Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Germany and delivering a Council opinion on the 2018 Stability Programme of Germany
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Germany, budgetary equilibrium, competition policy, digitisation, economic policy, economic reform, employment policy, investment, stability programme, tax system

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 405 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Germany  and delivering a Council opinion on the 2018 Stability Programme of Germany  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Germany 

and delivering a Council opinion on the 2018 Stability Programme of Germany 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

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

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission also adopted the Alert Mechanism Report, 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  a  Council 
recommendation on the economic policy of the euro area, which was endorsed by the 
European  Council  on  22  March  2018.  On  14  May  2018,  the  Council  adopted  the 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2018) 405 final. 
P8_TA(2018)0077 and P8_TA(2018)0078.  

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(2) 

(3) 

(4) 

(5) 

recommendation  on  the  economic  policy  of  the  euro  area  (‘recommendation  for  the 
euro area’).  

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 on the economic policy for 
the euro area, as reflected in recommendations (1) and (2) below. 
The  2018  country  report  for  Germany5  was  published  on  7  March  2018.  It  assessed 
Germany’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 11 July 2017, 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  7  March  20186.  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 a subdued level of investment relative to saving in both 
the private and the public sector. The surplus, which is largely with non-EU countries, 
has slightly narrowed since 2016 and is expected to gradually decline due to a pick-up 
in  domestic  demand  in  the  coming  years  whilst  remaining  at  historically  high  levels 
over  the  forecast  horizon.  While  there  is  currently  a  shift  towards  more  domestic 
demand-driven growth, both consumption and investment remain muted as a share of 
GDP  despite  the  favourable  cyclical  and  financing  conditions  and  the  infrastructure 
investment  needs  for  which  there  is  fiscal  space.  While  a  number  of  measures  have 
been  taken  to  strengthen  public  investment,  these  efforts  have  not  yet  resulted  in  a 
sustainable  upward  trend  in  public  investment  as  a  share  of  GDP.  Progress  in 
addressing recommendations in other areas has also been limited. 

On 30 April 2018, Germany submitted its 2018 National Reform Programme and its 
2018 Stability Programme. To take account of their interlinkages, the two programmes 
have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council7,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance8.  

(6) 

Germany  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject  to  the  debt  rule.  In  its  2018  Stability  Programme,  the  government  plans  a 

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SWD(2018) 204 final. 
COM(2018) 120 final. 
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). 
COM(2014) 494 final. 

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budget surplus of between 1 and 1 ½ % of GDP over 2018-2021. 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  53  %  in  2021.  While  the  Stability  Programme  lists  and  describes  several 
planned  measures  of  the  March  2018  coalition  agreement,  amounting  to  around 
broadly  1½  %  of  GDP  over  the  period  2018-2021,  those  are  not  yet  included  in  the 
Stability  Programme's  projections  as  they  are  not  yet  adopted.  The  macroeconomic 
scenario underpinning those budgetary projections, which has not been endorsed by an 
independent  body,  is  plausible.9  Based  on  the  Commission  2018  spring  forecast,  the 
structural balance is forecast to register a surplus of around 1.2 % of GDP in 2018 and 
1.0  %  of  GDP  in  2019,  above  the  medium-term  budgetary  objective.  General 
government debt is forecast to remain on a firm downward path. Overall, the Council 
is  of  the  opinion  that  Germany  is  projected  to  comply  with  the  provisions  of  the 
Stability and Growth Pact in  2018 and 2019. At the same time, while  respecting  the 
medium-term  objective,  there  remains  scope  to  use  fiscal  and  structural  policies  to 
achieve  a  sustained  upward  trend  in  public  and  private  investment  in  particular  on 
education, research and innovation. 

Real  public  investment  increased  robustly  in  2015-2017.  This  trend  reflects  the 
government’s efforts to strengthen investment. Public investment is picking up, but as 
a proportion of GDP the increase is still modest, and a significant backlog at municipal 
level, estimated at 4 % of GDP, remains. The public capital stock is still declining as a 
proportion  of  GDP,  due  to  negative  net  investment  at  municipal  level  (around 
EUR 6 billion annually  in 2010-2016).  Clearing the investment backlog at municipal 
level would require additional annual public investment of 0.3 % of GDP over the next 
decade. Investment as a percentage of the capital stock in the government sector, and 
public  investment  as  a  percentage  of  public  expenditure  are  below  the  euro  area 
average.  A  service  agency  set  up  to  support  public  investment  at  municipal  level 
became  operational  in  2017,  but  additional  efforts  are  needed  to  address  the 
investment  backlog.  Together  with  the  favourable  budgetary  position  this  indicates 
that  there  is  scope  to  increase  investment  at  all  levels  of  government,  notably  at 
regional and municipal levels. 

Public  expenditure  on  education  remained  at  4.2 %  of  GDP  in  2016,  below  the  EU 
average of 4.7 %. Spending on education and research remained at 9.0 % of GDP in 
2016,  falling  short  of  the  national  target  of  10 %.  This  corresponds  to  an  estimated 
investment gap of about EUR 33 billion. While education expenditure has increased in 
real  terms,  a  considerable  investment  backlog  remains.  At  the  same  time,  challenges 
such  as  growing  student  numbers,  teacher  shortages  and  further  expansion  of  early 
childhood  education  and  care  will  require  appropriate  public  financing.  Additional 
spending  on  education  and  on  research  and  innovation  is  crucial  for  Germany’s 
potential growth. 

to 

the  Regulation  on 

the  Economic  Projections  of 

the  Federal  Government 
According 
(Vorausschätzungsverordnung) passed by the Ministry of the Economy and Energy in agreement with 
the  Ministry  of  Finance  and  effective  from  July  2018,  the  Joint  Economic  Forecast  project  group 
(Gemeinschaftsdiagnose) has been declared the independent body in charge of assessing the economic 
projections underlying the Draft Budgetary Plans and the Stability Programmes in the sense of the Law 
on the Economic Projections (Vorausschätzungsgesetz). 

(7) 

(8) 

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(9) 

Digitalisation  of  the  German  economy  is  progressing  slowly  and  the  country  faces 
considerable challenges. There is an obvious urban-rural digital divide with regard to 
fast  internet  (next-generation  access  up  to  30  Mbit)  coverage  (only  54 %  in  rural 
areas).  Germany  is  lagging  behind  on  very-high-capacity  broadband  (> 100 Mbit) 
deployment.  Only  a  small  proportion  of  Germany’s  territory  (7.3 %)  is  covered  by 
high-performance  fibre-based  access  networks,  as  compared  with  an  EU  average  of 
26.8 %. Instead, upgrading existing copper cable networks (vectoring) continued to be 
the  dominating  incumbent’s  preferred  technological  solution.  Many  services  rely  on 
very–high-speed  connectivity  and  in  2017  25.3%  of  German  enterprises  found  their 
internet  connections  too  slow  for  their  actual  business  needs.  A  lack  of  such 
connectivity holds back investment, especially by small and medium-sized businesses, 
many of which are located in rural and semi-rural areas. Performance in digital public 
services and in e-health is also far below the EU average.  

(10)  Business  research  and  development  investment  is  growing  and  Germany  is  close  to 
achieving  its  Europe  2020  research  and  development  intensity  target.  However, 
investment  is  increasingly  concentrated  in  large  firms  and  in  medium/high-tech 
manufacturing,  while  the  contribution  of  small  and  medium-sized  enterprises  is 
declining.  A  number  of  measures  have  been  taken  to  strengthen  entrepreneurial 
activity,  especially  by  attracting  private  investments  in  risk  capital.  However, 
Germany’s  venture  capital  market  remains  less  developed  than  those  of  other 
international innovation leaders. 

(11)  Despite  some  improvements  in  recent  years,  Germany’s  tax  system  remains 
inefficient,  in  particular  because  it  is  complex  and  distorts  decision-making,  e.g. on 
investment,  financing  and  labour  market  participation.  Germany  places  a  relatively 
strong  emphasis  on  direct  taxes  to  raise  revenues  and  there  is  potential  to  reduce 
distortive  direct  taxation  or  for  a  shift  towards  less  distortive  taxes  on  property, 
inheritance and consumption. The levels of taxes and social contributions on income 
from employment were the sixth highest in the EU in 2015. The cost of capital and the 
effective average corporate tax rate, which differ across regions, are among the highest 
in  the  EU  (28.2 %  as  a  national  aggregate,  as  compared  with  an  EU  average  of 
20.9 %). Due to the interplay of corporate income tax, local trade tax and the solidarity 
surcharge, the corporate tax system is complex, involves high tax administration costs 
and  distorts  the  level  and  location  of  investments.  In  addition,  the  corporate  income 
tax  distorts  financing  decisions,  with  a  bias  towards  debt  financing.  This  bias  is  the 
seventh  highest  in  the  EU.  Lowering  the  capital  costs  on  equity  could  strengthen 
private  investment  and  the  relatively  under-developed  venture  capital  market. 
Furthermore,  loss  carry-forward  provisions  remain  relatively  strict,  limiting  the 
amount to 60 % of taxable income for a given year.  

(12)  Regulation  in  Germany  is  still  highly  restrictive,  especially  as  regards  business 
services,  regulated  professions  and  administrative  formalities  for  the  cross-border 
provision of services. Key restrictions concern inter alia legal form and shareholding. 
Churn  rates  in  key  business  services  sectors  such  as  legal,  accounting,  architectural 
and  engineering  activities  are  below  the  EU  average,  while  gross  operating  rates  in 
those  sectors  are  above  average,  suggesting  lower  competitive  pressures.  Because  of 
services’  role  as  intermediate  inputs,  less  restrictive  regulation  of  services  increases 
productivity in downstream service-intensive industries. 

(13)  Germany’s labour market performance has been very strong. Unemployment fell to a 
record  low  of  3.6 %  in  the  fourth  quarter  of  2017  and  employment  reached  79.8 %. 
The  level  of  youth  unemployment  (6.7 %  in  2017)  is  among  the  lowest  in  the  EU. 

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Germany is experiencing increasing shortages of skilled labour, while certain groups’ 
labour  market  potential  remains  under-used.  The  proportion  of  people  working 
part-time,  particularly  women  and  those  with  a  migrant  background  and  caring 
responsibilities,  is  among  the  highest  in  the  EU.  For  women,  key  factors  include 
disincentives  to  work  longer  hours,  coupled  with  a  lack  of  sufficient  childcare  and 
all-day  school  facilities.  Specific  tax  rules,  particularly  for  second  earners  and 
low-wage  workers,  and  the  lock-in  effects  of  the  mini-job  earning  threshold  of 
EUR 450  generated  further  disincentives  to  work  longer  hours.  Germany  has  one  of 
the  highest  tax  wedges  on  low  earners,  most  of  whom  are  women.  The  high  rate  of 
women  working  part-time  is  accompanied  by  one  of  the  widest  gender  gaps  in 
part-time employment in the EU (37.5 % vs EU average of 23.1 %). This contributes 
to a very wide gender pay gap in Germany. 

(14)  Nominal  wage  growth  remained  moderate  in  2017,  at  2.4 %,  despite  record  low 
unemployment and high job vacancy rates. This relatively subdued rate is partly due to 
slow  productivity  increases  in  services,  low  collective  bargaining  coverage  in  some 
sectors  and  a  reduction  in  structural  unemployment.  The  reaction  to  the  pick-up  in 
inflation was limited, with real wage growth declining from 1.8 % in 2016 to 0.7 % in 
2017.  Collective  agreements  from  early  2018  may  lead  to  some  wage  acceleration; 
developments in this area are worth monitoring. The proportion of low-wage earners 
remains high and there is scope for increases in the number of hours worked in lower 
wage  deciles.  Increased  immigration  did  not  prevent  wage  growth  in  lower  wage 
segments.  The  introduction  of  the  statutory  general  minimum  wage  in  2015,  and  its 
subsequent rise in 2017, increased wages at the bottom of the distribution. On top of 
wage increases, social partners are focusing on working time flexibility in the current 
round of wage negotiations. 

(15)  Germany has a solid social protection system overall. However, the at-risk of poverty 
rate for the total population rose steadily from 2005 to 2015 (16.7%) before the trend 
was  slightly  reversed  in  2016.  Income  inequality  has  also  begun  to  decline  in  2015, 
showing  a  modest  reduction  in  the  S80/S20  ratio  owing  to  an  improvement  in  the 
incomes  of  poorer  households.  The  recent  improvement  of  in-work  poverty  in  2016 
was also modest and only benefitted men.  

(16)  Germany  can  improve  the  attachment  of  older  workers  to  the  labour  market,  which 
would  increase  old-age  income,  boost  potential  output,  help  adapt  to  a  tight  labour 
market, and reduce the need for precautionary savings for old age. Fiscal sustainability 
risks  are  currently  low,  due  in  large  part  to  a  relatively  high  primary  surplus.  Still, 
Germany is expected to have one of the largest increases in pension expenditure in the 
EU  up  to  2070  according  the  2018  Ageing  Report.  At  17.6 %  in  2016,  the  risk  of 
poverty  in  old  age  (i.e.  above  65)  was  above  the  EU  average  of  14.7 %.  The  future 
deterioration of pension adequacy in the statutory first pillar is expected to increase the 
risk  of  poverty  in  old  age,  particularly  for  low-wage  earners,  people  with  atypical 
contracts  and  those  with  interruptions  in  their  employment  histories.  The  gender 
pension gap is one of the widest in the EU. At the same time, while the employment 
rate for workers  aged  60-64 (58.4 %  in  2017)  was among  the highest in the EU, the 
employment  rate  for  workers  aged  65-69  was  in  the  middle  third  of  Member  States 
(16.1 %). 

(17)  Socio-economic  background  remains  a  considerable  determinant  of  educational 
outcomes  and  labour  market  integration.  In  science,  it  contributes  to  a  performance 
difference  of  3  years  of  schooling  between  the  lowest  and  highest  social  quartiles 
according  to  the  Programme  for  International  Student  Assessment  in  2015.  National 

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data  confirm  the  substantial  correlation  also  for  primary  education.  Particular 
challenges exist for students with a migrant background. Compared with native-born 
students,  they  are  much  more  likely  to  underachieve  in  basic  skills  and  leave  school 
early  or  drop  out  of  university.  Also  the  labour  market  potential  of  people  with  a 
migrant  background  is  not  fully  used.  In  2017,  the  employment  rate  among  non-EU 
nationals  (aged  20-64)  was  more  than  27 pps.  lower  than  that  for  German  nationals 
(almost  33 pps.  lower  in  the  case  of  female  non-EU  nationals).  It  is  a  concern  for 
future  labour  market  performance  of  workers  that  adult  learning  is  below  the  EU 
average and remains a particular challenge for the low-skilled adult population of 7.5 
million people who lack basic reading and writing skills. 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Germany’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Stability  Programme  and  the  2018 
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 Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme  and  is  of  the  opinion10  that  Germany  is  expected  to  comply  with  the 
Stability and Growth Pact. 

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

(18) 

(19) 

(20) 

HEREBY RECOMMENDS that Germany take action in 2018 and 2019 to: 

1. 

2. 

While  respecting  the  medium-term  objective,  use  fiscal  and  structural  policies  to 
achieve a sustained upward trend in public and private investment, and in particular 
on education, research and innovation at all levels of government, notably at regional 
and municipal levels. Step up efforts to ensure the availability of very high-capacity 
broadband  infrastructure  nationwide.  Improve  the  efficiency  and  investment-
friendliness  of  the  tax  system.  Strengthen  competition  in  business  services  and 
regulated professions. 

Reduce disincentives to work more hours, including the high tax wedge, in particular 
for  low-wage  and  second  earners.  Take  measures  to  promote  longer  working  lives. 
Create  conditions  to  promote  higher  wage  growth,  while  respecting  the  role  of  the 
social  partners.  Improve  educational  outcomes  and  skills  levels  of  disadvantaged 
groups. 

Done at Brussels, 

For the Council 
The President 

10 

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

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