infrastructure investment.  Limited efforts have been made to stimulate competition in the services sector, improve the efficiency of the tax system or reduce the high tax wedge, especially for low wage earners. No measures have been taken to reduce disincentives for second earners or facilitate the transition from mini-jobs to standard employment. Conclusions from IDR analysis  Germany is running a persistently large current account surplus reflecting saving in excess of investment in both the private and public sector. Persistently weak domestic investment could constrain potential growth in the long term. Combined with the reliance on external demand, this could entail macroeconomic risks and affect the rebalancing and growth prospects of the rest of the euro area, given its aggregate demand shortfall.  While private consumption has strengthened somewhat, private investment has remained restrained, despite the favourable financing conditions. Private consumption is hampered by continued wage moderation despite a rather tight labour market, a rising tax burden and disincentives to work for certain groups. Public investment has picked up, though the available fiscal space has not been fully used.  Steps taken to increase public investment have not yet resulted in a clear upward trend in the public investment-to-GDP ratio that appears required to close the infrastructure investment gap. Efforts to improve the business environment for private investment have remained limited. Regulatory restrictiveness in the services sector remains high and inefficiency in corporate taxation persists. Disincentives to work for certain groups continue to reduce labour supply, disposable income and consumption opportunities.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES, FISCAL FRAMEWORKS AND 

TAXATION* (9) 

rules  appears  more 

Budget  projections  indicate  scope  under  EU 
fiscal  rules,  while  the  leeway  under  national 
fiscal 
limited.  The 
Commission  2017  winter  forecast,  which  covers 
the  period  2017-2018,  projects  that  the  structural 
balance  will  stay  about  1 %  of  GDP  above  the 
medium-term objective and that the debt ratio will 
remain  on  a  firm  downward  path  beyond  the 
requirement of the debt rule. This is also due to the 
very  low  interest  rate  environment  and  the  ‘safe 
haven’ status of German public debt. There is less 
scope  for  increasing  public  investment  under  the 
national ‘debt brake’ that has set a structural deficit 
limit  of  0.35 %  of  GDP  for  the  federal  budget 
since  2016.  However,  a  structural  balance  of 
around 0 % of GDP in 2017 and 2018 (as projected 
by  the  2016  Stability  Programme)  suggests  that 
some space may be available in the federal budget 
(Table 4.1.1). 

Table 4.1.1:  Budgetary projections for Germany compared 

to European and national deficit ceilings 

(1) European Commission Winter Forecast 2017 
(2) German Stability Programme 2016 
(3) Commission calculations 
Source: European Commission, European Commission 2017, 
Federal Ministry of Finance, 2016a 

Tax  revenue  continues  a  favourable  path.  Tax 
revenue took a hit after the financial crisis, but has 
regained  strength  since  2010  and  increased  by 
about  1.7  percentage  points  of  GDP  in  the  period 
until  2015.  The  Commission’s  2017  winter 
forecast  projects  the  tax  ratio  to  stay  flat  over  the 
period 2016-2018. Notably, the latest projection of 

(9)  An  asterisk  indicates  that  the  analysis  in  the  section 
contributes  to  the  in-depth  review  under  the  MIP  (see 
Section 3 for an overall summary of main findings). 

tax revenue undertaken by the Ministry of Finance 
suggests  that  tax  revenue  is  projected  to  rise  over 
2016-2020  by  about  0.6 %  of  GDP.  Assuming  a 
largely constant expenditure-to-GDP ratio, and that 
the  revenue-to-GDP  ratio  is  kept  constant,  this 
suggests  room  of  about  EUR 19 billion  that  could 
be used for a targeted reduction in labour taxes. 

The  tax  wedge  for  low  income  workers  is  still 
among  the  highest  in  the  EU  and  disincentives 
for second-earners persist. In 2015 the tax wedge 
amounted to 45.3 %, among the highest in the EU-
28,  reducing  take-home  pay  and  consumption 
opportunities. (10)  To  ensure  that  the  subsistence 
level  remains  tax-free  and  to  offset  the  impact  of 
fiscal  drag,  the  minimum  personal  income  tax 
allowance  and  child  allowances  have  been 
increased  and  income  tax  brackets  have  been 
adjusted.  These  measures  tend  to  benefit  low  and 
middle income groups because they are affected by 
fiscal  drag  relatively  stronger  than  high  income 
groups.  However,  their  impact  on  the  tax  wedge 
will  be  limited.  In  addition,  joint  taxation  of 
income for married couples (Ehegattensplitting), in 
addition  to  other  non-tax  related  factors  (see 
Section  4.3.1)  remain  disincentives  to  work  for 
second earners – in many cases women (European 
Commission, 2016a and Böhmer et al., 2014). 

included 

Several  options  are  being  discussed  to  reduce 
the tax burden on labour for low-wage earners, 
as  has  been  consistently 
in  the 
country-specific recommendations to Germany. 
The  current  political  debate  focusses  partly  on 
possible  scenarios  to  reduce  or  remove  the  steep 
increase  in  the  marginal  tax  rate  for  middle  and 
low  income  groups  in  personal  income  taxation 
(‘Mittelstandsbauch’).  Other  reform  scenarios  to 
relieve  middle  and  low  income  groups  from 
taxation that are currently under discussion include 
a reduction or abolition of the solidarity surcharge 
and  reductions  in  social  contributions  for  low-
wage  earners.  Such  reforms  are  likely  to  also 

(10)  In a recent paper focussing on Austria, Belgium, Germany 
and Italy, Attinasi et al. (2016) show that a budget-neutral 
reduction  of  the  tax  wedge  could  positively  affect  private 
consumption  and  reduce  unemployment,  provided  the 
measures 
to  ensure  budget  neutrality  do  not 
negatively affect private sector productivity or investment. 

taken 

21 

(% of GDP)2015201620172018General government balance (1)0.70.60.40.4Deficit ceiling-3-3-3-3Difference3.73.63.43.4Structural balance (1)0.70.70.40.3Medium-term objective-0.5-0.5-0.5-0.5Difference 1.21.20.90.8National debt brake for the federal budgetStructural balance (2)0.1-0.2-0.10.0Structural deficit ceiling -0.4-0.4-0.4-0.4Difference0.50.20.30.3Debt gap (negative value means compliance) (3)-5.3-4.7-4.8-4.5 
 
 
 
 
                                                           
                                                           
4.1. Public finances, fiscal frameworks and taxation 

and for involving the federal states in cooperation 
with other Member States at EU level. 

to  curb 

Several additional measures to curb tax evasion 
and  avoidance  have  been  proposed  by  the 
Federal  Government.  The  measures  partly 
respond  to new  EU  transparency  rules.  Moreover, 
the Federal Government put in place, among other 
things,  new  requirements  for  electronic  cash 
registers 
the  manipulation  of  sales 
information.  On  21  December  2016,  the  Federal 
Government adopted a bill to fight tax evasion and 
to  amend  other  tax  provisions.  This  draft  law 
contains 
greater 
transparency,  including  the  abolition  of  bank 
secrecy  for  tax  purposes  and  the  introduction  of 
reporting requirements for financial institutions on 
letterbox companies.  

provisions 

national 

for 

adopted 
The  Federal  Government  has 
the  preparation  and 
legislation  defining 
endorsement  process  for  the  macroeconomic 
forecasts  that  underpin  budgetary  projections. 
The  Commission  Opinion  on  Germany’s  Draft 
Budgetary  Plans  for  2015  and  2016  (European 
Commission,  2016c),  among  others,  has  pointed 
out  that  no  independent  body  in  charge  of 
producing  or  endorsing  macroeconomic  forecasts 
has  been  put  in  place  within  the  meaning  of 
Regulation  (EU)  No 473/2013.  In  response,  the 
Federal  Government  has  adopted  a  draft  law  that 
defines  the  preparation  and  endorsement  process 
It  will  be 
for  macroeconomic 
provisions 
complemented 
appointing 
the 
the 
forecast endorsement.  

by 
institution  responsible  for 

forecasts. 
implementing 

The  Federal  Ministry  of  Finance  has  in  the 
2015/2016  cycle  carried  out  spending  reviews 
with  a  view  to  improving  the  effectiveness  of 
federal  budget  spending.  The  first  cycle  of 
spending  reviews  focussed  on  smaller  policy 
programmes (‘support of combined traffic (13)’ and 
‘support  of professional  mobility of  young people 
seeking  vocational  training  in  Germany’),  with  a 
view  to  setting  up  the  assessment  framework  and 

(13)  Combined  traffic  is  a  special  form  of  freight  transport  in 
which  semi-trailers  trucks  or  containers  are  transported 
along  the  main  part  of  the  transport  route  by  rail  or  by 
inland  waterway,  while  lorries  are  used  to  pick  up  and 
deliver  loading  units  from  the  loading  and  unloading 
points.  The  aim  of  combined  traffic  is  to  strengthen 
environmentally friendly means of transport. 

impact  on  the  high  tax  wedge  for  low-wage 
earners. Box  4.1.1  analyses  the  distributional  and 
fiscal effects of certain reform scenarios to relieve 
middle and low-wage earners from taxation. 

The overall income tax burden on corporations 
remains  high,  while  the  tax  system  is  complex 
and includes inefficiencies. When accounting for 
the  local  trade  tax  (Gewerbesteuer)  and  the 
solidarity  surcharge,  the  top  statutory  tax  rate  on 
corporate income reached 30.2 % in 2016. (11) This 
was  substantially  above  the  non-weighted  EU 
average  of  22.8 %.  The  effective  average  tax  rate 
is  28.2 %  compared  with  a  non-weighted  average 
of 21.1 % for the EU. The debt bias, which arises 
from  a  differential  tax  treatment  of  equity  and 
debt, was the eighth highest in the EU in 2016. The 
corporate  tax  reforms  of  2001  and  2008  have 
increased  the  relative  attractiveness  of  retained 
earnings  as  a  source  of  funding,  but  have  not 
eliminated the debt bias. In addition, the local trade 
tax is prone to inefficiencies due to the inclusion of 
non-profit elements in the tax base. (12) In addition 
to  the  high  level  of  corporate  taxation,  the  tax 
system is complex and tax administration costs are 
high (see Section 4.4.2). 

in 

authority 

the 
to 

federal 
the  states’ 

of 
in  relation 

the  area  of 
optimise 

The  planned  strengthened  competence  of  the 
tax 
Federal  Government 
administration 
the 
could  help 
administration’s  performance.  If  implemented 
effectively,  additional  general  and  IT-specific 
tax 
functional 
administration 
tax 
administrations  as  agreed  as  part  of  the  reform  of 
facilitate  an 
federal 
relations  could 
accelerated  modernisation 
tax 
administration.  The  fight  against  tax  fraud  and 
evasion,  both  at  national  and  international  level, 
could  benefit  from  such  modernisation.  For 
instance,  modernisation  could  pave  the  way  for 
addressing  the  currently  strictly  limited  exchange 
of  data  between  the  different  tax  administrations 

fiscal 

the 

of 

(11)  Based  on  the  Berlin  rate  for  the  trade  tax  of  14.35 %.  In 
2012, the average trade tax rate for Western Germany was 
13.29 % and for Eastern Germany 12.99 %. 

(12)  On  the  other  hand,  the  inclusion  of  non-profit  elements 
reduces the cyclical nature of the tax base. The local trade 
tax is the most significant tax for which municipalities can 
autonomously  set  the  tax  rate.  It  appears  to  be  rather 
unsuitable for the local level, however, since its tax base is 
mobile,  strongly  cyclical  and  unequally  distributed  across 
municipalities 
(see  European 
and 
Commission, 2016a). 

federal 

states 

22 

 
                                                           
                                                           
4.1. Public finances, fiscal frameworks and taxation 

procedures.  For  the  2016/2017  cycle,  further 
spending  reviews  are  foreseen,  with  a  focus  on 
programmes  from  the  policy  fields  ‘housing’  and 
‘energy and climate’. 

23 

 
 
4.1. Public finances, fiscal frameworks and taxation 

24 

 Box 4.1.1: Scenarios for labour taxation reforms: distributional and fiscal effectsGermany has been recommended to reduce the high tax-wedge for low wage earners. This box analyses the distributional and fiscal effects of several reform scenarios to relieve middle and low-income earners from taxation, namely (1) a flattening of the personal income tax tariff, (2) a removal of the solidarity surcharge, and (3) a combination of (1) and (2). (1)  Reform scenario (1) addresses the steep increase in the marginal tax rate for middle and low-income earners in the current personal income tax tariff (Tariff 2016 in Table 1). The tariff includes a basic tax free allowance until an income of EUR 8 652, as well as linear increases in the marginal tax rate from 14 % to 24 % in the second tax bracket and from 24 % to 42 % in the third tax bracket. Table 1 compares the current personal income tax tariff with a reform scenario that flattens out the steep increase in the marginal tax rate for middle and low-income earners (‘Mittelstandsbauch’).  Table 1: Reform scenario (1): current personal income tax tariff and reform scenario  Source: European Commission  Simulations based on EUROMOD (2) show a relief of middle and low-incomes across three reform scenarios. For reform scenario (1), the estimated average increase in annual equivalised disposable income amounts to 2.9 %, with a positive effect for all income deciles. Removing of the solidarity surcharge as foreseen in reform scenario (2), in turn, would result in an average increase in mean disposable income of 1 %, while the effect of reform scenario (3) would amount to about 3.7 %. The effect on the tax wedge measured by implicit tax rates on labour would be similar (Graph 1). (3) The fiscal costs amount to EUR 41 billion for reform scenario (1), 10 billion for reform scenario (2) (4) and 53 billion for reform scenario (3).  Graph 1: Distributional and fiscal effects of reform scenarios  Source: European Commission, Joint Research Centre based on the EUROMOD model                                                             (1) These are stylized scenarios, with the mere purpose of illustrating the potential fiscal and distributional impacts. (2) Simulations were conducted by the European Commissions’ Joint Research Centre. EUROMOD simulates the benefit entitlements and tax liabilities (including social security contributions) of individual and households according to the tax-benefit rules in place in each Member State. The simulations are based on representative survey data from the European Statistics on Income and Living Conditions (EU-SILC) and cover the main elements of direct taxation and social contributions as well as non-contributory benefits. (3) The implicit tax rate on labour measures the effective average tax burden on employed labour income. It is defined as the ‘sum of all direct and indirect taxes and employees’ and employers’ social contributions levied on employed labour income divided by the total compensation of employees working in the economic territory increased by taxes on wage bill and payroll. (4) While EUROMOD uses the EU Survey on Income and Living Conditions (EU-SILC), actual revenue data from the Ministry of Finance for 2016 suggest that the fiscal effect of abolishing the solidarity surcharge could amount to about EUR 16.6 bn. Basic allowanceInterval 1Interval 2Interval 3Interval 4Tariff 20168,6528,65213,66953,665254,446Tax rates014244245Reform scenario8,6528,65253,665254,446Tax rates01442450.01.02.03.04.05.06.07.012345678910Change in mean annual equivalised disposable income (differences to baseline, %) Income deciles (smallest to largest)Reform scenario (1)Reform scenario (2)Reform scenario (3)-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.012345678910Change of implicit tax rates on labour (differences to baseline, %) Income deciles (smallest to largest)Reform scenario (1)Reform scenario (2)Reform scenario (3)0.010000.020000.030000.040000.050000.060000.0Reformscenario (1)Reformscenario (2)Reformscenario (3)Aggregate revenue in billion euro 
 
 
 
 
 
4.2.  FINANCIAL SECTOR 

4.2.1.  BANKING SECTOR 

The  German  banking  sector  is  medium-sized 
and relatively well capitalised. With assets equal 
to  about  252 %  of  GDP  the  sector  is  significantly 
smaller compared with the banking sectors e.g. in 
France  (386 %)  or  the  Netherlands  (379 %).  The 
German  financial  sector  has  relatively  strong 
cooperative  and  public  bank  pillars  with  a 
relatively  low  concentration  of  banks.  It  has 
increased its resilience, including by increasing its 
core  capital  ratio  (CAR)  Tier  1  somewhat  above 
the euro area average of 14.3 % (Table 4.2.1). (14) 
(15)  The  main  contribution  came  from 
the 
reduction  in  risk-weighted  assets  over  time,  but 
raising  capital  from  retained  earnings  is  more 
challenging.  In  2015,  German  banks  transferred 
EUR 9.7 billion of their profits to capital, which is 
37 %  of 
(Deutsche 
Bundesbank, 2016b). 

total  profits before 

tax 

Table 4.2.1: 

Financial soundness indicators, all banks in 
Germany 

* ECB aggregated balance sheet: loans excluding to 
government and monetary financial institutions 
(MFI)/deposits excluding from government and MFI 
Source: European Central Bank 

Sustaining  profitability  remains  the  biggest 
challenge  for  the  business  models  of  German 
banks.  A  return  on  equity  of  0.8 %  in  June  2016 
(16) – among the lowest in the EU – and a further 
deteriorated cost/income ratio of 70.4 % at the end 
of  2015  (Deutsche  Bundesbank,  2016b)  raise 
questions  on  the  viability  of  the  German  bank’s 
business  models  and  indicate  a  need  for  cost 
reductions.  In  2015,  profits  were  supported  by  an 
all-time low of net additions to risk provisions, due 
to  the  favourable  operating  environment  and 

(14)  Tier 1 capital is considered to be the going concern capital 
– it allows an institution to continue its activities and helps 
to prevent insolvency. The purest form is Common Equity 
Tier 1 (CET1) capital which includes e.g. ordinary shares. 
(15)  European  Central  Bank  (ECB)  data  including  foreign-
controlled  subsidiaries  and  branches;  if  foreign-controlled 
subsidiaries and branches are excluded, the ratio is 15.2 %. 
(16)  European  Central  Bank  (ECB)  data  including  foreign-
controlled  subsidiaries  and  branches;  if  foreign-controlled 
subsidiaries and branches are excluded, the ratio is 0.9 %. 

asset 

quality.  Should 

improved 
economic 
conditions  weaken,  provisioning  would  have  to 
rise  to  normal  levels  again,  leading  to  declining 
profitability  and  more  challenging  generic  capital 
increases. 

German credit institutions still rely strongly on 
interest  business.  In  2015, 
the  traditional 
German  banks  partly  increased  interest  rate  and 
liquidity  risk  to  limit  the  decline  in  net  income 
from  the  interest  business  to  EUR  0.9  billion. 
Banks  issue  loans  with  longer  maturities,  while 
maturities  on  the  liability  side  remain  rather  short 
(e.g. overnight deposits). This makes the sector, in 
particular  cooperative  banks  and  savings  banks, 
more  vulnerable  to  a  potential  increase  in  interest 
rates, especially if it were to occur suddenly. (17) 

Further  efficiency 
improvements  and  cost 
cutting  efforts  appear  necessary  to  strengthen 
profitability. In 2015, German banks increased net 
fee and commission income by EUR 1.2 billion to 
counter  headwinds  on  generating  net  interest 
income.  Banks  have  also  undertaken  a  number  of 
measures  to  reduce  costs.  This  is  reflected  in  the 
number  of  branches  which  declined  by  about 
3.5 %  in  2015  (Deutsche  Bundesbank,  2016b). 
Consolidation  is  ongoing  within  the  savings  and 
cooperative  banking  sectors  (e.g.  by  closing 
unprofitable branches) and is expected to start also 
in 
light  of  announced 
the 
consolidation  measures.  Nevertheless,  without 
to 
further  cost-cutting  measures, 
increase  profitability  and  thus  to  build  up  more 
capital  seems  limited.  This  however  would  be 
necessary to hedge against the increased exposure 
to  interest  rate  risks  and  a  possible  weakening  of 
the  banks’  operating  environment,  and  to  better 
face the challenges of digitisation. 

larger  banks 

the  ability 

in 

The digital transformation of  financial  services 
has  strongly  affected  the  German  banking 
sector in the last few years. It is estimated that by 
2020  almost  half  of  all  German  bank  customers 
will  use  a  digital  bank  account (Drummer  et  al., 
(FinTech) 
2016), 
companies  will  jeopardise  between  29 %  to  35 % 
of  all  bank  revenues.  Overall,  Germany  is  the 

technology 

financial 

and 

(17)  For a recent analysis on different interest rate scenarios and 
the  extent  to  which  they  can  cause  a  further  narrowing  of 
the  interest  rate  margin  of  German  banks,  see  Dombret, 
Gündüz, and Rocholl, (2017) 

25 

(%)2010201120122013201420152016Q2Non-performing loans2.41.61.71.82.52.01.9Coverage ratio35.040.138.342.839.141.642.4Loan-to-deposit ratio*84.783.482.580.179.278.478.7Tier 1 ratio11.411.713.815.214.815.415.4Return on equity1.92.21.11.32.51.7-Return on assets0.10.10.00.10.10.1- 
 
 
 
 
                                                           
                                                           
4.2. Financial sector 

regulatory  hurdles 

favourable loan and investment conditions. On the 
other  hand,  insufficient  and  relatively  inelastic 
supply  was  exacerbated  by  structural  factors  such 
for 
as 
construction  land  as  well  as  environmental  and 
energy  efficiency  standards)  (Deutsche  Bank 
Research,  2016).  Reducing  constraints  to  building 
supply  would  help  to  alleviate  existing  price 
pressures. 
It  would  also  strengthen  private 
investment.  

regulations 

(i.e. 

Graph 4.2.1:  House price trends in Germany 

Note: Nominal house prices deflated using the private 
consumption deflator from the national account statistics. 
Data from 1995 first quarter to 2016 third quarter.  
Source: OECD 

In  contrast  to  regional  price  developments, 
aggregate  house  prices  in  Germany  appear  to 
be  developing  in  line  with  their  underlying 
fundamentals. European Commission calculations 
do  not  suggest  a  potential  overvaluation  on  a 
national scale as house prices appear to be around 
a  fair  value.  Though  aggregate  house  prices  in 
Germany  still  appear  to  be  in  line  with  the 
(e.g.  measured  by 
underlying 
affordability  indicators  such  as  price-to-income 
these 
and  price-to-rent  ratios)  (Graph  4.2.2), 
aggregate 
regional 
significant 
figures  mask 
differences in housing market dynamics. 

fundamentals 

second largest FinTech market in Europe, after the 
UK,  with  the  total  market  volume  of  FinTech 
businesses 
and  wealth 
management sectors accounting to EUR 2.2 billion 
in 2015. 

financing 

the 

in 

are 

existing 

Almost  87 %  of  surveyed  German  financial 
institutions  currently  cooperate  or  plan  to 
participate  in  a  FinTech  business  in  the  future 
and  Hornuf, 
(Dorfleitner 
2016).  Digital 
transformation 
is  bringing  new  products  and 
processes developed either by traditional banks or 
new players – often technology companies – which 
enter the financial services market and place major 
competitive  pressure  on 
financial 
institutions.  For  instance,  in  2016  the  FinTech 
market  for  payment  solutions  already  reached  a 
transaction volume of EUR 17 billion. As a result, 
banks 
a  major 
technological  change  of  the  entire  value  chain. 
This results for example in lower operational costs 
and innovative products and services. Compared to 
new players (i.e. FinTech firms), they can count on 
a  vast  customer  base,  broad  product  portfolio, 
strong  brands  and  the  funds  necessary  for  the 
transformation.  However,  some  smaller  banks, 
operating on a more limited geographical area with 
fewer  products,  appear  to  be  catching  up  more 
slowly  with  innovations  in  financial  services. 
Therefore,  their  business  models  and  profitability 
may  be  challenged  by 
the  new  FinTech 
competitors. 

implementing 

already 

4.2.2.  HOUSING MARKET* 

Following  a  prolonged  contraction  period,  the 
German  housing  market  is  currently  in  a 
dynamic  phase. (18)  Recent  upward  dynamics  in 
real  estate  prices  in  Germany  result  from  strong 
housing  demand  and  insufficient  housing  supply. 
As  a  result,  house  prices  have  accelerated 
noticeably  in  real  and  nominal  terms  since  2010 
(Graph  4.2.1).  In  2015,  house  prices  increased  by 
around  4.5 %  and  continued  to  grow  even  more 
strongly in 2016. On the one hand, strong demand 
for  houses  has  been  supported  by  the  growing 
number  of  households, positive  income  prospects, 
that  create 
interest 
and 

low  nominal 

rates 

(18)  For  previous  in-depth  analyses  of  the  German  housing 
market please see European Commission (2014), p. 46 and 
European Commission (2015a), p. 46. 

26 

9010011012013014015095Q198Q101Q104Q107Q110Q113Q116Q1Index, 2010=100Real house price indices, seasonally adjustedNominal house price indices, seasonally adjusted 
                                                           
 
4.2. Financial sector 

Graph 4.2.2:  Price-to-income and price-to-rent ratios 

may  be  crowded  out  of  the  cities  to  peripheral 
areas. 

Graph 4.2.3:  Rents versus house prices 

Source: OECD, ECB, BIS, European Commission 

in 

Upward  dynamics 
in  property  prices  are 
concentrated in agglomerations, where demand 
is expected to increase further in the future. (19) 
In  2015,  upward  dynamics  in  real  estate  prices 
were  most  pronounced 
large  cities  (6 % 
compared with 3 % to 4 % economy-wide) (Graph 
4.2.3). In these areas, overvaluations of residential 
properties  amounted  to  10 %  to  20%  suggesting 
that  prices  decoupled  from 
their  underlying 
fundamentals  (Deutsche  Bundesbank,  2016c  and 
2016d). (20)  Although  accommodation  in  cities 
tends  to  prove  more  expensive  for  immigrants, 
metropolitan  areas  seem 
to  be  particularly 
attractive  owing  to  job  opportunities,  personal 
connections, available public infrastructure as well 
as  lower  linguistic  and  cultural  barriers  (Federal 
Statistical  Office,  2016a). (21) (22)  Large  cities 
attract  primarily  not  only  young  people  and 
foreigners but also elderly people who prefer urban 
areas  to  rural  ones  because  of  infrastructure 
advantages. 
and 
growing 
urbanisation  trends  prevail  in  the  future,  it  may 
further  increase  house  prices.  This  could  have 
social  implications  as  socially  vulnerable  people 

population 

If 

(19)  See  Deutsche  Bank  Research  (2017)  for  an  outlook  on 
price developments in the five major cities in Germany.  
(20)  According  to  the  Global  Real  Estate  Bubble  Index  2016, 
Munich is prone to "bubble risk" while Frankfurt am Main 
is categorised as "overvalued" (UBS, 2016). 

(21)  Network  effects  are  the  main  driver  of  immigration  to 
urban regions, where the share of foreign nationals is much 
higher (around 12 %) than in rural regions (almost 5 %). 
(22)  See  Geis,  Placke,  and  Plünnecke  (2016)  for  an  expert 
report on the employment development and a proposal for 
the regional distribution of refugees. 

Source: European Commission calculations; Association of 
German Pfandbrief Banks (vdp); Federal Statistical Office; 
Deutsche Bundesbank 

Purchasing prices for houses have grown faster 
than  rents  but  new  rents  have  started  to  catch 
up  since  2013.  In  the  period  2010-2016  rent 
indices that refer to Germany as a whole, including 
also  rural  areas,  rose  by  7.6 %  (in  Berlin  by 
10.2 %). The real rent index, which is adjusted for 
consumer price inflation, grew by 0.3% (in Berlin 
by 2 %). Comparing rent and price trends indicates 
whether the actual real estate price development is 
fundamentally justified. Over the same period, new 
rents  –  expressed  as  a  percentage  of  rents  and 
prices – increased economy-wide by around 20 % 
(in  Berlin  by  46.4 %).  This  was  significantly  less 
than  purchase  prices  over  the  same  time  (52.4 % 
and  79.5 %,  respectively).  New  rental  contracts 
reflect  the  price  hike  as  landlords  are  passing 
higher  purchasing  prices 
tenants.  As  a 
consequence, new rents have drifted apart from the 
overall  rent  index  since  2011  (Graph  4.2.3).  A 
rental price brake introduced in Germany in 2015, 
applies 
experiencing 
property  markets 
significant price pressures and aims at curbing rent 
hikes  on  new  tenancies  to  10 %  above  existing 
rental benchmarks. (23) 

to 

to 

(23)  The  rental  price  brake  applies  in  12  federal  states,  i.e.  in 
whole or in part in Berlin, Cologne, Düsseldorf, Frankfurt 
am  Main,  Munich  and  Stuttgart  as  well  as  in  many  small 
and  medium-sized  towns  and  municipalities.  Brandenburg 

27 

-40-35-30-25-20-15-10-5002Q103Q104Q105Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q1% deviation from averagePrice to rental vs long-term averagePrice to income vs long-term average90951001051101151201251301351401451501550506070809101112131415House prices (owner-occupied apartments), 127 citiesHouse prices, totalRents (new contracts)Rents (deflator national accounts)Index, 2008=100 
 
                                                           
 
                                                           
4.2. Financial sector 

Graph 4.2.4:  Building permits and construction work 
completed for dwellings 

Note: Permits and construction completed refers to the 
number of dwellings in the construction of new buildings 
and work on existing buildings; estimated demand refers to 
the level of annual demand estimated by the Federal 
Ministry for the Environment, Nature Conservation, Building 
and Nuclear Safety. 
Sources: European Commission calculations; Federal 
Statistical Office 

Investment  in  new  dwellings  picked  up  after 
2010  but  most  of  the  housing 
investment 
corresponds  to  renovating  existing  properties. 
Investment  in  new  dwellings  had  touched  bottom 
in  Germany  in  2008/2009  before  rebounding 
noticeably  after  2010.  Despite  a  pick-up  of 
investment  in  new  owner-occupied  properties  and 
new apartments, most expenditure, with a constant 
share  of  around  70 %,  is  used  for  renovating  and 
modernising  existing  dwellings.  In  2015,  almost 
28 %  (EUR  36.4  billion  of  total  EUR  130.8 
billion)  of  investments  in  existing  dwelling  have 
been used for energy related investments while the 
share  of  investments  in  energy-saving  measures 
was  around  32 %  in  2010  (EUR  38.6  billion  of 
total EUR 118.9 billion) (Graph 4.2.5). In contrast, 
during  the  mid-1990s  refurbishment  and  new 
investment  were  almost  balanced  (Gornig  et  al., 
2016).  

the  average  annual  growth 

In  spite  of  strong  growth  in  construction,  the 
expansion  of  housing  supply  seems  insufficient 
to  match  demand.  In  response  to  accelerating 
house prices, German construction investment rose 
on  average  by  1.9 %  between  2010  and  2016. 
Prices for building land picked up with a time lag 
of around four years and have been growing at an 
accelerated  pace  since  then.  Between  2010  and 
2014 
rate  of 
construction completions was 11 %. Yet, it slowed 
to  1 %  in  2015.  Completions  amounted  only  to 
248 000  in  2015,  although  projected  demand  – 
taking  immigration  into  account  –  is  estimated  at 
350 000 annually until 2020 (Graph 4.2.4) (Federal 
Ministry 
Environment,  Nature 
Conservation, Building and Nuclear Safety, 2016). 
(24) Moreover, only around 57 000 social dwellings 
were  finished  between  2010  and  2016  (German 
Bundestag, 2016). With an increase of 23 % (year-
on-year)  during  the  first  11  months  of  2016,  the 
number of building permits indicated the strongest 
increase  in  scheduled  building  activity  for  17 
years. (25)  Permits  for  dwellings  in  residential 
homes showed the highest increase (125.4 %, year-
on-year) largely due to the construction of shelters 
for  asylum  seekers  and  refugees  and  temporary 
homes (Federal Statistical Office, 2017). 

the 

for 

and  Thuringia  implemented  the  rental  brake  in  2016.  In 
313  municipalities  it  affects  around  28 %  of  the  overall 
population in Germany. See Federal Ministry of Justice and 
Consumer  Protection  (2015),  Kholodilin,  Mense  and 
Michelsen  (2016),  the  Federal  Institute  for  Research  on 
Building, Urban Affairs, and Spatial Development (2016). 
(24)  See  Federal  Institute  for  Research  on  Building,  Urban 
Affairs,  and  Spatial  Development  (2015).  The  sum  of 
350 000  new  dwellings  assumes  100 000  owner-occupied 
flats/houses, 170 000 rental flats in mansion blocks as well 
as 80 000 social dwellings (flats). 

(25)  Part  of  the  surge  in  overall  permits  might  be  related  to 
temporary factors such as the introduction of the new laws 
on  energy  efficiency  that  entered  into  force  in  2016 
(Deutsche  Bundesbank,  2016e)  and  which  may  have  led 
investors to being forward some permit applications. 

28 

05010015020025030035040045005010015020025030035040045005060708091011121314151617181920Estimated demandThousandsthousand dwellingsPermits for building constructionConstruction work completedEstimated demand (appartments, rhs) 
                                                                                   
 
4.2. Financial sector 

Graph 4.2.5:  Structure of housing investment 

mortgage loans for housing purposes with a long-
term fixed interest rate for 10 years increased from 
around 30 % in 2010-2014 to around 45 % in early 
2015 (Deutsche Bundesbank, 2016d). (26)  

Draft  legislation  has  been  adopted  to  reinforce 
macroprudential  policies  ensuring  financial 
stability.  In  response  to  the  recommendation  by 
the  Financial  Stability  Committee,  the  Federal 
Government  put  forward  a  draft  law to  introduce 
counteractive  measures.  (27)  The  law  provides  the 
necessary legal basis to allow the Federal Financial 
für 
Supervisory  Authority 
Finanzdienstleistungsaufsicht) 
introduce 
minimum 
the  credit-based 
for 
financing  of  residential  property  purchases  (e.g. 
caps on loan-to-value ratios, debt-to-income ratios, 
debt-service-to-income 
debt-service-
coverage  ratios  and  amortisation  requirements). 
The  use  of  these  instruments  will  depend  on  the 
assessment  of  potential  risks  to  financial  stability 
arising  from  excessive  debt  and  price  bubbles  on 
the real estate market. 

(Bundesanstalt 
to 

requirements 

ratios, 

(26)  Fixing  interest  rates  for  at  least  10  years  is  the  common 
practice in mortgage-based borrowing in Germany. On the 
one hand, this limits the flexibility to benefit from the low 
interest  rate  environment  since  re-mortgaging  is  dis-
incentivised  by  comparatively  high  refinancing  costs 
(European Commission, 2016a). On the other hand, from a 
financial  stability  perspective  the  comparatively  long 
fixation  terms  minimize  the  vulnerability  of  borrowers  to 
interest rate shocks. 

(27)  Legislative  proposal  for  the  amendment  of  the  financial 
services  supervision  law.  Respective  legal  bases  are 
introduced  as  regards  relevant  loans  provided  by  credit 
investment  funds  (AIFs)  and 
institutions,  alternative 
insurance  enterprises.  The  draft 
for 
corresponding  amendments  to  the  German  Banking  Act 
(KWG),  the  Insurance  Supervision  Act  (VAG)  and  the 
German Capital Investment Code (KAGB)  

law  provides 

Source: European Commission; Bundesministerium für 
Verkehr, Bau und Stadtentwicklung (BMVBS); Deutsches 
Institut für Wirtschaftsforschung (DIW) 

The  refugee  inflow  is  estimated  to  have  a 
limited  positive  effect  on  real  estate  prices  and 
rents.  According 
to  Deutsche  Bundesbank 
(2016c),  the  effect  of  the  inflow  of  refugees  on 
rents  and  house  prices  could  amount  to  a  ½-1 
percentage point increase over the next two years. 
Simulations  using  the  European  Commission's 
QUEST model give similar values. Higher demand 
for housing in response to the refugee inflow raises 
the  price  of  housing  in  the  economy.  Increased 
housing  demand  also  leads  to  additional  housing 
investment,  which  is,  however,  subject  to  supply 
constraints on land  and  in  the  construction sector. 
The simulation results suggest a price increase for 
housing of around ½ % over a two-year period and 
around 1½ % over ten years. 

In spite of recent price dynamics, available data 
suggest  that  the  housing  market  does  not 
constitute  a  risk  to  financial  stability.  Since 
2010  there  has  been  no  indication  of  falling 
borrowing  standards  for  mortgages  (European 
Central  Bank,  2016b).  Though  increasing,  credit 
volume  for  housing  purposes  has  remained  at  a 
moderate level (3.7 % in November 2016, year-on-
year)  compared  with  the  1980s  and  1990s.  The 
overall  outstanding  stock  of  mortgages  increased 
nominally by 12.5 % between November 2012 and 
November  2016.  At  the  same  time,  the  overall 
indebtedness  of  private  households 
(as  a 
percentage of GDP and of disposable income) fell 
steadily  from  the  early  2000s.  The  share  of  new 

29 

0%10%20%30%40%50%60%70%80%90%100%0204060801001201401601800506070809101112131415Existing dwellingsNew apartmentsNew owner-occupied propertiesShare of new dwellings (rhs)EUR billionshare 
 
                                                           
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET* 

The  German labour  market  is performing  well 
but  given  population  ageing  looming  there  are 
additional  risks  of  labour  and  skills  shortages. 
The  employment  rate  reached  78.9 %  in  the  third 
quarter  of  2016  (age  20-64).  Employment  grew 
particularly  in  services  attached  to  businesses, 
public  services,  education  and  the  health  sector. 
Unemployment  decreased  to  3.9 %  by  the  fourth 
quarter of 2016 (Graph 4.3.1). In this context, there 
is a scope for tapping the considerable potential for 
the  employment  of  women,  older  workers  and 
migrants. 

Graph 4.3.1:  Labour force indicators 

Note: Data from 2005 first quarter to 2016 third quarter.  
Source: European Commission 

Wage growth decelerated in 2016. The low level 
of unemployment helped to support nominal wages 
that  increased  by  2.5 %  in  2016,  following  an 
increase  of  2.7 %  in  2015 (28).  Nominal  wage 
growth  continued  to  slightly  outpace  increases  in 
negotiated wages. This reflects good labour market 
conditions  and  possibly  still  some  effects  of  the 

(28)  Wage  developments  play  a  major  role  in  influencing 
household  savings  and  consumption  decisions.  Thus, 
through their impact on domestic demand, wage dynamics 
also  have  an  influence  on  the  high  and  persistent  current 
account  surplus  in  Germany.  For  a  description  of  wage 
developments  in  Germany  see  European  Commission 
(2016a). 

introduction  of  the  statutory  general  minimum 
wage. (29)  

Disincentives to work and the widespread part-
time  work  are  hampering  the  full  use  of  the 
labour market potential (European Commission, 
2016a). Owing to a high share (47 %) of part-time 
work, Germany  ranks  in  the  bottom  third  of 
Member States in terms of its full-time equivalent 
(FTE)  employment  rate  of  women  (57.1 %  in 
2015).  Women  with  a  migrant  background  and 
women with caring responsibilities are particularly 
affected.  (30)  Better  provision  of  quality  full-time 
childcare,  all-day  schools  and  long-term-care  is  a 
crucial  lever  for  increasing  woman's  participation 
in the workforce. Moreover, this lower attachment 
to  the  labour  market  is  combined  with  a  high 
gender  pay  gap  (22.3 %  compared  to  an  EU-
average of 16.7 % in 2014). (31) The tax treatment 
of  second  earners  (mostly  women)  is  another 
full-time 
important  driver  hampering 
employment 
(see  Section  4.1).  Moreover, 
disincentives to work resulting from the tax system 
also  affect  low-wage  earners  (see  Section  4.1  and 
Section 4.3.3). Mini-jobs remain widespread, with 
about 4.8 million people having a mini-job as their 
only job in September 2016, which represents only 
a 1 % reduction in a year. According to Pusch and 
Seifert  (2017),  a  significant  share  of  mini-jobbers 
earns  hourly  wages  below  the  general  minimum. 
This 
the 
Commission  still  valid  (European  Commission, 
2016a). In this regard, researchers do not expect a 
major  reduction  without  additional  measures  to 
favour  transitions  to  standard  employment  (IAB, 
2016a). 

assessments 

former 

female 

leaves 

by 

Labour  market  outcomes  of  people  with  a 
migrant  background  continue  to  be  below 
average. At 57 %, the employment rate of non-EU 
nationals  was  only  at  the  EU  average  in  2015,  in 
spite of better labour market conditions and around 

(29)  For  an  analysis  of  price  competitiveness  in  Germany,  see 

European Commission (2014). 

(30)  Between  2006-2014,  the  total  number  of  children  under 
three years in early childhood education and care has more 
than doubled with an increase from 13.6% to around 33%, 
but  according  to  recent  estimations  there  are  still  165 000 
places  missing.  See  European  Commission  (2016a)  and 
Bertelsmann Foundation (2015a).  

(31)  There  is  strong  gender  difference  across  sectors  and 
occupations  and  after  controlling  for  socio-demographic 
and job characteristics approx. one third of the gender pay 
gap remains unexplained (Boll et al., 2016). 

30 

02468101245505560657075808505Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q1% of labour force% of populationLong term unemployment rate (rhs)Non-long term unemployment rate 15-74 (rhs)Activity rate 20-64Employment rate 20-64, seasonally adjusted 
 
 
                                                           
                                                           
4.3. Labour market, education and social policies 

23 pps lower than for German citizens. Particularly 
affected  are  women  with  a  non-EU  nationality 
with  an  employment  rate  of  45.6 %.  This  was 
around  30  pps  points  below  the  level  of  female 
German  citizens.  Not  only  does  the  share  of  low-
skilled people among non-EU nationals of working 
age (50.5 %) exceed the EU average (45.7 %). It is 
also  much  higher  than  the  share  of  low-skilled 
people  among  German  citizens  (16.8 %).  In 
addition,  non-EU  nationals  have  a 
lower 
employment rate at every skills level. The gap (25 
pps)  is  particularly  high  for  those  with  a  tertiary 
representing  a  potential 
level  of  education, 
underuse of skilled labour (Graph 4.3.2). A major 
obstacle  to  the  transition  to  the  labour  market 
might be the lack of German language proficiency. 
Only 29 % of migrants who have arrived in the last 
10 years have an advanced knowledge of German 
(European  Commission,  2016d). (32)  Labour 
market  difficulties  persist 
second 
generation (children of  non-EU born  immigrants), 
even if their situation has improved relatively since 
2005 (Höhne, 2016).  

the 

for 

Graph 4.3.2:  Employment rate difference between tertiary 
educated nationals and third country citizens 
(2015) 

Note: Age 20-64 
Source: European Commission  

(32)  For  latest  policy  measures  on  refugee  integration  see  Box 

4.3.1. 

31 

2727252523221914051015202530NLSEDEFRBEATEU-28UK 
 
 
 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3. Labour market, education and social policies 

32 

 Box 4.3.1: Refugee integrationIn light of recent migration inflows, Germany has taken considerable action to accommodate and integrate refugee. The Act on the Acceleration of Asylum Procedures provides for a certain group of refugees integration courses to start soon after the person’s arrival. It also introduced federally-funded classes of German as a second language as well as integration measures for asylum seekers with good prospects of staying in Germany. The latest Integration Act adopted in August 2016 (The Federal Government, 2016), regulates benefits, labour market integration and the residence obligation (Wohnsitzregelung). (1) As a pre-requisite for successful integration, the act creates more legal certainty for asylum-seekers and tolerated persons (Zustimmung für einen geduldeten Aufenthalt) who start vocational training in Germany and improves planning certainty for employers. The law allows the Department of Foreigners to determine, for a period of three years, where refugees may settle, either by prohibiting them from settling in certain areas or by allocating them to particular areas. The aim of this provision is to avoid a concentration of migrants in any one area. However, refugees who have found work, a place for training or academic studies are exempt from this rule. Although the level of educational attainment and qualifications of recent asylum seekers poses a challenge, Germany's vocational training system may prove to be an asset for integration. In 2015, asylum seekers had a mixed educational background: 17 % attended tertiary, 19 % upper secondary, and 31 % lower secondary schools prior to arrival, while 23 % attended only primary education and 8 % had no education at all (IAB, 2016b). The majority of refugees who arrived during the first 10 months of 2016 were under the age of 30 (Federal Office for Migration and Refugees, 2016). In this regard, Germany's tradition of vocational training may have significant potential to provide a pathway into work for many, particularly young, refugees. For refugees with qualifications there are institutional barriers to having those qualifications recognised. Notwithstanding recent efforts, regulations for the recognition of overseas educational attainments and non-formal qualifications differ between federal states and the process remains costly for applicants (Federal Ministry of Education and Research, 2016). (2) The recognition of foreign qualifications in the German educational system is limited overall and restricted to cases for which qualifications are demonstrated by means of a certificate. This may increase the need to provide adequate reskilling opportunities in the German education system.  Small businesses, especially in the manufacturing and hospitality sector but also in less-regulated sectors and those with no formal language requirements, may play an important role in the labour market integration of refugees (Saliktluk, Giesecke, and Kroh, 2016). (3) The social partners in Germany agree on the need to make a concerted effort to integrating refugees into vocational training and apprenticeship programmes and measures to that end are already under way. At an employer’s instigation, young refugees may apply for language support and internships to prepare for an apprenticeship. Moreover, people with a migrant background often set up their own business (see Section 4.5.3) (Bertelsmann Foundation, 2016a).                                                            (1) See also Flüchtlingsintegrationsmaßnahmen, in short FIM (a refugee labour market integration programme that provides work opportunities), "KompAS programme" (assessing competences, early activation, acquiring language skills), "Prospects for (young/female) refugees" (enables professional orientation and practical experience in a company to be combined), "Integration through qualification (IQ) support programme", European Social Fund (ESF) integration guidelines of the government focusing on the integration of asylum seekers and refugees (IvAF). (2) For example, the 2012 Recognition Act aimed at addressing the problem of over-qualification of refugees. The introduction of this law increased access to information about the prospects of and opportunities for having foreign qualifications recognized, which has since resulted in a considerable increase in applications. (3) The IAB-SOEP-Migrationsstichprobe covers a large sample of refugees and other migrants that arrived in Germany between 1990 and 2010. For details on IAB-SOEP data see Institut für Arbeitsmarkt- und Berufsforschung (IAB) in cooperation with Sozio-oekonomisches Panel (SOEP) of the German Institute for Economic Research (DIW).  
 
 
 
 
 
 
 
 
 
4.3. Labour market, education and social policies 

pressure on wages of temporary agency workers, a 
law was adopted in 2016 providing equal pay after 
nine  months  of  working  in  the  sector  and  the 
introduction  of  a  maximum  transitional  period  of 
18 months after which these workers must be hired 
by the company. (33) 

4.3.2.  SOCIAL POLICY (POVERTY AND SOCIAL 
ASPECTS OF SOCIAL SECURITY SYSTEMS) 

from 

the  proportion  of 

The good labour market performance of recent 
years has not led to a decline in poverty. At the 
end  of  2015,  a  rising  proportion  of  the  total 
population  was  receiving  one  form  of  minimum 
income  support  (9.7 %  compared  with  9.1 %  in 
2014, respectively). (34) The at-risk-of-poverty rate 
has  stabilised  at  a  relatively  high  level  following 
earlier  increases.  Particularly  vulnerable  are  the 
unemployed,  for  whom  the  at-risk-of-poverty  rate 
remains considerable (69.1% in 2015). This stems 
partly 
long-term 
unemployed  people  who  are  only  eligible  for  the 
means-tested  basic 
In-work 
poverty  has  steadily  increased  in  Germany  in 
recent years and is above the EU average (in 2015, 
9.7 %  compared  with  9.5 %),  which  partly  relates 
to  the  high  proportion  of  part-time  employment 
(see  European  Commission,  2016a).  The  at-risk-
of-poverty  rate  in  old  age  (i.e.  above  65)  is  also 
above  the  EU  average  (16.5 %  in  2015  compared 
with  14.1 %)  and  the  number  of  people  at  risk  of 
old-age  poverty  is  expected  to  increase  in  the 
coming  years.  Nevertheless,  severe  material 
deprivation has  remained broadly  stable, hovering 
just below 5 % (4.6 % in 2005 and 4.4 % in 2015).  

income  support. 

Going forward, pension adequacy is expected to 
deteriorate.  Most  recent  government  reports 
forecast a further decline in the replacement rate of 
the statutory pension scheme from 47.7 % in 2015 
to 44.5 % by 2030 and to 41.7 % by 2045 (Federal 
Ministry of  Labour  and  Social  Affairs, 2016a  and 
2016b).  Moreover,  until  now  the  take-up  and 
coverage of second- and third-pillar schemes is too 

(33)  Gesetz 

zur 

Änderung 

des 

Arbeitnehmerüberlassungsgesetzes und anderer Gesetze.  
(34)  The  minimum  income  schemes  consist  in:  Basic  income 
support  for  job  seekers  ('Hartz  IV'),  current  assistance 
towards living expenses outside of institutions, needs-based 
pension supplement in old age and in the event of reduced 
earning  capacity,  basic  support  for  refugees,  and  war 
victim assistance.  

Although  the  employment  prospects  of  older 
workers have improved considerably, extending 
working lives remains a challenge, especially in 
the context of ageing. Extending working lives is 
only  possible  if  matched  with  incentives  for  later 
retirement  and  with  skills-upgrading  measures 
based  on  well-targeted  relevant  types  of  learning. 
However,  the  participation  of  older  adults  (55-64 
years)  in  life-long  learning  was  3.1%  in  2015 
below  the  EU  average  of  6.0%.  While  the  ‘Flexi-
Rente’  could  contribute 
to  a  more  flexible 
combination  of  pensions  and  additional  income 
during  the  transition  to  retirement,  it  is  unclear  to 
what extent this most recent reform may offset the 
stronger incentives for early retirement introduced 
by the 2014 pension reform (see Overview table in 
Annex A). 

them 

suffer 

Despite  positive  labour  market  developments, 
the number of registered long-term unemployed 
has  remained  broadly  stable  at  about  1  million 
(Federal  Employment  Agency,  2016a). Around 
57 %  of  long-term  unemployed  people  have  been 
in that status for more than two years. A significant 
from  multiple 
proportion  of 
employment barriers such as low skills and a lack 
of 
skills,  health  problems,  care 
obligations or age-related problems. Jobcentres do 
not  seem  to  sufficiently  link  active  labour  market 
policy  (ALMP)  measures  to  follow-up  actions. 
Moreover,  the  per-capita  integration  budget  for 
long-term  unemployed  recipients  of  unemployed 
benefit  II  (Eingliederungsleistungen)  has  been 
reduced since 2010. 

language 

Protection  from  potential  abuses  in  temporary 
work  and  work  contracts  is  improving.  The 
number  of  temporary  agency  workers  has  been 
increasing  (Federal  Employment  Agency,  2016b). 
It  reached  around  1  million  (close  to  3 %  of  total 
employment)  in  June  2016.  Temporary  agency 
workers  are  often  occupied  in  jobs  requiring  a 
relatively  low  skills  level.  The  majority,  in  which 
foreigners  are  overrepresented,  are  male,  young, 
and without vocational training. Around 20 % have 
previously been unemployed for at least a year or 
have  never  been  employed  –  evidencing  some 
foothold  effects  towards  employment.  However, 
around 50 % of temporary agency contracts are of 
very  short  duration  and  terminated  in  under  three 
months. To prevent the abuse from work contracts 
(i.e.  the  unnecessary  substitution  of  temporary 
workers  for  permanent  workers)  and  downward 

33 

 
                                                           
4.3. Labour market, education and social policies 

The  family  benefits  system  is  not  adequately 
tailored to families and children in need. The at-
risk-of-poverty  rate  for  children 
in  Germany 
remains above pre-crisis levels at 14.6 pps, 2.2 pps 
above the 2006 level, which is also more than the 
increase recorded at EU level over the same period 
(1.1  pps).  A  key  reason  for  child  poverty  in 
Germany  is  the  high  at-risk-of-poverty  rate  of 
single parents (33.7 % in 2015) including in-work 
poverty (24.3 % in 2015). (36) Some instruments in 
the  current  family  benefit  system  such  as  the  tax-
free  child  allowance  (Kinderfreibetrag)  favour 
middle-and upper-class families as they rise in line 
with  parent's  earnings.  At  the  same  time,  for 
recipients  of  means-tested  minimum  income,  the 
child  benefit  (Kindergeld)  is  counted  as  income 
and thus does not top up the minimum income. (37) 
Other instruments set contradictory incentives. For 
example,  the parental allowance (Elterngeld  Plus) 
is 
labour  market 
participation of parents, whereas the joint taxation 
of income for married couples (Ehegattensplitting) 
and  free  health  insurance  coverage  for  non-
working  spouses  remain  disincentives  to  work for 
second earners (see Section 4.3.1). 

intended 

increase 

the 

to 

4.3.3.  EDUCATION AND SKILLS 

German  education  outcomes  are  above  the  EU 
average.  In  2015,  education  outcomes  remained 
stable  for  science  and  mathematics  and  improved 
for  reading  compared  to  2012  (OECD,  2016a).  In 
these  three  subjects,  the  share  of  low  achievers  is 
significantly  below  the  EU  average  (17 %  in 
science,  16 % 
in 
mathematics). However, the share of low achievers 
in  science  is  noticeably  higher  for  people  with  an 
immigrant background (42.5 % for first-generation 
and 31.1 % for second-generation) than for people 
without an immigrant background (11.8 %) (Graph 
4.3.3) (European Commission, 2016e). 

and  17 % 

reading 

in 

(36)  According 

to 

the 

Institut 

für  Arbeitsmarkt  und 
Berufsforschung  (IAB),  19 %  of  the  children  and  16 %  of 
the  population  as  a  whole  are  at-risk  of  poverty  (IAB, 
2016c).  Other  studies  confirm  the  above  statements  (see 
Bertelsmann Foundation, 2015b and 2016b). 

(37)  Children  of  low  income  earners  are  disadvantaged  in  the 
current  system  as  the  tax  relief  through  the  parental 
allowance  is  higher  than  support  for  children  of  low 
income  earners 
the 
supplementary  child  allowance 
in  need 
(Kinderzuschlag). 

the  child  benefit  or 
for  people 

through 

Section 

jobs  or  an 
(see 

low  to  fully  compensate  for  the  decrease  in  the 
replacement  rate  of  the  first  pillar.  Coverage  is 
particularly low among people who are at high risk 
of  insufficient  accrual  of  public  pension  benefits 
such  as  low  wage  earners,  part-time  workers  or 
interrupted 
people  with  atypical 
employment 
4.3.1). 
history 
Accordingly, the long-term net replacement rate is 
significantly  below  the  OECD  average  for  both 
low and average wage earners (OECD, 2015a). (35) 
The  adequacy  of  pension  incomes  is  further 
negatively  impacted  by  the  current  low  level  of 
interest  rates,  which  jeopardises  the  rate  of  return 
of  private  pension  schemes.  The  gender  pension 
gap  in  Germany,  which  compares  the  average 
retirement  income  (i.e.  pension)  between  women 
and men, is one of the highest in the EU (in 2015, 
on  average  45.7 %  compared  with  38.3 %, 
respectively) and older women are at a particularly 
high risk of poverty.  

pension 

occupational 

income.  However, 

The  agreed  measures  under  the  proposed 
‘integrated  concept’  (Gesamtkonzept)  for  old-
age  provision  could  help  to  alleviate  old-age 
poverty.  These  measures  aim  at  increasing  the 
take-up  of  the  occupational  and  private  pension 
schemes, in particular through tax credits for low-
wage  earners,  an 
in  basic  public 
increase 
allowances and additional incentives for employers 
offering 
schemes. 
Furthermore,  they  also  aim  at  improving  the 
entitlements  for  recipients  of  a  reduced  earning 
capacity  pension,  and  at  introducing  allowances 
for  people  receiving  a  means-tested  minimum 
retirement 
the  Federal 
Government  has  not  yet  presented  legislative 
proposals  on  a  so-called  life  performance  pension 
(Lebensleistungsrente)  that  recognises  the  long-
standing  labour  market  performance  of  insured 
workers,  as  it  was  announced  in  the  coalition 
agreement  (The  Federal  Government,  2013).  The 
income ceilings set for pension payments currently 
limit contributions to the statutory pension system 
at a comparatively low level, given the direct link 
between  contributions  and  entitlements. 
In 
addition,  capital  income  is  in  general  exempted 
from  social  security  contributions.  The  provision 
of  complete  and  comprehensive  information  on 
total  pension  entitlements  in  all  three  pension 
pillars is not yet a standard service. 

(35)  The  net  replacement  rate  corresponds  to  the  proportion  of 
net income in work that is maintained after retirement. 

34 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

Graph 4.3.3:  PISA performance in science (2015) 

Source: OECD 

Federal  and  regional governments  have  agreed 
to  improve  the  quality  of  early  childhood 
education  and  care  (ECEC).  The  interim  report 
2016  by  the  Federal  Ministry  for  Family  Affairs, 
Senior  Citizens,  Woman  and  Youth  and  the 
respective ministries of the federal states provides 
details about the agreed aspects of quality such as 
child-staff ratio, staff training or management, and 
also identifies substantial estimated costs linked to 
their implementation (Federal Ministry for Family 
Affairs,  Senior  Citizens,  Women  and  Youth, 
2016). (38) About 60 % of compulsory schools now 
offer  all-day  classes,  a  marked  increase  compared 
to 2002, and another means to mitigate the effects 
of  a  child’s  socio-economic  background.  Only  a 
small proportion of pupils attend (38 %) these all-
day classes, however. 

integration 

challenge  will 

The 
require 
additional  investment  in  education.  Germany’s 
general  government  expenditure  on  education 
remains  below  the  EU  average.  This  is  the  case 
both  as  a  proportion  of  GDP  (in  2014,  4.3 % 
compared  with  an  EU  average  of  4.9 %)  and  as  a 

(38)  With  regard  to  estimations  by  the  Technical  University 
Dortmund, making early childhood education and care free 
of  charge  could  cost  EUR  3.5  billion.  Provided  an  extra 
100 000  places  to  children  under  three  would  require  an 
investment of about EUR 2.6 billion and EU 913 million of 
operating costs. Additional places for asylum seekers could 
amount to EUR 320 to 420 million. Improving the teacher-
to-child  ratio  could  cost  between  EUR 5.7  billion  and 
EUR 11.4  billion.  Strengthening  the  management  function 
could amount to EUR 574 million a year. 

3 

billion 

annually 

share of total public expenditure (9.7 % compared 
with  10.2 %,  respectively).  However,  integrating 
newcomers into education and training and further 
expanding early childhood education and care and 
all-day  schools  will  require  additional  financial 
resources  of  additional  annual  investment  up  to 
EUR 
(Autorengruppe 
Bildungsberichterstattung,  2016).  The  need  for 
additional  education 
increase 
(around  300 000-390 000  places  require  around 
30 000-40 000  extra 
is 
particularly the case in the areas of early childhood 
education  and  care,  compulsory  schooling  and 
preparation  for  vocational  education  and  'dual 
training'  that  are  apprenticeships  combined  with 
vocational 
Autorengruppe 
Bildungsberichterstattung, 2016).  

teachers/staff).  This 

resources  will 

training 

( 

4.0', 

A  number  of 
initiatives  are  underway  to 
improve  digital  skills  in  Germany.  Improved 
digital  skills  remain  crucial  to  support  digital 
transformation.  In  2016,  67.5 %  of  Germans 
reported  having  at  least  basic  digital  skills.  This 
compares  with  86.1 %  in  Luxembourg,  77.6 %  in 
Denmark and 73.1 % in Finland and 56.2 % in the 
EU  as  a  whole  (European  Commission,  2016d). 
The  use  of  computers  by  young  Germans  has 
increased  between  2009  and  2012,  particularly 
outside school, but in both areas it remains below 
the  OECD  average  (OCED,  2015b).  A  significant 
number of  schools do  not have  broadband access, 
in  particular  vocational  education  and  training 
(VET)  schools  (Bertelsmann  Foundation,  2016c). 
Work  on  exploring  the  future  of  manufacturing 
('Industry 
digitally-connected 
i.e. 
manufacturing)  has  progressed  well.  Following  a 
consultation  process  on  'Work  4.0',  a  draft  white 
paper was presented in late 2016. Education issues 
are  being  addressed  in  the  Federal  Government’s 
‘Digital  Agenda  2014-2017’  and  in  the  strategy 
‘Education  in  a  digital  World’  adopted  by  the 
Conference  of  Education  Ministers  of  the  federal 
states  in  early  December  (2016). The  strategy 
covers  education  plans  and  curricula,  teacher 
training,  e-governance,  education  media.  The 
‘DigitalPakt#D’  as  part  of  the  comprehensive 
education  strategy  for 
the  digital  knowledge 
society  announced  by  the  Federal  Ministry  of 
Education and Research foresees mutual efforts by 
the Federal Government and the states to improve 
digital 
Federal 
Government  would  invest  EUR  5  billion  over  a 
period of five years in digital infrastructure such as 

education.  Whereas 

the 

35 

0510152025303540Topperformers -immigrantstudentsTopperformers -non-immigrantstudentsLowperformers -immigrantstudentsLowperformers -non-immigrantstudents% 
 
                                                           
4.3. Labour market, education and social policies 

broadband  connections  and  computers  in  schools 
of  all  education  levels,  the  federal  states  would 
commit to investing in digital education, including 
teacher  training  (Federal  Ministry  for  Education 
and Research, 2016). 

Germany’s  teaching  force  is  older  than  that  of 
most  other  comparable  EU  countries  except 
Italy. The proportion of teachers aged 50 or older 
is  around  46 %  for  both  academic  and  vocational 
schools.  The  share  of  those over 60 has  increased 
from  8 %  in  2004  to  14 %  in  2014.  Estimates 
indicate that until 2025 there is an annual shortage 
of 1 600 teachers in eastern Germany compared to 
a  surplus  of  7  400  teachers  in  western  Germany. 
The  percentage  of  teachers  without  recognised 
training  was  at  6 %  in  2014.  Until  2025,  teachers 
in  chemistry,  mathematics, 
are  most  needed 
(Autorengruppe 
physics,  English  and  music 
Bildungsberichterstattung, 
2016).  Motivating 
enough  young  students  to  specialise  in  science, 
technology, engineering and mathematics (STEM) 
will be a challenge. At the same time, this provides 
an opportunity to upgrade and modernise teaching 
methods, in particular with respect to digitisation. 

36 

 
 
 
4.4. INVESTMENT 

Investment  as  a  share  of  GDP  has  remained 
subdued  overall  in  Germany  in  the  last  few 
years,  despite  strong  increases  in  2015-2016. 
The  German  economy  weathered  the  crisis  well, 
but 
investment  activity  has  remained  rather 
subdued  since  then  and  has  contributed  relatively 
little  to  potential  growth.  Germany’s  capital  stock 
increased much more slowly than that of the USA 
or  even  the  rest  of  the  EU-15.  This  may  have 
slowed down potential growth, which is estimated 
to be 0.3 or 0.7 pps lower than that of the USA or 
the  UK,  respectively,  in  2015.  Although  public 
investment  increased  strongly  in  2015-2016,  the 
public 
investment-to-GDP  ratio  has  remained 
largely  constant  over  the  last  few  years  (2.2 %  of 
GDP in 2016). It still appears low compared to the 
euro  area  (2.8 %  of  GDP  without  Germany), 
despite  a  downward  euro  area  trend  since  2009 
(Graph 4.4.1).  

Graph 4.4.1:  Investment gap with respect to the euro area 

investment  over  several  years  until  2015  suggests 
protracted underinvestment at the municipal level. 
(40)   

4.4.1.  CORPORATE SAVING AND INVESTMENT* 

Non-financial corporations (NFCs) have played 
a  key  role  in  increasing  the  saving-investment 
surplus  prior  to  and  especially  after  the  2009 
crisis.  As  far  back  as  the  early  2000’s  the  sector 
began  accumulating  net  assets  (Graph  4.4.2).  On 
the one hand, this was helped by a declining share 
of labour costs, while on the other it reflected a fall 
in  the  NFC  investment  ratio  in  2001-2002  from 
13 %  to  11 %  of  GDP,  owing  partly  to  a  credit 
slowdown. In the years that followed, and prior to 
the global financial crisis, the share of labour costs 
continued  to  decline  as  a  result  of  labour  market 
reforms.  This  supported  an  improvement  in  the 
operating  surplus  and  a  mild  recovery  in  the 
investment  ratio.  It  also  made  it  possible  to  raise 
dividend pay-outs without increasing indebtedness. 

Graph 4.4.2:  Determinants of the savings-investment 

balance of non-financial corporations 

Note: Difference in the investment-to-GDP ratio with respect 
to the rest of the euro area excluding Ireland and Spain 
Source: European Commission 

While this investment gap can partly be explained 
by  cyclical  and  structural  developments 
in 
Germany  and  other  euro  area  countries,  it  also 
reflects  a 
investment 
backlog. (39) In particular, pronounced negative net 

infrastructure 

sizeable 

(39)  In  fact,  the  investment  gap  can  be  partly  explained  by 
lower  relative  price  increases  for  investment  in  Germany, 
construction  booms  and  bubbles  in  other  countries,  the 
investment-intensive  catch-up  process  in  eastern  Germany 
during  the  1990s,  the  allocation  of  construction  and  the 
operation  of  infrastructure  to  the  private  sector,  and  the 
privatisation  of  previously  publicly-provided  services  and 
infrastructure (European Commission, 2014). 

Source: European Commission 

Lower  dividend  pay-outs  helped  to  rebuild 
company equity and have driven the increase in 
corporate  saving  and  net 
the 
aftermath  of  the  crisis,  the  operating  surplus 

lending.  In 

(40)  While  gross  fixed  capital  formation  at  municipal  level 
decreased  from  0.9%  of  GDP  to  0.7%  of  GDP  between 
2009 and 2015, depreciation remained largely flat at 1% of 
GDP, leading to net investment of -0.2% of GDP in 2015. 

37 

-3-2-101200010203040506070809101112131415161718General governmentPrivate sectorTotal% of GDPForecast-25-20-15-10-50510152025309597990103050709111315% of GDP% of GDPOperating surplusSavingGross fixed capital formationNet property income (rhs) 
 
 
                                                           
 
                                                           
4.4. Investment 

Key  sectors,  in  particular  network  industries, 
have  failed  to  keep  up.  Overall,  the  volume  of 
investment  has  more  than  made  up  for  the 
depreciation  in  fixed  assets,  but  in  certain  sectors 
capital  stock  has  stagnated,  possibly  creating 
capacity  bottlenecks  (Graph  4.4.3).  Investment  in 
real  estate  services  (housing)  has  been  consistent 
and owing to its high share has helped sustain the 
increase  in  the  aggregate  capital stock. It has  also 
driven  a  rebound  in  the  construction  sector’s 
capital  stock.  However,  there  are  indications  that 
housing  construction  may  still  be  lagging  behind 
actual needs (see Section 4.2.3). The infrastructure 
capacity  of  network  industries  (energy,  water  and 
waste  management,  transport,  communications) 
has not been expanding in line with the rest of the 
the  progress 
economy.  This  may 
towards  digitisation  and  the  switch  to  alternative 
energy sources. 

jeopardise 

Graph 4.4.3:  Net capital stock by type of economic activity 

Source: European Commission calculations 

focused  on 

than  net  payers,  of 

stagnated,  while  the  investment  ratio  fell  (Graph 
4.4.2).  NFCs 
rebuilding  equity, 
enabling them to reduce their reliance on external 
financing. Paradoxically, they became net earners, 
rather 
interest.  More 
importantly,  dividend  pay-outs  were  reduced, 
which  has  turned  out  to  be  a  key  factor  in  the 
recent  growth  in  NFCs’  net  lending.  Possibly 
devised  as  a  temporary response  to  the  crisis,  this 
trend  has  continued  for  a  number  of  years.  It  has 
usefully  freed  up  some  financing  space  for 
additional  investment.  However,  the  investment 
ratio recovered only partly and thereafter stabilised 
at a level just below the long-term average.  

to 

the  availability  of 

The investment share of NFCs has reacted only 
freed-up 
partially 
resources  and  remained  roughly  stable.  There 
are  several  possible  reasons  for  the  stagnant 
investment ratio despite available equity and bank 
liquidity. According to various reports, these range 
from  the  risk-aversion  of  the  ageing  owners  of 
family  businesses  or  uncertainty  in  the  face  of 
technological  change  (a  ‘wait  and  see’  attitude); 
the  rise  of  less  capital-intensive  sectors;  the 
increased  efficiency  and  lower  cost of  equipment; 
and  digitisation  and  changing  consumption 
patterns. 

the  automotive 

the  sluggishness 

(Graph  1.2)  and 

German  manufacturing  has  focused  on  its 
traditional core strengths. The relative weakness 
in  machinery  and  equipment  investment  after  the 
in 
crisis 
manufacturing capital stock (Graph 4.4.3) conceal 
ongoing  shifts  in  the  structure  of  this  sector.  The 
sub-sectors  that  have  been  expanding  capacity 
consistently  are 
industry  and 
pharmaceuticals.  In  comparison  to  1995,  their 
capacity  (the  real  value  of  their  capital  stock)  has 
grown  by  over  50 %.  Other  machine  building 
industries  have,  by  and  large,  maintained  the 
volume of their capital stock. Other industrial sub-
sectors – typically the users rather than developers 
of  equipment  –  have  seen  their  capital  stock 
decline.  Typical  examples  are 
low-tech 
industries  with  low  value-added:  food,  chemicals, 
non-metallic  mineral  products,  basic  metals  and 
textiles. In these sectors, output has been declining, 
or  increasing  at  a  below-average  rate.  Owing  to 
increased  capital  efficiency,  even  in  these  sub-
sectors,  output  has  either  declined  less  than 
capacity or increased over time. 

the 

38 

909294969810010210410610811000010203040506070809101112131415Index, 2008=100ManufacturingEnergyWater & wasteCommunicationsHousingTOTAL 
 
 
4.4. Investment 

39 

Box 4.4.1: Investment challenges and reforms in GermanySection 1. Macroeconomic perspective  Total investment in Germany (measured as gross fixed capital formation) proved to be fairly resilient to the crisis. Nevertheless, public and until recently private investment has been below the EU average (see Section 4.4.1). The growth in machinery and equipment investment slowed down and non-residential construction investment stagnated, leaving an accumulated backlog unaddressed. Investment in housing has picked up since 2010 but indications are that it still needs to catch up with rising housing needs. In  the next few years, housing investment is expected to develop dynamically, while corporate and government investment in equipment and non-residential construction will depend on improvements in business confidence and the capacity to set up, plan and implement public investment projects. Section 2. Assessment of barriers to investment and ongoing reforms Barriers to private investment in Germany are not related to financing constraints, but rather to uncertainty and unfavourable perceptions of the investment climate. More ambitious liberalisation of regulated professions could spur investment in the affected sectors and in the wider economy (European Commission, 2015b).   Main barriers to investment and priority actions underway: 1. Among the main barriers to private investment, the relatively high level and complexity of corporate taxation and high tax administration costs remain key. While measures have been taken to simplify certain areas of taxation, enhance tax administration and improve conditions for venture capital, no further initiatives have been taken or are planned to review corporate taxation or the local trade tax (Gewerbesteuer). 2. Regulatory restrictiveness in the services sectors gives rise to low productivity and uncompetitive pricing which affects also the costs and performance of the manufacturing sector. Limited action has been announced with respect to further liberalizing professional services. 3. The current design of federal fiscal relations has been a barrier to public investment at municipal level. The scope for public investment tends to be narrowed by a mismatch between the available resources of the different layers of government and their individual investment responsibilities, and by limited revenue autonomy of federal states and municipalities. Several measures have been recently taken to improve public investment conditions at municipal level. The agreed reform of federal fiscal relations should further increase investment possibilities at municipal level, even though it falls short of more fundamental changes in terms of increasing tax autonomy of federal states and municipalities. Regulatory/ administrative burdenTaxationCSRPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
4.4. Investment 

purpose  of  value-added  taxation,  the  high  tax 
wedge  and  the  negative  tax  incentives  for  second 
earners. 

of 

There  are  several  options  for  eliminating  the 
the 
debt  bias,  with  varying  effects  on 
investment-friendliness 
corporate 
taxation.   One  would  be  to  discontinue  the 
deductibility  of  interest  payments.  Alternatively, 
an allowance for corporate equity (ACE) has been 
discussed, (44) which provides for a deduction of a 
notional  return  on  equity  at  corporate  level, 
thereby  improving  the  conditions  for  equity-
financed  investment.  The  effect  of  introducing  an 
ACE  crucially  depends  on  the  chosen  notional 
interest  rate  and  on  a  solid  anti-avoidance 
framework. (45)  The  ACE  rate  will  determine  to 
which  extent  financing  neutrality  is  ensured,  and 
how much effective corporate taxation is reduced, 
thus  providing  a  positive  impact  on  corporate 
choice.  Overall, 
location 
investment 
simulations based on the CORTAX model suggest 
that  an  ACE  reduces  the  marginal  cost  of  capital 
for  new  investments.  This  has  correspondingly  a 
positive  impact  on  GDP,  employment,  and  wages 
(Box 4.4.2). Lowering the cost of equity financing 
could  also  benefit  in  particular  those  companies 
that  usually  face  stronger  borrowing  constraints, 
such as young businesses. 

and 

Adjusting  the  current  depreciation  regime 
could  also  help  to  make  the  tax  system  more 
investment-friendly,  though  only  to  a  limited 
extent.  Although  declining-balance  depreciation 
was  permitted  until  2008,  the  German  system  has 
since  opted  for  straight-line  depreciation. (46) 
Lowering corporate capital costs by re-introducing 
the  declining-balance  depreciation  could  improve 
the  private  investment  climate.  However,  Spengel 
and Bergner (2015) suggest that declining-balance 
depreciation  would  lower  corporate  capital  costs 
only slightly, hence limiting positive the impact on 
private investment. 

4.4.2.  INVESTMENT-FRIENDLINIESS OF THE TAX 

SYSTEM 

in  corporate 
Despite  significant  reductions 
capital  costs,  the  friendliness  of  the  tax  system 
for  private  investment  still  ranks  low  by  EU-
wide  comparison.  Corporate  capital  costs (41)  in 
Germany are still high. The overall mean corporate 
capital  costs  fell  by  around  16 %  between  2000 
and  2016.  This  was  largely  driven  by  significant 
reductions  in  the  corporate  tax  rate  as  part  of  the 
corporate  tax  reforms  of  2001  and  2008. (42) 
Although  this  is  the  highest  reduction  among  the 
EU-28, corporate capital costs in Germany are still 
among the highest in the EU-28. Besides the high 
level  of  corporate  taxation,  the  tax  system  is  also 
complex and tax administration costs are high (see 
European Commission, 2016a).  

Several  corporate  taxation  provisions  may  be 
hampering  private  investment. (43)  A  recurring 
issue is the bias towards debt in corporate taxation. 
Due to a less favourable tax treatment, investments 
financed  by  equity  need  to  earn  2.7  percentage 
points more in return than investments financed by 
debt (ZEW, 2017). This debt bias was the seventh 
highest  in  the  EU  in  2016.  At  shareholder  level, 
the extent of the debt bias is similar. This matters 
in  particular  for  SMEs,  which  tend  to  have 
domestic  shareholders.  Lowering  the  capital  costs 
on equity could strengthen private investment, e.g. 
by  strengthening 
the  underdeveloped  German 
venture  capital  market.  Other  features  of  the  tax 
system that might distort financing and investment 
decisions  are  the  inclusion  of  non-profit  elements 
the 
in 
tax 
(Gewerbesteuer), 
loss  carry-
limitations 
forwards, and tax induced distortions with respect 
to  the  choice  of  legal  form.  In  addition,  several 
specific  provisions 
investment-
friendliness  of  the  tax  system.  These  include  the 
depreciation  regime,  the  interest  rate  used  to 
calculate  deductible  pension  provisions, 
the 
taxation  of  capital  gains,  cash  accounting  for  the 

tax  base  of 

local 
  on 

reduce 

trade 

the 

the 

(41)  ‘Cost of capital’ in this context is defined as the minimum 
pre-tax real rate of return on an investment, given an after-
tax  real  rate  of  return  of  an  alternative  capital  market 
investment. 

(42)  In the 2001 reform, the corporate tax rate was  reduced by 
15.8  pp  to  26.38 %,  while  the  2008  reform  introduced  a 
further reduction to 15.83%. 

(43)  See  Ifo  Institut  (2015),  Federal  Ministry  for  Economic 
Affairs  and  Energy  (2015),  Fratzscher  et  al.  (2014),  and 
Spengel and Bergner (2015). 

(44)  See  DIW  (2016);  German  Council  of  Economic  Experts 

(2014 and 2012).  

(45)  An  alternative  reform  that  is  significantly  more  robust  to 
tax  avoidance  and  budgetary  less  costly  is  the  Allowance 
for  growth  and  investment,  as  recently  proposed  by  the 
Commission  as  part  of  the  Common  (Consolidated) 
Corporate Tax Base (European Commission 2016f, 2016g). 
(46)  Declining-balance  depreciation  was  allowed  again  in  the 
years 2009 and 2010 to cushion the effects of the financial 
crisis. 

40 

 
                                                           
                                                           
4.4. Investment 

(Continued on the next page) 

41 

Box 4.4.2: Reducing the debt bias and improving the investment-friendliness of corporate taxationThe debt bias of corporate taxation may have a negative impact on investment by credit constrained firms. In 2015, German corporations, whose indebtedness is on aggregate already the lowest in the euro area, continued deleveraging. However, this did not result in increased nominal corporate investment. As in most other countries, the German corporate tax system treats debt and equity-financed investments differently. While interest on debt is deductible from the corporate tax base, equity financing costs are not tax deductible. This debt bias, which was the seventh highest in the EU in 2016, puts credit constrained firms at a disadvantage, thus potentially hampering their investment activity. Several reform options may address the debt bias. The Allowance for Corporate Equity (ACE) allows the deduction of a notional return on equity from the corporate income tax base, similar to the existing deductibility provision for debt interest. (1) The debt bias could also be eliminated by disallowing any deduction of interest payments. The macroeconomic effects of both reform options for Germany were evaluated using CORTAX, a computable general equilibrium model for the EU. (2) The analysis focuses on an ACE with the ACE rate varying from 1 % to 6.4 %, the central reform scenario assuming a rate equal to the nominal interest rate on debt (3.4 %). Table 1 shows the macroeconomic impact of the reform scenarios in terms of differences to the baseline scenario without an ACE. All simulations assume a budget neutral implementation of the reforms.  Table 1: Impact of budget neutral ACE reforms  Notes: Results are reported for Germany (normal font) and for the rest of the EU (italic). All scenarios reported here assume ex-ante closure on corporate income tax rate and rate and ex-post closure on transfers to the old generation. Corporate income tax (CIT) rate = percentage point change in the corporate tax rate; Cost of Capital = percentage point change in the cost of capital; Investment = percentage change in total capital stock; Wage= percentage change in the wage rate; Employment = percentage change in total employment; GDP = percentage change in gross domestic product; Revenues (corporate) = change in the corporate tax revenue in % of baseline revenues; Revenues (total) = change in total tax revenue in % of baseline revenues; Welfare = change in compensating variation in % of GDP (positive value reflects a welfare gain). Source: European Commission, Joint Research Centre.                                                              (1) The ACE has been criticised because of the tax planning opportunities it can create in the form of cascading of the deductions on the same initial capital within corporate groups. An alternative reform that is significantly more robust to tax avoidance and budgetary less costly is the Allowance for growth and investment, as recently proposed by the Commission as part of the Common (Consolidated) Corporate Tax Base (European Commission 2016f and 2016g). (2) Simulations were conducted by the Joint Research Centre of the European Commission. CORTAX simulates the production and investment behaviour of domestic and multinational firms including their cross-border profit shifting activities. CORTAX models in detail corporate taxes according to the rules in place in each Member State; it also models personal and consumption taxes in a stylised way. The model incorporates firms' behavioural responses concerning the level of capital investment, employment, the choice between debt or equity financing, profit shifting to a tax haven and (for multinationals only) tax avoidance by transfer pricing. The simulations are based on calibration data for 2012. The methodology and data source used for calibration are described in Álvarez-Martínez et al. (2016). ACE rateCIT rateCost of CapitalInvestmentWageEmploymentGDPRevenue (corporate)Revenue (total)WelfareCentral scenario6.38-0.273.370.920.401.11-0.110.000.23-0.00-0.020.01-0.020.080.010.000.02Sensitivity1.65-0.060.730.200.080.23-0.020.000.06-0.000.000.00-0.010.020.000.000.0110.49-0.496.631.800.852.24-0.250.000.38-0.00-0.030.01-0.040.160.010.000.0514.97-0.8011.803.151.634.04-0.50-0.010.53-0.00-0.050.02-0.070.270.020.000.085%6.4%1%3.4% 
 
 
 
 
 
 
4.4. Investment 

proceeds  from  auctioning  off  broadcast  spectrum 
were  made  available  for  investment  in  broadband 
expansion.  In  2016,  the  Federal  Government 
provided  the  federal  states  once  more  with  extra 
funds  for 
in  social  housing  and 
these 
expanding  preschool  childcare.  Overall, 
measures amount to an average of about EUR 8.5 
billion  or  0.3 %  of  GDP  annually  over  the  period 
2016-2018. 

investment 

Providing  further  financial  relief  to  federal 
states and municipalities and reforming federal 
fiscal  relations  are  expected  to  increase  the 
scope  for  public  investment.  Federal  states  and 
municipalities  have  been  further  relieved  of 
expenditure 
to  asylum  seekers  and 
refugees  and  other  social  spending,  which  should 
investment. 
increase 
Moreover, the Federal Government and the federal 
states agreed on a reform of federal fiscal relations 
that,  once  adopted,  will  take  effect  in  2020  (Box 

their  scope 

for  public 

relating 

Box (continued) 

4.4.3.  PUBLIC INVESTMENT 

In  the  last  few  years,  the  Federal  Government 
has  taken  a  number  of  measures  to  strengthen 
its  own  investment  spending  as  well  as  that  of 
the  federal  states  and  municipalities.  In  2014, 
the Federal Government made available additional 
funds  for  investment  in  childcare  facilities,  public 
transport  infrastructure  and  urban  development.  It 
provided  financial  relief  to  the  federal  states  and 
municipalities and topped up a special fund for the 
expansion  of  childcare  facilities.  In  2015,  it 
allocated for example an additional EUR 10 billion 
for investment in infrastructure, energy efficiency, 
climate 
and  urban 
flood  protection, 
development,  set  up  a  special  fund  of  EUR  3.5 
in  municipal 
billion 
infrastructure,  and  contributed  funds  to  finance 
local  public  transport,  expand  social  housing  and 
finance  energy-saving  measures.  Parts  of  the 

to  support 

investment 

and 

42 

 The ACE addresses the debt bias and reduces the marginal cost of capital for new investments, with a corresponding positive impact on GDP, employment, and wages. Increasing the ACE rate leads to stronger effects, but also requires larger compensatory measures to ensure budget neutrality. By assumption, the model increases the German corporate tax rate to compensate for the loss in revenues. This is, however, insufficient as firms’ subsequent behavioural responses cause further revenue losses. (3) The decrease in corporate income tax revenues is broadly compensated for by the positive economic impacts and the resulting increases in other taxes. Welfare rises with the size of the ACE rate. The results also suggest that introducing an ACE would move the economy towards more balanced debt-equity ratios. For example, the central scenario would lead to a reduction in the share of investment financed by debt by 4 percentage points. Disallowing any deduction of interest payments results in a higher cost of capital, with a corresponding adverse macroeconomic impact. The debt bias could also be addressed by disallowing interest deductibility. The results of introducing such a regime are summarised in Table 2. To keep corporate tax revenues in line with the pre-reform scenario, the tax rate has been lowered. The combined effect of lowering the tax rate and broadening the tax base increases the cost of capital. Consequently, investment, GDP, wages and employment, and welfare decrease.  Table 2: ACE vs. non-deductibility of interest  Notes: Results are reported for Germany (normal font) and for the rest of the EU as a whole (italic). Source: European Commission, Joint Research Centre                                                              (3) The reason for the impact on tax revenues despite the adjustment in the corporate tax rate are the subsequent behavioural responses by households and firms. To keep the reform budget neutral, any remaining changes in revenue are compensated through transfers to the older generation. ScenarioCIT rateCost of capitalInvestmentWageEmploymentGDPRevenue (corporate)Revenue (total)Welfare6.38-0.273.370.920.401.11-0.110.000.23-0.00-0.020.01-0.020.080.010.000.02-6.870.20-2.25-0.50-0.30-0.620.070.00-0.06-0.000.020.000.02-0.06-0.010.00-0.02ACE (central scenario)No interest deductibility 
 
 
 
 
4.4. Investment 

4.4.3).  This  reform  should  improve  conditions  for 
public  investment  at  all  levels  of  government  and 
address  some  of  the  barriers  to  financing  and 
implementing  transport  infrastructure  investment 
identified in last year’s Country Report (European 
Commission,  2016a).  However,  the  reform  fell 
short  of  more  fundamental  changes  in  terms  of 
increasing  the  tax  autonomy  of  federal  states  and 
municipalities, which could have further increased 
the  scope  for  public  investment.  It  also  still 
remains to be seen to what extent the federal states 
and  municipalities  will  use  the  additional  fiscal 
space  for  more  public  investment.  On  the  other 
hand,  the  recent  extension  of  consulting  services 
on  infrastructure  investment  planning  to  include 
the  municipalities  should  boost  the  planning  and 
implementation  of  infrastructure  investment  at 
municipal level. This appears particularly relevant, 
given  that  the  federal  funds  made  available  to 
support  infrastructure  investment  in  the  federal 
states and municipalities have remained to a large 
extent  untapped  due  to  capacity  and  planning 
constraints. 

Education  and  research  expenditure  as  a 
proportion of GDP has remained largely stable 
in  recent  years.  Total  consolidated  public  and 
private  expenditure  on  education  and  research 
amounted  to  9.1 %  of  GDP  in  2013  and  2014. 
(Federal Statistical Office, 2016b) It therefore fell 
short of the national target of 10 % of GDP that the 
Federal  Government  and  the  federal  states  agreed 
to meet by 2015. General government expenditure 
on education as a proportion of GDP has remained 
stable  at  around  4.3 %  of  GDP  since  2009  and 
therefore  well  below  the  EU  average  (4.9 %  in 
2014).  Public  expenditure  on 
research  and 
development (R&D) has remained stable at around 
0.9 %  of  GDP  in  recent  years.  Total  gross 
domestic  public  and  private  expenditure  on  R&D 
accounted  for  around  2.9 %  of  GDP  in  2014  and 
2015,  thus  Germany  almost  met  its  Europe  2020 
target  of  3 %  R&D 
spending,  However, 
Germany’s R&D intensity in 2015 was lower than 
in  Sweden  (3.3 %),  Austria  (3.1 %),  Denmark 
(3.0 %)  and  Finland  (2.9 %  of  GDP)  and  also 
remained  behind  that  of  South  Korea  (4.3 %  in 
2014) and Japan (3.6 % in 2014). 

43 

 
 
4.4. Investment 

44 

Box 4.4.3: Main elements of the reform of federal fiscal relationsThe equalisation transfers between federal states (Länderfinanzausgleich) will be abolished. Instead, fiscal equalisation will be achieved mainly through the horizontal allocation of the federal states’ share of VAT revenue. To this end, VAT revenue will be allocated to the individual federal states based on the number of inhabitants, modified by supplements or deductions according to the federal states’ financial capacity. The financial capacity will be calculated using a method similar to that used to calculate the current equalisation transfers, though with some modifications. In particular, it will include 75 % of municipalities’ revenue, rather than 64 % as at present. The Federal Government agreed to increase the federal states’ revenue in a number of ways in order to ensure that no state ends up in a worse position owing to the fiscal equalisation reform. The federal states will receive a higher share of the vertically-allocated VAT revenue. The Federal Government will also contribute to partially equalise differences in the financial capacity of municipalities. It will provide additional supplementary federal grants to the federal states and additional consolidation assistance to the states of Bremen and Saarland. In turn, the Stability Council will be endowed with additional powers and competences. The Stability Council consists of the federal ministers of finance and economic affairs as well as the federal state ministers of finance. It is currently in charge of monitoring budgetary developments at national and federal state level to avoid budgetary emergencies and assessing compliance of the federal states receiving specific consolidation assistance with the agreed consolidation path. Furthermore, the Stability Council reviews whether Germany (federation, federal states, municipalities and social insurances) complies with the requirements of the Fiscal Compact and the Stability and Growth Pact. In the future, it will also be responsible for monitoring compliance with the constitutional balanced-budget rule (‘debt brake’) at national and federal state level, based on the corresponding European standards and procedures. Moreover, some executive competences will be redistributed between the Federal Government and the federal states. A transport infrastructure company will be established at the national level that combines all relevant competences for the funding, planning, construction and maintenance of federal motorways. It should overcome the current split of competences between the Federal Government (funding) and the federal states (planning and construction) which has led to inefficiency, including significant delays in infrastructure projects and only limited use of the additional amounts provided by the Federal Government in recent years. In turn, the perpetuity of public ownership in federal transport infrastructure will be enshrined in the constitution. The Federal Government will also have more possibilities to promote public investment in areas of general government interest but outside its constitutional competences, in particular education infrastructure (e.g. schools, kindergartens) in financially weak municipalities. In the event of federal co-funding, the Federal Court of Auditors will be granted monitoring powers. The federal tax administration will be granted additional general functional authority over the federal states’ tax administrations and additional authority to ensure a more uniform use of tax administration software between states. The Federal Government will set up a central internet portal for citizens which will also link to public services from the federal states.  
 
 
 
 
 
4.5. SECTORAL POLICIES 

4.5.1.  INNOVATION, VENTURE CAPITAL AND 

Graph 4.5.1:  Business enterprise expenditure on R&D by 

ENTREPRENEURIAL ACTIVITY 

economic activity (2014) 

While investment in knowledge-based capital is 
crucial  for  long-term  productivity  growth,  it  is 
currently  lower  than  in  other  high-income 
economies.  In  countries  close  to  the  technology 
frontier,  such  as  Germany,  the  contribution  of 
capital (47) 
knowledge-based 
to  productivity 
growth  is  expected  to  be  particularly  strong. 
Business  expenditure  on  R&D  (a  sub-component 
of knowledge-based capital) is high in Germany by 
however, 
international 
investment  in  knowledge-based  capital  relative  to 
GDP  is  lower  than  in  some  other  high-income 
economies  such  as  Denmark,  Sweden  or  the  US 
and  has  grown  little  over  time.  It  is  particularly 
low in the services sector (OECD, 2016b). 

standards.  Overall, 

Strong  R&D  investment  by  the  manufacturing 
sector contributes to a high level of intellectual 
property  rights,  while  R&D  investment  in  the 
services  sector 
low.  In  2014, 
is  relatively 
Germany  recorded  the  fourth  highest  business 
expenditure on R&D in relation to GDP in the EU 
(Graph  4.5.1).  German  manufacturers  contributed 
86 %  to  total  business  expenditure  on  R&D  and 
were  the  top  investors  in  innovation  (1.7 %  of 
GDP) across the EU. Yet the relative share of the 
manufacturing sector was even higher in the more 
R&D-intensive  countries,  Japan  and  South  Korea 
(both  89 %).  By  contrast,  expenditure  on  R&D  in 
the  services  sector  accounted  for  only  0.24 %  of 
GDP.  As  a  result,  the  services  share  of  German 
business  expenditure  on  R&D  was  by  far  the 
lowest  in  the  EU.  In  2013,  Germany  filed  in 
relation  to  GDP  the  third  highest  number  of 
international  patent  applications  under  the  Patent 
Cooperation Treaty (PCT) in the EU. The country 
is the world’s largest applicant for design rights in 
the transport sector (OECD, 2013).  

(47)  Knowledge-based 

capital 

includes 

computerised 
information  (software  and  databases),  innovative  property 
(R&D, mineral explorations, copyright and creative assets, 
new  product  development  in  financial  services,  and  new 
architectural  and  engineering  designs)  and  economic 
competences 
advertisement,  market 
research,  training  of  staff,  management  consulting,  and 
own organisational investment). 

(brand-building 

(1) BE, IE, EL, FR, LU, AT, SE: 2013 
(2) LU: Other activities includes manufacturing  
Source: European Commission 

it 

in 

investment 

is  growing, 

medium-high 

investment 
increasingly 
is 
Business  R&D 
large  firms.  While  overall 
concentrated 
in 
business  R&D 
is 
increasingly  concentrated  in  big  companies,  in 
particular 
technology 
manufacturing  sectors.  At  the  same  time,  the 
contribution  of  SMEs  is  declining.  In  particular, 
smaller companies and those with only occasional 
research  needs  seem 
their 
innovation  activities.  Most  of  the  obstacles  to 
innovation  for  SMEs  stem  from  shortages  of 
financial and human resources. 

to  have  reduced 

Public support for business R&D in Germany is 
relatively  low  by  international  comparison  and 
does not include tax incentives. While investment 
in  public  R&D  has  increased  in  recent  years  in 
Germany,  government  support  for  business  R&D 
(0.08 %  of  GDP  in  2014)  is  significantly  lower 
than  for  example  in  Belgium  (0.44 %),  France 
(0.42 %)  and  Austria  (0.40 %)  and  some  OECD 
countries 
like  South  Korea  (0.36 %),  Russia 
(0.41 %)  and  the  US  (0.26 %)  (OECD,  2016c). 
Unlike  the  majority  of  EU  and  OECD  countries, 
Germany  relies  entirely  on  direct  government 
funding, e.g. through grants or contracts, and does 
not  offer  preferential  tax  treatment  for  business 
R&D expenditure. 

Venture  capital  investment  has  increased  in 
still  remains 
the  market 
Germany,  but 

45 

0.00.51.01.52.02.5CyprusRomaniaLatviaGreeceLithuaniaSlovakiaCroatiaMaltaPolandBulgariaPortugalEstoniaSpainLuxembourg (2)ItalyHungaryUnited KingdomCzech RepublicNetherlandsIrelandFranceBelgiumSloveniaDenmarkGermanyAustriaFinlandSweden% of GDPManufacturingServices of the business economyOther activities 
 
                                                           
 
underdeveloped  by 
international  standards. 
Venture  capital  investment  in  Germany  increased 
to  about  EUR  837  million  in  2015,  which  is  still 
below  the  level  in  2008  (Graph  4.5.2).  In  2015, 
venture  capital  investment  accounted  for  about 
0.03 %  of  GDP,  which  is  slightly  above  the  EU 
average  but  still  below  countries  such  as  Finland, 
the  UK,  Sweden,  Ireland  or  France  and  much 
below non-EU countries such as Israel and the US. 
The venture capital market in Germany appears to 
be failing to provide in particular bigger later-stage 
investments  (KfW  et  al.,  2016).  While  the  public 
funding of start-ups has developed well as a result 
of specific funding instruments (EXIST and High-
Tech Gründerfonds), the framework conditions for 
private  investors  during  the  growth  phase  remain 
poor  (Commission  of  Experts  for  Research  and 
Innovation  2016).  Despite  some  encouraging 
developments, 
the  dynamic  start-up 
ecosystems  in  Berlin  and  Munich,  Germany  and 
Europe as a whole continue to lag behind the US in 
terms  of  venture  capital  investment  in  important 
areas of the digital economy, such as computer and 
consumer electronics (OECD, 2015c). 

including 

Graph 4.5.2:  Venture capital investments in German 

companies 

4.5. Sectoral policies 

is  again  operating  as  an  anchor  investor (48)  and 
the  INVEST  programme  for  business  angels  has 
been  expanded.  Further  measures  are  being 
technology 
including  a  dedicated 
considered, 
growth  fund  to  support  the  venture  debt  market. 
The  absence  of  a  dedicated  stock  market  segment 
for  SMEs  may  be  a  disadvantage.  However,  the 
Deutsche  Börse  Venture  Network  launched  in 
2015 aims to bring young, fast-growing companies 
together  with  potential  investors  and  a  new  SME 
stock  market  segment  is planned for  March 2017. 
Nevertheless, some elements of corporate taxation 
might still hamper private investment (see Section 
4.4). 

including 

two  examples  of 

Despite some encouraging developments, trends 
in  entrepreneurial  activity  are  overall  rather 
negative, 
in  knowledge-intensive 
sectors. The dynamic start-up ecosystem in Berlin 
and  the  large  increase  in  entrepreneurs  with  a 
migrant  background  –  who  currently  account  for 
nearly 45 % of new businesses compared to 13 % 
in  2003  –  are 
increasing 
entrepreneurial  activity.(49)  However,  the  number 
of  high-growth  innovative  firms  and  employment 
in  such  firms  has  decreased.  There  are  a  range  of 
challenges  in  this  area,  including  limited  venture 
capital  markets,  tax  and  regulatory  obstacles,  a 
lack of exit prospects for venture capital providers 
and  demographic  trends.  An  ageing  population 
may  also  have  an  impact  on  entrepreneurial 
activity  in  the  coming  years,  including  on  the 
transfer  of  existing  businesses.  Up  to  17 %  of 
entrepreneurs  are  planning  to  transfer  or  sell  their 
businesses  by  2018,  while  there  are  currently 
around  three  times  as  many  entrepreneurs  willing 
to  hand  over  their  business  as  there  are  potential 
investors. 

Source: Invest Europe, PEREP_Analytics 

Some steps have been taken to support venture 
capital  investment.  The  Federal  Government  has 
simplified the taxation of investment funds and has 
improved  loss  carry-forwards  under  the  corporate 
income taxation system to make it easier for young 
and 
to  access  equity. 
Moreover,  Kreditanstalt  für  Wiederaufbau  (KfW) 

innovative  companies 

4.5.2.   COMPETITION IN PRODUCT AND 

SERVICES MARKETS* 

Restrictions  on  entering  the  service  market 
persist  and  are  holding  back  productivity 

(48)  Anchor  investors  are  usually  investors  that  take  a  large 
share in the investment and provide confidence to potential 
other investors. 

(49)  As part of the project ‘Die Neue Gründerzeit’, the German 
government launched a pilot scheme called ‘Gründerpaten’ 
to  support  the  entrepreneurial  potential  of  refugees.  See 
Federal  Ministry  for  Economic  Affairs  and  Energy 
(2016a). 

46 

02004006008001,0001,20002004006008001,0001,200070809101112131415number of dealsEUR millionsSeedStart-upLater-stage ventureNumber of deals (rhs) 
 
                                                           
growth.  Regulatory  restrictiveness  in  the  services 
sector  remains  high,  in  particularly  for  business 
services.  This  is  affecting  business  dynamics  and 
competitiveness  (European  Commission,  2016a). 
As  a  result,  productivity  growth  in  the  services 
sector 
the 
manufacturing sector. However, inefficiency in the 
business  services  sector  is  also  having  wider 
negative  repercussions  on  the  economy,  given  its 
importance for manufacturing. 

is  considerably  below 

that  of 

certain 

initiative 

decisions 

to  modernise 

Germany  announced  only  a  limited  number  of 
measures for certain professions in its National 
Action  Plan.  Some  measures  are  envisaged  for 
liberal professions and business services. Germany 
is  planning  selected  minor  modifications 
to 
existing regulations, partly in response to national 
court 
existing 
declaring 
regulations unlawful. This concerns the prohibition 
on  medical  doctors  and  lawyers  offering  services 
in  partnership  and  mandatory  tariffs  for  tax 
advisers.  However,  there  is  no  comprehensive 
policy 
the  regulated 
professions  and  to  strengthen  competition  in  the 
services  sector.  According  to  a  new  indicator 
developed 
the  European  Commission 
(European  Commission,  2016h),  the  level  of 
restrictiveness  in  Germany  is  higher  than  the  EU 
weighted average for architects, engineers, lawyers 
and  accountants/tax  advisers  (Graph  4.5.3).  A 
recent  EU-wide  survey  revealed  that  33 %  of  the 
German  labour  force  can  be  considered  to  be 
working  in  regulated  professions  (Koumenta  and 
Pagliero, 2016). This is far above the EU average 
(21 %)  and  higher  than  in  any  other  EU  country, 
suggesting 
regulatory 
that  changes 
framework could have significant impact. 

the 

by 

to 

4.5. Sectoral policies 

Graph 4.5.3:  Restrictiveness indicator (2016) 

Source: European Commission 

for 

rules 

restrictive 

Germany  is among  the  10  Member  States  with 
retail 
the  most 
establishment.  This  is  according  to  a  recent 
assessment  of  retail  establishment  restrictiveness 
(European Commission, 2015c). Restrictive spatial 
planning  rules  are  applied  in  some  federal  states, 
which  are  having  a  negative  impact  on  retail 
market dynamics. In particular, they are hampering 
the establishment of certain retail formats based on 
a wider range of complementary products that are 
not commonly found on the German market.  

Germany is witnessing a lively public debate on 
the  emerging  collaborative  economy  in  the 
country.  At  policy  level,  the  approaches  taken 
differ between the federal states, notably as regards 
short-term  tourist  accommodation.  The  state  of 
Berlin has taken a very restrictive approach to the 
short-term  rental  of  tourist  accommodation.  A 
recent  law  constitutes  an  effective  ban  on  such 
activities (50). Parts of the law have been rendered 
its 
inapplicable  by  court  decisions  rejecting 
necessity  and  proportionality  in  meeting  public 
interest  objectives. 
the  urban  passenger 
transport  sector,  court  decisions  have  effectively 
banned collaborative platforms from working with 
providers of urban transport services that are not in 
the possession of the appropriate business licences, 
with  negative  implications  for  competition  and 
innovation in this sector. 

In 

(50)  Zweckentfremdungsgesetz. 

47 

0.01.02.03.04.05.0AccountantArchitectCivil engineerLawyerPatent agentReal estateagentTourist guidescoreEUDE 
 
                                                           
4.5. Sectoral policies 

for 

The  market  share  of  new  entrants  in  the  long-
distance  passenger  train  services  market  is 
stagnating  at  around  1 %.  High  track  access 
charges remain one of the main obstacles for new 
entrants.  Track  access  charges 
intercity 
passenger  services  in  Germany  are  the  highest  of 
all Member States (European Commission, 2016i) 
(Graph  4.5.4).  They  are  also  higher  than  in  the 
freight and regional segments where market shares 
and  the  number  of  competitors  to  the  incumbent 
are considerably higher. This situation is expected 
to  further  deteriorate  further  once  the  ongoing 
revision of the track access charges by the German 
infrastructure  manager  DB Netz  is  completed  and 
enters  into  force  in  December  2018.  This  is 
because  the  new  railway  law  adopted  in  2016 
contains  a  provision  restricting  increases  in  track 
access  charges  for  regional  passenger  services 
provided 
obligation 
public 
contracts (51).  Given  the  limited  ability  of  freight 
services  to  pay  higher  track  access  charges,  it  is 
expected that the long-distance passenger segment 
may have to bear additional increases in charges. 

service 

under 

Graph 4.5.4:  Trends in track access charges 

Notes: DK – break in time series from 2016; HR and DE – 2014 
charges; LV – 2015 charges; LT and SI – arithmetic mean of 
min./max. charges; FR – some train services excluded; UK – 
increase only in line with inflation and currency movements; 
data for several EU countries missing, NO – does not apply 
charges. 
Source: European Commission 

In  addition,  the  existing  legal  framework  may 
also be impeding competition. Germany has been 

(51)  See  Section 37  of  Eisenbahnregulierungsgesetz  of 

29 August 2016 (BGBl. I S. 2082). 

in 

the 

financial 

to  separate 

referred  to  the  European  court  in  2013  for  its 
failure 
flows  between 
operators  and  infrastructure  managers  and  for  its 
failure  to  ensure  that  public  funds  used  for  the 
provision of public passenger transport services are 
shown  separately 
relevant  accounts. 
According  to  the  2016  opinion  of  the  advocate 
general (Opinion  of  advocate  general,  2016)  the 
failure  to  publish  accounts  showing  the  public 
funds paid for business relating to the management 
of  infrastructure  prevents  the  monitoring  of  the 
prohibition  on  the  transfer  of  these  funds  to 
businesses  relating  to  the  provision  of  transport 
services.  Additional  factors  hindering  competition 
are the limited availability of used rolling stock for 
long-distance  passenger  markets  and  restricted 
access  to  ticket  distribution  channels (German 
Monopolies Commission, 2015). 

4.5.3.  ENERGY, RESOURCES AND CLIMATE 

CHANGE 

Despite  recent  reforms  of  the  Renewable 
Energy  Act,  the  renewables  surcharge  has 
increased further. The resulting rise in electricity 
prices  is  expected  to  continue  until  feed-in  tariffs 
for older renewable energy installations are phased 
out  to  a  significant  extent  as  from  the  mid-2020s. 
Exemptions from the renewable surcharge granted 
to  large  sections  of  the  manufacturing  sector  are 
further  adding  to  the  electricity  bills  of  other 
industrial  consumers  and  households  and  tend  to 
distort  price  signals.  The  latest  reform  of  the 
Renewable  Energy  Act,  which  entered  into  force 
on  1 January  2017,  has 
the  cost-
effectiveness  of  new  installations.  It  expands 
competitive tendering for the funding of renewable 
energy-based  electricity  generation.  Tenders  will 
also be open to installations in other EU countries 
up  to  5 %  of  newly  installed  renewable  energy-
based electricity capacity per year. 

improved 

investment 

Planned 
in  domestic  electricity 
infrastructure  is  significantly  delayed,  but  may 
be accelerated by underground cables, albeit at 
a significantly higher cost. Only around 35 % of 
the  highest  voltage  grid  projects  identified  in  the 
2009  Energy  Network  Expansion  Act  had  been 
implemented by mid-2016, mainly owing to public 
opposition.  45 %  are  expected  to  be  implemented 
by  2017.  Out  of  a  current  total  of  6 100  km  of 
power  lines  planned  in  the  Federal  Requirement 

48 

01234567DELVESBEFRLTATPLITEELUNLROSKHUUKSECZPTBGHRSIFIDKIEELNOEUR per train-km20132016 
 
                                                           
4.5. Sectoral policies 

the  Netherlands  and  Norway  will  also  improve 
links  to  the  electricity  networks  of  neighbouring 
countries. Moreover, current national arrangements 
for  congestion  management  and  the  establishment 
of  bidding  zones  in  central  Europe  that  do  not 
always  accurately  reflect  current  congestion  are 
leading  to  increasing  limitations  on  cross-border 
flows of electricity. This points to a lack of a joint 
regional 
affected 
neighbours. 

agreed  by 

solution 

all 

Although  Germany  reduced  its  primary  and 
final  energy  consumption  in  2014,  it  could  fall 
short of its indicative national energy efficiency 
targets  for  2020.  The  measures  included  in  the 
National  Energy  Efficiency  Action  Plan  for  the 
energy supply side and the transport sector may be 
insufficient. In particular, energy consumption has 
increased in the residential sector if climate factors 
are  taken  into  account.  The  Federal  Government 
adopted major action programmes and published a 
green paper  on  energy  efficiency  in  August 2016. 
The  measures  proposed  and  implemented  mostly 
target 
for 
renovation).  Further  measures  are  not  expected 
before the federal elections in autumn 2017. 

the  building  stock 

funding 

(e.g. 

its 

own 

economy 

resource 

Although  Germany  is  following  an  advanced 
circular  economy  approach,  it  is  in  danger  of 
productivity 
missing 
objectives.  The 
concept 
circular 
increasingly  permeates  political  programmes  and 
objectives.  In  2002,  the  Federal  Government 
included  in  its  sustainable  development  strategy 
the objective of doubling resource productivity by 
2020 compared to 1994. The ProgRess programme 
was set up in 2012 to promote resource efficiency 
and  was  last  updated  in  2016.  However,  despite 
some success in decoupling economic growth from 
resource  use,  the  current  growth  rate  in  resource 
productivity  appears  insufficient.  Based  on  the 
improvements  in  resource  productivity  over  the 
last  five  years,  it  is  likely  that  only  60 %  of  the 
target  will  be  reached  (Federal  Ministry  for  the 
Environment,  Nature  Conservation,  Building  and 
Nuclear Safety, 2015). 

It  appears  uncertain  whether  Germany  will 
achieve  its  emission  reductions  targets.  Under 
EU law, the country needs to reduce its emissions 
in sectors that are not covered by the EU emission 
trading  system  (EU  ETS)  by  14 %  between  2005 
and  2020.  Current  projections  suggest  that  this 

1 % 

have 

constructed. 

Plan Act, only around 6 % have been approved and 
only 
Full 
been 
implementation  is  not  expected  before  the  mid-
2020s.  The  political  decision  in  2015  to  prioritise 
underground  high-voltage  direct  current  (HVDC) 
transmission  lines  is  expected  to  accelerate  grid 
expansion,  though  at  a  cost  two  to  three  times 
higher  than  for  comparable  overhead  lines.  The 
total  investment  cost  of  all  land-based  electricity 
transmission  grid  expansion  and  reinforcement 
projects until 2024 is expected to be approximately 
EUR  26 
the 
Transmission  System  Operators  (TSOs),  of  which 
EUR  3  to  8  billion  is  additional  expenditure  on 
underground HVDC transmission lines. 

to  31  billion  according 

to 

The  shift  towards  renewable  energy  makes 
significant investment in electricity distribution 
networks  necessary.  The  increasing  feed-in  of 
renewable energies means that not only electricity 
transmission  infrastructure,  but  also  distribution 
grids  covering  about  98 %  of  power  lines  in 
Germany  must  enable  and  manage  weather-
dependent power flows. A study commissioned by 
the  Federal  Ministry  of  Economic  Affairs  and 
Energy (2014) estimated the additional investment 
needed  to  modernise  distribution  networks  at 
between  EUR 23 billion  and  EUR 49 billion  until 
2032  compared  to  the  level  in  2012.  70 %  would 
be provided until 2022. Investment in low-voltage 
grids  will  be  concentrated  mainly  in  southern 
Germany  (due  to  the  continued  expansion  of 
in 
photovoltaics)  and 
northern  and  eastern  Germany  (to  transmit  wind 
energy  to  consumption  centres).  The  Incentive 
Regulation 
Ordinance 
(Anreizregulierungsverordnung),  establishing  a 
revenue  cap  for  each  network  operator,  was 
recently  amended  with  the  aim  of  improving  the 
investment-friendliness of the payment framework 
for  grid  operators,  while  ensuring  overall 
efficiency.  

in  high-voltage  grids 

of 

lack 

sufficient 

The 
cross-border 
interconnections  is  still  constraining  trade  in 
electricity  with  neighbouring  countries  and 
impairing  the  security  of  supply.  In  2014, 
Germany’s  interconnection  level  for  electricity 
was  10 %  of  its  installed  electricity  production 
capacity.  In  particular,  the  available  electricity 
interconnection  capacity  with  Denmark  appears 
insufficient. The implementation of the Projects of 
Common  Interest  with  Poland,  Austria,  Belgium, 

49 

 
4.5. Sectoral policies 

EUR  2.7  billion  already  allocated  until  2020. 
Investment  will  be  focused  on  rural  areas  where 
private  investment  is  lacking  due  to  insufficient 
profitability  and  where  the  availability  of  fast 
networks is particularly limited (Table 4.5.1). 

Graph 4.5.5:  Share of fibre connections as a proportion of 
total fixed broadband (2015) 

Source: OECD and Communications Committee (COCOM) 

Table 4.5.1:  Broadband availability (2016) 

Source: Federal Ministry of Transport and Digital 
Infrastructure, 2016 

for 

target  of  reducing 

the  Federal  Ministry 

target  may  be  met  by  only  a  very  small  margin, 
with  an  expected  emissions  reduction  of  just  14.8 
%  over  this  period.  Moreover,  a  recent  report 
the 
published  by 
Environment,  Nature  Conservation,  Building  and 
Nuclear  Safety  casts  doubt  on  the  attainability  of 
the 
total  greenhouse  gas 
emissions  by  40  %  between  1990  and  2020.  It 
estimates  an  emissions  reduction  of  just  37 %  to 
40 % if all measures under the Action Programme 
for  Climate  Protection  2020  and  the  plan  to 
decommission 
are 
implemented.  The  Federal  Government  has 
recently  published  a  long-term  climate  strategy 
setting ambitious targets post-2020. The goal is to 
be  greenhouse  gas  neutral  to  a  large  extent  by 
2050. 

lignite 

power 

plants 

4.5.4.  TELECOM NETWORKS 

that 

broadband 

connections, 

Germany is lagging behind in the availability of 
high-speed 
in 
particular  in  semi-urban  and  rural  regions. 
Although fixed-line operators have in recent years 
upgraded  their  legacy  copper  and  coaxial  cable 
networks,  the  current  market  share  of  fibre-based 
access  networks  is  well  below  the  EU  average 
(1.3 %  compared  with  8.7 %)  and  the  share  in 
other advanced economies (Graph 4.5.5). Germany 
is  also  performing  below  the  EU  average  in  the 
uptake  of  fast  broadband  services.  40 %  of 
insufficient 
companies  recently  reported 
broadband  infrastructure  was  a  major  constraint. 
Consequently,  to  set  up  ultrafast  networks  there 
will be an increasing need to install fibre closer to 
business  premises  and  households.  The  Federal 
for  Economic  Affairs  and  Energy 
Ministry 
estimates  that  nationwide  fibre  network  coverage 
requires investment of up to EUR 100 billion. The 
Federal  Government’s  Digital  Agenda  2014-2017 
internet  (≥ 
aims 
50Mbit/s)  to  all  rural  and  urban  areas  through  a 
variety  of  technologies  by  2018.  The  roll-out  of 
nearshore  vectoring  should  contribute  to  reaching 
the  2018  targets  by  providing  for  the  first  time 
connection  speeds  above  50  Mbit/s  for  about  1.4 
million  households.  However,  this  could  lead  to 
lower  investment  in  fibre-based  access  networks, 
which are the basis for ultrafast connections in the 
future.  The  Federal  Government  also  plans  to 
increase  the  budget  for  broadband  infrastructure 
investment  by  EUR  1.3  billion  in  addition  to  the 

to  provide  fast  broadband 

50 

01020304050607080GermanyEU28UnitedStatesSouthKoreaJapan%BandwidthUrbanSemi urbanRural≥ 1Mbit/s10099.898.7≥ 2Mbit/s10099.798.2≥ 6Mbit/s99.897.691.3≥ 16Mbit/s97.282.363.2≥ 30Mbit/s92.47248.9≥ 50Mbit/s86.260.329.9 
 
 
 
 
 
4.6. PUBLIC ADMINISTRATION 

4.6.1.  E-GOVERNMENT AND PUBLIC 

PROCUREMENT  

consistent 

federal 
to 

structure  poses 

in  digital  public 
Germany’s  performance 
services  is  below  the  EU  average.  According  to 
the  National  Regulatory  Control  Council  (2016), 
specific 
Germany’s 
and 
establishing 
challenges 
nationwide e-government services. A wide variety 
of  systems  that  are  not  always  interoperable 
creates  inefficiency.  Moreover,  according  to  the 
eGovernment  Monitor  (eGovernment  Monitor, 
2016), existing digital public services may need to 
be  better  promoted.  The  ‘Digital  Administration 
2020’  programme  aims  to  ensure  that,  in  the 
future,  public  administration 
is  electronically 
accessible  to  all  citizens.  It  includes  measures  on 
electronic filing, the central DE-Mail gateway, the 
central  e-ID  service,  an  extended  payment 
platform  and  public procurement.  Furthermore,  as 
part  of  the  reform  of  federal  fiscal  relations  (see 
Box  4.4.3)  the  Federal  Government  will  set  up  a 
central  internet  portal  for  citizens  which  will  also 
offer  public  services  from  the  federal  states.  If 
implemented  effectively,  this  could  contribute  to 
consistent and nationwide e-government services. 

The  value  of  contracts  published  under  EU 
procurement  legislation  remains  low  despite 
ongoing  efforts.  German  contracting  authorities 
submit a disproportionately low number of tenders 
for publication in Tenders Electronic Daily (TED). 
At 1.2 % of GDP Germany has for years recorded 
the lowest values for contracts published under EU 
rules  (the  EU  average  is  4.2 %  of  GDP).  E-
procurement  may  in  the  long  run  have  a  positive 
effect  on  the  publication  rate  and  may  lead  to 
further  efficiency  gains.  The  Federal  Government 
has  developed  an  e-procurement  standard  which 
ensures  the  compatibility  of  data  processed  by 
different  procurement  platforms.  Once 
fully 
operational, the system should significantly reduce 
complexity.  At  federal  level,  the  transition  to  e-
procurement is considered to be complete. At local 
level, e-notification of tenders has been set up but 
some  concerns  may  remain  regarding  the  online 
documents.  The  EU-wide 
availability 
publication  of  public 
increase 
transparency,  improve  the  quality  of  services  and 
enable  further  efficiency  gains.  For  example,  the 
value  of  procurement  contracts  published  in  TED 
in  the  healthcare  sector  is  lower  than  that  of 
Denmark  and  procurement  contracts  for  medical 

tenders  could 

of 

imaging  equipment,  such  as  CT scanners,  rarely 
seem  to  be  published  in  TED,  even  though 
individual  prices  are  often  well  above 
the 
threshold.  Moreover,  even  if  a  public  contract  for 
the  purchase  of  medical  imaging  equipment  or  of 
medicinal  products  is  published,  there  is  little 
competition  as  only  a  single  bid  is  submitted  in 
29 % and 41 % of cases, respectively. 

Aggregated  purchasing  is  hardly  used.  In  2015 
public  procurement  expenditure  on  works,  goods 
and  services  amounted  to  EUR  461.7  billion,  or 
15.2 % of GDP. According to data extracted from 
TED, individual authorities in Germany rarely buy 
together  (only  in  5 %  of  procedures,  compared 
with  an  EU  average  of  8 %). (52)  Buying  in  bulk 
can  lead  to  better  prices  and  better  quality. 
Although not all types of purchase are suitable for 
aggregation,  excessively  low  aggregation  rates 
imply lost opportunities. Moreover, the smarter use 
of  public  procurement  could  also  encourage 
innovation. Despite the introduction of a centre of 
excellence  for  innovative  public  procurement  in 
2013,  the  progress  made  at  federal  and  regional 
level  in  stimulating  innovation  through  public 
procurement seems limited. 

4.6.2.  BUSINESS ENVIRONMENT 

The  business  environment  is  favourable,  but 
further 
improvements  could  be  made  for 
example  to  digital  public  services.  The  World 
Bank  ranks  Germany  17th  in  the  world  for  doing 
business.  The  ‘one-in,  one-out’  rule  introduced  in 
2015  is  helping  to  avoid  a  further  increase  in  the 
administrative burden. A law to reduce red tape for 
SMEs, focusing in particular on young businesses 
and  start-ups,  entered  into  force  in  January  2016. 
(53)  It  raises  the  thresholds  for  complying  with 
certain  accounting  rules  and  producing  company 
statistics  and  exempts  start-ups  from  certain 
reporting  requirements.  In  June  2016,  the  Federal 
Government  presented  a  Better  Regulation  Work 
Programme 2016 (54) and in August 2016 adopted 
a second law to reduce red tape for SMEs which is 
still  under  parliamentary  consultation.  (55)  The 

(52)  Information  system  for  public  procurement  (SIMAP), 
standard  forms  for  public  procurement,  question  I.4: 
‘Contract award on behalf of other contracting authorities’. 

(53)  Bürokratieentlastungsgesetz (BEG). 
(54)  Arbeitsprogramm Bessere Rechtsetzung 2016. 
(55)  Bürokratieentlastungsgesetz (BEG II). 

51 

 
 
                                                           
4.6. Public administration 

latter  includes  simplifications,  for  example  in  the 
fields  of  taxation,  social  security  and  digital 
procedures.  National  rules  on  directly  transferring 
companies’  registered  offices  into  and  out  of 
Germany  are  still  insufficient.  Furthermore,  a 
shortage  of 
the  network 
skilled  workers, 
infrastructure  and  the  slow  response  of  regulatory 
bodies  to  new  digital  requirements  have  been 
identified as the greatest weaknesses of the digital 
economy  (Federal  Ministry  of  Economic  Affairs 
and Energy, 2016b). 

52 

 Box 4.6.1: Selected highlightsFuture productivity growth is closely linked to the digital transformation of the economy. A successful transformation requires both excellent telecommunications infrastructure (high-speed broadband network) and a pro-active attitude of enterprises, social partners and the government towards grasping the chances of digitisation while being guarded against its risks. Despite the prevailing shortcomings in the availability of high-speed broadband connections, in particular in semi-urban and rural regions (see Section 4.5.4), German companies increasingly take advantage of the possibilities offered by digitisation. In particular, micro-enterprises and large companies show a high level of digitisation. However, small and medium-sized enterprises (SMEs) have a need to catch up, in particular with respect to ‘Industry 4.0’ applications, and only one-fifth of SMEs have a digitisation strategy.  Strengthening and accelerating the digitisation of industry is a priority of the Federal Government in order to help businesses play a leading role in increasingly digitised and connected industrial production processes and value chains. In particular, the Federal Government has set up the ‘Industrie 4.0’ platform which brings together all relevant stakeholders, including business, social partners and education providers. The platform makes policy recommendations and offers practical guidance to support and accelerate technology adoption at company level. The funding programme ‘Smart Service World’ addresses ‘smart services’ that include value chains beyond the factory gates and the related online services. In addition, Germany has set up a network of 10 SME centres of excellence and one centre of excellence in digital crafts (‘Mittelstand 4.0’). The main purpose of these centres is to make small businesses aware of the potential benefits and risks of digitisation. The centres help SMEs to test advanced technologies and train their staff. Since 2017, SMEs are also offered a go-digital programme providing financial assistance for the use of digitisation consultants. Germany plans to set up additional centres and extend the subjects they cover. At present, digital hubs are emerging in several cities and regions, with a view to promoting closer cooperation between start-ups, SMEs, industry, science and administration. In November 2016, the government launched the funding programme ‘Smart Service World II’ to promote cross-cutting, flagship solutions for SMEs in the fields of employment (e.g. use of smart services to safeguard employment or to alleviate the skills shortage), mobility (e.g. new logistics solutions for multimodal local transport use), housing (e.g. digital services to help older people by increasing the safety and comfort of buildings), and basic services (e.g. smart services for energy supply, the supply of goods and services, and basic medical care). No evaluations of the impact and effectiveness of these recent initiatives are yet available.  
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX A 

Overview table 

Commitments 

Summary assessment (56)  

2016 Country-specific recommendations (CSRs) 

research  and 

CSR  1:  Achieve  a  sustained  upward  trend  in 
public  investment,  especially  in  infrastructure, 
education, 
innovation,  while 
respecting the medium term  objective. Improve 
the design of federal fiscal relations with a view 
to  increasing  public  investment,  especially  at 
municipal level. 

Achieve  a  sustained  upward  trend  in  public 
investment, especially in infrastructure,… 

Germany  has  made  some  progress  in  addressing 
CSR 1  (this  overall  assessment  of  CSR 1  does  not 
include  an  assessment  of  compliance  with  the 
Stability and Growth Pact): 

  Some  progress  has  been  made  in  increasing 
investment  in  public  infrastructure.  The  federal 
infrastructure  plan  2030  announces  significant 
increases in transport infrastructure investment. If 
implemented  effectively,  the  planned  transport 
infrastructure company could be a step forward in 
addressing the barriers to investment identified in 
last  year’s  country  report.  Funds  provided  for 
investment 
the 
federal budget have increased in recent years.   

infrastructure 

transport 

in 

in 

…education,… 

  Limited  progress  has  been  made  in  increasing 
public expenditure on education and no additional 
measures have been taken in this regard. Despite 
the  Federal  Government, 
more  spending  by 
expenditure on education as a proportion of GDP 
at  the  level  of  general  government  has  remained 
stable  in  recent  years  and  well  below  the  EU 
average. Overall public and private education and 

(56)  The following categories are used to assess progress in implementing the 2016 country-specific recommendations: 
No progress:  
The Member State has not credibly announced nor adopted any measures to address the CSR. Below a number of non-exhaustive 
typical situations that could be covered under this, to be interpreted on a case by case basis taking into account country-specific 
conditions: 
• no legal, administrative, or budgetary measures have been announced in the National Reform Programme or in other official 
communication to the national Parliament / relevant parliamentary committees, the European Commission, or announced in public 
(e.g. in a press statement, information on government’s website); 
• no non-legislative acts have been presented by the governing or legislator body; 
• the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study group to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), while 
clearly-specified measure(s) to address the CSR has not been proposed. 
Limited progress:  
The Member State has: 
• announced certain measures but these only address the CSR to a limited extent; 
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 
further work is needed before the CSR will be implemented; 
• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress:  
The Member State has adopted measures that partly address the CSR; 
and/or 
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only a few of the adopted measures have been implemented. For instance: adopted by national parliament; by ministerial decision; 
but no implementing decisions are in place. 
Substantial progress:  
The Member State has adopted measures that go a long way in addressing the CSR and most of which have been implemented. 
Full implementation:  
The Member State has implemented all measures needed to address the CSR appropriately. 

53 

 
 
 
                                                           
A. Overview table 

…research and innovation, while respecting the 
medium term objective. 

Improve  the  design  of  federal  fiscal  relations 
with  a  view  to  increasing  public  investment, 
especially at municipal level. 

research  expenditure  has  increased  only  slightly 
in  recent  years  and  may  have  fallen  short  of  the 
national target of 10 % of GDP. 

  Limited  progress  has  been  made  in  increasing 
public  expenditure  on  research  and  innovation 
and  no  additional  measures  have  been  taken  in 
this  regard.  Public  expenditure  on  R&D  has 
remained stable at around 0.9 % of GDP in recent 
years  and  total  public  and  private  expenditure 
stabilised  at  around  2.9 %  of  GDP  in  2014  and 
2015.  

  Some  progress  has  been  made  in  improving  the 
scope  for  public  investment,  including  at  federal 
state and municipal level, though it remains to be 
seen  to  what  extent  this  additional  fiscal  space 
will actually be used for more public investment. 

joint  VAT  revenue.  They  also 

  The  Federal  Government  is  further  relieving 
federal  states  and  municipalities  of  expenditure 
relating to asylum seekers and refugees and other 
social  spending,  which  should  increase  their 
scope  for  public  investment.  The  transfers  to  the 
federal  states  comprise  an  annual  lump  sum  of 
EUR 2 billion over the period 2016-2018 through 
an equivalent increase in the federal states’ share 
of 
include 
compensation  for  the  cost  of  accommodation 
allowances  for  those  granted  asylum,  amounting 
to  EUR 400 million  in  2016,  EUR 900 million  in 
2017  and  EUR 1.3 billion  in  2018.  As  of  2018, 
the  municipalities  will  receive  an  additional 
EUR 5 billion  of 
through  a 
combination of a higher share of municipalities in 
joint  VAT  revenue  and  an  increased  federal 
contribution to the funding of the accommodation 
allowance for the long-term unemployed. In total, 
the  relief  planned  for  2016  amounted  to  about 
0.1 % of GDP (or 5.4 % of the gross fixed capital 
formation of the federal states and municipalities 
in  2015),  rising  to  around  0.3 %  of  GDP  (20 %) 
by 2018. 

relief  annually 

  The planned reform of federal fiscal relations that 
will  take  effect  in  2020  (see  Box  4.4.3)  should 
also improve the conditions for public investment 
at  all  levels  of  government.  The  adoption  of  the 
related  constitutional  changes  and  implementing 
legislation by both the Federal Parliament and the 
Federal  Council  representing  the  federal  states  is 
envisaged  for  spring  2017.  The  extra  revenue 

54 

 
 
A. Overview table 

allocated  to  the  federal  states  –  estimated  at 
around  EUR  9.7  billion  in  2020  (0.3 %  of  2015 
GDP), rising to EUR 13 billion by 2030 – should 
increase  the  scope  for  public  investment  both  at 
federal  state  and  municipal  level  in  the  longer 
term.  However,  the  reform  falls  short  of  more 
fundamental  changes  in  terms  of  increasing  the 
tax autonomy of federal states and municipalities, 
which  could  have  further  increased  the  scope  for 
public  investment.  The  planned  federal  transport 
infrastructure company could alleviate significant 
barriers to public infrastructure investment.  

  The  recent  extension  of  the  services  of  the 
existing 
(ÖPP 
independent  consulting 
Deutschland  AG)  that  promotes  public  private 
partnerships  to  include  the  whole  public  sector 
and 
should 
implementation  of 
investment, 
particularly at municipal level. 

the 
infrastructure 

planning 

boost 

firm 

also 

Germany  has  made  limited  progress  in  addressing 
CSR 2: 

CSR 2: Reduce inefficiencies in the tax system, 
in  particular  by  reviewing  corporate  taxation 
and  the  local  trade  tax,  modernise  the  tax 
regulatory 
administration  and 
framework for venture capital. Step up measures 
to  stimulate  competition  in  the  services  sector, 
in  particular  in  business  services  and  regulated 
professions. 

review 

the 

Reduce  inefficiencies  in  the  tax  system,  in 
particular  by  reviewing  corporate  taxation  and 
the local trade tax,… 

  Limited  progress  has  been  made  in  reducing 
inefficiencies  in  the  tax  system.  The  law  on  the 
reform  of  investment  fund  taxation  aims  at 
simplifying  the  taxation  of  public  investment 
funds  and  at  closing  some  loopholes  for  tax 
avoidance.  Key  elements  are  that  public  funds 
will  be  subject  to  corporate  taxation,  while  the 
transparency  principle  will  be  abolished.  No 
measures  have  been  taken  to  review  corporate 
taxation and the local trade tax. 

…modernise the tax administration... 

  Limited progress has been made in modernising 

the tax administration. 

  The law on modernising taxation procedures aims 
at  strengthening  the  automatic  processing  of  tax 
submit 
returns.  Previous 
supporting 
been 
abolished. Combined with a stronger emphasis on 
risk-based audits, this also prepares the ground for 
a more efficient and effective tax administration. 

requirements 
have 

to 
largely 

documents 

55 

 
A. Overview table 

 

If implemented effectively, additional general and 
IT-specific functional authority of the federal tax 
administration  in  relation  to  the  states’  tax 
administrations as agreed as part of the reform of 
facilitate  an 
federal 
relations  could 
accelerated  modernisation 
tax 
administration. 

fiscal 

the 

of 

…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. 

CSR  3:  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. 

Increase incentives for later retirement… 

  Several  additional  measures  to  curb  tax  evasion 
and avoidance have been proposed by the Federal 
Government. 

  Some  progress  has  been  made  in  reviewing  the 
regulatory  framework  for  venture  capital.  The 
Federal  Government  has  adopted  a  draft  law  to 
improve the loss carry-forward for companies that 
have  a  change  in  shareholders  but  continue  their 
core  business.  This  is  to  facilitate  access  to 
venture  capital 
innovative 
companies, particularly in later start-up stages. 

for  young  and 

  Limited  progress  has  been  made  in  stimulating 
competition  in  the  services  sector.  The  Federal 
Government plans some limited modifications for 
certain  liberal  professions  and  business  services, 
partly  in  response  to  national  court  decisions 
having  declared 
regulations 
unlawful.  This  concerns 
the  prohibition  of 
medical doctors and lawyers on offering services 
in  partnership  and  mandatory  tariffs  for  tax 
advisers.  However, 
to 
there 
substantially  modernise  the  regulated  professions 
and  to  strengthen  competition  in  the  services 
sector. 

is  no  strategy 

some  existing 

Germany  has  made  limited  progress  in  addressing 
CSR 3: 

for 

later 

retirement.  A 

  Limited  progress  has  been  made  in  increasing 
incentives 
law  on 
facilitating  the  transition  of  older  workers  into 
retirement  (‘Flexi-Rente’)  has  been  adopted.  It 
mainly  aims  to  make  the  transition  of  older 
workers 
In 
retirement  more 
particular,  the  reform  promotes  the  combination 
of  early  retirement  and  part-time  work  by 
reducing pension deductions in the event of extra 
income.  It  also  incentivises  employment  above 
retirement age for employees by enabling them to 

flexible. 

into 

56 

 
A. Overview table 

acquire additional pension entitlements as well as 
for  employers,  by  releasing  them  from  the 
obligation 
insurance 
to  pay  unemployment 
contributions for employees above retirement age. 
It is too early to assess to what extent the reform 
may  offset  the  stronger  incentives  for  early 
retirement  introduced  by  the  last  pension  reform 
and  the  impact  of  an  ageing  population.  Further 
assessment  and  monitoring  appears  required  in 
this regard. 

…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. 

  No  progress  has  been  made 

reducing 
disincentives  to  work  for  second  earners.  No 
initiatives  have  been  taken  or  announced  in  this 
regard. 

in 

income 

  Limited progress has been made in reducing the 
high tax wedge for low-wage earners. The Federal 
Government  adopted  a  package  of  measures 
aimed  at  safeguarding  the  minimum  subsistence 
level and compensating for fiscal drag. The basic 
the  child 
tax  allowance, 
personal 
allowance, 
the  child 
the  child  benefit  and 
supplement will be increased in 2017 and 2018 to 
align  them  with  the  adjusted  subsistence  level  in 
accordance  with  existing  law.  Moreover,  the 
income tax brackets will be adjusted to offset the 
impact of fiscal drag based on the tax progression 
report  that  is  published  every  two  years.  These 
measures  largely  aim  at  adjusting  for  price 
developments and tend to benefit in particular low 
and  middle  income  groups.  However,  only  a 
limited  impact  on  the  tax  wedge,  if  any,  can  be 
expected. 

  No  progress  has  been  made  in  facilitating  the 
transition 
standard 
from  mini-jobs 
employment.  No  initiatives  have  been  taken  or 
announced in this regard. 

to 

Europe 2020 (national targets and progress) 

Employment  rate  of  the  population  aged  20-64 
years: 77 % 

78.9 % in the year ending September 2016. 

Employment  rate  of  the  population  aged  55-64 
years: 60 % 

68.9 % in the year ending September 2016. 

Employment rate of women: 73 % 

74.7 % in the year ending September 2016. 

R&D target set in the 2016 NRP: 3.0 % of GDP   Germany has made good progress and almost reached 
the 3 % R&D intensity target (total R&D expenditure 

57 

 
A. Overview table 

as  %  of  GDP).  Total  R&D  intensity  increased  by 
around 0.5 pps over the last decade and stabilised at 
around  2.9 %  in  2014  and  2015.  Between  2005  and 
2014, business R&D intensity increased by about 0.3 
pps, with a corresponding increase of around 0.2 pps 
for  the  government,  higher  education  and  private 
non-profit sectors taken together. Businesses account 
for about two thirds of total R&D expenditure. 

According to the latest national projections submitted 
to  the  Commission  and  taking  into  account  existing 
measures,  it  is  expected  that  the  target  will  be 
achieved  by  only  a  very  small  margin:  -14.8 %  in 
2020 compared with 2005. 

With  a  share  of  energy  from  renewable  sources  in 
gross  final  energy  consumption  of  13.8 %  in  2014, 
Germany  is  on  track  to  meet  its  2020  renewable 
energy  target.  However,  further  deployment  may  be 
restrained  by  insufficient  electricity  infrastructure. 
(57) 

Germany  increased  its  primary  energy  consumption 
by  1  %  from  291.1  Mtoe  in  2014  to  292.9  Mtoe  in 
2015.  Final  energy  consumption  increased  by  2  % 
from 208.9 Mtoe in 2014 to 212.1 Mtoe in 2015. 

Germany  needs  to  increase  its  effort  to  decrease  its 
primary  and  final  energy  consumption  in  order  to 
achieve its indicative national 2020 targets. 

The  downward  trend  continued  and  at  10.1 % 
Germany has almost reached the European target and 
is  close  to  the  national  target.  However,  it  is  below 
the EU average of 11 %. 

Germany is continuing to increase tertiary attainment 
which  now  stands  at  32.3 %  but  remains  below  the 
EU  average  of  38.7 %  and  below  the  EU  average 
increase. But it still has a long way to go to meet the 
EU target of 40 % and the national target of 42 %. 

Greenhouse  gas  emissions,  national 
target:  
-14 %  in  2020  compared  to  2005  (in  non-ETS 
sectors) 

2020  renewable  energy  target  in  gross  final 
energy consumption: 18 % 

Energy  efficiency,  indicative  national  2020 
targets: 

  276.6 Mtoe (primary energy consumption); 

  194.3 Mtoe (final energy consumption). 

Early school leaving target: <10 %. 

Tertiary  education  target:  40 %  (EU  2020)  or 
42 % (national target). 

Target for reducing the number of people at risk 
of  poverty  or  social  exclusion,  expressed  as  an 
absolute  number  of  people:  20 %  reduction  in 
the  number  of  long-term  unemployed  by  2020 
as  compared  with  2008  (i.e.  reduction  by 
320 000 long-term unemployed). 

The number of long-term unemployed people fell by 
658 000  in  2013,  707 000  in  2014  and  775 000  in 
2015 compared with 2008. The number of long-term 
unemployed  people  fell  by  around  48 %  between 
2008 and 2015. 

Germany  has  already  met  the  national  Europe  2020 

(57)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See Öko-
the  2016  Report  on  Renewable  Energy, 

in  Realisation  of 

Institut  Report:  Study  on  Technical  Assistance 
http://ec.europa.eu/energy/en/studies. 

58 

 
 
                                                           
A. Overview table 

poverty target. 

59 

 
 
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP Scoreboard for Germany 

1) b: break in time series. 
Note: Figures highlighted are those falling outside the threshold established in the European Commission’s Alert Mechanism 
Report. For real effective exchange rate and unit labour cost, the first threshold applies to euro area Member States. 
Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for real effective 
exchange rate), and International Monetary Fund 

60 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%5.75.86.26.67.07.5-35%25.723.228.033.840.248.7Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% -3.7-4.9-9.0-1.9-0.4-1.4Export market share - % of world exports5 years % change-6%-7.5-8.8-16.0-11.9-8.9-2.8Nominal unit labour cost index (2010=100)3 years % change9% & 12% 7.55.72.75.97.35.76%-0.91.42.02.02.24.114%0.01.61.21.70.23.0133%106.6102.7102.1102.899.598.960%81.078.779.977.574.971.2Unemployment rate3 year average10%7.36.86.15.55.24.916.5%-1.12.93.3-6.14.22.8-0.2%1.1b1.4b0.90.90.40.40.5%-1.6-1.1-1.1-1.0-0.6-0.42%-2.0-1.9-3.1-2.0-0.8-0.8Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
 
ANNEX C 

Standard tables 

Table C.1: 

Financial market indicators 

1 Latest data Q2 2016. 
2 Quarterly values are not annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); European 
Central Bank (all other indicators). 

61 

201120122013201420152016Total assets of the banking sector (% of GDP)310.5298.3266.4266.8252.7252.0Share of assets of the five largest banks (% of total assets)33.533.030.632.130.6-Foreign ownership of banking system (% of total assets)11.512.211.211.712.3-Financial soundness indicators:1              - non-performing loans (% of total loans)1.61.71.82.52.01.9              - capital adequacy ratio (%)15.817.418.717.317.917.8              - return on equity (%)22.21.11.32.51.70.8Bank loans to the private sector (year-on-year % change)2.01.10.51.32.33.8Lending for house purchase (year-on-year % change)1.21.92.02.43.53.7Loan to deposit ratio83.482.580.179.278.478.3Central Bank liquidity as % of liabilities1.81.71.41.11.01.0Private debt (% of GDP)102.7102.1102.899.598.9-Gross external debt (% of GDP)1 - public47.449.745.848.942.842.6    - private43.841.841.741.542.343.8Long-term interest rate spread versus Bund (basis points)*0.00.00.00.00.00.0Credit default swap spreads for sovereign securities (5-year)*44.832.714.912.77.711.5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.2: 

Labour market and social indicators 

1 The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks. 
2 Long-term unemployed are those who have been unemployed for at least 12 months. 
3 Not in education, employment or training. 
4 Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.  
Source: European Commission (EU Labour Force Survey). 

62 

201120122013201420152016 4Employment rate(% of population aged 20-64)76.576.977.377.778.078.5Employment growth (% change from previous year)1.41.20.60.80.91.1Employment rate of women(% of female population aged 20-64)71.371.672.573.173.674.3Employment rate of men (% of male population aged 20-64)81.782.182.182.282.382.6Employment rate of older workers (% of population aged 55-64)60.061.663.665.666.268.4Part-time employment (% of total employment, aged 15-64)25.925.826.626.526.826.8Fixed-term employment (% of employees with a fixed term contract, aged 15-64)14.613.813.413.113.213.0Transitions from temporary to permanent employment40.740.227.531.1::Unemployment rate1 (% active population, age group 15-74)5.85.45.25.04.64.2Long-term unemployment rate2 (% of labour force)2.82.42.32.22.01.7Youth unemployment rate (% active population aged 15-24)8.58.07.87.77.27.1Youth NEET3 rate (% of population aged 15-24)7.57.16.36.46.2:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)11.610.59.89.510.1:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)30.631.832.931.432.3:Formal childcare (30 hours or over; % of population aged less than 3 years)15.015.019.015.0:: 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.3: 

Labour market and social indicators (continued) 

1 People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity. 
2 At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.  
3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.  
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.  
5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes). 
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

63 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare9,29,19,39,59,7:Disability2,22,12,22,22,2:Old age and survivors11,411,011,010,910,9:Family/children3,13,13,13,13,1:Unemployment1,61,31,11,11,1:Housing0,70,60,60,60,6:Social exclusion n.e.c.0,10,10,20,20,2:Total28,527,327,427,727,8:of which: means-tested benefits3,43,33,33,43,4:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)19,719,919,620,320,620,0Children at risk of poverty or social exclusion  (% of people aged 0-17)21,719,918,419,419,618,5At-risk-of-poverty  rate2 (% of total population)15,615,816,116,116,716,7Severe material deprivation rate3  (% of total population)4,55,34,95,45,04,4Proportion of people living in low work intensity households4 (% of people aged 0-59)11,211,29,99,910,09,8In-work at-risk-of-poverty rate (% of persons employed)7,27,77,88,69,99,7Impact of social transfers (excluding pensions) on reducing poverty35,537,133,734,033,233,5Poverty thresholds, expressed in national currency at constant prices5107151072710772105441045410862Gross disposable income (households; growth %)2,43,12,61,72,43,1Inequality of income distribution (S80/S20 income quintile share ratio)4,54,54,34,65,14,8GINI coefficient before taxes and transfers52,051,550,551,751,6:GINI coefficient after taxes and transfers29,429,128,529,730,7: 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at 
http://www.doingbusiness.org/methodology. 
2 Average of the answer to question Q7B_a.  ‘[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome? ’. Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or the outcome is not known. 
3 Percentage of population aged 15-64 having completed tertiary education. 
4 Percentage of population aged 20-24 having attained at least upper secondary education. 
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm 
6 Aggregate OECD indicators of regulation in energy, transport and communications. 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

64 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry12.571.83-0.34-0.973.480.93Labour productivity in construction5.602.10-0.98-1.720.920.26Labour productivity in market services-0.611.852.531.86-0.200.89Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-11.80-0.343.633.96-1.801.09ULC in construction-5.200.794.672.652.113.77ULC in market services2.381.112.650.623.732.27Business environment201020112012201320142015Time needed to enforce contracts1 (days)394.0394.0394.0394.0459.0479.0Time needed to start a business1 (days)14.514.514.514.514.510.5Outcome of applications by SMEs for bank loans20.550.490.280.170.580.35Research and innovation201020112012201320142015R&D intensity2.712.802.872.822.892.87Total public expenditure on education as % of GDP, for all levels of education combined5.084.984.844.80nanaNumber of science & technology people employed as % of total employment424143434444Population having completed tertiary education3232425252324Young people with upper secondary education4757676777777Trade balance of high technology products as % of GDP0.350.591.051.050.900.97Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.411.29OECD PMR5, retail3.382.882.71OECD PMR5, professional services3.032.822.65OECD PMR5, network industries61.871.331.27 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.5:  Green growth 

General explanation of the table items: 
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices) 
 Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)   
 Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
 Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
 Waste intensity: waste (in kg) divided by GDP (in EUR). 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP.  
Weighting of energy in harmonised index of consumer prices (HICP): the proportion of ‘energy’ items in the consumption 
basket used for the construction of the HICP. 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change).   
Real unit energy cost: real energy costs as a percentage of total value-added for the economy. 
Environmental taxes over labour taxes and GDP: from European Commission’s database, ‘Taxation trends in the European 
Union’. 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value-added of industry (in 2005 
EUR). 
Real unit energy costs for manufacturing excluding refining: real costs as a percentage of value-added for manufacturing 
sectors. 
Share of energy-intensive industries in the economy: share of gross value-added of the energy-intensive industries in GDP. 
Electricity and gas prices for medium-sized industrial users: consumption band 500-20 00MWh and 10 000-100 000 GJ; figures 
excl. VAT.   
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste. 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP. 
Proportion of greenhouse gas (GHG) emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on 
greenhouse gas emissions (excl. land use, land use change and forestry) as reported by Member States to the European 
Environment Agency.  
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value-
added (in 2005 EUR).  
Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value-added of the transport 
sector. 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels. 
Aggregated supplier concentration index: covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.   
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels. 
* European Commission and European Environment Agency 
Source: European Commission (Eurostat) unless indicated otherwise 

65 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0,130,120,120,120,110,11Carbon intensity kg / €0,380,360,360,370,35-Resource intensity (reciprocal of resource productivity)kg / €0,520,540,520,510,520,50Waste intensity kg / €0,15-0,14-0,15-Energy balance of trade % GDP-2,8-3,6-3,7-3,5-2,8-Weighting of energy in HICP%11,5812,3012,5512,3911,9411,78Difference between energy price change and inflation %-0,87,03,63,2-1,6-5,5Real unit of energy cost% of value added9,610,510,49,99,9-Ratio of environmental taxes to labour taxesratio0,100,100,100,100,09-Environmental taxes% GDP2,12,22,12,02,0-Sectoral Industry energy intensity kgoe / € 0,110,100,100,100,100,10Real unit energy cost for manufacturing industry excl. refining% of value added12,112,912,812,412,2-Share of energy-intensive industries in the economy% GDP10,4710,1610,2710,1310,20-Electricity prices for medium-sized industrial users€ / kWh0,120,120,130,140,160,15Gas prices for medium-sized industrial users€ / kWh0,040,040,040,050,040,04Public R&D for energy % GDP0,030,030,040,050,050,04Public R&D for environmental protection% GDP0,020,020,020,030,030,03Municipal waste recycling rate%62,563,065,263,865,666,1Share of GHG emissions covered by ETS*%51,151,651,551,151,450,3Transport energy intensitykgoe / €0,580,570,570,560,610,61Transport carbon intensitykg / €1,461,441,431,431,54-Security of energy supplyEnergy import dependency%60,361,961,562,761,761,9Aggregated supplier concentration indexHHI12,313,913,715,015,3-Diversification of energy mixHHI0,240,240,240,250,24- 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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