Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Germany and delivering a Council opinion on the 2017 Stability Programme of Germany
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Germany, budgetary equilibrium, competition policy, economic policy, economic reform, employment policy, pay policy, public investment, stability programme, tax system

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 505 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Germany  and delivering a Council opinion on the 2017 Stability Programme of Germany   
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Germany 

and delivering a Council opinion on the 2017 Stability Programme of Germany 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No 1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16 November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances,2 and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission,3 
Having regard to the resolutions of the European Parliament,4 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

1 
2 
3 
4 
5 
6 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,5 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,6  in  which  it 
identified Germany as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2017) 505 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 

EN 

2 

   EN 

 
 
 
 
 
                                                 
(2) 

(3) 

(4) 

(5) 

7 
8 
9 
10 

a  Council  Recommendation  on  the  economic  policy  of  the  euro  area.  That 
Recommendation  was  endorsed  by  the  European  Council  on  9-10 March 2017  and 
adopted by the Council on 21 March 2017.7  

As a Member State whose currency is the euro and in view of the close interlinkages 
between the economies in the economic and monetary union, Germany should ensure 
the full and timely implementation of the Recommendation for the euro area which is 
reflected in recommendations 1 and 2 below. 
The  2017  country  report  for  Germany8  was  published  on  22 February  2017.  It 
assessed  Germany’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 12 July 2016, the follow-up given to the recommendations 
adopted in previous years and Germany’s progress towards its national Europe 2020 
targets.  It  also  included  an  in-depth  review  under  Article 5  of  Regulation  (EU) 
No 1176/2011, the results of which were also published on 22 February 2017.9 The 
Commission’s  analysis  leads  it  to  conclude  that  Germany  is  experiencing 
macroeconomic  imbalances.  In  particular,  the  persistently  high  current  account 
surplus  has  cross-border  relevance  and  reflects  —  besides  a  strong  integration  and 
performance of its highly competitive industry in the international division of labour 
— excess savings and subdued investment in both the private and the public sector. 
The  current  account  surplus  increased  further  in  2015,  stayed  largely  unchanged  in 
2016  and  is  expected  to  remain  at  a  high  level.  Addressing  the  surplus  can  have 
implications  on  the  rebalancing  prospects  of  the  rest  of  the  euro  area  and  the  EU 
because more dynamic domestic demand in Germany can ease deleveraging needs in 
highly-indebted  Member  States.  Despite  low  interest  rates  that  create  favourable 
financing conditions, business investment as a share of GDP is still subdued. While 
the recovery in private consumption has continued, household savings have reached 
record high levels in the EU. The need for action to reduce the risk of adverse effects 
on  the  German  economy  and,  given  its  size  and  cross-border  relevance,  on  the 
economic and monetary union, is particularly important. 

On 13 April 2017 Germany submitted its 2017 Stability Programme and on 28 April 
2017 Germany submitted its 2017 National Reform Programme. To take account of 
their interlinkages, the two programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,10 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 

OJ C92/01, 24.3.2017, p. 1. 
SWD(2017) 71 final. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 

EN 

3 

   EN 

 
                                                 
(6) 

(7) 

(8) 

(9) 

(10) 

and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.11 

Germany  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject  to  the  debt  rule.  In  its  2017  Stability  Programme,  the  government  plans  a 
budget  surplus  of  between  ¼  and  ½%  of  GDP  over  2017-2021.  The  medium-term 
budgetary  objective  —  a  structural  deficit  of  0.5%  of  GDP  —  continues  to  be  met 
with  a  margin  throughout  the  programme  period.  According  to  the  Stability 
Programme,  the  general  government  debt-to-GDP  ratio  is  expected  to  gradually 
decline to 57% in 2021. The macroeconomic scenario underpinning these budgetary 
projections, which has not been endorsed by an independent body, is plausible.  

Based on the Commission 2017 spring forecast, the structural balance is forecast to 
register  a  surplus  of  0.6%  of  GDP  in  2017  and  0.3%  of  GDP  in  2018,  above  the 
medium-term budgetary objective. General government debt is forecast to remain on 
a firm downward path beyond the requirements of the debt rule. Overall, the Council 
is  of  the  opinion  that  Germany  is  projected  to  comply  with  the  provisions  of  the 
Stability and Growth Pact in 2017 and 2018. At the same time, there remains scope 
to  support  domestic  demand  by  using  fiscal  policy  notably  to  achieve  a  sustained 
upward trend in investment, and by creating conditions for higher real wage growth.  

Public investment as a proportion of GDP has remained largely constant and is below 
the euro area average. A public investment backlog persists in particular at municipal 
level, where net investment remained negative in 2016. This is despite the measures 
taken over the last few years and significant increases in public investment at general 
government level in 2015 and 2016. Additional measures were taken in 2016 which 
should  increase  the  scope  for  public  investment,  including  at  federal  State  and 
municipal level. These include a reform of federal fiscal relations that, once adopted, 
will  take  effect  in  2020.  Moreover,  extending  consulting  services  on  infrastructure 
investment  planning  to  include  municipalities  should  improve  the  planning  and 
implementation  of  infrastructure  investment  at  municipal  level.  This  appears 
particularly relevant given that infrastructure investment projects in the federal States 
and  municipalities  are  only  executed  to  a  limited  extent  and  are  influenced  by 
capacity  and  planning  constraints.  The  favourable  budgetary  position  generally 
indicates available  fiscal space, for example to provide additional funds to increase 
public investment at all levels of government. 

Overall public and private education and research expenditure has been rather stable 
relative  to  GDP  in  recent  years,  but  it  remains  below  the  EU  average.  At  9.1 %  in 
2015  it  fell  short  of  the  national  target  of  10 %  of  GDP.  Additional  investment  in 
education, research and innovation is crucial for Germany’s future economic success 
and in particular to effectively integrate recently arrived immigrants. To achieve the 
latter,  Germany  has  undertaken  considerable  efforts,  especially  in  the  area  of 
vocational  education  and  training.  In  the  coming  years,  comparable  efforts  will  be 
necessary in other educational sectors. 

The  German  tax  system  remains  complex,  tax  administration  costs  are  high  and 
several corporate taxation provisions may be hampering private investment. Despite 
significant reductions, corporate capital costs in Germany are still among the highest 
in  the  EU-28.  When  accounting  for  the  local  trade  tax  (Gewerbesteuer)  and  the 
solidarity surcharge, the top statutory tax rate on corporate income reached 30.2 % in 

11 

COM(2014) 494 final. 

EN 

4 

   EN 

 
                                                 
2016.  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  bias  towards  debt  in  corporate  taxation  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  and  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 in the tax base of the local trade tax, limitations on loss carry-forwards, and 
tax-induced  distortions  with  respect  to  the  choice  of  legal  form.  Further  provisions 
that  might  reduce  the  investment-friendliness  of  the  tax  system  include  the 
depreciation regime, the interest rate used to calculate deductible pension provisions, 
the  taxation  of  capital  gains,  and  cash  accounting  for  the  purpose  of  value-added 
taxation. If implemented effectively, the additional general and IT-specific functional 
authority  of 
tax 
administrations that was agreed as part of the reform of federal fiscal relations could 
help in accelerating the modernisation of the tax administration. 

tax  administration 

the  federal 

the  States’ 

in  relation 

to 

(11) 

(12) 

(13) 

Venture  capital  investment  has  increased  in  Germany,  but  the  market  still  remains 
underdeveloped  by  international  standards.  In  2015,  venture  capital  investment 
accounted for about 0.03 % of GDP, which is slightly above the EU average but still 
below  Member  States  such  as  Finland,  the  United  Kingdom,  Sweden,  Ireland  or 
France, and far below non-EU Member States such as Israel and the United States. In 
particular,  the  venture  capital  market  in  Germany  appears  to  be  failing  to  provide 
bigger  later-stage  investments.  The  federal  government  has  taken  a  number  of 
measures  to  support  venture  capital  investment.  For  example,  it  simplified  the 
taxation  of  investment  funds,  improved  loss  carry-forwards  under  the  corporate 
income taxation system and expanded the INVEST programme for business angels. 

The shift towards renewable energy necessitates significant investment in electricity 
distribution  networks.  However,  planned 
in  domestic  electricity 
infrastructure  has  been  significantly  delayed.  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. Of a current total of 
6 100 km of power lines planned in the Federal Requirement Plan Act, only around 
6 % have been approved and only 1 % have been constructed.  

investment 

There  are  still  barriers  to  reaping  the  full  benefits  of  digitisation.  For  example, 
Germany  is  not  performing  well  in  the  availability  of  high-speed  and  ultra-fast 
broadband  connections,  in  particular  in  semi-urban  and  rural  regions.  Computer 
usage  by  young  Germans  is  comparatively  low  and  many  schools  lack  broadband 
access.  Performance  in  digital  public  services  is  also  below  the  EU  average.  In 
particular  SMEs  need  to  catch  up  in  terms  of  digitisation.  Only  one  fifth  of  SMEs 
have a digitisation strategy. A network of SME centres of excellence has been set up 
to strengthen and accelerate the digitisation of SMEs and the ‘Industrie 4.0’ platform 
brings together all relevant stakeholders. While business R&D investment is growing 
and Germany is close to achieving its Europe 2020 R&D intensity target, investment 
is  increasingly  concentrated  in  large  companies,  while  the  contribution  of  SMEs  is 
declining.  Moreover,  an  ageing  population  may  also  have  an 
impact  on 
entrepreneurial activity in the coming years. 

(14) 

High  regulatory  barriers  remain  in  the  business  services  sector  and  regulated 
professions. The level of restrictions is higher than the EU average in particular for 

EN 

5 

   EN 

 
architects, engineers, lawyers and accountants/tax advisers. In addition, the business 
churn  rate  for  these  professions  is  significantly  lower  than  the  EU  average,  which 
seems to indicate relatively low dynamism and competition in professional services 
in Germany. These barriers include shareholding and company form restrictions for 
architects  and  engineers,  and  multidisciplinary  restrictions  for  architects,  engineers 
and  lawyers.  Reducing  these  barriers  could  generate  more  intensive  competition, 
resulting in more firms entering the market, and leading to benefits for consumers in 
terms of lower prices and broader choice. In January 2017 the Commission presented 
reform recommendations for regulation in professional services, as part of a package 
of measures to tackle barriers in services markets.12 

Employment has continued to rise and unemployment has fallen to historically low 
levels.  However,  the  increase  in  employment  has  been  partly  due  to  an  increase  in 
part-time work, in particular among women, and has been only partially reflected in 
aggregate  real  wage  growth,  which  decelerated  in  2016.  Disincentives  to  work  for 
second  earners  and  widespread  part-time  work  are  hampering  the  full  use  of  the 
labour  market  potential.  Better  provision  of  quality  and  affordable  full-time 
childcare, all-day schools and long-term care is a crucial lever for increasing female 
participation in the workforce. Joint taxation of income for married couples and free 
health care insurance coverage for non-working spouses discourage second earners, 
in  many  cases  women,  from  taking  up  a  job  or  increasing  the  number  of  hours 
worked. Moreover, lower labour market attachment is combined with a high gender 
pay gap of 22 % compared to an EU average of 16.3 % in 2015. 

Despite  a  slight  reduction,  mini-jobs  remain  widespread,  with  about  4.8  million 
people  having  a  mini-job  as  their  only  job  in  September  2016.  The  number  of 
temporary  agency  workers  has  quadrupled  since  2005,  reaching  around  1 million 
(close to 3 % of total employment) in June 2016. Protection from potential abuses in 
temporary agency work and work contracts is expected to improve, yet developments 
deserve monitoring. In addition, fixed-term contracts appear to have a comparatively 
high wage gap of 27 % compared to permanent contracts. 

The  tax  wedge  for  low-wage  earners  is  high  in  comparison  with  other  Member 
States, thus reducing work incentives, take-home pay and consumption opportunities. 
Germany  increased  the  minimum  personal  income  tax  allowance  and  child 
allowances and adjusted the income tax brackets. These measures tend to benefit low 
and middle income groups, but the overall impact on the tax wedge will be limited. 
In spite of recent substantial rises in real disposable income, wages and productivity 
evolutions  have  been  diverging  over  a  long  period,  leading  to  a  considerable 
accumulated  gap.  Higher  real  wage  growth  would  also  contribute  to  reducing  the 
high external imbalances. 

Germany  has  done  considerable  efforts  in  receiving  asylum  seekers  and  in 
integrating refugees and other immigrants. Further improvements appear possible, as 
in  2016  the  number  of  job-seeking  refugees  increased  to  10%  of  all  unemployed. 
Labour  market  integration  of  people  with  a  migrant  background,  in  particular 
women,  remains  a  major  challenge  which,  including  through  the  education  system, 
also applies to children born in Germany with parents born outside the EU. 

(15) 

(16) 

(17) 

(18) 

12 

COM(2016)  820  final,  COM(2016)  821  final,  COM(2016)  822  final,  COM(2016)  823  final, 
COM(2016) 824 final. 

EN 

6 

   EN 

 
                                                 
(19) 

(20) 

(21) 

(22) 

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,  while  wealth  inequality 
remains  among  the  highest  in  the  euro  area.  Moreover,  the  good  labour  market 
performance  has  not  led  to  a  decline  in  the  risk  of  poverty.  The  at-risk-of-poverty 
rate in old age is above the EU average and the number of people at risk of old-age 
poverty  is  expected  to  increase  in  the  coming  years.  The  replacement  rate  of  the 
statutory pension scheme is forecasted to further decline. At the same time, the rates 
of  enrolment  in  second  or  third-pillar  pension  schemes  are  too  low  to  fully 
compensate for the decrease in the replacement rate of the first pillar. If not offset, 
pension adequacy is thus expected to deteriorate. It remains to be seen how effective 
the recent proposals to improve incentives for later retirement (Flexi-Rente) can be in 
counteracting the incentives for early retirement introduced in 2014. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Germany’s economic policy and published it in the 2017 
country report. It has also assessed the Stability Programme and the National Reform 
Programme and the follow-up given to the recommendations addressed to Germany 
in  previous years.  It has taken into account  not only  their relevance for sustainable 
fiscal and socioeconomic policy in Germany, but also their compliance with EU rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and  is  of  the  opinion13  that  Germany  is  expected  to  comply  with  the  Stability  and 
Growth Pact. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  National  Reform  Programme  and  the  Stability  Programme.  Its 
recommendations  made  under  Article  6  of  Regulation  (EU)  No 1176/2011  are 
reflected in recommendations 1 and 2 below, 

HEREBY RECOMMENDS that Germany take action in 2017 and 2018 to: 

1. 

2. 

Use fiscal policy to support domestic demand and achieve a sustained upward trend 
in investment. Accelerate public investment at all levels of government, especially in 
education, research and innovation, and address capacity and planning constraints for 
investment-
infrastructure 
friendliness  of  the  tax  system.  Stimulate  competition  in  business  services  and 
regulated professions. 

investments.  Further 

the  efficiency  and 

improve 

Reduce disincentives to work for second earners and facilitate transitions to standard 
employment. Reduce the high tax wedge for low-wage earners. Create conditions to 
promote higher real wage growth, respecting the role of the social partners. 

Done at Brussels, 

13 

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

For the Council 
The President 

EN 

7 

   EN