COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2019 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 EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Germany, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1004 final  COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2019      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 EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Overall findings regarding imbalances, risks and adjustment issues 

4.  Reform priorities 

4.1.  Public finances and taxation* 

4.2.  Financial sector 

4.3.  Labour market, education and social policies* 

4.4.   Competitiveness reforms and investment* 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

4 

8 

17 

20 

25 

25 

35 

38 

47 

60 

66 

67 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Germany  73 

References 

LIST OF TABLES 

Table 1.1: 

Key components of income and final demand of non-financial corporations: 

contributions to the economy-wide net lending 

Table 1.2: 

Key components of household income and final demand: contributions to the 

economy-wide net lending 

Table 1.3: 

Key components of government revenue and expenditure: contributions to the 

economy-wide net lending 

Table 1.4: 

Key economic and financial indicators - Germany 

Table 2.1: 

Summary table on 2018 CSR assessment 

Table 3.1: 

Outward spillover heat map for Germany 

Table 1: 

Spillover effects of structural reforms – Germany closing half of the structural reform 

gaps 

Table 3.2: 

MIP Assessment Matrix 

Table 1: 

Budgetary impact of the reform scenarios (in million EUR) 

1 

78 

12 

12 

12 

16 

18 

21 

22 

24 

31 

 
 
 
Table 4.2.1:  Quarterly financial soundness indicators 

Table 4.4.1: 

Emissions Effort Sharing sectors 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 

Demand components of GDP growth 

Graph 1.2: 

Prices and costs in construction 

Graph 1.3: 

New dwellings completed 

Graph 1.4: 

Contributions to headline inflation 

Graph 1.5: 

Improving labour market 

Graph 1.6: 

Economic performance by regions, compared to the EU average 

Graph 1.7: 

Sectoral net lending 

Graph 1.8: 

Current account and component balances 

Graph 1.9: 

Current account balance and components of the financial account 

Graph 1.10: 

Factors explaining the current account surplus 

Graph 1.11:  General government budget balance and gross debt 

Graph 2.1:  Overall multiannual implementation of 2011-2018 CSRs to date 

Graph 4.1.1:  Correlation between gross investment and debt in 2017 

Graph 4.1.2:  Regional debt and investment shares in 2017 

Graph 4.1.3:  Cost of tax compliance (as % of turnover) 

Graph 4.1.4:  Paying taxes: time to comply (hours per year) 

Graph 4.1.5:  Environmental tax revenues (% GDP) 

Graph 1: 

Overview of simulation results 

Graph 4.2.1:  Mortgage debt, volume and % of GDP 

Graph 4.3.1:  Beveridge curve 

Graph 4.3.2:  Real unit labour cost, real compensation per employee and real productivity - 

compared to 2000 

Graph 4.3.3:  Poverty and social exclusion 

Graph 4.4.1:  Labour and total factor productivity 

Graph 4.4.2:  Expenditure for R&D&I in Germany 

Graph 4.4.3:  Start-up rates in Germany 

Graph 4.4.4:  Change in GDP per head (PPS), 2007-2016 

36 

57 

67 

68 

69 

70 

71 

72 

8 

9 

9 

10 

10 

11 

11 

13 

13 

14 

14 

17 

25 

25 

27 

28 

29 

31 

36 

38 

39 

43 

47 

50 

50 

54 

2 

 
 
 
 
LIST OF BOXES 

Box 1.1: The automotive sector in Germany 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in Germany 

Box 3.1: Spillovers of structural reforms – the case of Germany 

Box 4.1.1: Tax shift from labour to inheritances and gifts 

Box 4.1.2: Reform options for the German pension system 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 4.4.1: Investment challenges and reforms in Germany 

15 

19 

22 

30 

34 

40 

49 

3 

 
 
 
 
EXECUTIVE SUMMARY 

and 

investment  efforts  and 

Sizeable 
innovation 
combined with structural reforms, would make 
to 
the  German  economy  more  resilient 
domestic 
external 
unfavourable 
developments  and  ensure  a  sustainable  and 
inclusive growth model. The German economy is 
facing  challenges  in  a  number  of  sectors,  which 
have  traditionally  performed  well  internationally. 
Stronger  investment  and  innovation  efforts  are 
needed  to  boost  productivity  and  help  diversify 
Germany’s  growth  model,  keeping  up  with 
technological  change  and  demand  shift  and 
dynamics.  Boosting  both  private  and  public 
investment  would  be  a  way  to  address  challenges 
related 
transport,  decentralised 
renewable  energy  production,  digitalisation  and 
demographic  change.  Higher  investment  in  and 
expenditure  on  education  and  skills,  very  high-
capacity broadband and research and development 
are  key  to  raising  long-term  growth  potential. 
Structural  reforms  promoting  better  use  of  the 
labour market potential of  groups that have so far 
been  inactive  or  under-represented  could  help 
address the already noticeable shortages of skilled 
labour  and  support  income,  especially  for  low-
income earners. (1) 

to  sustainable 

The  German  economy  continues  to  grow, 
driven  by  domestic  demand  in  an  increasingly 
challenging external environment.  After a 2.2 % 
rise  in  2017,  GDP  grew  by  only  1.5 %  in  2018. 
The contribution of net exports turned negative, as 
solid  domestic  demand  pushed  up  the  import-to-
GDP  ratio  and  export  growth  was  weaker  than  in 
previous  years.  The  current  account  surplus 
declined from 8.5 % in 2016 to 8.0 % in 2017 and 
7.4 %  in  2018.  Underpinned  by  the  continued 
economic  expansion,  unemployment  fell  to  a 
record low of 3.2 % by the end of 2018, despite the 

(1)  This  report  assesses  Germany’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
focusing 
reforms 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic  stability  and  sound  public  finance.  At  the 
same 
the  Alert 
the  Commission  published 
Mechanism  Report  (AMR)  that  initiated  the  eighth  round 
of  the  macroeconomic  imbalance  procedure.  The  AMR 
found that Germany warranted an in-depth review, which is 
presented in this report. 

time, 

increase  in  the  labour  force.  Despite  very  low 
unemployment  and  high  job  vacancy  rates,  real 
wage  growth  has  edged  up  only  moderately,  to 
around  1 %.  Core  inflation  was  at  1.5 %  in  2018 
and is expected to edge up to 1.6 % by 2020, in the 
context of moderate domestic demand.  

increased 
The  government  budget  surplus 
during  the  reporting  period,  and  public  debt 
continues to fall, providing ample space to boost 
public  investment.  In  2017,  the  government 
surplus  reached  1.0 %  of  GDP,  rising  further  to  a 
record  high  of  1.7 %  of  GDP  in  2018.(2)  The 
budget is expected to remain in surplus in 2019 as 
well,  but at  a  lower  level.  The  gross debt-to-GDP 
ratio is expected to decrease from 63.9 % in 2017 
to  60.1 %  in  2018  and  to  fall  further  below  the 
Treaty  reference  value  over  the  next  couple  of 
years. 

in  Germany  could  both  raise 
for  growth  and 

Given  its  economic  importance  and  strong 
in  EU  value  chains,  structural 
integration 
reforms 
its 
potential 
trigger  positive 
spillovers  in  other  EU  countries.  Structural 
reforms  in  Germany,  such  as  lowering  the  heavy 
tax burden on labour, would increase its GDP and, 
to some extent, that of other EU countries as well, 
as higher demand for foreign products in Germany 
is  expected 
in 
competitiveness. Germany also plays an important 
role  in  further  developing  the  Single  Market. 
However, some obstacles remain, such as the lack 
of  competition 
the 
underinvestment in network industries. 

in  business  services  and 

to  outweigh 

increase 

the 

Focusing  private  and  public  investment  on 
network industries and services such as digital, 
energy  and  transport  infrastructure,  as  well  as 
on  education  and  innovation,  could  improve 
Germany's  growth  potential.  Despite  some 
acceleration  in  public  investment,  the  country’s 
investment  ratio  in  2017  was  still  below  the 
average  of  the  rest  of  the  euro  area.  It  is  lagging 
behind in deploying very high-capacity broadband, 
which  could  improve  productivity  growth  and 
boost  convergence  in  regional  living  conditions  if 
more  were  invested.  Stronger  public  and  private 
investment  in  sustainable  transport  and  electricity 
infrastructure  is  crucial  to  meet  climate,  energy 
and  environmental  targets.  Higher  investment  in 

2 Based on preliminary national data. 

4 

 
 
                                                           
                                                           
research  and  innovation,  especially  among  small 
and medium-sized enterprises, could increase total 
factor  productivity.  Higher 
expenditure  on 
education and skills could help to tackle short-term 
labour  shortages  and  demographic  ageing,  while 
ensuring  growth  that  is  inclusive..  Annex  D 
identifies  key  priorities  for  EU  cohesion  policy 
funding  over  2021-2027  in  Germany,  building  on 
the  analysis  of  investment  needs  and  challenges 
outlined in this report. 

Overall, Germany has made limited (3) progress 
country-specific 
the  2018 
in  addressing 
recommendations.  

There  has  been  some  progress  in  the  following 
areas:  

  Public  and  private  investment,  including  R&D 
expenditure has increased, partly as a result of 
to 
the 
infrastructure programmes. 

resources  allocated 

increase 

in 

  Disincentives  to  work  more  hours  are  being 
security 
are 

reduced  as  changes 
contributions 
increasing net wages. 

in 
certain 

benefits 

social 

and 

  Wage  increases  reflect  improved  conditions, 
but the increase remained limited in real terms.  

There  has  been  limited  progress  in  the  following 
areas:  

  The 

of 

very 

availability 

high-capacity 
broadband 
has 
improved  only  slowly,  despite  promising 
announcements. 

infrastructure 

nationwide 

  Only a few measures have been taken to make 
the  tax  system  more  efficient  and  investment-
friendly. 

  Only  a  few,  skills  related  measures  have  been 
taken, e.g., to promote longer working lives. 

(3)  Information on the level of progress and measures taken in 
response to the policy advice in each subpart of a country-
specific recommendation is presented in the overview table 
in the Annex. 

Executive summary 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Germany  is 
performing well on:  

 

 

 

the employment rate 

reducing early school leaving and poverty 

investment  in  research  and  development 
(R&D) 

 

increasing the share of renewable energy. 

However,  it  is  unlikely  to  reach  its  national 
indicative energy efficiency and climate targets by 
2020. 

Germany performs well on the indicators of the 
Social  Scoreboard  supporting  the  European 
Pillar of Social Rights. It has low unemployment, 
including youth unemployment. However, it scores 
only averagely on the Social Scoreboard as regards 
the  gender  employment  gap.  The  social  dialogue 
functions  well,  and  the  social  partners  are  overall 
closely involved in policy-making. 

findings  of 

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

in-depth 

the 

  The  current  account  surplus  has  declined 
for  the  last  three  years,  but  is  expected  to 
remain  high,  contributing  2.3  pps.  to  the 
euro  area  surplus  of  3.3  %  of  euro  area 
GDP.  Strong  domestic  demand  is  expected  to 
keep  import  growth  above  export  growth, 
further easing the current account surplus. The 
domestic  saving-investment  imbalance,  which 
has been growing since 2008, reached a turning 
point  in  2016.  Since  then,  private  sector  net 
lending  has  been  coming  down,  but  partially 
the  public  surplus  which  has 
offset  by 
continued to rise. Despite the efforts made, the 
factors  which  keep  investment  low  relative  to 
savings remain largely in place. 

  Private investment has increased noticeably, 
but  not  across  all  asset  types.  Equipment 
investment  has  grown  robustly  in  response  to 
capacity  utilisation.  Housing 
record-high 
investment  continues  to  boom,  even  if  the 
construction sector reports capacity constraints 

5 

 
 
                                                           
Executive summary 

countries  in  terms  of  congestion  management. 
Efforts  are  being  made  to  improve  internal 
networks,  but  the  need  for  investment  in 
additional  transmission  capacity  is  likely  to 
grow even further. The inadequate transmission 
capacity  of  Germany's  north-south  electricity 
lines  strains  the  grid  capacity  of  neighbouring 
countries. 

  More  investment  in  sustainable  transport  is 
needed  to  tackle  air  quality  challenges, 
support  climate  change  mitigation  and 
adaptation  and  improve  productivity.  Low 
emissions cuts mean Germany is likely to miss 
its Effort Sharing Decision target. The transport 
sector  has  done  particularly  badly  at  cutting 
emissions  of  both  greenhouse  gases  and  local 
air pollutants. 

  Germany’s  tax  system  is  not  particularly 
efficient  and  favourable  to  growth  and 
investment.  More  distortive  direct 
taxes, 
notably  on  labour  income,  as  a  share  of  GDP 
are higher than the EU average, while revenues 
from consumption and environmental taxes are 
lower.  Employment  incentives  are  dampened 
by  the  heavy  tax  burden  on  labour  including 
that  on  low-income  and  second  earners,  also 
impacting household income and consumption. 
The  statutory  corporate  tax  rate  and  effective 
average  tax  rates  are  high.  The  tax  system 
remains  complex  and  compliance  costs  are 
relatively  high.  The  effective  tax  rate  on 
inheritance  and  gifts  is  low,  at  about  2  %, 
thereby  maintaining  Germany's  high  wealth 
inequality.  

  Even 

and 

growth 

though 

shortages 

are 
labour 
increasing,  there  has  been  little  real  wage 
growth  and  some  labour  market  potential 
remains  underused.  The  German 
labour 
is  performing  well,  with  strong 
market 
employment 
record-low 
unemployment.  With  a  high  job  vacancy  rate, 
skilled 
increasingly 
limiting  economic  development.  At  the  same 
time,  real  wage  growth  has  been  modest. 
Weaker coverage of collective agreements may 
have  contained wage  growth.  Despite  growing 
skilled  labour  shortages,  the  labour  market 
potential  of  under-represented  groups  such  as 
women and people with a migrant background, 

labour  shortages  are 

and  price 
increases.  However,  significant 
challenges  loom.  The  manufacturing  sector 
faces a slowdown in foreign demand dynamics, 
in  tandem  with  a  need  to  adapt  to  new 
technological 
and 
consumer 
change 
cars).  Non-
low-emission 
residential  construction  has  been  increasing 
that 
sluggishly 
essential  infrastructure  may  not  have  kept  up 
with the economy’s needs. 

terms,  suggesting 

preferences 

in  real 

(e.g. 

and 

education. 

investment 

  Real  public  investment  is  increasing  after  a 
period of reduction, but more efforts are still 
needed  to  clear  the  large  investment  gap, 
in 
particularly  as  regards 
infrastructure 
Public 
investment  in  2018  grew  by  7.7  %  nominally 
and 3.8 % in real terms. Real public investment 
growth  has  been  positive  for  the  last  three 
years,  after  showing  negative  growth  rates 
before that. This reflects government efforts to 
boost  investment.  However,  as  in  the  years 
before,  net 
investment  at  municipal  level 
remained  negative  in  2018  and  the  investment 
backlog  accumulated  by  2018  rose  to  5 %  of 
GDP.  The  biggest  shortfalls  are  in  education 
and 
in  public 
infrastructure is still held back by capacity and 
level. 
planning  constraints  at  municipal 
Measures  initiated  to  overcome  these  have  yet 
to  show  tangible  results.  Moreover,  there  is 
scope  to  improve  digital  public  services  and 
public procurement. 

infrastructure. 

Investment 

  Labour productivity growth in Germany has 
slowed  and  turned  negative  in  the  second 
half  of  2018..  Given  the  reduction  in  labour 
force potential caused by demographic change, 
productivity  growth  will  increasingly  depend 
on 
in  productive  capital  and 
innovation,  including  in  digitalisation.  Firm-
level data show that the gap between the most 
and 
least  productive  companies  has 
widened, suggesting that there are obstacles to 
the spread of technology.  

investment 

the 

  Germany’s electricity networks are still slow 
to adapt to higher shares of renewables, and 
there  has  not  been  enough  investment  in 
transmission and distribution grids. The lack 
of  appropriate  grid  infrastructure  is  causing 
financial  losses  to  Germany  and  other  EU 

6 

 
 
Executive summary 

  The  education  system  is  slow  to  respond  to 
rapid  changes  in  the  labour  market  and 
society.  While  Germany  has 
addressed 
relatively well some recent challenges, such as 
integrating refugees into the education system, 
skills, 
as  digital 
others, 
school 
shortages,  are 
teacher 
infrastructure  and 
technological 
of 
mounting. 
transformation  and  increasing  shortages  of 
skilled labour, this is of concern. 

view 

such 

In 

remains 

refugees, 

including 
under-used. 
Although  some  measures  have  been  taken  to 
reduce  the  heavy  tax  burden  on  low-income 
earners,  disincentives  to  work  persist  for  this 
group. 

Other key structural issues analysed in this report, 
which point to particular challenges for Germany's 
economy, are the following: 

  Risks  to  the  financial  sector  seem  to  be 
contained  but  cost  structures  need  to  be 
the  banking  sector  has 
tackled.  Although 
relatively  good  capital  and  liquidity  levels,  it 
needs to tackle its cost structure. A fragmented 
market  structure  weighs  on  profits,  but 
capitalisation  ratios  are  satisfactory,  and  the 
ratio  of  non-performing  loans  is  half  the  euro 
area average. House price increases are not yet 
causing  macro  or  financial  stability  risks. 
Squeezed  revenues  from  the  low  interest  rate 
environment, 
through 
digitalisation,  regulatory  requirements  and  the 
emergence of new competitors are intensifying 
the challenges faced by banks. 

incurred 

costs 

the 

future, 

also  because 

  Germany’s  social  protection  system  works 
well  overall,  but  there  are  some  concerns 
of 
about 
demographic  change.  The  number  of  people 
at risk of poverty or social exclusion is falling, 
but the children of low-skilled people continue 
to  fare  much  worse  than  average,  pointing  to 
challenges in equality of opportunity and a long 
term  persistence  of  disadvantage  across 
generations.  Recent  government  measures  are 
associated  with  commitments  to  guarantee 
adequate  social  protection.  However,  ensuring 
this  in  the  long  run  may  require  structural 
measures.  Demographic  change  will  strain 
public 
the 
sustainability and the adequacy of pensions. In 
addition  to  adequacy  and  sustainability,  the 
fairness  and  the  regressive  nature  of  the 
pension  system  need 
to  be  considered. 
improved, 
Healthcare  efficiency  could  be 
especially in hospital and pharmaceutical care, 
by  providing  the  same  price  signal  across 
different  patient  groups  to  suppliers  for  the 
same  treatment,  and  by  making  better  use  of 
eHealth.  

finances  and  challenge  both 

7 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Investment 

Public  investment  effort  is  increasing  against  a 
backdrop  of  a  significant  investment  backlog. 
Overall  public  investment  rose  by  around  6 %  in 
2015  and  2016  and  by  close  to  8 %  in  2017  and 
2018 in nominal terms. In real terms, the increase 
for  the  last  four  years  was  around  4.5 %  on 
average. In 2017 and 2018, overall government net 
investment  has  turned  positive  for  the  first  time 
since 2012. Since 2018, public investment growth 
has  been  driven  by  the  municipal  sector,  where 
however  investment  remains  much  lower  than 
depreciation. 

Private  investment  is  expected  to  expand  as  a 
result  of  high 
capacity  utilisation  and 
replacement  needs,  but  uncertainty  has 
increased  considerably.  Above-average  capacity 
utilisation  and  changing  consumer  preferences 
should  spur  the  effort  to  renew  and  expand  the 
capital  stock,  though  economic  sentiment  in  the 
manufacturing  sector  has  cooled  markedly  during 
2018. Housing investment posted strong growth in 
2018  and  is  expected  to  continue  increasing, 
although at a slower rate, given ample order book 
backlogs  and  a  still-high  level  of  new  building 
permits. 

House prices are set to rise further, owing to the 
inadequacy of the housing supply in large cities. 
This  has  implications  for  rent  levels.  Despite  a 
pick-up  in  residential  investment,  the  housing 
supply  still  lags  behind  demographic  change, 
especially  in  conurbations  and  big  cities.  As  a 
result, a housing shortage has built up over the past 
decade.  This  is  probably  one  of  the  main  factors 
pushing  up  house  prices  in  large  cities  and  the 
country  as  a  whole.  While  house  prices  stagnated 
in  the  2000s,  the  widening  supply  gap  correlates 
with  the  30 %  nominal  rise  in  house  prices  that 
took place between 2010 and 2017. (4) 

(4)  Although  rents  have  risen  considerably  in  some  large-city 
markets,  the  national  aggregate  has  risen  far  less  than 
house  prices.  Combined  with  a  weak  supply  response  for 
smaller  rental  flats  in  cities,  the  lagged  rent  response  may 
amplify  rent  levels  on  the  private-rental  market  in  future, 
making housing less affordable. 

in 

the 

in  an 

The  German  economy  is  expected  to  maintain 
solid  growth  for  the  foreseeable  future,  driven 
by  domestic  demand 
increasingly 
challenging  external  environment.  Germany’s 
GDP  growth  came  out  at  1.5 %  in  2018  preceded 
two  preceding  years.  The 
by  2.2 % 
slowdown  was  driven  by  weaker  export  growth 
amid  rising  protectionism.  Private  consumption 
declined in the second half of the year despite solid 
employment  and  income  growth.  Investment  in 
both  equipment  and  construction  stayed  robust, 
however  economic 
in 
manufacturing, has cooled down and latest survey 
data suggest a downward revision of orders and the 
export outlook. High capacity utilisation and order 
books may help the economy rebound and sustain 
growth  in  the  short  run.  However,  the  external 
environment  is  becoming  less  favourable.  The 
strong  labour  market  and  ample  fiscal  space  are 
expected to support the domestic demand this year 
and next. Overall, real GDP growth is expected to 
cool down to 1.1 % in 2019 and rebound mildly to 
1.7 % in 2020, helped not least by a higher number 
of  working  days,  according  to  the  2019  winter 
interim forecast. 

sentiment,  especially 

Graph 1.1:  Demand components of GDP growth 

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

Steady  growth  in  domestic  demand  is  expected 
to  help  reduce  the  high  external  surplus.  The 
export outlook has worsened over the past year. At 
the  same  time,  the  solid  domestic  demand  could 
keep  import  growth  high  and  result  in  a  further 
easing of the current account surplus. 

8 

-2-1012341011121314151617181920Net exportsInvestmentPriv. consumptionGov. consumptionInventoriesReal GDP (y-o-y%)forecastpps.  
 
 
 
                                                           
1. Economic situation and outlook 

stagnating  building  permits  suggest  that  annual 
dwelling completions will plateau at 300 000 units 
over  the  coming  years  (Gornig  and  Michelsen, 
2018). The weak supply response is likely to keep 
pressure  on  house  prices  and  rents,  especially  in 
major  and  southern  cities.  Although  demographic 
pressures  have  been  building  up  since  the  late 
2000s,  weak  building  activity  has  resulted  in  a 
housing  gap  put  by  most  estimates  at  one million 
units (GdW, 2017) or significantly higher (Holm et 
al., 2018), with a particular focus on big cities and 
conurbations. 

Graph 1.3:  New dwellings completed 

Graph 1.2: 

Prices and costs in construction 

Note: quarterly seasonally and calendar adjusted data, last 
data point Q3 2018 
Source: European Commission 

The  construction  sector  is  operating  at  full 
capacity,  as  reflected  by  the  rising  prices  of 
construction services and rising profit margins. 
Inflation  in  construction  investment  rose  from 
1.4 % in early 2016 to 5.2 % in the third quarter of 
2018.  Inflation 
the 
construction  sector  has  tended  to  be  significantly 
stronger, suggesting that the prices of construction 
output  rise  faster  than  input  prices.  At  the  same 
time,  real  unit  labour  costs  (i.e.  the  labour  share) 
are  actually  falling,  implying  that  building  firms 
are  maintaining  some  degree  of  wage  moderation 
and becoming more profitable (see Graph 1.2). 

the  value  added  of 

in 

yet 

the 

since 

crisis, 

The  completion  of  new  dwellings  has  risen 
strongly 
remains 
considerably  below  potential  demand.  Numbers 
completed  rose  from  158 000  in  2011  to  285 000 
in 2017, although owner-occupied dwellings rather 
than  rental  flats  accounted  for  the  lion's  share  of 
the  increase  (See  Graph  1.3).  New  residential 
investment  thus  expanded  from  1.5 %  of  GDP  to 
2.0 % of GDP during that period. Yet the number 
of  dwellings  completed  remains  below  the  annual 
target  of  400 000  unit  completions. (5)  Moreover, 

(5)  In  2015,  the  Federal  Institute  for  Research  on  Building, 
Urban  Affairs  and  Spatial  Development,  BBSR,  released 
its  five-year  estimate  of  the  number  of  new  dwellings 
needed  per  region,  suggesting  that  nearly  300 000  units  a 
year  were  needed  in  the  late  2010s.  In  view  of  further 
backlogs  and  migration,  the  Federal  Government  referred 
to a target of 350 000 units in 2017. Given the backlog that 
had  accumulated  by  2018,  the  Association  of  German 

9 

Source: Destatis, German Federal Government, Association 
of German Cities 

Clearing  the  housing  supply  gap  would  raise 
investment  significantly.  Commission  estimates 
based on regional data suggest that just reaching a 
target  of  350 000-400 000  annual  completions 
would  require  additional  construction  investment 
of 1.0-1.5 % of GDP, compared to 2017 levels.(6) 
Conversely,  had  400 000  units  been  completed 

Cities  (Städtetag),  along  with  several 
industry  and 
academic  sources,  are  now  calling  for  a  target  of  400,000 
units annually. 

(6)  This  estimate  is  based  on  house  prices  (excluding  land 
prices),  completion  statistics  in  square  metres,  and  local 
targets  at  district  (Kreis)  level.  The  underlying  targets  at 
local level derive from BBSR (2015), and amount to about. 
300 000  for  Germany  as  a  whole.  For  this  estimate,  it  is 
assumed that the additional units needed to reach the target 
of  350 000  or  400 000  correspond  solely  to  the  18  cities 
with  the  greatest  needs.  Note  that  in  these  cities,  building 
costs  are  20-50 %  higher  per  habitable  square  metre  than 
the national average, which affects the resulting investment 
need. 

0.00.10.20.30.40.50.60.70.80.91.0-505101520939803081318y-o-y % ch.y-o-y % ch.Deflator of value added in constructionDeflator of construction investmentReal unit labour costs (rhs)01000002000003000004000005000006000008085909500051015number of dwellingsNot owner-occupiedOwner-occupiedFederal gov't targetStädtetag target 
 
                                                           
 
                                                                                   
1. Economic situation and outlook 

annually since  2011,  investment  would  have  been 
2.0 %  higher  over  2011-2014.  Input-output  tables 
suggest that the current account surplus would then 
have  been  0.5 pps.  of  GDP  lower  during  that 
period.  Filling  the  housing  supply  gap  could  thus 
have  a  significant  impact  on  the  current  account 
surplus.  The  deep  dip  in  construction  investment 
(as  a  share  of  GDP)  from  the  late  1990s  to  2015 
was  the  most  significant  change  in  German 
investment  during  the  emergence  of  the  current 
account surplus. 

Graph 1.4:  Contributions to headline inflation 

GDP  growth  cooled  off  somewhat.  Nevertheless 
employment  growth  (1.3 %)  slowed  down  only 
marginally  compared  to  2017  (1.4 %)  and  the 
labour  market  has  been  showing  increasing  signs 
of labour shortages. 

Graph 1.5: 

Improving labour market 

Source: European Commission 

Inflation 

HICP  inflation  increased  to  1.9%  in  2018 
driven  by  energy  prices,  while  core  inflation 
remained  unchanged  at  1.5%.  Inflation 
is 
expected to average 1.5% in 2019-2020, as energy 
inflation moderates further. Wage growth has been 
strengthening  but  would  likely  moderate  again  if 
the  outlook  remains  subdued,  which  should  keep 
core inflation from rising much further. 

Labour market 

Labour market performance improved further, 
with  record 
low  unemployment  and  high 
employment  rates.  On  the  back  of  strong  labour 
demand 
from  continued  economic 
growth, the employment rate reached  79.7 % (age 
20-64)  in  the  third  quarter  of  2018,  one  of  the 
highest in the EU. This helped push unemployment 
down  to  a  record  low  of  3.2 %  in  2018.  In  2018, 

resulting 

(1) Activity and employment rates (% of population), total, 
ages 20-64, seasonally adjusted 
(2) Unemployment rate (% of labour force), seasonally 
adjusted 
Source: European Commission 

Despite  record  low  unemployment  and  a  high 
job  vacancy  rate,  real  wage  growth  has  edged 
up  only  slightly.  After  nominal  compensation 
growth hovered at around 2.5 % between 2014 and 
2017,  the  relative  scarcity  of  labour  had  some 
impact  on  wage  settlements  and  contributed  to  a 
nominal  compensation  growth  of  3 %  in  2018. 
(See  section  4.3).  Given  somewhat  stronger 
inflation,  this  implies  that  real  wage  growth 
remains in the ballpark of somewhat above 1 %. 

Social developments 

The  relative  inclusiveness  of  growth  continues 
to  pose  challenges.  Households' 
real  gross 
disposable  income  grew  by  1.7 %  in  the  year  to 
2017.  However,  this  was  below  GDP  growth 
(2.2 %), confirming a persistent pattern (see Table 
1.2)  and  raising  questions  about  the  inclusiveness 
of growth. In 2017, the richest 20 % of society had 
an income 4.5 times higher than the poorest 20 %. 
The disparity was slightly less than in the previous 
year  (4.6  in  2016).  This  was  consistent  with  the 
change at EU level, from 5.2 to 5.1. 

10 

-2.0-1.00.01.02.03.010Q111Q112Q113Q114Q115Q116Q117Q118Q1y-o-y % changeEnergyUnprocessed foodProcessed food incl.alcohol, tobaccoNon-energy industrial goodsServicesHICP all itemsOverall index excluding energy and unprocessed food02468101245505560657075808500Q101Q102Q103Q104Q105Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q117Q118Q1% of labour force% of populationUnemployment rate (rhs)Activity rate 20-64Employment rate 20-64 
 
 
1. Economic situation and outlook 

Graph 1.6: 

Economic performance by regions, compared 
to the EU average 

Source: Eurostat 

Regional disparities 

Disparities  in  GDP  per  head  between  German 
regions  have  narrowed  over  time,  but  the 
eastern  part  of  Germany  remains  weaker  in 
many  respects.  Convergence  was  driven  mainly 
by  the  catching  up  process  of  the  eastern  Länder. 
As a result, disparities between the eastern and the 
western  Länder,  which  have  been  the  focus  of 
development  policy  since  unification  in  1990,  are 
narrowing. However, in 2016 GDP per head in the 
east, in purchasing power standards, was still only 
73 % of the figure for the west. Moreover, the east 
is  facing  challenges  for  future  growth,  including 
lack  of  private  sector  research,  ageing 
the 
population and a shrinking labour force. 

Disparities  in  unemployment  between  east  and 
west  have  narrowed,  yet  persist.  When  the 
registered  unemployment  rate  peaked  in  2006,  it 
was 18.7 % in the eastern Länder and 9.9 % in the 
western ones (7). The gap had narrowed by January 
2019,  with  registered  unemployment  down  to 
7.1 %  in  the  east  and  4.9 %  in  the  west.  Though 
in  unemployment  have 
regional  disparities 

(7) 

'Registered  unemployment'  refers  to  the  proportion  of 
registered  unemployed  people  in  the  labour  force.  This 
concept differs from the standard ILO definition, according 
to which a person is deemed unemployed if i) she currently 
does not have a job; ii) is actively seeking a job, and iii) is 
ready to starting working if a suitable job is offered to her. 

in 

the 

narrowed, 
registered 
January  2019 
unemployment  rate  was  as  high  as  9.8 %  in 
Bremen and 8.1 % in Berlin, well above that of the 
best  performing  Länder,  Bavaria  and  Baden-
Württemberg  (3.3 %).  Youth  unemployment  was 
also particularly high in Berlin in 2017, at 11.6 %, 
compared  to  the  national  average  of  6.8 %.  The 
reduction  in  unemployment  in  the  east  has  not 
been  accompanied  by  an  increase  in  employment 
numbers, as the working age population has fallen 
considerably (see Section 4.4.2). 

Graph 1.7: 

Sectoral net lending 

Source: Destatis, European Commission 

Sectoral balances 

Private  sector  net  lending  has  edged  down. 
Private borrowing rose further in 2018 above GDP 
growth,  benefiting  from  declining  interest  rates, 
and  private  sector  deleveraging  slowed  down. 
Corporate  investment  rose  consistently,  in  line 
with  or  at  a  slightly  more  rapid  rate  than  GDP 
growth,  in  response  to  rising  capacity  utilisation. 
Thus  the  corporate  investment  share  of  GDP  has 
edged up. In addition, corporate savings have been 
declining somewhat as a share of GDP since 2016. 
The  decline  in  the  share  of  corporate  savings  in 
GDP  in  recent  years  is  the  consequence  of  a 
combination of  multiple  factors: slight declines  in 
operating 
investment 
income,  and  at  the  same  time  a  moderate  rise  in 
dividend  pay-outs  from  a  historically  low  level, 
after  a  long  post-crisis  spell  of  strengthening 
equity  buffers,  and  an  ongoing  increase  in  the 
share  of  labour  costs  (see  Table  1.1).  As  a  result, 
corporations,  which  have  a  level  of  indebtedness  
among  the  lowest  in  the  euro  area,  reduced  their 
net  lending  position  and  thus  contributed  to 

profitability, 

(foreign) 

11 

20406080100120140160180200220GDP per headGDP per headchangeInvestmentratePopulation growthProductivityInnovationscoreboardUnemployment rateIndex, EU 28=100EU28German regionsGermany averageBerlin-8-6-4-2024681012000102030405060708091011121314151617181920% of GDPHouseholdsFinancial corporationsNon-financial corporationsGeneral governmentSurplus savings/ current account balanceForecast 
 
 
                                                           
 
 
1. Economic situation and outlook 

reducing  the  savings  surplus.  This  contrasts  with 
earlier  years,  when  their  behaviour  was  key  to 
explaining the rise in the current account. 

share  of  GDP  has  largely  followed  income  trends 
(see Table 1.2). 

Table 1.1: 

Key components of income and final demand 
of non-financial corporations: contributions to 
the economy-wide net lending 

Table 1.2: 

Key components of household income and 
final demand: contributions to the economy-
wide net lending 

(1) Percentage points. Accumulated change in the GDP 
share since 2001 (the latest year with a non-positive current 
account balance) 
(2) (+) indicates a positive, (-) - a negative relationship with 
the current account balance 
Source: European Commission 

Households’  net  lending  has  stayed  largely 
unchanged. The gross household savings rate rose 
further  to  17.3 %  of  disposable  income  in  2017, 
the highest in the euro area (average: 11.9 %), and 
is expected to stay high, partly driven by provision 
for  ageing  and  propped  up  by  rising  labour 
incomes.  The  latter  have  been  driven  both  by 
rising  employment  and  somewhat  stronger  wage 
growth. Meanwhile, household investment growth 
was  maintained,  which  has  stabilised  households’ 
net  lending  position.  The  improvement  in  labour 
income  has  not  offset  or  countered  the  long-term 
trend  of  a  decline  in  the  share  of  household 
disposable  income  in  GDP.  Following  the  social 
security  and  labour  market  reforms  of  the  2000s, 
social  transfers  account  for  a  permanently  lower 
share of GDP. The share of non-labour income has 
also continued to decline as a result of two factors. 
The  strong  labour  market  has  made  dependent 
employment 
in 
relatively  more 
comparison  with  self-employment.  Net  property 
income has remained lower as a share of GDP than 
in earlier years, as corporations' dividend pay-outs 
remain  low  in  the  aftermath  of  the  crisis  (see 
Tables  1.1,  1.2).  The  proportion  of  income  that 
comes  from  interest  has  continued  to  decrease  in 
the  context  of  low  interest  rates  and  has  been 
below 0.5 % of GDP since mid-2016. Although the 
share  of  GDP  accruing  to  households  has  been 
falling,  the  household  propensity  to  save  has 
actually  increased  slightly.  The  fluctuation  of  the 
ratio  of  household  savings  to  GDP  has  thus  been 
limited,  as  the  decline  in  the  private  consumption 

attractive 

(1) Percentage points. Accumulated change in the GDP 
share since 2001 (the latest year with a non-positive current 
account balance) 
(2) (+) indicates a positive, (-) a negative relationship with 
the current account balance 
Source: Destatis, European Commission 

The  public  sector  surplus  is  increasing.  The 
sector  whose  net  lending  has  been  growing  since 
the peak of the current account surplus in 2015 is 
general  government.  The  strong  cyclical  position 
of the economy has favoured public savings. It has 
helped contain social transfer payments, while tax 
revenue  grew  strongly  (almost  3  pps.  of  GDP  by 
mid-2018 compared to 2010) (see Table 1.3). 

Table 1.3: 

Key components of government revenue and 
expenditure: contributions to the economy-
wide net lending 

(1) Percentage points. Accumulated change in the GDP 
share since 2001 (the latest year with a non-positive current 
account balance) 
(2) (+) indicates a positive, (-) a negative relationship with 
the current account balance. 
Source: European Commission 

Meanwhile the public investment ratio has not kept 
pace  with  growth  in  public  revenue.  A  more 
pronounced  correction  of  the  current  account 
surplus from its peak was constrained by relatively 
weak  public  investment.  This  seems  to  have  been 
changing  lately,  as  the  capacity  to  plan  and 
is 
investments  at  municipal 
implement 

level 

12 

20072009201120122016201710'17-09'18Compensation of employees (-)2.91.21.30.5-0.1-0.5-0.8Operating surplus (+)4.61.52.71.52.32.11.8Property income, net (+)2.31.92.82.92.42.01.9Corporate taxes (-)-0.30.6-0.1-0.1-0.2-0.2-0.4Distributed income (-)-3.1-1.8-1.2-0.90.50.80.6Saving, gross (+)3.21.93.93.24.73.93.5Fixed capital formation (-)0.82.01.41.71.41.41.2Net lending6.17.97.48.59.48.57.3200720092011201710'17-09'18Net wages (+)-2.6-1.0-1.4-0.8-0.6Social transfers (+)-1.50.5-1.2-1.5-1.6Net non-labour income (+)o.w.1.40.80.0-3.3-3.6Distributed incomeof corporations (+)2.02.20.5-0.9-0.7Income from self-employment (+)-0.3-0.7-0.3-1.0-1.0Taxes (+)-0.2-0.20.0-0.7-0.8Disposable income (+)-2.4-0.4-2.9-5.3-5.4Consumption (-)2.3-0.12.04.54.8Saving (+)0.20.2-0.3-0.3-0.1Investment (-)0.91.71.01.21.1S-I1.11.90.80.91.0200320082010201710'17-09'18Net lending (+) /net borrowing (-)-1.12.9-1.14.15.0Net property income, paid (-)-0.10.20.31.61.7Direct taxes less subsidies (+)-0.21.60.12.62.9Social contributions (D61r) (+) lesssocial transfers (D62p+D632p) (-)-0.90.0-1.0-0.10.0Indirect taxes (+)0.10.10.20.0-0.1Services by public institutions (D631p+P32) (-)-0.10.70.00.20.2Net fixed capital formation (-)0.10.20.00.10.0Other capital expenditure, net (-)0.00.1-0.60.30.7Other net transfers (incl. EU own resources) (-)0.1-0.1-0.1-0.5-0.5 
 
 
 
 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

of  trade  narrowed  the  surplus  further  despite  a 
positive  growth  contribution  of  foreign  trade.  In 
2018  terms  of  trade  effects  continue  to  exert  a 
downward pressure on the surplus. 

The  trade  balance  has  been  affected  by 
structural  and  cyclical  issues  in  the automotive 
sector.  The  disclosure  that  the  environmental 
compliance  test  results  of  a  number  of  German 
brands  of  diesel  cars  had  been  manipulated  (the 
Diesel scandal) may have slowed down growth in 
car and parts exports since 2015. At the same time, 
the  German  car  market  became  more  open  to 
imported brands. This caused net exports of cars to 
decline  from  4.2 %  of  GDP  in  2015  to  3.4 %  for 
the year ending in September 2018. The slump was 
precipitated in the 3rd quarter of 2018 by delays in 
complying  with  a  newly 
testing 
procedure. (See also Box 1.1.) 

introduced 

Graph 1.9:  Current account balance and components of 

the financial account 

Note: Twelve month moving average 
Source: Deutsche Bundsebank 

Net  capital  exports  comprise  mainly  flows  of 
debt  assets  and  direct  investment  into  offshore 
centres.  In  recent  years,  the  main  channel  of 
German  foreign  investment  has  been  portfolio 
investments,  which  have  accounted  for  roughly 
two  thirds  of  the  financial  account  balance  since 
2014. Since 2015, around half of these flows have 
consisted  of  German  securities  returning  home 
(e.g.  in  the  context  of  the  Eurosystem’s  Asset 
Purchase  Programme).  Thus,  the  acquisition  of 
debt  assets  has  roughly  halved  compared  to  the 
years  before  that  (see  Graph  1.9).  Net  foreign 

showing  first  signs  of 
starting from a low level. 

improvement, 

though 

Graph 1.8:  Current account and component balances 

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

External position 

The current account surplus has been gradually 
declining  since  2015.  According  to  Bundesbank 
data, the current account surplus for 2018 stood at 
7.4 %  of  GDP,  suggesting  a  further  decline 
compared to 2015 (8.9 %), 2016 (8.5 %) and 2017 
(8.0 %).  The  fall  in  2017  is  due  to  an  increase  in 
net  foreign  transfers  abroad (-1.7 % net  compared 
to  -1.3 %  in  2016),  and  a  narrowing  of  the  trade 
balance from 8.5 % in 2016 to 8.2 %, whereas the 
primary income balance improved slightly to 2.1% 
of GDP.  Compared  to 2017,  the  trade balance  for 
2018  deteriorated  by  another  0.9  pps  of  GDP, 
while  the  secondary  income  balance  and  the 
services balance improved by a total of 0.4 pps and 
the  primary  income  balance(8)  stayed  stable.  The 
trends observed in the current account balance can 
be  also  explained  by  the  developments  in  the 
terms-of  trade  effects.  The  increase  in  the  current 
account to its peak in 2015 was importantly driven 
by  positive 
terms-of-trade  effects  (especially 
falling oil prices). Terms of trade improved further 
in  2016:  however,  domestic  demand  was  strong 
while  exports  slowed  down  and  the  current 
account  surplus  decreased  nonetheless.  In  2017, 
with rebounding energy prices, deteriorating terms 

(8)  The key countries/ regions of origin of net primary income 
since  2016  are  the  Netherlands  (0.4%  of  GDP),  China 
(0.3% of GDP), USA (0.3%), Luxembourg (0.3%), Central 
America (0.2%). 

13 

-4-202468101205060708091011121314151617181920% of GDPGoods, EAGoods, non-EAPrim. income, EAPrim. income, non-EAServices, EAServices, non-EASec. income, EASec. income, non-EACurrent accountForecast-15-10-50510152000030609121518% of GDPFDIPortf. Inv. AssetsPortf. Inv. Liab.DerivativesOth. InvestmentReservesCA 
 
 
                                                           
 
 
1. Economic situation and outlook 

increase),  and  an  increasing  net  international 
investment  position  that  gave  rise  to  a  sizeable 
positive  income  balance  (+1.6 pps,  down  from 
+1.9 pps in 2016). 

Graph 1.11:  General government budget balance and 

gross debt 

direct  investment  has  picked  up  somewhat  since 
2014.  The  key  destinations  during  the  period  in 
question  were  the  Netherlands  (2014-15)  and 
Luxembourg (2016-17). These two countries have 
tended  to  host  large  amounts  of  FDI  through 
special  purpose  entities,  driven  by  tax-planning 
motives  (European  Commission,  2017c).  Other 
major  destinations  were  the  United  States  (2015 
and 2018) and Spain (2018). All in all, however, it 
is  difficult  to  infer  to  what  extent  capital  exports 
are used to finance productive activities abroad. 

Graph 1.10:  Factors explaining the current account surplus 

Source: European Commission 

surplus 

current 

account 

The 
remains 
considerably above what fundamentals suggest. 
According  to  the  Commission's  current  account 
‘norm’  calculations,  fundamental  determinants  of 
savings and investment currently suggest a surplus 
of +3.0 % of GDP (compared to the latest value of 
7.8 %  of  GDP).  Though  this  is  mostly  due  to 
ageing  (+1.6 pps),  the  manufacturing  intensity  of 
German  exports 
factor 
is  another 
(+0.8 pps). (9)  Yet  most  of  the  surplus  (+3.4 pps) 
and  its  dynamics  is  explained  by  factors  that  can 
be  more  directly  influenced  by  policies.  Private-
sector  deleveraging  since  2000  explains  a  large 
part  of  the  surplus  —  although  its  impact  did  not 
increase  further  in  2017  (+1.2 pps,  unchanged) 
along  with  the  fiscal  stance  (+0.9 pps,  slight 

relevant 

(9)  The  current  account  ‘norm’  benchmark  is  derived  from 
regressions  capturing  the  main  fundamental  determinants 
of  the  saving-investment  balance  (e.g.  demographics, 
resources),  as  well  as  policy  factors  and  global  financial 
conditions. See also Coutinho et al., (2018). 

Source: European Commission 

Public finances 

Germany is expected to meet the debt criterion, 
as  government  debt  is  projected  to  fall  below 
the  Maastricht  Treaty  reference  value  of  60 % 
of  GDP.  For  the  first  time  since  2002,  Germany 
will fulfil again the debt criterion (see Graph 1.11). 
The introduction of the ‘debt brake’ in 2009 seems 
to have had a considerable and sustainable effect in 
reducing  overall  government  debt  and  turning  the 
budget  balance  from  deficit  to  surplus.  Since 
public debt peaked at 80.9 % of GDP in 2010, the 
figure has fallen continuously, and it is expected to 
fall  below  the  60 %  threshold  in  2019.  Also 
benefiting  from  cyclical  effects  and  low  interest 
rates,  the  headline  deficit  fell  significantly  after 
2010. In 2014 it gave way to a surplus, which has 
been  sustainably  increasing  since  then.  In  2018, 
the  headline  budget  surplus  reached  a  peak  at 
1.7 % of GDP and  is projected  to  remain  positive 
in  the  years  thereafter.(10)  As  the  debt  brake 
became  binding  for  the  Federal  Government  in 
2016 and will become binding for the Länder from 
2020, general government debt can be expected to 
fall further over the coming years. 

10 Based on preliminary national data. 

14 

-5-3-113579000204060810121416% of GDPResidualCycleCredit/constructionStructural fiscal balanceOther policy factorsGlobal fin. factors / NIIPDemographicsOther fundamentalsCurrent account % of GDP30354045505560657075808590-5-4-3-2-101234596980002040608101214161820% of GDPforecast% of GDPbars: budget balance (lhs)area: gross debt ratio (rhs) 
 
                                                           
 
                                                           
1. Economic situation and outlook 

Box 1.1: The automotive sector in Germany 

The automotive industry is a backbone of the German industry and has grown in importance. It is a 
significant contributor to German GDP and employment. The sector has continuously increased its share of 
total value added from 3.1 % in 1995 to 5.3 % in 2016, well above the EU average of 2.3 % in 2016 (with 
France,  Spain  and  Italy  at  1.5 %,  1.7 %  and  1.4 %  respectively).  Similarly,  its  share  of  manufacturing 
increased from 13.7 % in 1995 to 22.6 % in 2016 (EU average 10.6 %). Motor vehicles and vehicle parts are 
Germany’s most important export product, accounting for 19.2 % of German exports in 2017. The sector has 
one  of  the  most  internationalised  value  chains  in  the  world.  In  2017,  about  66 %  of  the  German-branded 
vehicles  were  produced  abroad.  The  success  of  German  original  equipment  manufacturers  (OEMs)  also 
relies on their suppliers, notably from the rest of the EU, representing up to 80 % of the value added. 

In 2018, car sales experienced significant volatility owing to the move to new emissions test legislation 
at  the  beginning  of  September,  which  appears  to  be  a  temporary  disruption.  Car  registrations  were 
markedly up in July and August in seasonally adjusted terms before the new Worldwide Harmonised Light 
Vehicle  Test  Procedure  standard  came  into  force.  Afterwards,  they  dropped  sharply  in  September,  as  car 
manufacturers were not able to complete in time the certification of most of their car models. It remains to 
be seen how long bottlenecks related to the new emissions test legislation will persist.  

Demand  for  new  diesel  cars  has  dropped  significantly  due  to  the  diesel  emissions  scandal  and  the 
insufficient  response  by  car  manufacturers  and  policy  makers.  Car  manufacturers  of  diesel-fuelled 
power  trains had  reverted  to  devices  that turned  off  the  emission-control technology  in  most  normal  uses. 
When  these  defeat  devices  were  eventually  uncovered  and  the  responses  of  both  policy  makers  and  car 
manufacturers  were  perceived  as  being  insufficient,  demand  for  diesel  cars  slumped,  also  damaging  the 
‘Made in Germany’ brand both internationally and domestically. The possibility of city bans on Euro 5 and 
older  diesel  cars  and  the  continuing  environmental  underperformance  of  diesel  cars,  including  those  that 
underwent  a  software  update,  foretell  a  further  decline  in  demand.  In  October  2018,  the  share  of  new 
registrations of diesel cars fell below 30 % for the first time (from its peak of about 50 % in 2015). However, 
overall demand for new cars is expected to remain rather strong in the short run, as the drop in demand for 
new diesel cars is expected to be largely offset by higher demand for petrol cars. Moreover, external demand 
appears to be less affected, as exported cars are mainly petrol cars.  

The  shift  towards  low  and  zero  emission  mobility  might  lead  to  a  global  shift  in  value  creation, 
affecting  German  car  manufacturers  and  suppliers.  A  significant  transition  to  alternative  power  trains 
(such as e-mobility and fuel cells) and automation is expected to take place in the medium to long term. The 
German Federal Government has introduced a package of stimulus measures for electric vehicles. However, 
e-mobility currently faces a number of challenges related to price, distance, charging infrastructure, charging 
time,  and  technological  competition  (e.g.  charging  batteries  as  opposed  to  replacing  them).  A  possible 
intermediate  step  for  e-mobility  might  be  local  ‘island  solutions’,  such  as  electric  buses,  postal  lorries  or 
taxis.  As  electric  vehicles  are  significantly  less  complex  than  those  with  a  combustion  engine,  the 
competitive advantage of the German OEMs and suppliers might – at least temporarily – diminish.  

Germany  is  still  an  innovation  leader  in  the  automotive  sector  but  securing  its  competitive  position 
will require further investment in training, research and innovation. So far, the competitiveness of the 
German  car  industry  has  been  determined  largely  by  the  supply  of  qualified  labour  and  an  efficient 
innovation  ecosystem.  The  technological  transformation  of  the  car  industry  will  require  even  stronger 
investment in quality education, in-house training, retraining and life-long learning. The automotive industry 
accounts for about 35 % of business R&D expenditure in Germany and about 40 % of patents. Nearly half of 
all  global  patents  on  automation  in  the  automotive  sector  come  from  German  firms.  However,  Germany 
faces  strong  competition  from  the  US  and  China  with  regard  to  battery  research.  Even  though  R&D  in 
Germany  is  increasingly  focused  on  new  technologies,  especially  those  relating  to  automation  and 
connectivity, this may not be sufficient to offset potential losses resulting from a lower degree of ambition in 
the area of e-mobility and other alternative power trains.  

15 

 
 
 
1. Economic situation and outlook 

Table 1.4: 

Key economic and financial indicators - Germany 

(1) NIIP excluding direct investment and portfolio equity shares 
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation. 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise). 

16 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)2.20.71.52.22.21.51.11.7Potential growth (y-o-y)1.31.01.71.61.61.92.12.0Private consumption (y-o-y)0.70.81.12.11.8...Public consumption (y-o-y)0.51.91.94.01.6...Gross fixed capital formation (y-o-y)3.10.51.43.52.9...Exports of goods and services (y-o-y)9.92.23.92.34.6...Imports of goods and services (y-o-y) 7.72.24.14.14.8...Contribution to GDP growth:Domestic demand (y-o-y)1.10.91.32.61.8...Inventories (y-o-y)0.0-0.30.00.20.0...Net exports (y-o-y)1.20.20.2-0.50.3...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.10.00.70.60.50.80.90.8Capital accumulation (y-o-y)0.30.30.30.30.40.40.50.5Total factor productivity (y-o-y)0.90.70.70.70.70.70.70.8Output gap-0.4-0.7-0.40.30.80.60.40.0Unemployment rate10.16.64.94.13.83.53.23.0GDP deflator (y-o-y)0.91.21.91.41.51.92.01.9Harmonised index of consumer prices (HICP, y-o-y)1.91.70.80.41.71.91.41.5Nominal compensation per employee (y-o-y)0.62.12.42.22.63.03.03.0Labour productivity (real, person employed, y-o-y)1.5-0.20.70.90.70.2..Unit labour costs (ULC, whole economy, y-o-y)-0.92.21.81.31.82.82.02.0Real unit labour costs (y-o-y)-1.81.0-0.1-0.10.30.90.00.1Real effective exchange rate (ULC, y-o-y)-1.9-0.40.81.02.53.2-0.8-0.2Real effective exchange rate (HICP, y-o-y)-0.1-1.6-0.71.71.12.6-1.3-0.8Savings rate of households (net saving as percentage of net disposable income)10.19.99.49.89.9...Private credit flow, consolidated (% of GDP)0.30.51.83.74.9...Private sector debt, consolidated (% of GDP)115.2106.799.998.5100.1...of which household debt, consolidated (% of GDP)65.658.754.252.952.7...of which non-financial corporate debt, consolidated (% of GDP)49.648.145.745.647.3...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).2.12.11.81.6...Corporations, net lending (+) or net borrowing (-) (% of GDP)1.72.42.42.61.91.31.41.3Corporations, gross operating surplus (% of GDP)26.925.824.925.525.324.925.225.2Households, net lending (+) or net borrowing (-) (% of GDP)5.85.44.95.15.14.84.74.5Deflated house price index (y-o-y)-2.00.72.85.32.9...Residential investment (% of GDP)5.15.35.85.96.16.3..Current account balance (% of GDP), balance of payments5.46.07.78.58.07.87.36.9Trade balance (% of GDP), balance of payments5.55.47.07.97.5...Terms of trade of goods and services (y-o-y)-0.8-0.51.71.7-1.0-0.70.00.0Capital account balance (% of GDP)-0.10.00.00.10.0...Net international investment position (% of GDP)14.124.140.550.754.0...NIIP excluding non-defaultable instruments (% of GDP) (1)9.618.931.837.541.5...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)125.3163.4155.9151.4140.3...Export performance vs. advanced countries (% change over 5 years)14.80.0-3.5-0.31.7...Export market share, goods and services (y-o-y)..1.43.3-1.1...Net FDI flows (% of GDP)1.71.21.81.01.3...General government balance (% of GDP)-2.2-1.70.40.91.01.61.21.1Structural budget balance (% of GDP)..0.70.80.91.51.01.1General government gross debt (% of GDP)65.575.474.367.963.960.156.753.7Tax-to-GDP ratio (%) (3)38.739.039.640.240.540.940.640.6Tax rate for a single person earning the average wage (%)42.340.439.539.7....Tax rate for a single person earning 50% of the average wage (%)31.831.230.831.0....forecast 
 
 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

of 

all 

51 % 

assessment 

the  multiannual 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Germany  have 
recorded  at  least  “some  progress”. (11)  Looking 
at 
the 
implementation of the CSRs since these were first 
adopted,  51 %  of  all  the  CSRs  made  to  Germany 
have  recorded  at  least  ‘some  progress‘.  49 %  of 
CSRs recorded ‘limited progress‘ or ‘no progress‘ 
(see Graph 2.1). Overall, for every Semester cycle, 
multiannual 
in  Germany  has 
remained relatively weak, at or below the average 
progress made by other Member States. However, 
implementation scores improved in 2018. 

implementation 

Graph 2.1:  Overall multiannual implementation of 2011-

2018 CSRs to date 

* The overall assessment of the country-specific 
recommendations on fiscal policy excludes compliance 
with the Stability and Growth Pact. 
** 2011-2012: Different CSR assessment categories.  
***The multiannual CSR assessment looks at implementation 
from the time when the CSRs were first adopted up to the 
February 2019 Country report.  
Source: European Commission 

remained 

fiscal  position 

While  the  fiscal  position  remained  sound  over 
time, public finances have been slow to become 
more  growth-friendly.  Between  2011  and  2018, 
sound, 
Germany’s 
showing  high  compliance  with  CSRs  from  the 
early  2010s  as  regards  compliance  with  the 
medium-term  budgetary  objective  and  reducing 
debt. On the other hand, the structure of revenues 
and expenditure has been made only slightly more 
growth-friendly.  On  the  revenue  side,  taxes  on 
labour  remained  high.  On  the  expenditure  side, 
over-reliance  on  hospital  care  has  continued, 

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

past, see in particular section 4.1, 4.2, 4.3 and 4.4. 

national 

target.  Overall, 

reducing  the  efficiency  of  healthcare  expenditure. 
Moreover,  expenditure  on  education  and  research 
and  development  has  been  falling  short  of  the 
public 
relevant 
investments remained subdued compared to needs, 
despite  some  improvement  from  the  early  2010s. 
In  addition,  the  tax  system  has  become  only 
marginally more efficient and investment-friendly. 
However, 
encouraging 
developments in 2018, with expenditure on public 
investment and education increasing. 

there  were 

some 

The  growth  potential  of  efficient  market 
structures has not yet been exploited to the full. 
Efficient  market  structures  contribute  to  higher 
value added and higher consumer welfare, yet little 
has  been  done  in  response  to  the  relevant  CSRs. 
Policy  measures  to  boost  competition  in  business 
services  and  regulated  professions  have  been 
largely absent. Barriers to competition in railways 
have been reduced to only to a limited extent. The 
energy  transition  is  relatively  costly,  while  the 
development of energy networks has been slow — 
although  the  power  grid  action  plan  of  2018  may 
result in future improvements. 

social 

dialogue, 

labour  market 

The 
situation  has  been 
improving  further,  helped  by  past  structural 
reforms  and  a  strong  economy.  Since  2011, 
Germany  has  benefited  from  high  employment 
growth  and  low  unemployment,  reflecting  the 
favourable  impact  of  past  labour  market  reforms, 
the 
employment-friendly 
improved  provision  of  early  childhood  education 
and care, and a competitive industry, among other 
factors.  Despite  the  persistently  high  tax  wedge, 
the  overall  employment  rate  rose  continuously. 
The  employment  rate  of  older  workers  (over  50) 
improved on the back of a good labour market and 
earlier  structural  reforms.  The  introduction  of  the 
statutory general minimum wage in 2015 promoted 
transitions from mini-jobs to standard employment 
and helped to boost hourly wages at the bottom of 
the  wage  distribution.  However,  its  effects  have 
reforms, 
time.  With 
lessened 
disincentives  to  work  are  expected  to  be  reduced 
somewhat  in  2019  and  2020.  There  is  further 
potential  to  improve  labour  market  outcomes, 
reflected  in  persistently  high  fiscal  disincentives 
for  second  earners  and  an  undersupply  of  early 
childhood education and care. 

over 

new 

17 

No Progress3%Limited Progress46%Some Progress35%Substantial Progress5%Full Implementation11% 
 
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2018 CSR assessment 

(1) This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 

to 

Overall, Germany has made limited progress in 
responding 
country-specific 
the  2018 
recommendations (CSRs) (12). Some progress has 
been  made  towards  achieving  sustainable  growth 
in  public  and  private  investment,  a  CSR  closely 
related  to  the  euro  area  recommendation  about 
strengthening  domestic  demand  and  growth 
potential. This has been done by reforming federal 
fiscal relations and by allocating more resources to 
the  Länder  and  municipalities  and  for  specific 
infrastructure  programmes.  At  the  same  time, 
despite  promising  initiatives,  limited  progress  has 
been made so far with stepping up public spending 
on  education.  Although  this  is  increasing  in 
absolute  terms,  it  has  largely  stagnated  as  a  share 
of  GDP.  There  has  been  some  progress  in  raising 
expenditure  on  research  and  innovation.  Private 
increased  noticeably  as  well. 
investment  has 
However  non-residential  construction  has  been 

(12)  Information  on  the  level  of  progress  and  the  measures 
taken in response to the policy advice in each 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. 

that 
is 

increasing  sluggishly  in  real  terms,  and  essential 
infrastructure  may  not  have  kept  up  with  the 
the 
economy’s  needs.  Announcements 
nationwide  broadband 
to  be 
infrastructure 
improved  are  encouraging,  but  so  far  only  small 
steps  have  been  taken  to  put  this  into  practice. 
Limited  progress  has  been  made  with  making  the 
tax system more efficient and investment-friendly. 
Progress  has  also  been  limited  in  promoting 
competition in business services and the regulated 
professions.  There  has  been  some  progress  on 
issues related to the recommendation on the labour 
market, including on the advice about reducing the 
tax  wedge  for  low-wage  earners,  yet  related 
disincentives remain high. There are no signs that 
current  pension  reforms  will  promote 
longer 
working lives, and so far limited progress has been 
recorded  in  improving  the  educational  outcomes 
and skill levels of disadvantaged groups. There has 
been  some  progress  in  creating  the  necessary 
conditions to promote higher wage growth. 

18 

  Germany Overall assessment of progress with 2018 CSRs:   Limited CSR1: 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. (MIP-relevant)  Limited progress   Some progress in achieving a sustained upward trend in public and private investment.  Limited progress in raising expenditure on education.  Some progress in raising expenditure on research and innovation.   Limited progress in ensuring the availability of very high-capacity broadband infrastructure nationwide.  Limited progress in improving the efficiency and investment friendliness of the tax system.  Limited progress in strengthening competition in business services and regulated professions. CSR2: 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. (MIP-relevant) Some progress  Some progress in reducing disincentives to work more hours.  Some progress in reducing the high tax wedge in particular for low-wage earners.  Limited progress in reducing disincentives for second earners.  Limited progress in taking measures to promote longer working lives.  Some progress in creating conditions to promote higher wage growth.  Limited progress in improving educational outcomes and skills levels of disadvantaged groups.   
                                                           
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in Germany 

EU  solidarity  continues  to  support  structural  change  in  Germany.  Under  the  current  Multiannual 
Financial  Framework  (2014-2020),  the  financial  allocation  from  the  European  Structural  and  Investment 
Funds (ESI Funds) - assigned to Germany to help the country face development challenges - exceeds EUR 
27.9 billion. This is equivalent to about 0.1 % of annual GDP. By the end of 2018, some EUR 18.6 billion 
(about 67 % of the total) had already been allocated to specific projects. In addition to the ESI Funds, the 
Connecting  Europe  Facility  has  allocated  EUR 2.2 billion  to  projects  on  strategic  transport  networks. 
Moreover,  many  German  research  institutions,  innovative  firms  and  individual  researchers  have  benefited 
from other EU funding instruments. An example is Horizon 2020, which has provided EUR 5.6 billion to 
improve  innovation  and  research  in  Germany.  Part  of  EU  funds  contributed  to  supporting  the 
implementation of Country Specific Recommendations. 

EU  funding  have  helped  to  address  policy  challenges  identified  in  the  2018  CSRs.  ESI  Funds 
contributed to improving educational and employment outcomes for disadvantaged groups, supporting over 
1.3 million  participants  by  the  end  of  2017,  including  more  than  390 000  from  minority  backgrounds. 
Overall,  more  than  437 000  people  have  gained  a  qualification.  The  European  Social  Fund  (ESF)  has 
supported  human  capital  investments,  including  214 600  disadvantaged  people  with  targeted  measures 
mobilising their economic potential, 89 800 participants with education and training programmes, as well as 
7 600 projects promoting employability of women. The European Regional Development Fund (ERDF) has 
supported closer collaboration between business and research institutions, as well as R&D investment in the 
private sector. By the end of 2017, 1 510 enterprises had been selected for support by the ERDF in building 
cooperation  with  research  institutions  and  3 860  enterprises  in  introducing  new  products  to  their  markets. 
Horizon  2020  has  supported  5 585  research  projects  covering  a  very  broad  thematic  spectrum  from 
‘Innovation in SMEs’ (small and medium-sized enterprises) to ‘Health, demographic change and wellbeing’. 

ESI  Funds  also  help  mobilise  private  investment  through  financial  instruments.  By  the  end  of  2017, 
EUR 1.06 billion  of  support  from  ESI  funds  had  been  allocated  to  financial  instruments,  including  loans, 
guarantees and equity. This is expected to leverage substantial additional private investment. 

In  addition,  the  Commission  can  provide  tailor-made  technical  support  upon  a  Member  State's 
request  via  the  Structural  Reform  Support  Programme  to  help  Member  States  implement  growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or  other 
national  reforms.  Germany,  for  example,  is  receiving  support  for  developing  an  institutional  solution  to 
modernise mechanisms for capturing and processing business data from multinational enterprise groups in 
the context of a globalised economy. The support measure focuses on the German statistical system, while it 
is also designed to help improve the quality of core economic data for policy-making purposes. 

In  absolute  terms,  Germany  is  the  fourth  biggest  recipient  of  finance  from  the  European  Fund  for 
Strategic Investments, but it ranks 22nd when considering the overall volume of approved operations 
as  a  share  of  GDP.  Total  financing  amounts  to  EUR  7.3 billion  and  is  set  to  trigger  EUR  35.2 billion  in 
additional private and public investments. For the Infrastructure and Innovation window, 74 projects(1) were 
approved at a total value of about EUR 6.4 billion, set to trigger EUR 29.1 billion in total investment. Under 
the  SMEs  window,  29 agreements  with  intermediary  banks  worth  EUR 974 million  have  been  approved. 
These are set to trigger about EUR 6 billion in investments, with some 30 285 small and medium-sized and 
mid-cap companies expected to benefit from improved access to finance. One such project in Germany is 
‘Evotec  medical  research’,  which  benefited  from  EUR 75 million  in  EU  financing.  Evotec  is  a  drug 
discovery  company,  and  the  EUR 75 million  loan  enabled  it  to  invest  in  researching  and  developing 
treatments for serious illnesses. 

Further information: https://cohesiondata.ec.europa.eu/countries/DE 

(1)  Including 36 multi-country projects. 

19 

 
 
3.  OVERALL FINDINGS REGARDING IMBALANCES, RISKS AND 

ADJUSTMENT ISSUES 

to  assess 

for  Germany 

in-depth  review 

The  2019  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken 
the 
persistence or unwinding of the imbalances that 
affect  it  (European  Commission,  2018a).  In 
spring  2018,  Germany  was  identified  as  having 
macroeconomic 
(European 
Commission,  2018b).  The  imbalances  identified 
related  in  particular  to  excess  savings  and  weak 
private  and  public 
investment.  This  chapter 
summarises  the  findings  of  the  analyses  in  the 
context  of 
Imbalance 
the  Macroeconomic 
Procedure (MIP) in-depth review that are set out in 
various sections of this report. (13) 

imbalances 

Imbalances and their gravity  

The German economy’s persistent large current 
account  surplus  reflects  a  subdued  level  of 
consumption and investment relative to income. 
While  there  is  currently  a  shift  towards  more 
domestic  demand-driven  growth 
and  more 
investment, the overall shares of consumption and 
investment  remain  relatively 
the 
favourable labour market, financing conditions and 
infrastructure investment needs. 

low,  given 

The  persistently  subdued  investment  share  of 
GDP continues to undermine Germany’s future 
growth  potential,  and  has  implications  for  the 
euro  area.  Private  investment  is  lagging  behind 
infrastructure  and  housing  needs.  Additional 
construction investment to meet the targets for new 
dwellings  could  lower the  current  account  surplus 
by  0.5 pps  of  GDP  (cf.  Section  1  on  investment). 
Public  investment  has  picked  up,  but  a  major 
investment  backlog,  with  depreciation 
still 
exceeding new investment at municipal level, will 
take  longer  to  make  up.  Stronger  investment  in 
innovation, quality education and skills, very high-
speed  broadband  networks,  sustainable  transport 
infrastructures  combined  with 
and  electricity 
the 
structural 

reforms  aimed  at 

improving 

(13)  Analyses  relevant  to  the  in-depth  review  can  be  found  in 
the  following  sections:  public  and  private  investment,  the 
housing market (Chapter 1.), public finances (Section 4.1), 
financial  sector  (Section  4.2),  labour  market  and  social 
policy  (Section  4.3),  and  sectoral  and  regional  aspects  of 
investment  (Section  4.4).  An  asterisk  shows  that  the 
analysis  in  that  section  contributes  to  the  in-depth  review 
under the MIP. 

investment-friendliness  and  efficiency  of  the  tax 
system  can  raise  potential  growth  in  future. 
Structural  reforms  promoting  better  use  of  the 
labour market potential of so far under-represented 
groups  could  help  address  the  already  noticeable 
shortages  of  skilled  labour.  This  would  be  of 
crucial importance especially as population ageing 
intensifies  and  immigration  may  slow  down. 
Growth-enhancing  policies  could  also  have 
positive spillovers for the other EU countries. 

Evolution, prospects, and policy responses 

The current account surplus has been gradually 
declining  since  2015.  The  trade  balance has  been 
affected  by  structural  and  cyclical  issues  in  the 
automotive sector. Net capital exports were driven 
mostly by flows of debt titles, even if on a smaller 
scale  than  in  earlier  periods.  Although  foreign 
direct investment is growing, it has, until recently, 
been  directed  mostly  at  offshore  centres.  This 
makes it difficult to discern a link with productive 
activity  abroad.  Corporate  sector  net  lending  has 
edged  down  as  profitability  has  weakened 
somewhat,  while  investment  has  remained  robust. 
Households’  net  lending  has  remained  largely 
unchanged,  which  puts  it  at  a  very  high  level 
compared  with 
peers. 
Improvements in labour incomes have boosted the 
saving rate, while increases in households’ income 
and consumption have lagged behind GDP growth. 
The public sector surplus has grown as a result of 
stronger revenues from tax and social contributions 
and  savings  on  social  transfers,  thanks  to  the 
strong cyclical position of the economy and to low 
unemployment. 

country's  EU 

the 

The adjustment of the imbalance has been slow 
so far, but is expected to advance further. With 
the  external  environment  becoming  increasingly 
challenging  for  exporters,  domestic  demand  is 
expected to be the key growth driver in 2018-2020, 
as  set  out  in  the  Commission’s  Winter  2019 
interim  Economic  Forecast.  Efforts  to  reduce  the 
public  investment  backlog  are  set  to  continue, 
combined with other expansionary fiscal measures. 
Private  investment  is  also  expected  to  increase 
further  to  keep  the  economy  fit  for  technological 
change.  The  strong  labour  income  and  rising 
support  private  consumption. 
wages 

should 

20 

 
 
                                                           
3. Overall findings regarding imbalances, risks and adjustment issues 

Table 3.1: 

Outward spillover heat map for Germany 

Note: cross-border figures for Germany expressed as a % of the GDP of the partner country. The darkest shade of red 
corresponds to percentile 95 and the darkest shade of green to percentile 5. The percentiles were calculated for each 
variable based on the full available sample of bilateral exposures among EU countries. The blank spaces represent missing 
data. Data refer to: Imports — 2016, Imports (in value added) — 2014, Financial liabilities — 2015, Financial assets — 2015, 
Liabilities (to banks) — 2018-Q2, Bank Claims — 2018-Q2. 
Source: UN, OECD, WIOD, BIS and European Commission 

Currently,  population  ageing  and  concerns  about 
the adequacy of future pension levels contribute to 
the  rise  in  domestic  savings.  The  demographic 
transition  is  pushing  up  the  current  account 
surplus, but should  lower  savings  in  the  long  run. 
Nevertheless, 
is 
expected  to  remain  above  the  Macroeconomic 
Imbalance Procedure threshold and to decline only 
gradually in the medium term. 

the  current  account  surplus 

Given  the  size  of  the  German  economy  and  its 
strong  trade  and  financial  linkages,  there  are 
to  other  EU 
potentially  strong  spillovers 
countries. Germany’s strong exports make it a key 
trading  partner  for  all  EU  countries.  Indeed, 
imports  from  Germany  exceed  10 %  of  GDP  in 
some  countries,  including  the  Czech  Republic, 
Hungary, Austria, the Netherlands and Poland (see 
Table  3.1).  Especially  in  the  case  of  central  and 
eastern  Europe,  this  reflects  the  importance  of 
international  value  chains  coordinated  by  German 
companies,  with  a  significant  amount  of  trade 
being  essentially  intra-company  transfers.  As  the 
most  important  of  these  value  chains  is  car 
manufacturing,  the  potential  negative  spillovers 
can  be  significant  if  German  carmakers  fail  to 
maintain 
their  global  competitive  advantage. 
Financial linkages from the country are on average 
smaller than trade linkages, yet for some countries, 
they  remain  very  strong.  Given  the  large  share  of 
financial  assets  invested  in  Germany,  economic 
developments 
the  country  are  particularly 
important for Austria, Ireland, Luxembourg, Malta 
and  the  Netherlands.  Liabilities  to  German  banks 
and  bank  claims  on  Germany  are  particularly 
concentrated  for  certain  financial  centres,  such  as 
Luxembourg,  Malta,  the  Netherlands,  the  UK, 
Ireland  and  Austria.  While  structural  reforms  in 
Germany  primarily  increase  its  own  GDP,  they 

in 

also  have  positive  spillover  effects  on  other  euro 
area countries (see Box 3.1) (14). 

to 

address 

More  recently,  Germany  has  taken  some 
its 
steps 
important  policy 
imbalances,  but  more  efforts  will  be  needed  in 
the  coming  years  to  fully  address  Germany's 
imbalances.   There have  been  policy  advances  in 
the  area  of  public  investment,  though  municipal 
level investment is still lagging behind. There have 
also  been  some  smaller  advances  as  regards 
investment 
infrastructure,  reducing 
disincentives to work and promoting wage growth. 
However, it remains to be seen if policy action has 
been  decisive  enough  to  produce  the  desired 
outcomes. 

in  digital 

(14)  The simulations presented in Box 3.1 are in the spirit of the 

2019 Council Recommendations for the euro area. 

21 

ATBEBGHRCYCZDKEEFIFRDEELHUIEITLVLTLUMTNLPLPTROSKSIESSEUKImports15.6106.67.90.8275.62.93.73.83.224.283.82.94.419.63.814.112.84.18.419.313.83.53.82.4Imports (in value added)12.75.75.54.74.012.65.65.54.63.93.011.73.33.54.04.56.83.76.38.43.65.39.06.63.24.83.0Financial liabilities27.330.82.94.117.74.629.64.613.313.93.8359.37.471.2103224.155.10.890.52.79.8412.420.5Financial assets53.629.89.59.631.415.819.64.031.127.017.722.363.517.110.415.41547.0175.067.516.116.66.817.123.924.923.023.7Liabilities (to banks)9.51.31.56.31.10.39.619.314.55.57.9Bank claims9.34.80.511.233.70.46.75.41.82.48.94.41.10.5121.614.889.65.20.21.92.64.35.310.5EU partner 
 
 
 
 
 
 
 
 
 
 
                                                           
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

Box 3.1: Spillovers of structural reforms – the case of Germany 

Structural reforms tend to  have both positive and negative  spillover effects on other countries, with 
uncertainty about the size and direction of the overall impact. While the demand effect (higher demand 
for foreign products) leads unequivocally to positive spillovers, reforms typically also improve a country’s 
competitiveness,  which  can  come  at  the  (relative)  expense  of  other  countries.  Whether  the  net  effect  is 
positive  or  negative  depends  on  the  relative  strength  of  these  two  opposing  channels  and  is  likely  to  be 
reform-specific. 

The  European  Commission’s  QUEST  model(1)  was  applied  to  simulate,  in  a  harmonised  way,  the 
impact  of  a  comprehensive  set  of  reforms  on  all  EU  Member  States.(2)  For  a  large  set  of  structural 
indicators the  benchmark  is  defined  as the average  of the three best-performing countries,  and  then  in the 
simulation these gaps are closed by half, for all indicators together, for each country separately. An update 
of  the  2014  exercise  for  Germany  is  shown  in  the  table  below,  based  on  more  recent  indicators  (but  not 
capturing the most recently introduced reform measures). As the magnitude of the reform ‘shocks’ simulated 
here  is  based  on  a  harmonised  benchmarking  exercise,  they  clearly  do  not  correspond  exactly  to  past 
European  Semester  country-specific  recommendations.  However,  they  do illustrate  the  potential economic 
impact of structural reforms on Germany itself and on the rest of the euro area. 

Structural reforms would have a small but positive effect on the rest of the euro area. A broad range of 
structural  reforms  are  simulated,  including  improving  product  market  regulation  and  entry,  labour  market 
participation  and  taxation  structure.  Germany  is  a  good  performer  overall,  with  limited  gaps  in  structural 
indicators by comparison with EU best performers. The largest ‘reform gaps’ identified for Germany are in 
the  tax  structure  (as  captured  by  the  relative  share  of  labour  tax  revenues  compared  to  consumption  tax 
revenues), and lower labour force participation of low-skilled women. Altogether, the simulated ambitious 
reform package could lift GDP by 4 % after 10 years, and 6¾ % after 20 years (see Table 1). The reforms 
raise competitiveness, boosting exports, while imports also rise as demand increases. As the terms of trade 
fall by about 3 % after 10 years, the trade balance to GDP ratio actually falls slightly by 0.34 pps. The net 
spillover effect on the rest of the euro area is small but positive, and total euro area GDP increases by 0.3 % 
after 10 years. 

Table 1: 

Spillover effects of structural reforms – Germany closing half of the structural reform gaps 

Source: European Commission 

This  simulation  complements  earlier  QUEST  simulations  designed  to  model  a  more  immediate 
demand stimulus. Earlier simulations include an increase in public investment and a reduction in personal 
income tax (European Commission, 2017a) and increases in expenditure on R&D and education (European 
Commission, 2018a).  

(1)  For 

model 
http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm. 

information 

QUEST 

detailed 

the 

on 

and 

applications, 

see: 

(2)  The simulation follows the methodology of Varga and in’t Veld (2014). 

Overall assessment  

The  German  economy’s  current  account 
surplus  continues  to  reflect  a  subdued  level  of 
consumption  and  investment  relative  to  output 
and thus scope for further policy effort. The size 

and  persistence  of  the  surplus  can  only  be 
explained  in  part  by  the  country’s  industrial 
structure 
competitive 
manufacturing  sector)  and  other  characteristics  of 
the  economy  and  society.  Thus,  the  current 
than 
account  surplus 

is  significantly  higher 

highly 

(i.e. 

the 

22 

1234567891020GermanyGDP0.660.911.161.491.852.302.803.273.714.116.81Employment0.691.171.521.972.452.973.53.974.384.746.73Trade balance (% GDP)-0.89-1.26-1.08-0.77-0.45-0.25-0.23-0.27-0.31-0.34-0.33Rest of euro area GDP-0.010.070.090.080.060.040.030.030.030.030.07Euro area GDP0.030.120.150.160.160.170.190.210.240.260.45 
 
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

  stepping  up  municipal  investment,  as  well  as 
investment in education, innovation and digital 
infrastructure, 

 

reducing  disincentives  to  work  and  promoting 
wage growth, 

 

improving the tax system, 

  stimulating  competition  in  business  services 

and regulated professions, and  

 

introducing  measures 
working lives.  

to  promote 

longer 

Full  implementation  of  declared  policy  initiatives 
(e.g. the coalition treaty of spring 2018) could help 
address macroeconomic imbalances. 

empirical  benchmarks,  after  accounting  for  these 
German-specific  characteristics 
in  explaining 
cross-country differences. Subdued investment and 
private  consumption  have  also  contributed  to  the 
build-up  of  the  external  surplus.  The  necessary 
adjustments in the aftermath of the post-unification 
investment  boom  have  resulted  in  significant 
scaling back of construction and planning capacity; 
this is hampering the renewal and expansion of key 
infrastructure.  While  there  is  currently  a  shift 
towards  more  domestic  demand-driven  growth, 
consumption and investment are still muted, given 
the favourable labour market, financing conditions 
and 
needs.  The 
continuing  trend  of  relatively  subdued  domestic 
investment as a share of GDP is also undermining 
future  growth  potential  and  has 
Germany’s 
implications  for  the  euro  area.  Overall,  there  has 
been  policy  progress.  However,  more  efforts  are 
needed  to  fully  address  its  imbalances,  especially 
in the following ways: 

infrastructure 

investment 

23 

 
3. Overall findings regarding imbalances, risks and adjustment issues 

Table 3.2: 

MIP Assessment Matrix 

Source: European Commission 

24 

 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 considerably above the levels suggested by fundamental factors. Accumulated surpluses have resulted in a large positive net international investment position, which reached 54 % of GDP in 2017. The surplus reflects saving and deleveraging by all sectors of the economy: households, firms, and the public sector.  Weak domestic investment has resulted in bottlenecks in taking up renewable energy sources, in the functioning of the transport infrastructure, in expanding the housing supply, in slow progress in digitisation, low investment in education as well as in a significant municipal investment backlog. All of this poses risks to Germany’s potential growth in the future. In addition, as deleveraging pressures still weigh on EU growth, strengthening investment in Germany would benefit both Germany and its euro area and EU partners. The German surplus came down somewhat from its peak of 8.9% of GDP in 2015, and reached 7.4 % in 2018, partially driven by commodity prices. It is projected to decline but to persist at well above 6 % of GDP in the medium term. Imports have been increasing, including relative to exports and GDP, over 2017 and 2018. Net capital exports have remained significant on account of repatriation of German bonds while investment in foreign debt securities slowed down. Net foreign direct investment is also significant, but partly driven by investments in offshore centres. A long spell of building up corporate equity buffers, fiscal consolidation and subdued investment have contributed most significantly to widening the savings surplus in recent years. Real private consumption increased robustly, by 2.1 % in 2016 and 1.8% in 2017 but growth slowed to just 1% in 2018 despite record employment and wages picking up speed. The low interest rates have been supportive of household investment, but the propensity to save has increased, possibly due to ageing related concerns. The share of households' disposable income in GDP has continued to decline, as has the share of consumption. The share of labour income has been recovering. Real wage increases remained modest, while record high dependent employment was also partly due to a decline in self-employment. The latter, together with still subdued property income have kept the share of non-labour income at a historically low level. Private sector investment has been increasing in response to high capacity utilisation. Nevertheless investment in infrastructure has barely reacted to supportive growth and funding conditions. Public savings have been rising as a share of GDP thanks to strengthening tax revenues and savings on social transfers. This has driven the fiscal surplus up, creating room for more public investment and other long-term growth enhancing expenditure. Germany has taken some policy steps to address its imbalances. Public investment is increasing faster than GDP, but still more efforts are needed to clear the investment backlog. Public investment in 2017 and 2018 grew by close to 8 % nominally. This represents a noticeable increase compared to past years and the long-term average. However, given the backlog especially at municipal level, public investment still needs greater efforts to maintain the capital stock.  The federal government is intensifying efforts to support investment at regional and municipal levels. With the creation of the Local Authority Investment Promotion Fund and the setting-up of a consultancy service agency "Partnerschaft Deutschland" the government had taken measures to support investment at lower administrative levels. Furthermore, the federal government has taken steps to create room for additional investment at these levels especially in education and research. Smaller steps forward were also recorded with regard to investing into Germany's digital infrastructure, reducing disincentives to work and promoting wage growth. Conclusions from IDR analysis  Germany is running a persistently large current account surplus reflecting private consumption restraint and subdued investment relative to savings in the private and particularly public sector. A relapse to weak domestic investment could constrain potential growth in the long term not only in Germany but also in the rest of the euro area.  While private consumption has continued increasing in real terms, the ongoing recovery in the wage share of GDP has mainly resulted into higher savings. Wage growth increased somewhat with the tightening labour market, yet real wage growth remains modest. Disincentives to work for certain groups continue to reduce labour supply, disposable income and consumption opportunities.  Public savings have increased thanks to strong taxes and contributions revenue and savings on social transfers. 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, especially at the municipal level. The widening fiscal surplus accounts for an increasing share of aggregate net saving, and thus the surplus. Efforts to improve the business environment for private investment have remained very limited. Regulatory restrictiveness in the services sector remains high and inefficiency in corporate taxation persists.   
 
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION* 

Public finances 

trend 

Germany’s public finances show a solid surplus 
and,  the  debt-to-GDP  ratio  is  projected  to 
comply  with  the  Stability  and  Growth  Pact’s 
60 %  threshold.  Since  2014  the  government 
sector has achieved an overall budget surplus; this 
continuing 
is  now  becoming  more 
pronounced.  After  0.6 %  of  GDP  in  2014,  the 
headline  balance  reached  1.0 %  of  GDP  in  2017 
and  increased  to  1.7 %  of  GDP  in  2018.  Public 
debt  also  continues  its  sustained  decline  from  a 
peak  of  80.9 %  of  GDP  in  2010.  It  has  reached 
60.1 %  of  GDP  in  2018  and  is  expected  to 
decrease further to 56.7 % in 2019 according to the 
Commission  2018  autumn  forecast,  falling  below 
the  60 %  Maastricht  threshold  for  the  first  time 
since  2002.  For  a  debt  sustainability  analysis  and 
associated fiscal risks see Annex B. 

in 

lie 

investment  rate 

Saarland  (SL  0.87 %),  whereas  two  regions  with 
the  east: 
the  highest 
Mecklenburg-West  Pomerania  (MV  2.01 %)  and 
Saxony  (SA  1.92 %).  Investment  expenditure  is 
related to the level of economic activity measured 
by  the  share  of  GDP,  however  the  correlation  of 
public  investment  is  even  higher  with  the  public 
debt  level  of  the  different  Länder  where  more 
indebted  Länder  tend  to  invest  less  (see  Graph 
4.1.1).  This  negative  correlation  indicates  that 
Länder  having  conditions  of  tight  public  finances 
lack  the  financial  resources  to  invest  sufficiently 
according  to  their  level  of  economic  activity.  For 
example,  Saarland  and  North  Rhine-Westphalia, 
two formerly prosperous regions based on a strong 
coal and steel industry, struggle with the structural 
change 
lower 
the  economy,  resulting 
revenues  from  the  local  trade  tax,  higher  social 
expenditures and poor investment levels. 

in 

in 

Graph 4.1.1:  Correlation between gross investment and 

Graph 4.1.2:  Regional debt and investment shares in 2017 

debt in 2017 

Source: Destatis 

Source: Destatis 

Public investment by the German Länder shows 
a  correlation  with  economic  activity  and,  even 
more,  with  debt  levels.  Public  investment  as  a 
share of GDP varies across the different regions in 
Germany  (average:  1.24 %  of  GDP).  The  divide 
between the former West and East German Länder 
is  still  visible,  but  with  some  notable  exceptions. 
investment 
the  regions  with  poor 
Three  of 
performance lie in the west: Bremen (HB 0.81 %), 
(NRW  0.82 %)  and 
North  Rhine-Westphalia 

former  East  German 

Regional  disparities 
in  public  debt  and 
investment levels are also strong among western 
Länder.  If  we  divide  Germany  into  four  main 
economic  areas  (west:  North  Rhine-Westphalia 
(NRW),  east: 
regions 
including  Berlin  (BE),  south:  Bavaria  (BY)  and 
Baden-Württemberg  (BW),  north  and  middle: 
remaining  regions),  they  show  similar  population 
numbers that correspond largely to each economic 
area’s  regional  share  of  GDP  (see  Graph  4.1.2). 
However, debt at regional and municipal level per 

25 

NRWBYBWNDSHEBESARPHHSHBRSAATHMVHBSL0.00.51.01.52.02.5010203040506070Debt in % of GDPInvestment in % of GDP0%20%40%60%80%100%INVESTMENT at regionaland municipal levelper inhabitant (40 bn)DEBT at regional andmunicipal level perinhabitant (724 bn)GDP (3 263 bn)Population (82.7 mio)West = NRWEast with BESouth = BY+BWNorth and Middle 
 
 
 
4.1. Public finances and taxation* 

from  15 %  to  15.3 %  of  GDP.  This  means  that 
measures  taken  in  recent  years  to  contain  the 
upward  creep  due  to  the  ‘cold  progression’  (i.e. 
bracket  creep)  and  the  additional  income  tax 
allowances  have  not  yet  had  any  impact  on  the 
figures. The tax wedge on labour has been stable at 
about 50 %, above the EU average of 46 %, and is 
the  second  highest  in  the  EU.  The  tax  wedge  on 
low-income  earners  and 
secondary  earners 
continues  to be  high  compared  to  the  EU  average 
(see  Section  4.3.1).  Forecasts  by  the  Ministry  of 
Finance  in  the  2018  draft  budgetary  plan  suggest 
that  direct  taxes (15)  will  not  decrease  in  2018  or 
2019.  The  draft  budgetary  plan  includes  the 
abolition  of  the  solidarity  surcharge  for  90 %  of 
taxpayers as of 2021, which would help reduce the 
income tax burden. Full abolition of the solidarity 
surcharge  would  reduce  the  implicit  tax  rate  on 
labour  by  1 %  (European  Commission,  2017a).  A 
number of changes in social security contributions, 
family benefits and personal income tax will affect 
taxes on labour from 2019 on and are expected to 
reduce the tax burden on low-income earners (see 
Section 4.3.1.). 

is 

therefore  not  very  conducive 

The  tax  system  remains  relatively  inefficient 
and 
to 
investment. Both statutory corporate tax rates and 
effective  average  tax  rates  are  high  (European 
Commission 2018b), which makes the presence of 
distortions more severe (16). For example, the debt 
bias  in  corporate  taxation,  which  arises  from  the 
fact  that  debt  financing  costs  are  deductible  from 
the  corporate  income  tax  base,  whereas  equity 
financing  costs  cannot  be  deducted,  is  the  third 
highest 
(European  Commission, 
2018b).(17)  This  could  have  a  disproportionately 
investment  by  young, 
adverse 
innovative  and  high-risk  companies  that  usually 
rely more on equity financing. The same holds for 
family  businesses,  which  tend  to  have  a  higher 
share of equity financing (Gottschalk et al., 2017). 
Also, 
forward  provisions  are 
relatively  strict,  limiting  the  loss-carry  forward  to 
60 %  of  taxable  income  of  a  given  year  (ZEW, 
2019).  The  recent  reform  of  loss-carry  forward 

impact  on 

in  Europe 

loss-carry 

the 

(15)  As measured by the taxes on income and wealth. 
(16)  The  effective  average  tax  rate  in  2017  stood  at  28.8 %, 

compared to 20 % in the EU-28 (ZEW, 2018a). 

(17)  Measured as the additional rate of return before taxes that 
an  equity-financed  investment  needs  to  achieve  to  break 
even in comparison to a debt-financed investment, the bias 
amounts to 2.8 % in Germany. 

inhabitant  is  disproportionally  higher  in  the  west 
(145 % of Länder average) and lower in the south 
(41 % of Länder average), while public investment 
is  inversely  lower  in  the  west  (65 %  of  Länder 
average) and higher in the south (146 % of Länder 
average).  This  also  shows  that  disparities  within 
former West Germany are much more pronounced 
than within former East Germany (93 % of average 
Länder  debt  and  86 %  of  average  Länder 
investment).  Comparing  absolute  debt  levels  per 
inhabitant  between  2010  and  2017  shows  that 
regions with already low debt levels are improving 
further,  while  others  are  lagging  behind,  with 
disparities widening. The consequences for public 
investment  are  that  regions  with  more  acute 
investment  needs  remain  financially  constrained 
and continue to accumulate an investment backlog.  

Taxation 

The German tax system, with its relatively high 
tax  burden  skewed  towards  labour,  does  not 
appear  favourable  to  growth  and  investment. 
Germany raises a relatively high share of revenues 
from  more  distortive  direct  taxes,  notably  on 
labour. In 2017, the total tax burden was 39.1 % of 
GDP,  equal  to  the  EU  average.  Revenues  from 
labour  taxes  as  a  share  of  GDP  were  relatively 
high  in  2017  at  22.2 %  of  GDP  (EU  average 
19.4 %).  Personal  and  corporate  income  taxes  in 
Germany  (12.1 %  of  GDP)  are  equal  to  the  EU 
average,  whereas  revenues  from  indirect  taxes 
(10.7 %  of  GDP)  are  below  the  EU  average 
(13.6 %).  Revenues 
from  consumption  and 
environmental  taxes  (10.1 %  and  1.8 %  of  GDP 
respectively  in  2017)  are  also  below  the  EU 
averages (11.1 % and 2.4 %). This is also the case 
for  taxes  on  capital  (6.7 %  of  GDP,  EU  average 
8.6 %). Taxes on property (1.1 % of GDP v. 2.6 % 
EU  average)  are  very  low,  as  are  recurrent 
property  taxes  (at  0.4 %  of  GDP  v.  1.6 %  EU 
average). 

Despite  measures  to  contain  the  growth  of 
direct  taxes,  revenues  from  personal  income 
and  corporate  income  tax  continue  to  increase. 
Revenues  from  direct  taxes  rose  from  10.8 %  of 
GDP  in  2010  to  13.0 %  in  2017,  whereas  the 
amount of indirect taxes collected slightly declined 
from  10.9 %  to  10.7 %  of  GDP.  The  increase  in 
direct  taxes  was  driven  mainly  by  personal  and 
corporate  income  taxes.  Over  the  same  period, 
social  security  contributions  increased  slightly 

26 

 
                                                           
4.1. Public finances and taxation* 

Graph 4.1.3:  Cost of tax compliance (as % of turnover) 

provisions 
limitations 
removed  only  certain 
applicable to specific cases where the ownership of 
a young company changes. Other distortions in the 
tax  system  concern  labour  taxation,  the  fact  that 
Germany’s  tax  system  corrects  relatively  little  for 
market  failures  (especially  where  environmental 
taxation  is  concerned)  and  high  tax  compliance 
costs. 

to 

turnover (18) 

The  German  tax  system  remains  complex  and 
compliance  costs  are  relatively  high.  A  recent 
study (KPMG and GfK, 2018) which examined in 
detail tax compliance costs incurred by businesses 
found  that  Germany  ranks  17th  out  of  20  EU 
countries  in  terms  of  total  compliance  costs 
relative 
(see  Graph  4.1.3). 
Similarly,  the  World  Bank  finds  that  the  hours 
needed to comply with tax obligations in Germany 
come to 218, compared with an average of just 164 
hours for 22 other EU countries. This is a reversal 
of  the  situation  in 2006 (see  Graph  4.1.4). Recent 
measures may have helped reduce tax compliance 
costs, but they do not address the complexity of the 
tax  system.  The  current  roll-out  of  the  tax 
administration  reform  will  probably  help  cut  tax 
compliance  costs.  The  same  holds  for  the  recent 
increase 
immediate 
expensing  of  assets  from  EUR 410  to  EUR 800. 
complex, 
However, 
particularly  as  businesses  have  to  deal  with  two 
corporate income tax returns (19) based on complex 
legislation  and  up  to  16  tax  administrations  that 
exchange too little information. 

the  upper 

remains 

system 

limit 

the 

for 

in 

(18)  The  ranking  refers  to  all  taxes.  In  terms  of  absolute  tax 
compliance  costs,  Germany  ranks  last.  It  may  be  that  for 
corporate  income  tax  the  result  was  impacted  by  the  one-
off  costs  related  to  the  introduction  of  the  obligatory  E-
Bilanz. 

(19)  For corporate income tax and local trade tax. 

Source: European Commission (2018b). 

Ensuring a level playing field across businesses 
is also important to achieve a more efficient tax 
system. Arrangements, such as the so-called cum-
ex  and  cum-cum  trades,  aim  at  unduly  obtaining 
reimbursements of withholding taxes on dividends 
(Dutt  et  al.,  2018;  Buettner  et  al.,  2018)  or  to 
benefit  from  exemptions  or  a  lower  rate  of 
withholding tax. This has so far led to an estimated 
accumulated  tax  loss  for  Germany  of  at  least 
EUR 31.8 billion (Spengel et al., 2017a; Spengel et 
al., 2017b). While Germany is not the only country 
affected  by  such  schemes,  it  is  where  losses  were 
highest in absolute terms.  Although Germany has 
now  also  explicitly  closed  some  of  the  loopholes 
that  were  perceived  to  allow  these  schemes  to 
operate,  further  loopholes  in  the  system  remain 
(20),  which  might  lead  to  new  avoidance  schemes 
in the future. 

(20)  The current tax rules give incentives to exploit differences 
in  the  treatment  of  dividends  from  domestic  and  foreign 
investors,  as  well  as  differences  in  the  treatment  of 
different type of income sources for foreign investors. 

27 

01234LUIESIEEELNLBEUKFICZITROESATSEDEFRSKPL%Direct tax obligationsIndirect tax obligationsAverage 
                                                           
 
                                                           
4.1. Public finances and taxation* 

for  family  owned  businesses 

The  German  inheritance  and  gift  tax  grants 
large  tax  exemptions  when  family  businesses 
are  transferred  to  the  next  generation.  This 
makes  the  system  complex  and  inefficient,  and 
disadvantages 
that  change 
family  businesses 
ownership  via  market 
transactions.  These 
exemptions are considered fairly high and result in 
low  effective  inheritance  tax  burden  for  large  and 
very  large  capital  transfers  (Bach  and  Thiemann, 
2016;  Dorn  et  al.,  2017).  Reforms  in  2016  and 
2018,  following  a  judgment  by  the  German 
Constitutional  Court  that  such  exemptions  are  too 
far  reaching  and  unconstitutional,  have  changed 
the  situation  only  marginally.  Also,  the  economic 
tax 
rationale  behind  granting  very  generous 
exemptions 
is 
questionable,  as  it  is  not  clear  why  a  change  in 
ownership  via  inheritance,  where  a  tax  of  7  %  to 
30  %  would  be  due,  is  harming  jobs  or  the 
continuity of the business, whereas the acquisition 
through  an  independent  third  party  who  needs  to 
pay  the  full  market  value  is  not  (BMF,  2012; 
Kiziltepe and Scholz, 2016). So far, the inheritance 
and  gift  tax  yields  about  EUR  6 billion  a  year, 
corresponding to an effective tax rate of about 2 %. 
This  revenue  could  be  approximately  doubled  if 
the tax exemptions were abolished. The additional 
revenues that would be generated from abolishing 
or  substantially  reducing  the  exemptions  could  be 
used  to  lower  the  tax  rates  of  the  inheritance  and 
gift  tax  and  in  this  way  reduce  the  burden  on 
smaller  family  businesses  (Bach,  2018;  see  also 
Box  4.1.1,  scenario  1).  Potential  perceived 
liquidity and financing constraints of new business 
owners  could  be  addressed  by  allowing  for  a 
longer payment period of the tax obligation(21), or 
by financial market solutions, whereby heirs could 
borrow  at  favourable  conditions  as  the  sum  due 
would only be a fraction of the linked collateral.  

Revenues  from  environmental  taxes  as  a  share 
of  GDP  are  among  the  lowest  in  the  EU. 
Germany’s  environmental  tax  revenue  as  a  share 
of GDP fell from 2.4 % of GDP in 2005 to 1.8 % 
in 2017, compared to a fairly stable EU average of 
4.1.3). 
of  GDP 
around 
Environmental  taxation  encourages  more  efficient 
use  of  resources,  and  can  boost  investments  and 
employment. However, in Germany these taxes do 

(Graph 

2.4 % 

(21)  The  current 

inheritance  and  gift 

tax  system  allow 
beneficiaries  to  pay  the  tax  burden  from  current  profits 
over a period of up to 7 years. 

Graph 4.1.4:  Paying taxes: time to comply (hours per year) 

(1) EU-22 refers to the average for EU Member States, not 
including DE, CY, MT, LU, BG or HU. 
Source: World Bank, Doing Business Database 

Improving the design of the inheritance and gift 
taxes  could  reduce  inequality,  as  inherited 
wealth  preserves  the  large  wealth  inequality 
observed  in  Germany.  The  Gini  coefficient  for 
net wealth in Germany is one of the highest in the 
euro  area.  Wealth  in  Germany  is  very  unevenly 
distributed:  the  richest  10 %  of  households  own 
almost  two-thirds  of  national  wealth,  the  richest 
1 %  one-third,  the  richest  0.1 %  have  17 %  of 
assets  –  that  is  41 000  households  averaging 
EUR 40 million.  As  large  income  and  wealth 
inequalities  may  be  detrimental 
to  economic 
growth,  to  macroeconomic  stability,  and  to  social 
cohesion,  well-designed  inheritance  and  gift  taxes 
can  combat  wealth  inequality,  supporting  social 
mobility  and  ensuring  equality  of  opportunities  in 
the least distortive manner and with an acceptable 
level of administrative complexity (OECD, 2018a; 
Iara, 2015). In 2017 revenues from inheritance and 
gift tax accounted for 0.19 % of GDP (about 0.5 % 
taxation).  In  Germany  every  year, 
of 
EUR 250 to  300  billion  are  inherited  or  given 
away,  and  the  trend  is  rising  as  the  wealth  of 
German households has risen to more than EUR 10 
trillion. The distribution of inheritances is strongly 
unequal.  The  majority  inherits  nothing  or  only  a 
little. 45 % of the population can expect to inherit 
more  than  EUR 50 000,  only  8 %  more  than 
than 
EUR 200 000, 
EUR 5 million, EUR 17 million on average (Bach, 
2018).  

0.1 % 

more 

total 

and 

28 

05010015020025030020062017Hours per yearGermanyEU-22 
 
                                                           
4.1. Public finances and taxation* 

in  Germany 

energy  carriers  such  as  petrol  and  diesel,  natural 
gas  and  heating  oil 
(Agora 
Energiewende,  2018).  Coal  use  is  also  taxed  at 
lower  rates  than  natural  gas  use,  while  there  are 
income  tax  subsidies  for  commuting  .  Moreover, 
such  taxation  divergence  may  explain  the  slow 
progress made by Germany in terms of reducing its 
greenhouse  gas  emissions  in  sectors  such  as 
transport  and  heating  and  cooling,  as  covered  by 
the  Effort  Sharing  Decision.  Projections  indicate 
that  Germany  will  exceed  its  2017  Effort  Sharing 
Decision  target  by  more  than  20  MtCO2,  which 
makes it unlikely that the overall 2013-2020 target 
can be met. 

Graph 4.1.5:  Environmental tax revenues (% GDP) 

Source: Eurostat 

not serve their purpose of sending price signals to 
all polluters, as they are designed in such a way as 
to avoid many polluters having to pay, for example 
via exemptions or preferential rates. Transport fuel 
tax revenues have decreased as a share of GDP in 
recent  years.  Tax  rates  on  motor  fuels  have  not 
been  adjusted  since  2003.  In  addition,  there  is  a 
favourable  tax  treatment  of  diesel  compared  to 
petrol, making Germany increasingly an outlier in 
that  it  privileges  diesel  technology  through  excise 
duties.  Taxation  of  company  cars 
is  also 
favourable.  The  implicit  tax  rate  on  energy  in 
Germany  fell  by  26 %  to  EUR 203.2  per  toe 
between  2005  and  2016,  compared  with  an  EU 
average  of  EUR 234.8 per toe.  Exemptions  from 
the  energy  taxes  and  levies  for  energy-intensive 
processes  were  introduced  in  2006,  when  the 
energy  tax  law  was  introduced.  Exemptions  for 
sections  of  the  industry  from  the  renewable 
surcharge  add  to  the  electricity  bill  of  other 
industrial  consumers  and  households  and  tend  to 
distort price signals.  

Fossil  fuel  subsidies  have  risen  over  the  past 
decade.  Such  subsidies  include  energy  tax  and 
surcharges  relief  for  energy  intensive  companies 
and  various  tax  exemptions,  e.g.  for  commercial 
aviation,  public  transport,  and  diesel  used  in 
agriculture.  The  abolition  (or  limitation)  of  such 
measures would allow a shift to taxes that are less 
detrimental 
resolving 
to  growth  and  help 
environmental issues. 

Distortive  tax  rates  differ  widely  across  energy 
users, fuels and carbon intensity, slowing down 
emissions  reduction  and  investments  in  energy 
efficiency.  Taxes  and  levies  on  electricity  are 
higher  per  unit  of  energy  than  those  on  other 

29 

0.00.51.01.52.02.53.03.54.0LUIESKDEESLTROCZSEBEFRATUKEUHUPTBGMTPLEECYFIITNLHRLVDKSIELEnvironmental tax revenues (% GDP) 
 
 
 
 
4.1. Public finances and taxation* 

Box 4.1.1: Tax shift from labour to inheritances and gifts 

As in previous years, the 2018 Council CSRs for Germany recommend reducing the high tax wedge 
for low-wage and second earners and improving the efficiency and investment-friendliness of the tax 
system.  The  tax  wedge  on  labour  in  Germany  is  one  of  the  highest  in  the  EU,  including  for  low-wage 
earners.  Inheritance  and  gift  tax,  on  the  other  hand,  grants  relatively  large  tax  exemptions  when  family 
businesses  are  transferred  to  the  next  generation.  This  makes  the  system  overly  complex,  inefficient  and 
subject to tax planning (Bach, 2016; Bach and Thiemann, 2016; Kopczuk, 2012). 

This box provides a summary of three hypothetical scenarios of tax shifts away from personal income 
and social security contributions and towards inheritances and gifts. (1) In the current system (baseline), 
inheritances and gifts are taxed at progressive rates that depend both on the value of a transfer and on the 
relational proximity of an heir to the deceased person or donor. Furthermore, certain types of wealth, such as 
business wealth, are partially tax-exempt. In the three hypothetical inheritance and gift tax scenarios, all tax 
exemptions are removed, but a basic allowance of EUR 400 000 per taxpayer is kept. 

1.  The first scenario replaces the progressive rates by a proportional rate of 10 %. The additional tax 
revenue over and above the baseline is used to reduce the personal income tax burden by raising 
the  minimum  threshold  of  the  solidarity  surcharge  from  EUR 81  to  EUR 156/month  (of  tax 
liability).(2) 

2.  The second scenario keeps the existing progressive tax rates. The additional tax revenue over and 
above the baseline, is used to lower the personal income tax and social security burden, by raising 
the solidarity surcharge threshold further to EUR 316/month and by extending the midi-zone from 
EUR 850 to EUR 2 000/month, phasing in contributions linearly.  

3.  The  third  scenario  keeps  the  existing  progressive  tax  rates,  except  for  the  top  bracket.  The  top 
marginal tax rate, applied to wealth transfers above EUR 26 million, is raised from 30 % to 50 %. 
The additional tax revenue over and above the baseline is used to flatten the ‘middle-class bulge’ 
by extending the second tax bracket from EUR 13 996 to EUR 16 500. 

Static  distributional  and  budgetary  impact.  The  static  overnight  budgetary  effect,  in  the  absence  of 
behavioural responses (3), differs substantially from one scenario to another. While the first scenario yields 
about  EUR 550 million  over  and  above  the  baseline,  the  second  (+EUR 9.0 bn)  (4)  and  third  scenarios 
(+EUR 12.7 bn)  increase  revenue  significantly  more  (Table  1).  A  large  share  of  wealth  transfers  is  tax-
exempted  and  most  (second-most)  revenue  is  collected  from  inheritances  of  gifts  above  EUR 20 m. 
(EUR 500 000 – EUR 2.5 m) in all scenarios (Figure 2.1). All three tax shift scenarios lower the tax burden 
or  social  security  contributions  on  labour  and  lead  to  higher  income.  The  distributional  impact  of  the 
solidarity surcharge (‘Soli’) reform (Scenario 1) is very limited, whereas the second scenario ranks highest 
in redistributive terms. All deciles of the income distribution benefit from flattening the ‘middle class bulge’ 
(Scenario 3), in particular households located between the fourth and the ninth decile (Figure 1.2). 

30 

 
4.1. Public finances and taxation* 

Table 1: 

Budgetary impact of the reform scenarios (in million EUR) 

(1) EUROMOD simulations use 2018 tax rules as a benchmark, with 2016 incomes measured by the EU SILC survey, 
uprated to 2018.  
Source:  European Commission, Joint Research Centre, based on EUROMOD and based on Bach and Thiemann 
(2016) (inheritance and gift taxation). 

Graph 1:  Overview of simulation results 

(1)  According to the simulations, about EUR 235 billion of inheritances and gifts are transferred yearly. In all three 
scenarios, the tax is levied on the net value of an inheritance or gift, applying a basic allowance of EUR 400 000 per 
taxpayer. Tax rates vary across scenarios: a proportional rate of 10 % (scenario 1), the existing progressive rates, 
based on transfers from a parent (scenario 2) and the existing progressive rates as in scenario 2, replacing the top 
rate by 50 % (scenario 3). 
Source: European Commission, Joint Research Centre, based on EUROMOD and based on Bach and Thiemann 
(2016) (inheritance and gift taxation).  

Macroeconomic impact of the labour tax scenarios. There are no sizeable macroeconomic effects under 
the  first  scenario.  However,  the  reduction  of  the  tax  burden  on  labour  under  the  other  scenarios  increases 
employment and GDP, both in the short run and in the medium term (after 5 years). Employment increases 
by a similar amount in the medium term under scenarios 2 and 3 (+0.16 % or +0.18 %, respectively). This 
effect is mainly driven by low-skilled (scenario 2) and medium- and high-skilled employment (scenario 3). 
After five years, higher employment boosts economic output by 0.11 % (0.15 %), consumption by 0.18 % 
(0.24 %) and investment by 0.06 % (0.08 %) under scenario 2 (scenario 3) relative to the baseline.  

(1)  The  simulation  of  the  inheritance  and  gift  tax  scenarios  closely  follows  Bach  and  Thiemann  (2016).  It  relies  on  a 
consistent micro-based distribution of net wealth of German households in 2015. The wealth distribution, created from 
the  second  wave  of  the  Household  Finance  and  Consumption  Survey  (HFCS),  includes  a  supplementary  part  that 
adjusts  for  the  under-representation  of  the  very  wealthy  households  in  the  survey  data  (Bach  et  al.,  2018a).  By 
combining the database with current  mortality probabilities, by gender and age, we simulate the potential number of 
deaths over ten years (2015 – 2024). From this we infer the potential distribution of inheritances over the coming years, 
which enables us to simulate inheritance and gift tax scenarios. The simulation requires several assumptions, described 
in Bach and Thiemann (2016) and applied to the more recent data from 2015. In particular, we assume that net wealth 
for  2015  remains  constant  over  the  entire  simulation  period.  Considering  all  assumptions,  we  expect  the  future 
inheritance  and  gift  flow  to  be  noticeably  underestimated.  Inheritance  and  gift  tax  revenue,  under  the  current  law 
(baseline),  is  estimated  as  the  average  of  the  values  for  2016  and  2023,  using  the  official  projections  made  by  the 
Ministry  of  Finance  (BMF,  2018).  The  static  distributional  and  budgetary  impact  of  the  corresponding  income  tax 
reforms  is  simulated  using  EUROMOD;  see  Figari  and  Sutherland  (2013)  for  a  comprehensive  introduction  to  the 

31 

BaselineScenario 1 (Soli)Scenario 2 (Soli + SSC)Scenario 3 (PIT)Part I: Inheritance and gift taxTax revenue6,3055468,96412,670Part II: Income tax burdenPersonal income tax (PIT)381,834-588-331-12,889Total employee SSC215,8370-9,8190Total means-tested benefits71,410-18-1,110-223Net budgetary effect--570-9,041-12,666Absolute difference from baseline0102030405060020406080100120140Tax revenue in % of totalTotal inheritances and gifts (in bn. euros)Inheritances and gifts (in euro)Distribution of inheritances and gifts and tax revenues from inheritance and gift tax scenarios Tax rev. (Scenario 1 - Soli)Tax rev. (scenario 2 - Soli + SSC)Tax rev. (scenario 3 - PIT)Inheritances and gifts0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%12345678910Difference w.r.t. baseline (%)Deciles of equivalised disposable incomeDistributional impact of three labour tax scenariosScenario 1 (Soli)Scenario 2 (Soli + SSC)Scenario 3 (PIT) 
 
 
 
 
 
 
4.1. Public finances and taxation* 

model.  In  simulating  a  tax  shift  from  labour  to  wealth  transfers,  we  combine  two  separate  microsimulation  models 
(EUROMOD and the model used by Bach and Thiemann, 2016). In doing so, we implicitly assume that the inheritance 
and  gift  tax  is  paid  out  of  the  wealth  transfer  without  affecting  the  disposable  income  of  the  heirs.  In  other  words, 
inheritances and gifts are treated as exceptional events. 
(2)  The solidarity surcharge on capital income is not affected. 
(3)  In particular, the second and third inheritance and gift tax scenarios are likely to trigger behavioural responses which 

could eventually lower overall tax revenue. 

(4)  The change in PIT revenue is relatively small because of two opposing effects: exempting a larger share of income 

from the Soli (lower PIT) is partially offset by lower social security contributions, which in turn increases the PIT tax 
base (higher PIT). 

Healthcare 

Public  spending  on  healthcare  and  long-term 
care  in  Germany  is  projected  to  increase  in 
response  to  demographic  developments,  but 
fiscal  sustainability  risks  are  low.  Total  health 
expenditure per capita is among the highest in the 
EU, and expenditure as a share of GDP is also the 
second  highest  (11.3 %  of  GDP  in  2017),  with 
only  France  spending  more  in  the  EU.  As  a 
consequence  of  population  ageing,  healthcare 
expenditure on people insured under the Statutory 
Health  Insurance  scheme  is  projected  to  increase 
by  0.7 pps.  of  GDP,  below  the  expected  average 
growth level in the EU (0.9 pps. of GDP). Taking 
into  account 
impact  of  non-demographic 
technological 
drivers 
advances)  on  future  spending  growth,  healthcare 
expenditure on people insured under the Statutory 
Health  Insurance  scheme  is  expected  to  increase 
by  1.5 pps.  of  GDP  between  now  and  2070  (EU: 
1.6) (European Commission, 2018d). 

(such  as  medical  and 

the 

There is room for efficiency gains, especially in 
hospital  and  pharmaceutical  care.  The  cost  of 
in-patient  hospital care  is on the  rise  in  Germany. 
Hospital care is characterised by a high density of 
healthcare  facilities,  mostly  in  urban  settings, 
pointing towards a significant oversupply in some 
urban areas. The number of hospitals and hospital 
beds  per  1 000  inhabitants  and  the  average  length 
of  stay  in  German  hospitals  are  declining  only 
slowly  and  are  still  among  the  highest  in  the  EU. 
93 %  of  hospital  expenditure  goes  on  in-patient 
care  involving  an  overnight  stay,  the  second 
highest  in  the  EU,  while  the  shares  of  out-patient 
and  day-care  are  very  low.  Better  cooperation 
among  the  various  healthcare  services  and  with 
services  providing  social  care  and  care  for  the 
elderly could improve efficiency. 

Expenditure  on  pharmaceuticals  is  high  and 
rising,  and  recent  cost-containment  reforms 
increase. 
have  not  been  able  to  stop  the 

Insurance 

Expenses  incurred  for  pharmaceuticals  by  the 
Statutory Health Insurance funds and co-payments 
by patients rose by 3.7 % between 2016 and 2017, 
reaching  EUR 39.9 billion.  The  main  reason  for 
the  increase  was  newly  licensed  patent-protected 
pharmaceuticals,  which  account  for  45 %  of 
Statutory  Health 
pharmaceutical 
expenditure  (Schwabe  et  al.,  2018).  Germans 
spend  the  most  per  capita  in  the  EU  on  retail 
pharmaceuticals.  Annual  pharmaceutical  spending 
growth 
in  Germany  has 
outpaced  that  of  retail  pharmaceuticals  in  recent 
years.  The  Act  on  the  Reform  of  the  Market  for 
Medicinal  Products  has  been  only  partly  effective 
in 
on 
rising 
pharmaceuticals,  mainly  because  of  the  one  year 
setting  by  pharmaceutical 
long 
companies.  Unjustified  restrictions  of  imports  of 
prescription  medicinal  products  from  foreign 
online pharmacies continue. 

in  hospital  settings 

expenditure 

free  price 

containing 

The 
legal  framework  for  statutory  health 
insurance  and  private  health  insurance  creates 
inefficiencies  and  challenges  the  solidarity 
principle in healthcare. Although several reforms 
have  improved  the  situation,  the  current  legal 
framework,  which  allows  people  on  higher 
incomes,  civil  servants  and  the  self-employed  to 
opt  out  of  the  statutory  health  insurance  scheme, 
weakens  the  risk-  and  income-based  solidarity 
principle  in  healthcare.  Moreover,  doctors  can 
charge patients with private health insurance more 
the  statutory  health 
than 
insurance  scheme.  This  creates  inequalities  in 
waiting  times  and  the  accessibility  of  medical 
services.  It  also  incentivises  over-provision  of 
health services to private health insurance patients. 
A  working  group  on  the  future  of  the  German 
healthcare  system  has  been  commissioned  to  put 
forward  proposals  by  2020,  including  on  how  to 
reform payment for health services. 

those  covered  by 

32 

 
 
4.1. Public finances and taxation* 

favourable  opinion  endorsing  the  macroeconomic 
projections underlying the draft budgetary plan for 
2019.  As  regards  the  upper  limit  on  the  general 
government  structural  deficit  of  0.5 %  of  nominal 
GDP,  the  Stability  Council's  Advisory  Board 
assesses Germany as complying with the rules (in 
its report of December 2018). 

the 

increase 

to  conduct 

spending 
Germany  continues 
reviews 
efficiency  and 
to 
effectiveness  of  government  spending.  Since 
2015,  the  country  has  held  yearly  cycles  of 
spending  reviews  targeting  specific  policy  areas 
and  ministries.  The  2017-2018  cycle  covered  the 
topics  of  ‘procurement  of  standardised  bulk 
articles’  and  ‘humanitarian  aid  and  transition  aid, 
including crisis prevention, crisis response, peace-
keeping  and  development  cooperation’,  whereas 
the  ongoing  review  cycle  for  2018-2019  analyses 
the ‘management of receivables’. 

The  implementation  of  accrual  accounting  is 
uneven. Accrual accounting as a public accounting 
standard provides a comprehensive and transparent 
overview of a public body’s financial position and 
performance  and  can  support  sustainability  and 
intergenerational  equity.  A  majority  of  public 
bodies  in  Germany  at  the  municipal  level  have 
now switched to accrual accounting, but this is not 
the case at federal level or consistently at the state 
level.  

Pension system 

Demographic change will strain German public 
finances  and  challenge 
the  adequacy  of 
pensions.  Fiscal  sustainability  risks  are  currently 
low  in  Germany,  due  in  large  part  to  a  relatively 
high  primary  surplus.  However,  a  less  ambitious 
fiscal  position,  more 
line  with  historical 
in 
averages,  would  point  to  medium  sustainability 
risks.  The 
the  baby  boomer 
generation  is  affecting  Germany  more  than  other 
EU countries. By 2040, the country is expected to 
be  facing  one  of  the  largest  increases  in  spending 
on  public  pensions  in  the  EU  (up  by  1.9 pps.  of 
GDP),  while  the  public  pension  benefit  ratio  is 
expected to fall by 4.4 pps., to 37.6, according  to 
the  2018  Ageing  Report  (European  Commission, 
2018d) (see Box 4.1.2). 

retirement  of 

Fiscal framework 

Government 

the  budgetary  projections 

For  the  first  time  the  macroeconomic  forecast 
underlying 
is 
endorsed by an independent body. In July 2018, 
the Regulation on the Economic Projections of the 
(‘Vorausschätzungs-
Federal 
verordnung’)  came  into  effect.  It  names  the  Joint 
Economic Forecast Project Group, comprising the 
five leading German economic research institutes, 
as the independent body responsible for endorsing 
the  macroeconomic  forecast  underlying  the  draft 
budgetary  plans.  On  16 October  2018,  the  Joint 
Economic  Forecast  project  group  gave  a 

33 

 
 
4.1. Public finances and taxation* 

Box 4.1.2: Reform options for the German pension system 

While  recent  government  measures  commit  to  providing  adequacy  for  certain  groups,  guaranteeing 
adequate  pensions  in  the  long  run  may  require  structural  measures.  The  government  has  increased 
pension  entitlements  for  mothers  and  for  people  with  disabilities  (see  Section  4.3.2),  and  set  two  ‘stop 
lines’(doppelte  Haltelinie),  capping  the  pension  contribution  rate  at  20 %  and  setting  a  lower  limit  for 
income replacement rates at 48 % up to 2025. However, retaining these upper and lower limits under current 
policy  settings  is  expected  to  require  significant  fiscal  transfers.  (Börsch-Supan  et  al.,  2018)  Since  ageing 
will already affect the labour market strongly as of 2023, the Pension Commission's recommendations, due 
by March 2020, appear very timely. 

The  pensionable  age  is  a  key  adjustment  variable.  Germany  currently  has  an  implicit  link  between 
pension  levels and  life  expectancy  (as  pension  indexation  is  linked  to  the  ratio  of  pensioners to  workers). 
Consequently, higher life expectancy means lower pension levels. Raising pensionable age by two thirds of 
life  expectancy  increases  would  maintain  the  current  ratio  of  1:2  in  terms  of  the  average  time  spent  in 
retirement  versus  time  spent  working,  without  compromising  pension  adequacy.  The  link  could  be  made 
explicit and applied to pensionable age, as is the case in the Netherlands, Denmark, and other countries. 

Broader  reforms  of  pension  arrangements  could  also  be  considered.  For  instance,  notional  defined 
contribution systems(1)  could be one policy solution. Countries such as Sweden have had good experiences 
with  a  notional  defined  contribution  system,  even  though  there  are  also  challenges  (Weaver  and  Willén, 
2014). Their potential advantages include the fact that they: (1) create a sense of fairness, as annual benefits 
are in line with life-time contributions; (2) make redistribution transparent, as any non-contributory credits 
can be clearly shown (credits for education, bring up of children, unemployment etc.); and (3) provide an 
automatic  response  to  demographic  change  (longevity,  fertility)  and  developments  in  employment. 
However,  they  need  fine-tuning,  as  there  are  also  disadvantages,  including  the lack  of  substitutes  for  pre-
funding  and  the  lack  of  an  automatic  balancing  mechanism  if  annuities  are  frozen  at  retirement  and  the 
contribution rate is fixed. 

Pension  coverage  could  be  improved  to  secure  better  retirement  outcomes.  Making  the  first  public 
pension  pillar  more  comprehensive,  so  as  to  cover  self-employed  people  as  well,  would  be  helpful  (see 
section  in  4.3.2);  however,  civil  servants  still  remain  outside.  In  addition,  well-designed  second  and  third 
pillar pensions could significantly supplement the first pillar. Currently, occupational pensions cover about 
56 % of workers in Germany and private pensions about 34% (the coverage of occupational and/or private 
pension is estimated at 70% of workers). There are a number of problems with the design of private pension 
schemes in Germany (Riester-Rente), such as information gaps, low/negative yields and high administrative 
costs. The wide variation in administrative costs suggests the existence of market failures, as providers with 
the  highest  administrative  costs  have  not  left  the  market.  In  addition,  the  current  structure  of  Riester 
subsidies  requires  a  specific  set-up  of  life  insurance  plans  and  related  guarantees,  which  contributed  to 
portfolio  allocation  oriented  towards  low-yielding  safe  debt (2)  and  foreign  debt  securities.  The  tax 
incentives  thus  implicitly  impede  households  from  switching  to  third-pillar  plans  with  higher  returns  and 
higher equity investment allocation.  

In  addition  to  adequacy  and  sustainability,  the  fairness  and  regressivity  of  the  pension  system  also 
needs to  be  considered.  In  Germany,  people  at risk  of  poverty (with  incomes  below  60 %  of the  median 
income)  live,  on  average,  10  years  less  than  rich  people  (those  with  incomes  above  150 %  of  the  median 
income), and consequently receive their pension for a much shorter time. (Federal Government of Germany, 
2017).  Furthermore,  compared  to  other  OECD  countries,  net  replacement  rates  for  low-wage  earners  are 
particularly  low  in  Germany  (see  Section  4.3.2).  These  factors  lead  to  strong  regressivity  in  the  pension 
system from a life-time perspective.  

(1)  Notional defined contribution schemes record each worker’s contributions in an individual account and apply a rate of 
return to the accounts. The accounts are ‘notional’ in that both the incoming contributions and the interest charged on 
them exist only on the books of the managing institution. 

(2)  One example is their feeding of EUR 60 bn into the Zinszusatzreserve that was introduced in 2011. 

34 

 
 
4.2.  FINANCIAL SECTOR 

Macro-financial stability 

Germany’s  banking  sector  has  appropriate 
capital and liquidity levels, but is challenged by 
relatively  high  costs.  Fierce  competition  among 
Germany’s  various  banks  weighs  on  their  profits, 
but, at the same time, finances the real economy on 
quite  favourable  terms.  Running  an  extensive 
branch  network,  the  operating  costs  of  German 
banks are very high, with a cost to income ratio of 
more  than  71.9 %  at  the  end  of  2017.  Despite  a 
3.7 %  decrease 
is 
in 
2.6 percentage points higher than in 2016. 

staff  number, 

this 

Banks are still very much dependent on interest 
income. Interest intermediation  income  accounted 
for 69.5 % of bank revenues in 2017, a decline of 
1.7 percentage points. Pure intermediation revenue 
sank  by  7 %  to  EUR 71 billion,  as  banks  are  still 
cautious with negative deposit remuneration, hence 
reducing  the  profit  margin.  Yet  the  importance  of 
intermediation  income  differs  widely  among  bank 
types:  it  provides  for  57.3 %  of  total  operational 
results  for  big  banks,  which  earn  more  trading 
profits  and  commissions.  For  the  smaller  savings 
banks, it stands at 73.9 % and at 75.3 % for (even 
smaller)  cooperatives.  The  net  interest  margin 
varies considerably between banking types: 1.90 % 
for  cooperatives,  1.87 % 
for  savings  banks 
compared to the average of 1.04 %. 

An increasing share of deposits is remunerated 
negatively.  In  January  2017,  26 %  of  sight 
deposits faced negative interest rates. This rose to 
50 %  by  December  2017.  Negative  interest  rates 
concern  mainly  large  corporate  deposits.  Since 
March  2017, 
remuneration  of 
overnight  company  deposits  has  been  negative. 
Only  4 %  of  the  volume  of  households’  deposits 
earns  negative  interest,  but  the  number  of  banks 
passing  on  negative  rates  to  clients  quadrupled 
throughout 2017, rising from 3 % to 12 %. 

the  weighted 

Capitalisation is slightly above the EU average. 
In  June  2018,  German  banks’  Common  Equity 
Tier 1 ratio stood at 15.8 %, compared to 14.9 % in 
the EU and 14.7 % in the euro area. In September 
2018, the capital and reserves of all German banks 
were  EUR 595 billion,  a  63 %  increase  since 
September  2008,  when  Lehman  Brothers  went 
bankrupt.  The  ratio  of  balance  sheet  capital  to 
unweighted  total  assets  reached  a  new  peak  of 
5.9 %. Except for the Landesbanken and mortgage 

banks, total equity rose in all bank categories over 
2017.  German  capitalisation  ratios  have  increased 
more  slowly  than  elsewhere  in  Europe,  as  most 
banks in Germany are not stock companies able to 
issue 
rather  publicly  or 
are 
cooperatively  owned,  and  tend  to  rely  on  organic 
capital accumulation. 

shares,  but 

The  share  of  non-performing  loans  is  half  the 
euro area average. In June 2018, non-performing 
loans were 1.7 % of the total loan volume, 60 basis 
points  lower  than  12  months  earlier.  Hence, 
Germany  scores  well  below  the  EU’s  and  euro 
area’s averages (3.4 % and 4.2 %). 

Credit  grows  in  line  with  nominal  GDP  and 
stopped.  Banks’ 
passive  deleveraging  has 
outstanding  credit  for  the  private  non-financial 
sector  was  EUR 2 696 billion  at 
the  end  of 
September 2018, 4.5 % higher than a year before, 
and  something  of  an  acceleration  from  the  2-3 % 
yearly  increases  observed  earlier.  Measured  as  a 
share  of  GDP,  outstanding  credit  increased  by 
0.5 pps to 80.5 % of GDP in the year until end of 
September 2018. This minimal increase is the first 
time  that  private  non-financial  debt  is  growing 
again  (relative  to  GDP)  since  2001  when  private 
sector outstanding credits peaked at around 103 % 
of GDP. 

Mortgage  growth  at  the  aggregate  level  has 
been  moderate,  but  some  recent  acceleration 
can be observed. Although the overall outstanding 
stock of mortgages increased (Graph 4.2.1), it did 
so  at  a  pace  similar  to  nominal  GDP  growth. 
Consequently,  aggregate  mortgages  have  been 
hovering  around  35 %  of  GDP  over  the  past  six 
years.  More  recently,  some  moderate  acceleration 
can  be  observed,  as  the  annual  expansion  of 
housing  credits  was  4.5 %  in  September  2018, 
compared to 3.9 % 12 months earlier. 

House  price  increases  are  not  leading  to  any 
macroeconomic  or  financial  stability  risks. 
Whereas increases in recent years could be seen as 
a  price  normalisation  process,  by  now  housing 
markets  in  Germany’s  seven  biggest  cities  are 
estimated to have reached overvaluations of up to 
30 % (see also Chapter 1). Still, a real estate price 
correction of  30 %  and  the  related  financial  stress 
is  not  expected  to  bring  banks  below  regulatory 
capital minimums (Bundesbank, 2018). 

35 

 
 
4.2. Financial sector 

Table 4.2.1:  Quarterly financial soundness indicators 

(1) Annualised data. o/w: out of which. 
Source: ECB – CBD2 – Consolidated Banking data; own calculations 

Graph 4.2.1:  Mortgage debt, volume and % of GDP 

Source: ECB 

The borrower-based macro-prudential toolkit is 
not  yet  complete.  The  introduction  of  loan-to-
value  caps  and  maturity  limits,  i.e.,  amortisation 
requirements, was enabled in 2017. Yet the macro-
prudential toolkit lacks income-based instruments, 
such  as  the  possibility  of  introducing  debt-to-
income  and  debt-service-to-income  limits.  The 
loan-to-value  caps’  activation  process  legislated 
for  by  Germany  is  lengthy  and  complex.  In  other 
countries, supervisors have had to yield to political 
the  allocation  of 
pressures  when  restraining 
mortgages for reasons of macro-financial stability. 

Squeezed  revenues  from  the  low  interest  rate 
through 
environment, 
digitalisation,  regulatory  requirements  and  the 
entry  of  new  competitors  will  intensify  the 
challenges facing banks in the near future. The 

incurred 

costs 

the  German  banking 

large  number  of  small  banks,  coupled  with  a  still 
relatively  strong  dependence  on  interest  income, 
makes 
system  more 
vulnerable  to  current  challenges.  Digitalisation 
requires  costly  upfront  investments  in  software 
applications,  back  office,  and  internet  security. 
Fintech 
increase 
competition in parts of the financial system and are 
thus  expected  to  further  reduce  the  margins  of 
traditional banks. 

and  Bigtech 

companies 

Banks  will  need  a  strategic  vision  to  address 
these  challenges  by  reviewing  their  business 
model,  considering  mergers  and  cutting  costs 
further.  Realising  hidden  reserves,  increasing  the 
maturity  transformation,  and  taking  higher  risks 
have  kept  profitability  positive  during  the  past 
years,  and  capital  ratios  still  look  healthy.  Yet 
there  will  be  a  need 
the  future  for  a 
comprehensive  strategy  in  keeping  up  with  the 
increasingly digital and competitive environment. 

in 

Access to finance 

to 

Overall,  firms  have  good  access  to  credit  and 
the 
forms  of  capital.  According 
other 
Commission/European  Central  Bank  SAFE 
survey,  access  to  credit  is  not  a  concern  for  most 
firms  in Germany, as illustrated by the low levels 
of  rejected  loan  applications.  German  small  and 
medium-sized  enterprises  benefit  from  a  huge 
network of banks, which serve the local economy. 
Relationship  banking  (the  ‘Hausbank’)  means 
regional  banks  maintain  an  established  client 
relationship  over  many  years,  resulting  in  an  in-
depth  knowledge  of  the  business  seeking  credit. 
This  is  helped  by  the  fact  that  the  backbone  of 

36 

323334353637383940414243950100010501100115012001250040506070809101112131415161718bn EUR (lhs)% of GDP (rhs)bn EUR%of GDP14q415q416q216q316q417q117q217q317q418q118q2EU 18q2EA 18q2Non-performing loans3,93,02,82,72,62,52,32,11,81,71,73,44,2o/w foreign entities0,70,73,13,00,70,70,70,61,72,22,3--o/w NFC & HH sectors6,74,95,04,94,64,64,34,03,02,92,8--o/w NFC sector8,96,56,66,56,46,36,05,64,13,83,66,77,7o/w HH sector2,92,32,12,01,81,81,81,71,81,91,93,74,4Coverage ratio34,836,737,438,136,937,138,438,456,555,154,347,249,0Return on equity(1)2,51,71,61,32,22,41,92,02,94,14,88,06,8Return on assets(1)0,10,10,10,10,10,10,10,10,20,30,30,50,5Total capital ratio17,317,917,817,918,117,918,418,718,818,318,518,717,9CET 1 ratio14,314,914,814,915,014,915,415,815,915,415,814,914,7Tier 1 ratio14,815,415,415,515,615,616,016,416,416,016,316,215,6Loan to deposit ratio97,594,694,295,292,692,591,091,289,490,590,395,696,0 
 
 
 
 
 
4.2. Financial sector 

growth phase of young and innovative businesses, 
where funding opportunities are often limited. The 
lack  of  alternatives 
later-stage  rounds  of 
to 
financing for the capital-intensive scale-up phase is 
a  constraint  on  the  growth  of  domestic  start-ups 
(Expert  Commission  on  Research  and  Innovation, 
2017). Although a number of support measures are 
in  place,  initiatives  to  encourage  institutional 
investors such as insurance companies to invest in 
this  market  could  help  bridge  this  gap.  The 
national  investment  bank  KfW  intends  to  further 
expand  its  support  activities,  using  a  separate 
investment company among other means. 

the 

German  industry  is  its  Mittelstand  -  often  non-
listed,  family-owned  companies  which,  however, 
have  a  larger  volume  of  activities  (including 
export-oriented  business)  and  more  employees 
than 
small  and  medium-sized 
enterprise.  Such  firms  have  fewer  concerns  about 
providing  collateral  for  bank  credit,  but  the 
owners, often founders  who remain active in day-
to-day  business,  shy  away  from  the  publicity  and 
transparency that would come with a listing. 

typical 

In  addition  to  bank  credit  and  classic  bonds, 
Germany  offers  other  financing  alternatives. 
Promissory  notes  (Schuldscheine)  are  a  widely-
used  alternative.  Given  that  the  set-up  cost  for  a 
promissory  note  is  a  fraction  of  a  classic  bond,  it 
remains  a  viable  financing  alternative  for  smaller 
companies  as  well  as  large  ones.  The  German 
covered  bond  market  is  very  strong,  and  the 
Pfandbrief  (bank  debenture  with  usually  triple  A 
rating)  with  its  strict  coverage  rules  caters  for  a 
widespread  risk-averse  attitude.  In  recent  years, 
investors 
listed  by  medium-sized 
companies  (Mittelstandsanleihen)  have  suffered 
heavy  losses,  which  some  have  explained  as 
negative selection, since bank credit would be the 
financing method of choice for small and medium-
sized enterprises that are doing well. 

in  bonds 

is  also  below 

The  provision  of  venture  capital  has  improved 
in  recent  years,  but  remains  below  the  EU 
average. Although venture capital as a percentage 
of GDP has improved, it is still lower than in 2008 
and  also  remains  below  the  EU  level  of  0.04 % 
(Invest  Europe,  2018).  Aggregate  private  equity 
investment 
the  EU  average. 
Corporate  investors  have  become  an  increasingly 
important source of funding for start-up companies 
in  Germany  and  have  contributed  to  a  significant 
expansion of the market in recent years. Moreover, 
non-venture  capital  companies  investing  in  start-
ups have also increased their investment volumes. 
Within 
the  German  venture  capital  market, 
corporate  investment  has  become  increasingly 
concentrated  in  a  few  metropolitan  areas,  with 
Berlin  and  Munich  attracting  a  particularly  large 
share of investment. 

Despite  increasing  venture  capital  investment, 
the limited availability of scale-up capital is still 
an impediment to the growth of domestic start-
ups.  While  overall  framework  conditions  are 
favourable,  obstacles  remain,  especially  for  the 

37 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES* 

4.3.1.  LABOUR MARKET 

is  expected 

On  the  back  of  robust  economic  growth,  the 
labour  market  has  continued  to 
German 
tighten.  Employment 
to  have 
continued  growing  by  1.3 %  in  2018,  pushing 
unemployment  down  to  its  structural  level,  a 
record  low  of  3.2 %  in  Q4  2018,  which  is  also 
in 
highlighted 
Scoreboard 
accompanying 
the  European  Pillar  of  Social 
Rights. Employment growth in 2019 is expected to 
slow  down  as  compared  to  2018  as  the  labour 
market  continues  to  show  increasing  signs  of 
labour  shortages.  Employment  and  activity  rates 
continue to improve, but more could be done to tap 
the potential of certain groups. 

Social 

the 

With record low unemployment and a high job 
vacancy rate, labour shortages are increasingly 
apparent.  Reflecting  the  strong  cyclical  position 
and  the  steady  decline  of  unemployment,  the 
labour  shortage  indicator  increased  to  very  high 
levels  in  the  first  three  quarters  of  2018,  which 
points  towards  a  tightening  labour  market  (see 
Graph  4.3.1) (22)  This  is  also  clear  from  the 
number  of  vacancies  registered  at  the  public 
employment  service  that  reached  a  high  level  of 
around 800 000 (seasonally adjusted) in May 2018 
and has remained at this level since (until January 
2019),,  and  from  the  job  vacancy  rate,  which 
reached 2.9 %  for  the first  three  quarters of  2018, 
up  by  0.2 pp  from  the  same  period  in  2017.  The 
percentage of firms reporting a labour shortage as 
a  factor  limiting  production  in  the  service  sector 
has risen to 30.5 %, for industry to 25.8 %, and for 
the construction sector to 15.8 % for the first three 
quarters of 2018. 

Shortages  of  qualified  staff  may  be  an  obstacle 
to  economic  development,  requiring  further 
investment. (23)  Labour  shortages  have  a  strong 

(22)  The  ifo  Institute’s  labour shortage  indicator as  well  as  the 
Federal  Employment  Agency’s  BA-X  job  vacancy  index 
have been climbing to all-time highs since 2015. 

(23)  In  a  business  survey  (DIHK,  2018),  68 %  of  companies 
cited  a  shortage  of  qualified  staff  as  an  obstacle  to 
investment, and the share of firms that said the shortage of 
skilled workers was impeding their innovation activity was 
even higher, at 82 % (DIHK, 2017). Limited availability of 
skilled  staff  was  also  the  most  frequently  mentioned 
investment  barrier  in  the  EIBIS  survey  (EIB,  2018),  with 
84 %  of  firms  naming  this  as  an  obstacle  (EU  average 
77 %). Economic simulations suggest that the lack of about 
440 000  skilled  workers  may  be  slowing  down  economic 
growth by about 0.9 pps. (IW, 2018). 

regional dimension as well as a sectoral one. They 
hit  the  economically  strong  regions  in  southern 
Germany  (Bavaria,  Baden-Württemberg),  while 
parts  of  the  former  East  Germany,  including 
Thuringia,  are  also  affected.  Sectors  such  as 
healthcare and long-term care (in particular elderly 
care),  engineering  and  Information  Technology 
development  are  particularly affected. (24)  Though 
the  government  has  implemented  measures  in 
some of these sectors, (25) they appear to be limited 
compared to the projected shortages, especially  in 
underserved regions. New rules for immigration of 
skilled  workers  may  increase  the  competitiveness 
of the sectors concerned. Improving human capital 
by  stepping  up  investment  in  education  and 
improving  the  skills  of  the  labour  force  (see  also 
Section  4.3.3)  could  help  alleviate  these  concerns 
in  the  future,  while  also  contributing  to  higher 
overall investment (see Section 4.4.) 

Graph 4.3.1:  Beveridge curve 

(1) Annual data based in the average of the 4 quarters 
Source: Eurostat, European Commission 

Even  as  labour  shortages  increased,  real  wage 
growth  has  picked  up  little.  Nominal  earnings 
rose  by  3.0 %  in  2018,  0.5 pp  higher  than  in 

(24)  Studies project a shortage of nursing staff in healthcare and 
long-term  care  sectors  by  2030.  The  projected  shortfall 
ranges from 260 000 (under a best-case scenario) and half a 
million  (under  the  worst  case  scenario)  (Rothgang  et  al., 
2012). 

(25)  Staff 

Act 

(Strengthening) 

(Pflegepersonal-
Stärkungsgesetz),  designed  to  make  healthcare  and  long-
term  care  accessible  to  employees  in  hospitals  and 
residential  homes.  The  act  provides  for  a  range  of 
measures, including  employing  an  additional 13 000  long-
term care staff. 

38 

08q209q210q211q212q213q214q215q216q217q218q2-5051015202530135791113Labour Shortage Indicator (%)Unemployment rate (% of labour force) 
 
                                                           
 
                                                           
4.3. Labour market, education and social policies* 

Graph 4.3.2:  Real unit labour cost, real compensation per 
employee and real productivity - compared 
to 2000 

Source: Eurostat, European Commission 

2017. (26)  Gross  wages  and 
salaries  grew 
somewhat  more  from  2.5 %  in  2017  to  3.2 %  in 
2018. (27)  Monthly  negotiated  wages  are  expected 
to have increased by 2.8 % in 2018, 0.2 pp higher 
than  in  2017,  leaving  real  negotiated  wages 
unchanged.  Wage  agreements  in  the  public  sector 
were slightly more dynamic. (28) Part of the higher 
aggregate  wage  growth  can  be  explained  by  the 
changing  composition  of  the  workforce  (and  in 
particular  increasing  average  age)  rather  than  by 
the 
individual  wages  (European 
Commission  2018e).  In  addition,  concentration  of 
full-time 
employment  growth 
employment  and  a  reduction  of  the  employment 
share  of  marginal  part-time  work  also  contributed 
to overall wage growth in 2018. The accumulated 
gap  between  productivity  and  real  wage  growth 
since  2000  persists  (graph  4.3.2)  and  is  not 
expected to close rapidly in 2018 and 2019. 

in  better-paid 

increase 

in 

(26)  At  the  same  time,  inflation  also  accelerated  slightly,  from 

1.7 % to 1.9 %. 

(27)  Growth  of  nominal  earnings  is  expected  to  accelerate 
further on the back of a one-off effect: the reintroduction of 
the  rule  requiring  employers  and  employees  to  pay  equal 
contributions  to  statutory  health  insurance  in  2019.  This 
reduces  contributions  for  employees  (and  pensioners)  by 
0.5 pp, thereby increasing take-home pay. 

(28)  For  public  employees  at  the  federal  and  the  municipal 
level,  a  wage  agreement  was  reached,  running  for  30 
months  from  March  2018,  affecting  about  2.3  million 
workers directly and 300 thousand workers indirectly. This 
stipulates  wage 
lump-sum  payments, 
altogether  yielding  about  3.0 %  of  annualised  nominal 
wage increase. 

increases  and 

Weaker  coverage  of  collective  agreements  may 
have 
contained  wage  growth.  Collective 
bargaining coverage continued to decline (by 2 pp 
from 2016 to 2017), to 49 % in the west and 34 % 
in  the  east.  There  are  significant  differences  in 
terms  of  coverage  across  sectors,  with  better 
coverage  in  the  public  sector  and  industry,  while 
lower  coverage.  The 
services  have  a  much 
differences  in  coverage  are  also  quite  prominent 
across different wage groups, where only just over 
a  quarter  (27 %) of  the  two lowest wage quintiles 
was covered in 2014 by a collective agreement; in 
contrast,  bargaining  coverage  in  the  two  highest 
wage quintiles was over 60 % (Hayter and Visser, 
2018).  While  in  principle  facilitating  the  legal 
preconditions for extension, the 2014 reform of the 
collective  bargaining  law  has  brought  about  no 
significant  changes  to  the  number  of  collective 
agreement extensions. This may indicate that there 
are 
preventing 
still 
extensions. (29) 

significant 

obstacles 

(29)  The recent reform did not change the role of the Collective 
Bargaining  Committee  and  left  its  de  facto  veto  power  in 
place.  In  practice  sectoral  organisations  are  discouraged 
from applying for extension when they expect that the peak 
employers’  association  will  reject  it.    (Hayter  and  Visser, 
2018). 

39 

8085909510010511011512000010203040506070809101112131415161718Index, 2000=100Real compensation per employeeReal productivity per personReal unit labour cost 
                                                           
 
                                                           
4.3. Labour market, education and social policies* 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards better working and living conditions in the European Union.(1) It sets out twenty essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and 
social protection and inclusion. 

Germany performs well on the indicators of the Social Scoreboard supporting the European Pillar of 
Social Rights. It is among the best performers as regards high employment, the youth NEET rate and the net 
earnings of a full-time single worker. Nonetheless, equal opportunities in the labour market and fair working 
conditions, as well as the issue of labour market segmentation, need continuing attention. 

Despite  the  overall  good  labour  market 
situation,  some  challenges  remain,  such  as 
reducing  the  number  of  the  long-term 
unemployed.  Since  2008,  the  number  of 
people in  long-term  unemployment  halved to 
around  900 000.  However,  at  1.6 %  of  the 
labour  force  in  2017,  those  in  long-term 
unemployment  accounted  for  41.9 %  of  all 
unemployed  people  in  the  country.  This 
represents considerable unused labour market 
potential. 

It 
and 

Germany  recognises  that  the  provision  of 
sufficient childcare, of good quality, for the 
under-threes  is  an  essential  condition  to 
enable  parents  with  caring  responsibilities 
is 
longer  hours. 
to  work 
thus 
implementing 
ambitious 
systematic 
measures to improve the situation. These have 
resulted  in  a  substantial  increase  in  childcare 
provision.  Moreover,  in  June  2018  Germany 
adopted  a  programme  called 
‘Childcare 
financing’ 
the  expansion  of 
childcare  places  for  very  young  children,  to 
increase  the  number  of  women  working  full-
time.  The  programme,  with  a  budget  of 
an 
EUR 3.28 billion, 
to  provide 
aims 
In 
additional  100 000  childcare  places. 
September  2018,  the  Government  adopted  a 
bill  on  quality  in  early  childhood  education 
and care which took effect at the beginning of 
2019 (see Section 4.3.3).  

to  support 

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission.  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en 

While their share is still high, low-paid workers 
have  generally  benefited  from  the  gradual 
introduction  of  the  minimum  wage  since  2015. 
Hourly  wages  at  the  very  bottom  of  the  wage 
distribution,  notably  the  two  lowest  wage  deciles, 
increased substantially, while the number of hours 

worked  in  the  bottom  deciles  have  decreased. (30) 
However,  the  share  of  low-paid  workers  remains 

(30)  In the same time research by Caliendo et al., (2017) shows 
that  while  average  hourly  wages  at  the  lower  end  of  the 
wage  spectrum  have  increased,  the  number  of  hours 
worked  in  the  bottom  deciles  have  decreased,  such  that 
there was hardly any effect on monthly earnings. 

40 

Early leavers from education and training (% of population aged 18-24)On averageGender employment gapOn averageIncome quintile ratio (S80/S20)On averageAt risk of poverty or social exclusion (in %)Better than averageYouth NEET (% of total population aged 15-24)Best performersEmployment rate (% population aged 20-64)Best performersUnemployment rate (% population aged 15-74)Better than averageLong-term unemployment (% population aged 15-74)Better than averageGDHI per capita growth On averageNet earnings of a full-time single worker earning AWBest performersImpact of social transfers (other than pensions) on poverty reductionOn averageChildren aged less than 3 years in formal childcareTo watchSelf-reported unmet need for medical care Better than averageIndividuals' level of digital skillsBetter than averageSocial protection and inclusionDynamic labour markets and fair working conditionsEqual opportunities and access to the labour marketSOCIAL SCOREBOARD FOR GERMANYMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountry can be flagged as "better than average" if the level of the indicator is close to EU average,butitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJoint Employment Report 2019, COM (2018)761 final.Data update of 29 January 2019.NEET:neitherinemploymentnorineducationandtraining;GDHI:grossdisposablehousehold income.                       
 
                                                           
4.3. Labour market, education and social policies* 

large,  at  22.7 %  in  2016.  Even  if  it  has  declined 
from 24.5 % in 2010, it is considerably above the 
EU  average  (17.2 %  in  2014).  (Institut  für  Arbeit 
und Qualifikation, 2018) and some 0.8 million are 
still  earning  below  the  minimum  wage.  The 
number of people employed only in mini-jobs fell 
by 6.8 % over 2010-2018 and employment subject 
to  social  insurance  rose  by  around  18.1 %  in  the 
same  period.  There  was  sustained  growth  in  the 
number  of  people  employed  in  a  mini-job  as  a 
second  job:  from  1 963 000  in  2010  to  2 364 000 
in March 2014 and to 2 756 000 in March 2018. 

Better use of and investment in women's labour 
market potential could reduce labour shortages 
and  help  tackle  ageing.  Germany  has  one  of  the 
highest  employment  rates  for  women  in  the  EU, 
and this has been increasing steadily over the past 
10 years, reaching 75.2 % in 2017. Female labour 
market  participation  is,  however,  more  limited 
when  one  considers  full-time  equivalents,  as 
almost  half  (46.8 %)  of  women’s  employment  is 
part-time. The unadjusted gender pay gap is among 
the highest in the EU (in 2016, women in Germany 
earned 21.5 % less than men in hourly wages, the 
EU  average  being  16.2 %).  While  the  adjusted 
gender  pay  gap  is  more  limited,  the  considerable 
gap  reflects  the  negative  effect  of  part-time 
employment on wages and the over-representation 
of women in low-pay sectors, among other factors 
(31). 

responsible 

A  number  of  measures  are  being  taken  to 
reduce  disincentives  to  work  more  hours,  yet 
major  obstacles  remain.  The  family  benefit 
supplement, 
for  high  marginal 
effective  tax  rates  for  single  earners,  expected  to 
be  tapered  out  from  2020  more  gradually  as 
income increases, instead of full withdrawal at the 
cut-off point. Other measures, such as the right to 
return to full-time employment, may also help get 
more  women  into  jobs.  However,  taxes  on  labour 
in  Germany  remain  relatively  high  (see  Section 
4.1),  with  a  high  tax  wedge,  especially  for  lower 
wage  earners. (32)  The  particular  rules  governing 

(31)  Most  women  work  in  public  administration,  education, 
health and social services, as well as in wholesale and other 
services,  while  industry,  construction  and  agriculture 
employ fewer women. 

(32)  Between  2013  and  2016,  the  tax  wedge  increased  slightly 
from  42.0  to  42.2,  whereas  it  further  decreased  from  33.8 
to  32.5  for  the  EU-28  —  calculated  for  a  single  worker 
with 50 % of average earnings, without children. 

income 

taxation 

for  married  couples 
joint 
(Ehegattensplitting)  are  a  major 
in 
disincentivising  longer  working  hours  for  second 
earners  (Englisch  and  Becker,  2016;  European 
Commission, 2018a). 

factor 

increased 

threshold  was 

Some  measures  have  been  taken  to  reduce  the 
high  tax  wedge  on  low-income  earners.  While 
the  reduction  in  the  unemployment  contribution 
was  counterbalanced  by  the  increase  in  the  long-
term care contribution rate (-0.5 pp. and +0.5 pp.), 
the  midi-job 
from 
EUR 850 to EUR 1300, resulting in a more gradual 
phase-in  of  social  security  contributions.  This 
reduces  the  tax  wedge  for  certain  groups  of  low 
earners,  and  the  Government  expects  it  to  benefit 
large 
3.5 million  employees,  among 
number  of  women  working  part-time.  The 
developments  warrant  close  monitoring,  as  there 
may  be  adverse  effects  arising  from  increased 
incentives  for  staying  in  part-time  employment  or 
reducing  hours  worked  (Bach  et  al.,  2018b).  The 
reintroduction of the rule requiring employers and 
employees  to  pay  equal  contributions  to  statutory 
health  insurance  resulted  in  an  average  reduction 
of  0.5 pp.  in  contributions  for  employees  and 
pensioners,  thereby  increasing  take-home  pay  and 
unit labour costs. Yet as this was counterbalanced 
by  an  increase  in  employers’  contributions,  the 
effect of this measure on the tax wedge is neutral. 

them  a 

People with a migrant background have a lower 
employment  rate  than  people  with  a  native 
background,  with  a  particularly  high  gap  for 
women.  In  2017,  people  born  outside  the  EU 
represented  as  much  as  12 %  of  the  working-age 
population  (20-64),  but  their  employment  rate 
continued to be, at 64.5 %, significantly lower than 
that  of  people  born  in  Germany  (81.6 %,  a 
17.1 pps.  gap,  while  the  EU  average  gap  was 
10.0 pp).  Even  migrants  with  a  high  level  of 
education are less likely to be in employment. (33) 
Beyond 
immigrants,  people  with  a  migrant 
background  born  in  Germany  face  unfavourable 
labour  market  outcomes,  despite  being  born  and 
educated in the country. (34) 

(33)  The  employment  rate  for  highly  educated  people  born 
outside  the  EU  stood  at  73 %  in  2017,    compared  with 
90.4 %  for  native-born  people  with  a  similar  level  of 
education, Eurostat 2017. 

(34)  In 2017, native-born people (aged 15-34) with two foreign-
born  parents  had  an  employment  rate  of  74.9 %,  12.7 pp 

41 

 
                                                           
                                                           
4.3. Labour market, education and social policies* 

and/or  shorter  working  hours, 
together  with 
increased  provision  of  upskilling  (see  Section 
4.3.3) could further extend working lives. 

4.3.2.  SOCIAL POLICY  

reflecting 

improvements 

The  number  of  people  at  risk  of  poverty  or 
social  exclusion  fell  during  the  period  under 
consideration, 
in  
labour  market  and  social  situation.  In  2017, 
19 %  of  the  population  was  at  risk  of  poverty  or 
social exclusion. This figure is lower than the EU 
average  (22.5 %).  It  is  also  below  the  German 
figures  for  2016  (19.7 %)  and  2014,  when  a  peak 
was  reached  (20.6 %).  This  improvement  was 
broad-based.  The  proportion  of  people  suffering 
from  severe  material  deprivation  fell  to  3.4 %  in 
2017,  while  the  proportion  of  people  under  60 
living in households with very low work intensity 
fell  to  8.7 %.  The  at-risk  of  poverty  rate  stood  at 
16.1 %, having declined from 16.5 % in 2016 (see 
Graph  4.3.5).  Furthermore, 
the  adequacy  of 
minimum income benefits is relatively high, which 
among 
reduces 
recipients (36).  In  addition 
indicators 
to 
relating 
the  coverage  and  adequacy  of 
unemployment benefits score well (37). 

poverty 
this, 

severity 

the 

of 

to 

less 

favourable  when 

Poor  outcomes  for  the  children  of  low-skilled 
people  reveal  challenges  as  regards  equality  of 
opportunity. Though children in Germany were at 
a  much  lower  risk  of  poverty  or  social  exclusion 
than children in the EU as a whole, (38) the picture 
was 
their  parents' 
background was taken into consideration. In 2017, 
the  gap  between  the  risk  of  poverty  or  social 
exclusion facing the children of low-skilled (often 
migrant)  parents  and  the  risk  for  children  with 
highly  skilled  parents  was  67 pps.  This 
is 
substantially  greater  than  the  average  gap  in  the 
EU  (53.9 pps).  Improving  participation  in  high-
quality  early  childhood  education  and  care  for 

(36)  According 

to 

the 

results  of 

the  Social  Protection 
Committee's  2018  benchmarking  exercise  on  minimum 
income.  See  the  2019  draft  Joint  Employment  Report  for 
details. 

(37)  According to the benchmarking exercise on unemployment 
benefits and active labour market policies conducted within 
the EMCO Committee. See European Commission (2018o) 
for details. 

(38)  At  23.6 %,  the  risk  of  poverty  or  social  exclusion  for 
under-18-year-olds  was  well  below  the  EU  average  of 
29.1 % and remained relatively stable in 2017. 

improving, 

responsibilities 

labour  market 
Although  slowly 
participation  of  refugees 
is  a  challenge, 
requiring  further  investment.  The  employment 
rate of people from the countries from which most 
refugees came (35) was 32.7 % in November 2018, 
7.8 pps.  higher  than  in  November  2017.  Refugee 
women's  employment  rate  is  only  8 %  (IAB, 
2019). The main obstacles to refugees' integration 
into  the  labour  market  are  the  lack  of  German 
language  proficiency,  missing  or  non-transferable 
qualifications,  caring 
towards 
children and relatives, and lack of experience with 
informal rules on the German labour market (Dietz 
et  al,  2018).  Efficient  cooperation  between 
institutions at local level is crucial. The number of 
refugees  among  the  applicants  registered  with  the 
Federal  Employment  Agency  and  applying  for 
training more than doubled in 2017 compared with 
the  previous  year  (2016:  10 300;  2017:  26 400). 
inflows  of  asylum 
(BMBF,  2018).  Although 
triggered 
seekers  have 
considerable 
for 
regions  and  local  communities  in  different  areas: 
integration  in  the  labour  market,  education  and 
inclusion  and  housing. 
training,  and  social 
Investment  in  making  refugees  more  employable 
may help them integrate faster into society and the 
labour market and help meet current labour market 
demands.  

they  have 
investment  needs 

slowed, 
long-term 

Germany  has relatively  high employment  rates 
for older workers, but there is scope for further 
improvement.  The  employment  rate  of  people 
aged 55-64 rose from 45.5 % in 2005 to 71.0 % in 
the first three quarters of 2018, one of the highest 
rates in the EU. This increase reflected the gradual 
rise of the retirement age, reduced early retirement 
and 
unemployed 
pathways 
demographic  effects.  The  employment  rate  in  the 
65-69  age  group  was  16.8 %  in  the  first  three 
quarters of 2018, above the EU average of 13.4 %. 
Creating  incentives  to  work  longer,  including 
allowing  people  to  stay  in  their  jobs  with  flexible 

people, 

for 

lower  than  among  native-born  people  with  a  native 
background  (87.6 %).  Source:  OECD-EU  —  Settling  In 
2018, based on national labour force survey. (Employment 
rate among 15-34 excluding those still in education). 
(35)  According  to  German  labour  market  statistics,  these 
include: Afghanistan, Eritrea, Iraq, Iran, Nigeria, Pakistan, 
Somalia  and  Syria.  The  employment  rate  shown  above 
differs  from  the  usual  Eurostat  definition,  and  reflects  the 
proportion of a) workers in employment covered by social 
protection    as  well  as  those  in  marginal  employment,  
divided by b) number of people aged 15-64. 

42 

 
                                                                                   
                                                           
4.3. Labour market, education and social policies* 

2017).  The  introduction  of  a  ‘basic  pension’ 
(Grundrente)  (41)  might  be  limited  in  scope.  In 
many  cases,  those  affected  by  old-age  poverty 
would  not  meet  the  threshold  of  35   contributions 
years,  necessary  to  qualify  for  the  supplementary 
benefit.  (European  Commission,  2018f).  This  is 
accompanied  by  other 
long-term 
challenges in the pension system (see box in 4.1). 

lingering 

Housing  costs  in  large  cities  put  older  and 
poorer  people  at  greater  risk  of  poverty. 
Although the housing cost overburden rate for the 
population as a whole has been falling since 2012, 
it  was  above  the  EU  average  of  10.2 %  in  2017, 
standing  at  14.5 %  (42).  For  old  people  (aged  65 
and  over),  it  was  particularly  high  at  20 %.  The 
situation  of  poorer  people  is  particularly  severe. 
Although their rate of housing cost overburden has 
been falling since 2014, it remained above the EU 
average  of  34.3 %  in  2017,  at  44.5 %  (43).  There 
are substantial disparities in housing cost increases 
across  the  country.  This  is  a  major  challenge, 
especially  in  big  cities.  Microcensus  data  show  a 
provision gap of 880 000  affordable  dwellings    in 
10  large  cities  ranging  from  Berlin  to  Bremen. 
(44).The  stock  of  social  housing  could  provide  for 
only half of this provision gap (Holm et al., 2018). 
The  Federal  Government’s  financial  initiative  to 
make  100 000  additional  units  of  social  housing 
available thus appears very timely. However, even 
this initiative will not  cover supply gaps (see also 
Chapter 1 on housing shortages). 

4.3.3.  EDUCATION AND SKILLS 

While  Germany’s  education  system  has  some 
advantages,  it  nonetheless  faces  challenges  in 
terms  of  equality  and  needs  more  resources, 
more 
in 
recent  graduates  and  has 
employability  of 

investment.  Germany 

ranks  high 

(41)  The basic pension will be paid to elderly recipients of basic 
security  benefits  who  have  accrued  35  years  of 
contributions through employment, child rearing or periods 
of long-term care. These people should receive an old-age 
benefit 10 % above the basic security benefit level. 

(42)  The housing cost overburden rate is a  measure  of housing 
affordability  used  by  Eurostat.  It  measures  the  proportion 
of  the  population  spending  more  than  40 %  of  disposable 
income on housing costs. 

(43)  The  measurement 

refers 
representing 20% of population with lowest income. 

first 

to 

income  quintile, 

(44)  In some of these cities, including in Berlin and Bremen, the 
demand  for  affordable  housing  is  amplified,  given  that  in 
2016 the risk of poverty or exclusion was at 25 % or above. 

children of low-skilled parents can help break this 
cycle  of  disadvantage  (Camehl  and  Peter,  2017) 
and  would  also  make  it  easier  for  parents  to 
combine  work  and  family  life.  (See  also  Section 
4.3.3.) 

Graph 4.3.3:  Poverty and social exclusion 

Source: Eurostat 

The  government  has  introduced  reforms  to 
safeguard  pension  adequacy for  certain  groups 
of  elderly  people.  The  pension  package  which 
took effect in January 2019 is designed to improve 
pension  adequacy, 
including  higher  pension 
entitlements  for  groups  with  relatively  lower 
pensions (39)  such  as  women  with  children  born 
before  1992  (Mütterrente  II)  and  people  with 
disability pensions (Erwerbsminderungsrente) (40). 
The 
a 
commitment  to  including  self-employed  people 
under  the  first  pillar.  This  commitment  seems 
timely, as in 2017 42 % of formerly self-employed 
people  were  at  risk  of  poverty  in  old  age.  This 
figure  is  much  worse  than  the  at-risk-of-poverty 
rate  of  former  employees  (17 %)  (European 
Commission, 2018f). 

agreement 

coalition 

includes 

also 

income  of 

Yet  the  retirement 
low-income 
workers remains inadequate. People earning half 
the average wage can expect a replacement rate of 
55 %  of  their  previous  income,  well  below  the 
OECD  average  of  75 %  (OECD,  2017;  BMAS, 

(39)  Reflecting  distributional  analysis  for  Mütterrente  II,  by 

Bach et al., (2018c). 

(40)  The  Act  on  Improvements  to  Benefits  for  Recipients  of  a 

Reduced Capacity Pension took effect in 2017. 

43 

051015202505060708091011121314151617% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
                                                           
                                                           
4.3. Labour market, education and social policies* 

in  September  2018  provides  for  a  government 
investment  of  EUR 5.5 billion  in  improving  the 
quality  of  early  childhood  education  and  care,  to 
be  implemented  through  individual  contracts  with 
the Länder. 

2018; 

training 

(BMBF, 

educational 

Socio-economic  and  migrant  background  still 
outcomes. 
influence 
strongly 
to  disadvantaged  groups 
Students  belonging 
perform  worse  even 
in  primary  education 
(Hussmann et al., 2017; Stanat et al., 2017), leave 
school  earlier,  and  have  greater  difficulties  in 
finding  work  placements  in  vocational  education 
and 
European 
Commission,  2018m).  Overall,  the  school  system 
(primary  and  secondary  education)  has  become 
less  stratified,  due  to  the  marked  increase  in  the 
number  of  comprehensive  schools  with  multiple 
educational 
school-leaving 
qualifications 
(Autorengruppe 
Bildungsberichterstattung,  2018).  In  general,  later 
tracking  of  students  is  associated  with  lessening 
the 
factors  on 
performance  among  secondary  school  students 
the  system  more 
(OECD,  2016).  To  make 
inclusive,  the  Federal  Government  plans  to  make 
placement  in  all-day  primary  schools  a  legal 
entitlement and to further expand provision of all-
day  schools.  A  range  of  targeted  measures  across 
all education levels, introduced by both the Federal 
Government  and  the  Länder,  are  designed  to 
improve equity further. 

influence  of  socio-economic 

tracks 

and 

of 

into 

Integration 
education 
refugees 
continues,  but  further  investment  is  needed. 
Since  2015,  welcome  classes  and  parallel  support 
classes  with  a  focus  on  language  teaching  for 
newly  arrived  migrant  children  have  been 
developed  at  all  school  levels  (BAMF,  2018).  In 
higher  education,  a  non-representative  survey 
suggests that the number of refugee students newly 
in  2017-18  on  bachelor,  master  or 
enrolled 
doctoral  programmes  reached  3 000,  three  times 
more than one year before. Between 20 and 25 per 
cent of refugee students are female (HRK, 2018). 

The  early  school  leaving  rate  is  close  to  the 
national target, but remains high among people 
from  a  migrant  background.  At  10.1 %,  the 
proportion of people aged between 18 and 24 who 
left  education  or  training  early  in  2017  was  close 
to the target of 10 %. However, young people born 
outside  Germany  have  a  far  higher  early  school 

increased  participation 

substantially 
in  early 
childhood  education  and  care.  Still,  while 
participation in education has risen overall, limited 
progress has been made on reducing the influence 
of  socio-economic  and  migrant  background  on 
educational  performance.  Vocational  education 
appears  less  attractive  to  young  Germans  relative 
to educational alternatives than it once did, and the 
provision of digital education at all levels struggles 
to  meet  Germany’s  ambition  as  a  technological 
leader. 

Public  spending  on  education  remains  below 
the  EU  average  and  is  hampered  by  structural 
factors to do with the design of fiscal relations. 
In  2016,  public  spending  on  education  remained 
unchanged as a share of GDP at 4.2 %, lower than 
the  EU  average  of  4.7 %.  Out  of  overall 
government expenditure, 9.5 % went on education, 
which  is  also  below  the  EU  average  (10.2 %).  At 
the  same  time,  specific  challenges,  including high 
recent  immigration,  call  for  increased  spending 
efforts.  Almost  three  quarters  of  public  education 
expenditure  is  borne  by  the  Länder,  which  are 
responsible for this policy area. At municipal level, 
investment 
schools  and  adult 
in 
education  come  to  30 %  of  overall  investment 
needs.  At  EUR 47.7 billion,  these  shortfalls  have 
exceeded  the  size  of  shortfalls  in  the  transport 
sector (KfW, 2018). The Federal Government and 
the  Länder  have  not  so  far  managed  to  reach 
agreement  on  a  change  in  the  constitution  to 
extend the Federal Government's power to provide 
direct 
financially  weak 
municipalities to include all municipalities. 

financial  support 

shortfalls 

to 

Participation  in  early  childhood  education  and 
care  is  almost  universal  for  children  over  four, 
but  supply  gaps  are  still  pronounced  for  the 
under-threes.  In  2016,  96.6 %  of  children  aged 
between  four  and  compulsory  school  age  were 
enrolled  in  early  childhood  education  and  care, 
compared  with  95.3 %  in  the  EU  as  a  whole. 
Participation  of  under-threes  was  30.3 %  in  2017. 
National  data  suggest  the  demand-supply  gap  for 
that age group ranges from 7.4 % in East Germany 
to 13.1 % in West Germany (12.1 % overall). The 
authorities  estimate  that  an  additional  307 000 
places  for  the  under-threes  are  needed  by  2025 
(Federal  Ministry  of  Family  Affairs,  Senior 
Citizens,  Women  and  Youth,  2018).  Several 
Länder  have  abolished 
in  early 
childhood education and care. Legislation adopted 

tuition  fees 

44 

 
 
4.3. Labour market, education and social policies* 

support system for students (BAFöG), with higher 
grants and loans to more students. 

students 

secondary 

Employment  outcomes  of  vocational  education 
and  training  students  remain  excellent,  yet  the 
system 
faces  considerable  challenges.  The 
employment  rate  of  recent  vocational  education 
and  training  graduates  was  91.3 %  in  2017,  the 
highest in the EU. At the same time, the proportion 
of  upper 
in  vocational 
education  and  training  decreased  slightly  to  46 % 
in  2016,  below  the  EU  average  of  49 %.  Despite 
slight  increases  in  the  number  of  people  seeking 
training  places  (by  0.4 %),  training  places  offered 
(1.5 %) and training contracts (0.6 %) in 2017, the 
number  of  unfilled  apprenticeship  positions 
increased compared to 2016, given the difficulty of 
matching  demand  and  supply  (BMBF,  2018). 
Increased  links  between  vocational  education  and 
training  providers  and  local  businesses  could 
further  support  the  dissemination  of  the  latest 
technologies and respond to emerging skills needs. 

Opportunities 

Targeted measures addressing the participation 
of  workers  in  adult  learning  would  help  tackle 
labour shortages and incentivise longer working 
lives.  Participation  in  adult  learning  in  Germany 
stood  at  8.4 %  in  2017,  below  the  EU  average  of 
10.9 %,  and  is  even  lower  among  the  low-skilled. 
Moreover,  adult 
learning  among  unemployed 
people  aged  25-64  stood  at  8.4 %  in  2017,  below 
the  EU  average  of  10.1 %.  The  planned 
Act 
Qualification 
(Qualifizierungschancengesetz) 
to 
improve access to and financial support for further 
education  for  employees  whose  occupational 
activities  can  be  replaced  by  new  technologies, 
who are affected by structural changes, or who are 
in  jobs  with  a  shortage  of  skilled  workers. (45) 
Some 55 % of small and medium-sized enterprises 
report  a  shortage  of  skilled  employees,  especially 
technicians, 
of  highly  qualified 
researchers,  medical 
similar 
professionals. The Government is preparing a new 
National  Continuing  Training  Strategy  together 
with stakeholders. 

engineers, 
staff 

is  expected 

and 

qualification, 

(45)  At  present,  support  is  limited  to  employees  without  a 
vocational 
of 
unemployment, and small and medium-sized businesses. In 
the  future,  all  employees  should  be  able  to  access  further 
education,  regardless  of  their  qualifications,  age  and  type 
of employer. 

employees 

risk 

at 

to 

leaving rate than those born in the country (15 pps 
gap).  The  same  applies  to  people  with  disabilities 
compared 
(19.1 pps.  gap, 
those  without 
compared  with  an  EU  average  of  12.6 pps).  This 
gives  cause  for  concern,  given  that  employment 
opportunities  for  low-skilled  and  unskilled  people 
are dwindling.  

if  additional  challenges  such  as 

Serious  teacher  shortages  put  a  strain  on 
educational provision. The shortage of teachers is 
especially pronounced in vocational education and 
training,  special  needs  and  primary  education. 
Estimates  of  primary  teacher  needs  up  to  2025 
vary between about 15 000 (KMK, 2018) and over 
30 000 
the 
expansion  of  all-day  schooling  are  considered 
(Klemm  and  Zorn,  2018).  There  are  significant 
regional differences; while 38.5 % of all schools in 
Baden-Württemberg  are  all-day  schools, 
the 
percentage  is  97.4 %  in  Saxony  (2015).  Career 
fast-track  and  on-the-job 
changers 
training  account  for  most  new  hirings  in  some 
regions 
specific 
(GEW,  2017).  Moreover, 
challenges,  such  as  the  inclusion  of  special  needs 
students and the integration of migrants, including 
refugee  children,  call  for  additional  staff  and  for 
support  and  training  for  teachers.  To  increase  the 
attractiveness  of  the  profession,  several  Länder 
have raised salaries or introduced (or reintroduced) 
public servant status for teachers. The 10-year joint 
federal/ Länder  quality 
teacher 
training,  which  started  in  2013,  was  renewed  in 
further 
bolstered 
and 
June 2018 
EUR 64 million. 

receiving 

initiative 

for 

by 

a 

low.  At  34 %, 

The  long-term  increase  in  higher  education 
enrolment  continues,  yet  upward  mobility 
tertiary  education 
remains 
attainment increased slightly in 2017 compared to 
2016  (33.2 %),  though  it  remains  below  the  EU 
(39.9 %).  Enrolment,  especially  at 
average 
sciences 
applied 
of 
universities 
(Fachhochschulen), 
from 
rose 
542 000 students in 2006 to 957 000 in 2016. Only 
about  a  quarter  (27 %)  of  students  in  Germany 
have parents without tertiary education, the second 
lowest  share  in  the  EU.  There  has  been  little 
progress  since  2012,  when  the  figure  was  23 % 
(DZHW,  2018).  Tuition  fees  are  low  or  non-
existent. However, the heaviest burden on students' 
finances  –  accommodation  costs  –  has  increased 
substantially  in  recent  years  (DZHW,  2018).  The 
Federal  Government  plans  to  expand  the  public 

considerably 

45 

 
                                                           
4.3. Labour market, education and social policies* 

unused  or  under-used  labour  potential,  including 
that of migrants. There are possibilities to upgrade 
skills and to improve the inclusiveness and quality 
of education and training, including by making the 
teaching profession more attractive. Investment in 
social inclusion, and the availability of quality full-
time childcare and long-term care services creates 
both economic and social benefits. 

into 

technology 

infrastructure 

information 
their 

German  citizens  generally  possess  above-
average  digital  skills,  but  there  is  a  significant 
skills  shortage,  and  provision  of  Information 
and  Communication  Technology  education  is 
uneven, requiring further investment. Generally 
schools  are  well-equipped  with  information  and 
communication 
in 
southern  Germany  and  Hesse,  in  contrast  to  less 
well-equipped  Länder,  most  of  which  lie  in  East 
Germany  (IW,  2018).  The  Digitalpakt  Schule, 
designed to upgrade provision of such education in 
schools,  has  yet  to  be  implemented.  Teachers’ 
and 
integrating 
in 
proficiency 
communication 
lessons 
technology 
varies from region to region and school to school. 
This  also  depends  on  the  provision  of  in-service 
(continous)  training  in  digital  skills  (Initiative  21, 
2016).  There  are  regular  technical  exchanges 
between  the  Länder  on  their  respective  measures 
(KMK, 2016), but only five Länder have included 
digital  media  in  regulations  on  teacher  graduates’ 
examinations  (Bertelsmann  Stiftung,  2018).  3.7 % 
of  employees  are  ICT  specialists,  but  demand 
exceeds supply, with 55 000 ICT-related vacancies 
in  October  2017  (Bitkom,  2017),  while  67 %  of 
small  and  medium-sized  enterprises  report  a 
shortage  of  ICT  skills  among  their  employees. 
There  is  a  significant  gender  gap  among  Science, 
and  mathematics 
technology, 
graduates,  with  11.4  women  per  1000  individuals 
(aged  20-29)  versus  28.1  men  in  2016.  Only 
information  and  communication 
16.6 %  of 
(2016). 
are  women 
specialists 
technology 
Additionally, 
the 
in 
the  gender  pay  gap 
information  and  communication  sector  stood  at 
25 % in 2016 (European Commission, 2018p). To 
remedy 
information 
the 
technology  professionals, 
immigration of skilled foreign labour provides for 
specific rules for such professionals. 

the  critical  shortage  of 

the  bill  on 

engineering 

Investment needs 

Targeted  investment  in  education  and  training 
and  supporting  active  inclusion  are  important 
for  improving  competitiveness  and  inclusive 
growth.  Current  shortages  of  skilled  labour  are 
among  the  main  obstacles  to  business  growth  and 
investment,  and  disruptive  technological  change 
will  create  adaptation  pressures  in  the  future. 
These  point  to  the  need  to  spend  more  on 
education  and  training,  and  to  improve  their 
performance.  Additional  measures  could  help  tap 

46 

 
 
4.4. COMPETITIVENESS REFORMS AND INVESTMENT* 

4.4.1.  PRODUCTIVITY AND INVESTMENT NEEDS 

investment  efforts  are  needed 

To  maintain  Germany's  competitive  advantage 
and  ensure  sustainable  and  inclusive  growth 
stronger 
in 
innovation, digitalisation, quality education and 
skills,  very  high-capacity  broadband  network 
and  sustainable  infrastructures.  Germany  is 
lagging  behind  in  the  deployment  of  very  high-
capacity  broadband  (in  particular  fibre-to-the-
premises), in rural areas especially, where stronger 
investment  can 
improve  productivity  growth. 
Stronger  investments  in  sustainable  transport  and 
electricity 
to  meet 
infrastructure  are  crucial 
climate, energy and environmental targets. Higher 
expenditure  and 
in  research  and 
investment 
in  particular  among  small  and 
innovation, 
medium-sized  enterprises,  but  also  in  education 
and  skills  (See  Section  4.3)  necessary  for  digital 
and  technological  adoption,  can  raise  potential 
growth.  

regards 

the  efficiency  of 

last decade, suggesting that there may be obstacles 
to  technology  diffusion  and  obstacles  preventing 
resources from being efficiently reallocated to their 
most productive uses. Germany performs relatively 
well  as 
resource 
allocation  at  the  economy-wide  level,  and  macro-
level  allocative  efficiency  remained  largely  stable 
between  2000  and  2014.  However,  the  aggregate 
figures  mask  significant  differences  between 
sectors. Allocative efficiency is particularly low in 
some sectors – such as business services –, which 
means that resources are allocated less efficiently, 
largely  owing  to  the  lack  of  competition  in  the 
sector 
(see  European  Commission,  2018l). 
Germany has not yet set up a new or appointed an 
existing  institution  to  act  as  a  German  National 
the 
in 
Productivity  Board 
corresponding  Council  Recommendation.  While 
Germany  has  expressed  a  general  intention  to  do 
so,  a  corresponding  date  yet  needs 
to  be 
announced. 

sense  of 

the 

Productivity growth 

Graph 4.4.1:  Labour and total factor productivity 

Labour  productivity  growth  in  Germany  has 
slowed  down..  At  the  aggregate  level,  labour 
productivity growth in Germany has slowed down 
in  recent  decades  (see  Graph  4.4.1),  but  there  are 
significant  differences  across  sectors.  Labour 
productivity growth has been high in medium-high 
technology  sectors  such  as 
the  automotive 
industry.  However,  in  the  construction  sector, 
labour  productivity  growth  has  been  stagnating, 
while  in  business  services  it  has  even  been 
declining over the last decade.  In the longer term, 
demographic change will lead to a reduction of the 
labour  force  potential.  Productivity  growth  will 
therefore  be  crucial  to  support  growth  and  will 
increasingly depend on investments in Information 
and  Communication  Technologies  and  non-
Information  and  Communication  Technologies 
capital,  and  on  investments  in  intangible  assets, 
such  as  research,  development  and  innovation, 
raising  total  factor  productivity.  Reaping  the 
benefits of digitalisation in the future will require a 
modern  regulatory  framework  and  further  efforts 
in  education  and  digital 
infrastructure.  More 
investment  in  the  circular  economy  and  resource 
efficiency  will 
sustainable 
consumption  and  production  patterns,  and  has  the 
potential  to  further  raise  productivity.  Firm-level 
data indicate that the gap between the most and the 
least  productive  companies  has  widened  over  the 

ensure 

help 

Source: European Commission 

Investment needs 

Public  investment  is  increasing  faster  than 
GDP,  but  still  more  efforts  are  needed  to  clear 
the  investment  backlog.  Public  investment  in 
2018  grew  by  7.7 %  nominally  and  3.8 %  in  real 
terms,  posting 
fourth 
robust  growth 
consecutive  year.  However,  given  the  backlog  at 
municipal  level,  public  investment  still  needs 
additional efforts to maintain the capital stock. As 
in  previous  years,  net  investment  at  municipal 

for  a 

47 

-6-5-4-3-2-1012349698000204060810121416y-o-y % changeLabour productivityTotal Factor ProductivityLinear (Labour productivity) 
 
 
4.4. Competitiveness reforms and investment* 

level  remained  negative  in  2018,  as  existing 
infrastructure  depreciated  faster  than  it  could  be 
replaced.  According  to  the  national  investment 
bank  KfW,  the  investment  backlog  at  municipal 
level rose significantly to EUR 159 billion in 2018, 
representing  an  increase  of  EUR 33  billion  over 
the  previous  year  (KfW,  2018).  A  survey  by  the 
“Municipal 
Investment  Bank  on 
European 
Infrastructure”  identified  tight  budgets,  lacking 
technical planning capacities and lengthy approval 
processes  as  major  barriers  to  investment  in 
Germany (EIB, 2017).  

though 

There  has  been  a  robust  increase  in  private 
investment,  though  not  across  all  asset  types. 
Investment  in  equipment  has  grown  strongly  in 
recent quarters in response to record high capacity 
utilisation. Housing investment continues to boom, 
even 
the  construction  sector  reports 
capacity  constraints.  However,  major  challenges 
is  facing  a 
loom.  The  manufacturing  sector 
slowdown  in foreign  trade,  and,  at  the  same  time, 
the need to adapt to new consumer preferences and 
technological  change  (e.g.  the  automotive  sector). 
Non-residential  construction  has  been  growing 
sluggishly,  suggesting  that  essential  infrastructure 
may not have kept up with the economy’s needs. 

Research and innovation  

Germany has a strong research and innovation 
system,  but  in  a  context  of  slow  productivity 
trends, 
growth  and  negative  demographic 
higher  investment  in  R&D  and  innovation 
could  help  the  country  secure  its  competitive 
position. R&D expenditure in Germany increased 
to 3.02 % of GDP in 2017, the fourth highest R&D 
intensity in the EU. The increase in business R&D 
intensity  since  2010  (+0.27 pps.)  has  been  higher 
than  the  increase  in  public  R&D  intensity  (+ 
0.04 pps.).  According  to  the  European  Innovation 
innovation 
Scoreboard,  Germany's 
performance  has  stagnated  since  2010,  and  small 
and  medium-sized  enterprises'  innovation  activity 
is declining. (46) Over the last few years Germany 

overall 

(46)  The  European  Innovation  Scoreboard  shows  a  decrease  in 
relative  performance  since  2010  in  most  of  the  indicators 

innovation, 
sector, 

has taken measures to further strengthen its sound 
research  and  science  base,  but  there  is  scope  for 
boosting  scientific  excellence  further.  Germany 
currently  ranks  eighth  in  the  EU  on  the  key 
indicator  reflecting  scientific  excellence (47).  Its 
in  promoting 
policies  have  been  effective 
the 
incremental 
in 
framework 
manufacturing 
conditions  for  risky  and  disruptive  innovations 
could  be 
the  German 
Government  adopted  the  High-Tech  Strategy  for 
2025,  which  is  designed  to  promote  knowledge 
transfer  and  entrepreneurship.  An  agency  for  the 
promotion of disruptive innovation is to be set up. 
The Strategy also includes a 3.5 % R&D intensity 
target  and  R&D  tax  incentives  for  small  and 
medium-sized enterprises. 

especially 
the 

improved. 

In  2018, 

but 

While  cooperation  between  public  research 
institutes  and  the  business  sector  is  generally 
well  established,  small  and  medium-sized 
enterprises  are  not  benefiting  fully  from  it. 
Germany’s  approaches  to  encouraging  science-
business  cooperation  (e.g.  through  the  Fraunhofer 
Society organisations) are often taken as examples 
of  best  practice.  However,  the  country’s  high 
scores  on  the  relevant indicators  (48)  are  often  the 
result  of  strong  cooperation  between  a  few  large 
manufacturing  companies  and  public  research 
institutes.  As 
the  share  of  SMEs 
cooperating  with  academia  or  public  research 
institutes, Germany scores only slightly above the 
EU average (49). 

regards 

related  to  innovation  in  SMEs,  intellectual  assets  and  the 
impacts 
innovation. 
https://ec.europa.eu/docsroom/documents/30681. 

of 

(47)  The proportion of the country’s scientific publications that 
rank among the top 10 % most cited scientific publications 
worldwide. 

(48)  With  a  volume  of  public  R&D  financed  by  business 
enterprises  representing  0.12 %  of  GDP  in  2015  (EU 
average:  0.05 %),  Germany 
first  among  EU 
countries. 

ranks 

(49)  Based on data from the Community Innovation Survey for 

2014. 

48 

 
                                                           
 
                                                                                   
4.4. Competitiveness reforms and investment* 

Box 4.4.1: Investment challenges and reforms in Germany 

Macroeconomic outlook 

Investment is relatively low as a share of GDP, which undermines Germany’s future growth potential, and 
has implications for the euro area (see Chapters 1 and 3). Private investment has responded only in part to 
capacity utilisation and housing needs. Public investment has picked up, but a major investment backlog will 
take longer to unwind. Stronger capital accumulation will be needed to sustain potential growth in the future, 
especially as population ageing intensifies as expected and immigration may slow down. 

Assessment of barriers to investment and ongoing reforms 

The main barriers to private investment in Germany are: the inefficiency of the tax system (see Section 4.1), 
limited  availability  of  scale-up  capital  (see  Section  4.2),  shortages  of  skilled  labour  (see  Section  4.3); 
insufficient availability of certain network infrastructures, including very high-speed broadband (see Section 
4.4.1);  and  a  number  of  sectoral  regulations,  including  regulations  that  restrict  competition  in  business 
services and regulated professions (see Section 4.4.3). 

Selected barriers to investment and priority measures that are under way 

1. As the labour market tightens, availability of skilled labour is becoming more of a binding constraint, in 
particular  for  medium-sized  companies.  Current  measures  designed  to  reduce  disincentives  to  work  more 
(see Section 4.3.1), improve the financing of education and subsidise adult learning (see Section 4.3.3) may 
relieve this constraint to some extent. 

2. 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 resources available from 
the various tiers of government and their individual investment responsibilities, and by the limited revenue 
autonomy  of  the  Länder  and  municipalities.  The  ongoing  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 the tax autonomy of the Länder and municipalities. (See also Section 4.1) 

Germany  is  also  stimulating  investment  through  its  national  development  bank,  KfW,  Europe's  largest 
development  bank,  which  committed  a  total  financing  volume  of  EUR 76.5  billion  in  2017.  KfW  plays  a 
major  role  in  promoting  energy-efficient  housing,  in  financing  municipal  infrastructure  such  as  public 
transport and sanitation, and in supporting individual entrepreneurs and start-ups through loans, equity and 
mezzanine financing. In addition to KfW, the Rentenbank is a national development bank active in financing 
agricultural projects, and the Länder have their local development banks (Förderbank), which are smaller, 
yet play an important role in financing municipal infrastructure and projects, including in housing.  

49 

 
 
 
Private  investment  in  R&D  is  increasingly 
concentrated in large firms and in medium-high 
tech  manufacturing  sectors.  While  overall 
business  expenditure  on  R&D  shows  strong 
growth  rates,  R&D  has  become 
increasingly 
concentrated  in  large  firms  and  in  medium-high-
tech  manufacturing 
the 
automotive  sector.  R&D  expenditure  of  large 
companies  has  increased  considerably,  whereas 
small 
enterprises'  R&D 
expenditure  has  stagnated  over  the  past  decade 
(ZEW, 
and  medium-sized 
enterprises'  expenditure  on  R&D  as  a  percentage 
of  GDP  was  at  0.17 %  also  much  lower  than  the 
EU average of 0.30 % in 2015. 

sectors,  particularly 

and  medium-sized 

2018c).  Small 

Graph 4.4.2:  Expenditure for R&D&I in Germany 

(1) 2018 and 2019 figures based on planned data 
Source: ZEW 

 Entrepreneurship 

influenced 

is  hampered  by 
Entrepreneurial  activity 
regulatory barriers to starting a business and is 
demographic 
increasingly 
by 
developments.  Entrepreneurial 
has 
activity 
gradually  been  declining  in  most  age  groups, 
those  with  highest  entrepreneurial 
including 
activity  (i.e.  between  30  and  50  years).  The  firm 
birth  ratio  has  been  declining  in  recent  years, 
falling from 9.2 % in 2008 to 7.1 % in 2015, well 
below  the  EU  average  of  9.6 %.  While  low 
unemployment  and  the  rising  opportunity  cost  of 
starting a business are still the main reasons for the 
decline  in  start-up  activity,  regulatory  barriers, 
such  as  those  that  affect  the  relative  ease  of 
starting  a  business,  and  demography  are  further 
significant  factors.  According  to  the  World  Bank 

indicator  on  the  Ease  of  Starting  a  Business, 
Germany  performs  rather  poorly  (113th  in  the 
world). Demographic trends are expected to have a 
growing impact on entrepreneurial activity and the 
transfer  of  businesses  in  the  coming  years.  At  the 
end of 2018, the Federal Government launched an 
initiative  (Gründungsoffensive)  designed  to  boost 
entrepreneurial  culture  in  Germany  and  to  raise 
support  programmes. 
awareness  of  existing 
to  promote 
However,  more  could  be  done 
entrepreneurial 
including  
secondary and tertiary education. 

settings 

skills 

in 

Graph 4.4.3:  Start-up rates in Germany 

(1) Start-up rate: start-ups by 100 incumbent firms 
Source: ZEW 

in  fast-growing  firms 

Start-up rates in Germany have been declining,  
and  employment 
in 
innovative  sectors  has  fallen.  Start-up  rates  in 
Germany  have  been  on  the  wane  for  the  last  15 
years  in  various  sectors  and  regions.  Start-up 
activity  has  been  declining  not  only  in  non-
technological  sectors,  but  also  in  knowledge-
intensive  services  and  high-tech  manufacturing 
the  Community 
(Graph  4.4.3).  According 
Innovation  Survey,  the  share  of  businesses  with 
innovative activities has fallen, but continues to be 
among  the  highest  in  the  EU.  The  share  of 
in 
fast-growing 
employment 
innovative  sectors  has  fallen  since  2012,  and 
Germany  performs  below  the  EU  average  (see 
European Commission, 2018g). 

companies 

to 

in 

50 

02040608010012014016006070809101112131415161718*19*billion €SMEsLarge enterprises345678905060708091011121314151617All start-upsKnowledge-intensive servicesHigh-tech manufacturing 
 
 
 
4.4. Competitiveness reforms and investment* 

to 

themselves 

commitment  to  establish  a  digital  infrastructure 
fund.  The  fund  will  use  the  revenues  from  5G-
auction  especially  for  the  deployment  of  gigabit 
networks;  additional  financial  means  may  be 
provided in accordance with the Budget Law. The 
coalition  agreement  indicates  the  allocation  of  10 
to  12  billion  Euros  until  2021  to  support  the 
the 
deployment  of  gigabit  networks.  As 
deployment  of  high-performance  broadband 
networks  in  Germany  is  driven  primarily  by  the 
private  sector,  the  companies  belonging  to  the 
for  a  Digital  Germany 
Network  Alliance 
around 
investing 
committed 
EUR 100  billion  by  2023,  in  order  to  establish 
gigabit-capable  converged  infrastructure  by  2025. 
However, public intervention in the deployment of 
ultrafast  (≥100  Mbps)  broadband  infrastructure  in 
rural  areas  remains  crucial,  and  different  options 
going  beyond  subsidies  could  be  explored.  The 
coalition  agreement  establishes  the  legal  right  to 
fast  internet  from  1 January  2025  and  direct  fibre 
connections  for  socio-economic  drivers  (schools, 
hospitals,  business  parks,  etc.)  by  2021.  In 
November  2018,  the  German  regulatory  authority 
(“Bundesnetzagentur”)published  its  final  plan  for 
the  5G  spectrum  auction  scheduled  for  the  spring 
of 2019. The number of licenses auctioned, and the 
conditions  set  by 
regulator  will  have 
the 
repercussions  on  competition  and  investment  in 
this sector.  

its  artificial 

in  artificial 

Investment 
intelligence  and 
cybersecurity is needed if Germany is to remain 
globally  competitive  and  safeguard  digital 
sovereignty.  In  November  2018,  the  Federal 
Government  adopted 
intelligence 
strategy,  designed  to  consolidate  Germany’s  role 
as  a  research  location  and  use  by  small  and 
medium-sized enterprises. The budget allocation is 
EUR 500 million  in  2019  with  an  accumulated 
spending  of  EUR 3 billion  by  2025.  In  September 
2018, the Federal Ministry of the Interior, together 
with the Federation of German Industries, founded 
the  Cyber-Alliance  to  promote  key  technologies 
for  critical  business  processes.  The  aim  was  to 
the  digital  sovereignty  of  German 
safeguard 
industry and the state. There is a specific initiative 
to  raise  awareness  of  cybersecurity  among  small 
and  medium-sized  enterprises.  The  Agency  for 
Innovation in Cybersecurity is being set up in 2019 
with  a  view 
innovative  projects 
characterised  by  radical  technological  novelty, 
which could change the market. 

to  funding 

Digitalisation  

but 

small 

Germany  has  made  some  progress  as  regards 
the integration of digital technology in business 
and  medium-sized 
settings, 
enterprises  remain  slow  adopters  of  digital 
technologies,  and  a  large  proportion  of  them 
have a very low level of digitalisation. According 
to  the  Digital  Scoreboard,  German  companies  are 
increasingly taking  advantage  of  the  opportunities 
offered  by  online  commerce:  in  2017,  23.5 %  of 
small  and  medium-sized  enterprises  sold  online, 
while  11.3 %  sold  goods  or  services  to  customers 
in  other  countries.  However,  small  and  medium-
sized  enterprises  are  slow  adopters  of  digital 
technologies and 34.6 % of them have a very low 
level of digitalisation. Only 5.3 % of German small 
and  medium-sized  enterprises  used  big-data 
analytics  in  2016,  for  example,  as  compared  with 
almost 10 % in the EU as a whole. To help  small 
and  medium-sized  enterprises  catch  up  with 
digitalisation,  the  Government  is  expanding  a 
network  of  competence  centres.  Since  July  2017, 
the  ‘go  digital’  support  programme  has  been 
providing  small  and  medium-sized  enterprises  all 
over  the  country  with  consultancy  services  via 
innovation  vouchers, 
their  own 
digitalisation  in  the  areas  of  IT  security,  digital 
marketing  and  digitalised  business  processes. 
Digital  hubs  are  promoting  closer  cooperation 
small  and  medium-sized 
between 
enterprises, 
public 
administration  (European  Commission,  2018h). 
However,  a  lack  of  skilled  human  resources  and 
capacities  often  holds  these  companies  back  from 
investing  in  digitalisation  projects  (see  Chapter 
4.3). 

to  advance 

start-ups, 

industry, 

science 

and 

Germany  is  lagging  behind  in  deploying  very 
high-capacity  broadband  at  national  level,  and 
particularly  in  rural  areas,  where  stronger 
investment  could  improve productivity growth. 
The  share  of  fibre  connections  is  very  low  (only 
8 %  of  households  as  of  mid-2018),  putting 
Germany  some  way  behind  several  other  EU 
countries  (European  Commission,  2018h).  In 
October  2017,  23 700  business  parks  were  not 
connected  to  a  fibre  network  and  28 %  of  all 
companies lacked access to networks of at least 50 
megabits.  The  2018  Federal  Government’s 
coalition agreement includes a commitment to full 
and 
coverage  with  gigabit-ready  networks 
a 
prioritises 

networks. 

includes 

fibre 

It 

51 

 
4.4. Competitiveness reforms and investment* 

arrangements  for  congestion  management  and 
bidding-zone  definition  in  central  Europe  do  not 
necessarily  reflect  existing  congestion  accurately, 
and  this  is  leading  to  limitations  on  cross-border 
flows  of  electricity.  Structural  congestion  in  the 
transmission  system,  not  fully  reflected  in  the 
wholesale market, leads to additional loop-flows to 
in 
resulting 
neighbouring  countries, 
inefficient market outcomes (see section 4.4.3). 

thereby 

The environment and the circular economy 

Germany is advancing towards a more circular 
economy,  but will miss  its  national  objective of 
doubling  resource  productivity  by  2020.  As 
regards  the  circular  (secondary)  use  of  materials, 
i.e.  the  share  of  material  recovered  and  fed  back 
into  the  economy,  Germany  is  close  to  the  EU 
average  with  10.7 % 
in  2014,  but  behind 
neighbouring  countries  such  as  the  Netherlands 
(26.7 %), Belgium (18.1 %), and France (17.8 %). 
Considerable  additional  efforts  are  required  to 
meet  the  objectives  of  the  updated  Resource 
Efficiency Programme (PROGRESS II), especially 
as  regards  increasing  secondary  raw  material  use. 
Movements across the country to encourage reuse, 
repair  and  sharing  are  developing,  but  still  have 
niche  character.  The  next  update  of  PROGRESS, 
for  2020,  could  develop  a  more 
planned 
comprehensive circular economy strategy covering 
the  whole  life-cycle  of  materials,  and  could 
incorporate  the  aspects  of  decarbonisation  and 
digitalisation. 

The  EU  and  national  circular  economy 
ambitions  and  targets  require  a  sustained 
increase  in  investments,  including  in  R&D. 
Stronger  investments,  including  in  R&D,  will  be 
needed to reach the objectives of PROGRESS but 
also  to  comply  with  the  new  recycling  targets  for 
the  post-2020  period  and  the  EU  Action  Plan  for 
is  an 
the  Circular  Economy.  Eco-innovation 
important  enabling  factor  for  the  transition  to  a 
low-carbon,  circular  economy.  Product  design 
approaches  and  new  business  models  can  help  to 
produce  systemic  circularity  innovations,  creating 
new  business  opportunities.  The  results  of  a  2017 
Eurobarometer survey confirmed that there is room 
for  further  boosting  reuse,  repair  and  recycling  in 
the  German  economy.  The  proportion  of  German 
small  and  medium-sized  enterprises  that  have 
invested  too  little  (i.e.  less  than  1  %  of  their 

Energy  

The  switch  from  centralised  to  decentralised 
energy generation entails significant investment 
opportunities  and  is  fundamentally  reshaping 
the  German 
energy  market.  Significant 
investment  are  needed  to  make  the  electrical 
system  more 
this 
decentralisation  trend,  e.g.  in  electricity  storage, 
the  production  of  low-carbon  fuels  and  green 
technologies. 

light  of 

flexible 

the 

in 

losses 

2017), 

German 

regulatory 

leading  to  financial 

The  lack  of  an  appropriate  grid  infrastructure 
is  currently 
in 
Germany and other EU countries. According to 
authority 
the 
grid 
(“Bundesnetzagentur”)(BNetzA, 
operators  spent  EUR 1.4  billion  on  congestion 
management  measures  to  stabilise  the  electricity 
grid  in  2017.  This  is  about  60 %  higher  than  the 
amount  spent  in  2016  (EUR 880  million).  In 
addition, the amount of renewable energy curtailed 
increased in 2017, reaching 5 518 GWh (compared 
with 4 722 GWh in 2015 and 3 743 GWh in 2016). 
The 
authority 
(“Bundesnetzagentur”)attributed  this  increase  in 
feed-in  management  measures  and  their  costs  to 
the connection of new offshore wind farms in 2016 
and 2017. 

regulatory 

German 

Efforts  are  under  way  to  improve  internal 
networks,  but  the  need  for  investment  in 
additional  transmission  capacity  is  likely  to 
grow  still  further.  Investment  costs  for  onshore 
grid  development  are  expected  to  reach  EUR 32-
34  billion  by  2030;  according  to  transmission 
system  operators,  these  costs  may  even  reach 
that  date.  The  German 
EUR 50  billion  by 
Government  has  started  making  changes 
to 
planning  laws  that  are  relevant  to  grid  expansion. 
By  2030,  there  will  be  more  capacity  from 
renewable  energy  sources,  and  old  power  plants 
are  expected  to  be  closed.  If  the  grid  extension 
lacks  financial  support  or  timely  implementation, 
this will lead to higher costs related to congestion 
management  and  further  distortions  in  market 
functioning,  both  inside  Germany  and  in  cross-
border trade. 

Congestion  management  in  central  Europe, 
including  Germany,  needs  a  solution  that  will 
facilitate  cross-border  electricity  flows  while 
ensuring  system  security.  The  current  national 

52 

 
4.4. Competitiveness reforms and investment* 

convergence 

being the only region to exceed average EU GDP 
there  has  been  significant 
per  capita.  Still, 
economic 
since 
in  Germany 
reunification.  While  GDP  per  capita  in  the  east 
was  only  43 %  of  that  in  the  west  in  1991,  it  had 
risen  to  72 %  by  2010.  However,  more  recently 
this convergence has slowed, with only a marginal 
1  pp.  increase  to  73 %  between  2010  and  2016 
(BMWi,  2018a).  While  all  the  eastern  regions 
improved  their  GDP  per  capita  (PPS)  relative  to 
the  EU  average  between  2010  and  2016,  some  of 
the  strongest  regions  in  the  west  registered  a 
relative decline over the same period. Graph 4.4.4 
and  1.6  illustrate  the  spread  of  regional  GDP 
growth relative to the EU average. Similarly, east-
west  productivity  disparities  shrank  during  this 
period.  By  2000,  the  eastern  region  had  already 
increased  its  productivity  to  69 %  of  the  western 
value,  growing  further  to  reach  78 %  by  2017 
(BMWi,  2018a).  Convergence  between  labour 
market  outcomes  has  also  remained  strong  in 
recent years. 

Regional disparities within Germany go beyond 
the  east-west  divide.  Although  the  north-south 
divide among the Länder of former West Germany 
is  not  as  clearly  defined,  it  nonetheless  exists. 
Apart  from  city-states  such  as  Hamburg  and 
Bremen,  the  northern  Länder  perform  worse  in 
terms  of  economic  output  than  their  southern 
counterparts. In addition, there are western regions 
whose relative position has declined as a result of 
structural  change  in  the  economy  (e.g.  Hamburg 
and Darmstadt, see also Graph 4.4.4). 

turnover) in resource efficiency increased by 9 pps. 
to 47 % between 2015 and 2017. 

in 

investment 

sustainable  mobility 
More 
solutions  is  required  to  tackle  mobility  and 
associated  air  quality  challenges,  support 
climate  change  mitigation  and  adaptation,  and 
improve  productivity.  Air  quality  in  Germany 
gives  serious  cause  for  concern,  as  the  country  is 
still  failing  to  meet  EU  air  quality  standards. 
Germany  has  been  referred  to  the  EU  Court  of 
Justice  for  failing  to  comply  with  NO2  limit 
values. Traffic accounts for about 60 % of harmful 
NOx emissions in urban areas, and of this 72.5 % 
is  caused  by  diesel  vehicles.  Vehicles  running  on 
alternative fuels have seen the steepest increase in 
new  registrations,  but  the  numbers  remain  far 
below the target value of one million electric cars 
by 2020 set by the government. (KBA, 2018) Cars 
remain  by  far  the  most  commonly  used  means  of 
transport  for  daily  commuting.  The  average  time 
spent  in  traffic  jams  is  about  30  hours  per  year 
(European  Commission,  2018i).  Congestion  and 
looking  for  parking  spaces  has  been  estimated  to 
cost  EUR 110  billion  per  year,  or  about  4 %  of 
GDP 
is  an 
transport 
intermediary  service, 
this  causes  productivity 
losses in other sectors. Car sharing and ridesharing 
as options for more sustainable urban mobility are 
still  heavily  underexploited.  A  recent  case  study 
found that car sharing currently accounts for under 
one-tenth  of  passenger-kilometres  by  motor 
vehicle in Germany (Ecological Institute, 2018). 

(OECD  2018b).  As 

Surface  water  pollution  by  nitrates,  especially 
groundwater  pollution,  remains  a  serious 
concern, 
imposing  considerable  costs  on 
consumers  who  have  to  purify  drinking  water. 
Only  marginal  progress  has  been  registered  in 
reducing  pollution. 
(UBA,  2018).  Effective 
measures  are  needed  to  tackle  excess  deposits  of 
nitrates  and  achieve  compliance  with  the  Nitrates 
Directive  and  the  decision  of  the  European  Court 
of Justice. 

4.4.2.  REGIONAL DISPARITIES 

East-west  regional  disparities 
in  Germany 
persist, despite the convergence process that has 
been  in  progress  since  1990.  The  eastern  part  of 
Germany  remains  the  weaker  region  in  terms  of 
economic  output,  with  the  capital  city,  Berlin, 

53 

 
4.4. Competitiveness reforms and investment* 

Graph 4.4.4:  Change in GDP per head (PPS), 2007-2016 

just 53 % of the equivalent for the western Länder 
(BMWi, 2018a). 

as 

and 

such 

urban 

changes 

populations 

rising 
Demographic 
urbanisation;  and  population  decline  in  rural 
areas  aggravate  regional  differences,  and  this 
affects  healthcare  as  well.  While  the  population 
of  the  country  as  a  whole  is  growing,  certain 
regions  are  experiencing  significant  demographic 
decline,  and  this  is  most  pronounced  in  a  number 
of eastern regions. Rural-urban migration results in 
rising 
expanding 
conurbations. A number of urban centres in eastern 
Germany,  such  as  Leipzig,  Dresden,  Erfurt  and 
Magdeburg,  have  seen  substantial  increases  in 
population,  even  where  the  regional  population  is 
in  decline  overall.  Elsewhere,  the  populations  of 
large  cities  such  as  Berlin,  Hamburg,  Munich, 
Frankfurt  and  Stuttgart,  plus  those  of  their  urban 
hinterlands  and  wider  catchment  areas,  are 
expanding  rapidly.  There  are  disparities  in  the 
regional distribution of medical practitioners, and, 
due  to numerous forthcoming  retirements  of  elder 
physicians, access to primary healthcare may soon 
become  challenging  for  certain  rural  and  remote 
areas.  Moreover,  the  annual  mean  concentrations 
of  NO2  in  2016  –  compared  with  the  EU  annual 
limit  value  (40  µg/m3)  –  revealed  worrying 
outcomes for growing cities such as Berlin (51.06 
µg/m3),  Hamburg  (50.46  µg/m3)  and  Wiesbaden 
(52.95 µg/m3). 

from 

arising 

poverty 

Urban  regions  are  also  facing  socio-economic 
challenges 
and 
unemployment.    City-dwellers  are  more  likely to 
be  at  risk  of  poverty  or  social  exclusion  (23.7 %) 
compared  with  those  living  in  towns  or  suburbs 
(17.6 %)  or  in  rural  areas  (17.2 %).  Cities  with 
wide  disparities  in  individual  districts,  perhaps 
because of a highly differentiated social structure, 
are particularly badly affected. In many cities these 
socio-economic  inequalities  are  combined  with 
higher  rates  of  foreign  nationals  and  migrants 
among the population. For instance, in 2016, 28 % 
of  the  population  of  Frankfurt  am  Main  were 
foreign  nationals,  whilst  nationally  this  figure 
stood  at  10.5 %.  The  unemployment  rate  in 
Germany  is  low  and  below  the  EU  average,  but 
shows significant regional differences (see Chapter 
1.). 

Competitiveness 
varies 
significantly, closely  matching  economic output 

across  Germany 

(1) PPS: Purchasing Power Standard 
The values correspond to the GDP per head relatively to the 
EU28 in 2007 and 2016, respectively (EU28=100). The colours 
correspond to the change in the index from 2007 to 2016, 
with blue ones indicating an increase in the ratio. EU28 real 
GDP per head grew by 3.4% over the period. 
Source: European Commission 

The  aim  of  phasing  out  coal  from  German 
electricity  generation  will  change  the  economic 
and social development path of several regions. 
To  meet  its  CO2  reduction  targets,  Germany 
intends  to  phase  out  coal-fired  power  production. 
The  Commission  on  Growth,  Structural  Change 
and  Employment  has  recommended  in  January 
2019 to end coal-fired electricity generation by the 
end  of  2038  at  the  latest.  According  to  a  study 
drawn  up  for  the  Commission  ,  in  2016  almost 
20 000  people  were  directly  employed  in  the 
lignite  industry,  including  mining,  power  plant 
operation  and  reuse  of  former  mines.  Taking  into 
account  indirect  links,  55 000  people  could  be 
affected.  The  strongest  negative  effects  are 
expected  in  the  Länder  of  Brandenburg,  Saxony 
and  Saxony-Anhalt, 
though  North  Rhine-
Westphalia will also be affected. 

Disparities can also be found in the investment 
rate  between  the  eastern  and  western  Länder 
(see also section 4.1). Investment in the early years 
of  reunification  had  a  strong  bias  towards  the 
eastern Länder. In 1995, investment per inhabitant 
in  the  east  was  141.5 %  of  that  in  the  west.  This 
fell  to  below  100 %  in  2000  and  to  67.3 %  by 
2015.  The  disparity  as  regards  investment  in  the 
manufacturing  sector  is  even  more  pronounced, 
with  investment  per  capita  in  the  east  standing  at 

54 

 
 
4.4. Competitiveness reforms and investment* 

in 

EU  Member  States  and  changes 
the 
regulation  could  boost  economic  activity  and 
investment.  According  to  the  Intra-EEA  OECD 
Services  Trade  Restrictiveness  Index,  the  level  of 
regulatory restrictiveness in Germany is above the 
Single  Market  average  in  many  sectors,  including 
architecture, engineering, legal, computer services. 
This  leads  to  higher  mark-ups  and  higher  prices, 
which is problematic given the substantial share of 
services  inputs  in  the  German  manufacturing 
industry. Some professional services are viewed as 
over-regulated, where exclusive rights, compulsory 
chamber membership, and regulation of prices and 
fees  stifle  competition  (IMF,  2018).  Only  limited 
measures  have  been  taken  so  far,  following 
individual  court  decisions  on  certain  regulated 
professions. 

Restrictions 
in  the  retail  sector  are  far-
reaching.  According  to  the  Retail  Restrictiveness 
Indicator  published  by  the  Commission  in  2018, 
is  among 
Germany 
ten  most  restrictive 
the 
countries 
for  both  establishment  and  daily 
operations.  This  prevents  the  entry  of  innovative 
to  consumer 
business  models  and 
demand.  The  planning  rules  are  very  detailed  and 
limit the sale of a large variety of goods to certain 
specific  areas.  Restrictions  also  apply  to  daily 
operations. 

response 

The  sharing  economy  could  provide  markets 
with  new  dynamics,  broaden  consumer  choice, 
create  jobs  and  encourage  entrepreneurial 
activity.  A  recent  study  has  underlined 
the 
economic  relevance  of  the  ‘sharing  economy’  in 
Germany  and  has  analysed  existing  regulatory 
challenges  (BMWi,  2018b).  Regulation  differs 
regions  and  cities,  and  authorisation 
across 
schemes can be burdensome. 

Energy Union  

The  lack  of  transmission  capacity  of  internal 
electricity  lines  from  north  to  south  creates 
additional  loop  flows  that  strain  the  grid 
capacity of neighbouring countries. If such loop 
flows  can  be  expected,  interconnectors  are  forced 
to  reserve  some  of  their  transmission  capacity  for 
absorbing the loop flow electricity. As a result, less 
cross-border  capacity is available  for  cross-border 
electricity trade. In addition, German transmission 
system  operators  may  be  tempted  to  reduce  the 
available  cross-border  capacity,  thus  reducing 

levels.  Compared  to  other  regions  in  the  EU,  the 
innovation  performance  of  German  regions  is 
relatively  good.  All  German  regions  are  either 
strong  innovators  or  innovative  leaders.  Five 
German regions (Oberbayern, Tübingen, Stuttgart, 
Berlin  and  Karlsruhe)  belong  to  the  25  most 
innovative regions in Europe. Still, there are major 
regional differences: the south of Germany is more 
innovative  than  the  north  and  the  east  (European 
Commission,  2018j).  This  generally  correlates 
with 
share  of  high-technology 
employment,  R&D  expenditure  and  higher 
productivity  levels.  There  are  no  headquarters  of 
major  companies  located  in  the  eastern  Länder; 
this could partially explain the weakness of private 
research and development in these regions. 

a  greater 

There  is  a  digital  divide  between  rural  and 
urban areas in next-generation access coverage. 
fixed  broadband 
Although  Germany  has  a 
( 
coverage  of  98 %,  next-generation  access 
≥30Mbps)  reaches  only  54 %  of  rural  areas,  by 
comparison  with  a  national  average  of  84 % 
(European  Commission,  2018h).  This  is  likely  to 
make  areas  beyond  the  reach  of  next-generation 
access  significantly  less  competitive,  adversely 
affecting 
retain 
businesses and generate employment opportunities 
in high-value-added industries. 

to  attract  and 

their  ability 

4.4.3.  SINGLE MARKET INTEGRATION 

Internal market for goods and services 

Germany  plays  an  important  role  in  further 
developing the Single Market. It has particularly 
benefited from the integration in the Single Market 
(European  Commission,  2018n).  It  is  also  the 
largest importer of goods in the EU, with Hamburg 
being  the  third  biggest  port  in  Europe.  Germany 
in 
therefore  has  an 
ensuring that non-compliant products do not enter 
the  EU.  Unlike  most  Member  States,  Germany 
does  not  provide  data  on  customs  controls  in  the 
field  of  product  safety  and  compliance.  Despite  a 
reduction  in  the  number  of  pending  infringement 
proceedings,  Germany  still  lags  behind  the  EU 
average  in  this  respect  according  to  the  Single 
Market Scoreboard.  

important  responsibility 

Barriers  to  competition  in  business  services  in 
Germany  remain  high  in  comparison  to  other 

55 

 
4.4. Competitiveness reforms and investment* 

restrictions  adversely  affect  the  deployment  of 
wind power, in particular. This is also reflected in 
the  undersubscription  of  an  auction  held 
in 
October 2018, at which only just over 50 % of the 
auctioned  670  MW  were  allocated.  A  lack  of 
competition at auctions is also likely to push prices 
up. In addition, relatively strong economic growth 
increase  may  have 
and,  possibly,  population 
contributed 
in  energy 
recent 
to 
consumption in Germany. 

increases 

Investments in electrification, system flexibility, 
in  energy 
sector  coupling,  and  progress 
efficiency  in  all  sectors  could  help  Germany 
meet  its  Effort  Sharing  target  for  2030  and 
reduce  its  import  dependency  on  fossil  fuels. 
More  than  60 %  of  German  energy  consumption 
relies on imports, which is above the EU average. 
Reasons for this include high imports of crude oil 
and  natural  gas  liquids  (97 %),  hard  coal  (95 %), 
and natural gas (89 %). In its National Energy and 
Climate  Plan  to  be  submitted  by  31  December 
2019 in line with the Regulation 2018/1999 on the 
Governance  of  the  Energy  Union  and  Climate 
Action ,  Germany  will  provide  an  overview  of  its 
investment  needs  until  2030  for  the  different 
dimensions  of 
including 
renewable  energy,  energy  efficiency,  security  of 
supply,  and  climate  change  mitigation  and 
adaptation. The information provided, including in 
the  draft  plan  submitted  on  20  December  2018, 
will  further  contribute  to  the  identification  and 
climate-related 
and 
of 
assessment 
investment needs for Germany.  

the  Energy  Union, 

energy 

Low  emissions  reduction  means  that  Germany 
is  likely  to  miss  the  Effort  Sharing  target  set 
under  EU  law.  Preliminary  data  shows  that 
Germany  will  fail  to  meet  its  Effort  Sharing 
interim  target  for  2017  by  a  margin  of  7  pps.  In 
particular,  the  transport  (+  6  pps.)  and  agriculture 
(+  1  pps.)  sectors  increased  their  share  of  total 
emissions  in  Germany  between  1990  and  2017 
(see  Table  4.4.1).  Similarly,  the  latest  projections 
suggest an underachievement of 3 pps. for 2020. In 
view  of  recent  macroeconomic  developments 
(population  growth  and  economic  development), 
this  estimate  is  optimistic.  Consequently,  stronger 
measures are needed to meet the even stricter 2030 
the  Effort  Sharing 
target  of 
Regulation. The latest projections estimate that this 
target will be missed by 16 pps without additional 
measures.  

-38 %  under 

electricity  inflow  into  Germany,  so  as  to  avoid 
aggravating  congestion  on  internal  power  lines. 
Ultimately,  this  creates  inefficiencies  for  the 
Single  Market,  leading  to  a  loss  in  overall 
economic welfare. 

Germany has interconnectors with almost all its 
neighbours,  but  further  investment  in  cross-
border  capacity  could  strengthen  German 
exports.  A  first  interconnector  with  Belgium 
(ALEGrO)  is  under  construction.  ALEGrO  is 
planned  to  be  fully  operable  from  2020  onwards 
and  it  is  expected  to  further  facilitate  the  trade  in 
electricity  between  the  two  countries,  potentially 
improving  security  of  supply.(50)  With  9 %, 
Germany’s  interconnection  level  is  slightly  below 
for  2020. 
the  10 % 
Increasing  additional  cross-border  capacity  could 
enable additional income to be earned from energy 
exports. Investment in cross-border capacity would 
thus boost German exports. 

interconnection 

target 

to 

that  markets  continue 

Electricity  and  gas  retail  markets  remain 
competitive,  but  there  is  little  flexibility  or 
in  the  wholesale  sector. 
demand  response 
Ensuring 
function 
smoothly  and  achieving  correct  market-based 
investment signals is an ongoing challenge. There 
is  very  little  flexibility  and  demand  response 
traded  in  the  wholesale  and  ancillary  services 
markets.  Only  3.5%  of  households  generate 
electricity.  Smart  meters  are  a  precondition  for 
engaging  consumers  in  the  market.  However,  the 
rollout  planned  in  Germany  excludes  residential 
consumers  with  less  than  6 000  kWh  annual 
consumption. Even for large consumers, the rollout 
is scheduled to take many years. 

Germany  appears  to  be  on  track  to  reach  its 
European  2020  renewable  energy  target,  but 
some  recent  trends  could  jeopardise  that. 
Renewable  energy  accounted  for  just  15.5  %  of 
gross final energy consumption in 2017, while the 
target is 18 %. Despite strong investments in 2017, 
there  is  a  lack  of  certainty  as  regards  the  future 
in 
investment  opportunities 
Germany.  The  long  time  taken  to  issue  permits, 
planning 
legal 

renewables 

challenges 

increased 

and 

for 

(50)  If 

the 

interconnector  can  be  considered 

technically 
operational, it is important to  make  capacity available  and 
to  maximise  capacity  actually  made  available  to  the 
market. 

56 

 
                                                           
4.4. Competitiveness reforms and investment* 

Table 4.4.1:  Emissions Effort Sharing sectors 

(1) Data for 2017 are estimates 
Source: BMU (2018),  BMUB  (2016) 

Climate  policies  and  investments  have  the 
potential  to  generate  net  economic  benefits  for 
Germany. It is estimated that the net present value 
of  measures  from  the  Climate  Action  Programme 
2020  and  the  National  Action  Plan  on  Energy 
Efficiency 
approximately 
EUR 150 billion.  Households,  in  particular,  are 
expected  to  benefit  from  a  net  cost  reduction  of 
EUR 26 billion (BMU, 2018). 

costs  by 

exceed 

as 

such 

financially, 

Policy  measures  taken  at  national  level  to  relieve 
municipalities 
the 
infrastructure  programme  under  the  Municipal 
Investment  Promotion  Act  or  the  enlargement  of 
the services of the infrastructure consulting service 
company,  are  only  able  to  address  the  investment 
backlog  in  transport  infrastructure  to  a  limited 
extent. 

Germany  has  developed  a  climate  change 
adaptation  policy.  The  country  implemented  an 
adaptation  strategy  (BMUB,  2008)  a  decade  ago 
and  is  performing  well  on  almost  all  of  its 
adaptation  preparedness 
(European 
Commission,  2018k).  Furthermore,  all  Länder 
have  developed  regional  adaptation  strategies 
covering 100 % of German territory. Implementing 
these  adaptation  strategies  requires  additional 
investments. 

indicators 

Transport infrastructure  

Past  investment  levels  have  been  insufficient, 
leading  to  an  accumulated  investment  backlog, 
especially  in  rail  infrastructure  and  bridges, 
with  relevance  for  the  euro  area  beyond  the 
current account surplus. The quality of transport 
infrastructure  is  generally  high,  but  investment  in 
recent  years  has  increased  only  nominally;  in  real 
terms,  it  has  remained  constant  at  0.6 %  of  GDP 
and thus below pre-crisis levels. Consequently, the 
increases might be insufficient to make up for the 
investment backlog while improving infrastructure 
to meet future needs at the same time. As in other 
EU  Member  States,  besides 
infrastructure 
investment  to  build  new  projects  or  to  upgrade 
existing infrastructure to higher standards, there is 
also a significant need for maintenance to preserve 
construction  parameters  of  existing  infrastructure. 

is  making  good  progress  with 
Germany 
implementing 
the  TEN-T  network,  but 
investment needs remain high. A recent estimate 
by Germany assumes that between 2021 and 2030 
EUR 115 billion would be  needed on  the German 
sections  of  the  TEN-T  core  and  comprehensive 
network  (European  Commission,  2017b).  The 
German  Infrastructure  Plan  for 2030 fully reflects 
the  requirements  set  in  the  TEN-T  regulation. 
However, 
financial 
long-term  political  and 
commitments  to  complete  important  cross-border 
infrastructure, especially in the railway sector, are 
often  lacking  at  both  national  and  regional  level. 
As  Germany  is  a  major  transit  country,  this  not 
only  harms  the  functioning  of  the  internal  market 
but  also  contradicts  the  modal  shift  and  climate 
targets set at European and national level. Not until 
2021  will 
the  federal  transport  infrastructure 
company  be  operational  and  able  to  address  the 
complex  planning 
the 
different  levels  of  government.  Complicated  and 
lengthy approval procedures will be addressed by a 
strategy to help speed up planning and permit issue 
processes. However, it is not yet possible to predict 
how much it will speed up individual projects. 

responsibilities  across 

two 

subsectors 

Competition  in  the  railway  sector  is  increasing 
in 
(freight  and  regional 
passenger trains), but  the market  share  of new 
entrants  to  the  market  for 
long  distance 
passenger  train  services  remains  low.  New 

57 

Reduction target in Klimaschutzplan (climate protection plan)199020171990-20172016-20171990-2030Transport13 %19 %4 %3.1 %-40 % to -42 %Residential11 %10 %-31 %0.0 %-66 % to -67 % for buildingsCommerce, retail, and service sectors6 %4 %-50 %1.7 %-66 % to -67 % for buildingsAgriculture7 %8 %-20 %0.3 %-31 % to -34 %Waste management3 %1 %-74 %-4.3 %No specific targetShare of total emissionsChanges in emissionsEffort Sharing sectors 
 
 
 
4.4. Competitiveness reforms and investment* 

entrants  to  the  long  distance  passenger  train 
services market still accounted for only about 1 % 
of  the  market  in  2016,  and  no  progress  was 
observed in 2017 or 2018. The main reason for this 
is  the  high  level  of  track-access  charges  for  long-
distance  passenger  rail  transport,  which  result  in 
high  operating  costs,  the  necessity  for  sizeable 
investments  in  suitable  rolling  stock  and  the  need 
to secure attractive infrastructure slots. In 2017 and 
2018, 45 % and 66 % of train/km on suburban and 
regional  railway  networks  respectively  have  been 
tendered  competitively  (BAGSPNV,  2018).  For 
rail  freight  the  market  share  of  new  entrants  is 
already close to 50 %. Additionally, the rail freight 
masterplan  of  2017  (BMVI,  2017)  introduces  66 
measures  to  support  rail  freight  further,  including 
the  reduction  in  track  access  charges  for  rail 
infrastructure.  However,  implementation  of  the 
‘future of rail freight’ programme, which is part of 
the masterplan, will not start before 2020. 

4.4.4.  GOVERNANCE AND INSTITUTIONAL 

QUALTIY 

Digital public services  

authorities 

Germany is lagging behind in respect to digital 
public  services.  Germany  is  still  among  the  EU 
countries  with  least  online  interaction  between 
public 
citizens.  Currently, 
and 
eGovernment  services  are  fragmented  and  not 
always  very  user-friendly,  and  progress  in  this 
field  has  been  relatively  slow  in  the  past.  Several 
measures  were  taken  by  the  Federal  Government 
to  improve  the  situation.  An  exclusive  legislative 
competence  of 
the  Federal  Government  was 
incorporated  into  the  Constitution.  The  Online 
Access  Act  obliges  the  Federal  Government  and 
the  Länder  to  offer  their  administrative  services 
online within five years and to link their respective 
in  a  portal  network.  The  Federal 
portals 
Government plans to provide EUR 500 million for 
the implementation of the law and to set up an e-
government agency to develop standards and pilot 
projects.  The  IT  Planning  Council  launched  two 
projects:  the  digitalisation  programme  and  the 
National Gateway Network. 

Due  to  the  low  deployment  and  use  of  eHealth 
services,  Germany  foregoes  possible  efficiency 
gains  for  its  healthcare  system.  Only  7 %  of 
Germans  use  online  health  services  from  time  to 

time  (European  Commission,  2018h).  By  way  of 
comparison, almost half the population of Estonia 
and  Finland  do  so.  The  extremely  low  use  of 
eHealth  services  reflects  the  comparatively  low 
adoption  of  eHealth,  for  instance  among  general 
practitioners 
(European  Commission,  2019). 
Implementation  of  the  main  eHealth  project,  the 
electronic health card and its service infrastructure 
has  been  dragging  on  for  more  than  a  decade.  To 
give  new 
the  German 
Government introduced the new E-Health law that 
sets  milestones  for  the  deployment  of  a  digital 
eHealth  infrastructure  and  the  comprehensive  use 
of  the  electronic  health  card  in  all  medical 
establishments  as  of  mid-2018.  However,  the 
deadline  had  to  be  extended  to  mid-2019.  Apart 
from a few pilot projects, electronic health records 
and e-prescriptions have still not been rolled out in 
Germany.  

in  2015 

impetus, 

and 

infrastructure,  data 
the 

Investment needs in eHealth concern the digital 
service 
storage  and 
protection 
training  of  health 
professionals  in  using  eHealth  tools.  Based  on 
the  E-Health  law,  the  electronic  health  card  gives 
patients  and  members  of  the  medical  professions 
access  to  emergency  data,  medications  plans  and 
an  electronic  health  record.  Special  mobile  phone 
applications should as of 2021 give patients access 
to  their  electronic  health  record.  Furthermore,  in 
2018  the  German  Medical  Association,  using  its 
self-regulatory powers, eased the traditional ban on 
remote  treatment  in  the  professional  code  for 
physicians, to enable consultations in telemedicine. 

Public procurement 

procurement 

in  Germany 

is 
Public 
characterised  by  a  decentralised  public 
procurement landscape, a complex legal system 
and  a  lack  of  data  and  transparency.  At  1.2 % 
of  GDP,  Germany  has,  for  years,  recorded  the 
EU’s  lowest  values  for  contracts  published  EU-
wide (the EU average is 4.25 % of GDP). Greater 
transparency could improve the quality of services 
and allow for further efficiency gains. It could also 
improve  accountability  and 
in  public 
investment.  In  parts  of  the  health  sector,  the 
numbers of contract notices published are low and 
there are numerous cases in which only one bid is 
received.  So  far,  public  procurement  still  often 
resorts  to  established  or  less  innovative  solutions, 

trust 

58 

 
4.4. Competitiveness reforms and investment* 

leaving  potential 
products and services untapped. 

for  developing 

innovative 

eProcurement  has  become 
The  use  of 
mandatory,  which  may  also  help  address  the 
lack  of  data.  Data  on  public  procurement  is 
currently not collected centrally. This lack of data 
will  be  less  pronounced  once  the  regulation  on 
public procurement statistics is fully implemented. 
Better  use  of  eProcurement  could  also  improve 
data availability in public procurement. It has been 
mandatory  since  18.10.2018  to  use  eProcurement 
for  all  public  procurement  procedures  above  the 
EU 
important  step. 
Nevertheless,  the  complex  legal  system,  with 
different layers of legislation at federal and Länder 
level,  still  presents  challenges  for  public  buyers 
and economic operators alike. 

threshold,  which 

is  an 

59 

 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (51) 

2018 country-specific recommendations (CSRs)  

Germany has made Limited Progress in addressing 
CSR 1  

trend 

CSR 1: While respecting the medium-term objective, 
use  fiscal  and  structural  policies  to  achieve  a 
sustained  upward 
in  public  and  private 
investment,  and  in  particular  on  education,  research 
and  innovation  at  all  levels  of  government,  in 
particular  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.  

While  respecting  the  medium-term  objective,  use 
fiscal  and  structural  policies  to  achieve  a  sustained 
upward trend in public and private investment,  

Some  Progress  Overall,  the  investment  situation 
shows  signs  of  improvement,  but  further  action  is 
still  needed.  Public  investment  in  2018  grew  by  
7.7 %  nominally  and  by  3.8 %  in  real  terms.  This 
represents  a  noticeable  increase  compared  to  past 
years and the long-term average. However, given the 
backlog  especially  at  municipal 
level,  public 
investment still needs greater efforts to maintain the 
capital stock. This could be achieved, in particular by 
addressing  planning  constraints  as  well  as  the  high 
regional  differences  of  public  investment,  which 
suggest  that  the  current  fiscal  set  up  does  not  yet 
provide  all  municipalities  with  sufficient  financial 
resources  and  staff  to  significantly  step  up  their 
investment  levels.  Private  investment  has  increased 
noticeably  as  well,  but  not  across  all  asset  types. 

(51)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 

-no legal, administrative, or budgetary measures have been announced  
-in the national reform programme, 
-in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission,  
-publicly (e.g. in a press statement or on the government's website);  
-no non-legislative acts have been presented by the governing or legislative 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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 
-announced certain measures but these address the CSR only to a limited extent; and/or 
-presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented;  

-presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
-that partly address the CSR; and/or  
-that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures have been 
implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision, but 
no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

60 

 
 
                                                           
A. Overview Table 

robustly 

to  boom  even 

Equipment 
in 
investment  has  grown 
response to record high capacity utilisation. Housing 
investment  continues 
the 
construction  sector  reports  capacity  constraints  and 
price  increases.  Non-residential  construction  has 
been  increasing  sluggishly  in  real  terms,  suggesting 
that  essential  infrastructure  may  not  have  kept  up 
with the economy’s needs. 

if 

and in particular on education,  

in 

Limited  Progress  Spending  rose  in  real  terms  but 
remained  flat  as  a  share of GDP  at  4.2%. Important 
investment  were  announced 
the  coalition 
agreement.  However,  the  investment  backlog  in 
education  is  by  now  bigger  than  in  other  sectors  at 
municipal 
level.  Legislative  changes  for  direct 
government investment in the Länder is put on hold, 
with  a  stalling  effect  on  important  investments  in 
education  infrastructure  and  other  projects  (digital 
education).  

research  and  innovation  at  all  levels  of  government, 
in particular at regional and municipal levels.  

intensity  increased  from 
Some  Progress  R&D 
2.71 %  of  GDP  in  2010  to  3.02 %  in  2017.  The 
national  (and  EU)  target  of  3 %  has  thus  been 
achieved.  In  real  absolute  terms,  growth  was  also 
faster than the EU average. While expenditure by the 
business  sector  grew  faster  than  spending  by  the 
government  and  the  higher  education  sectors,  R&D 
intensity  in  the  business  sector  also  expanded  faster 
in  pps  (from  1.82 %  in  2010  to  2.09 %  of  GDP  in 
2017)  than  in  the  public  sector  (where  it  increased 
from 0.89 % of GDP in 2010 to 0.93 % in 2017).  

Step up efforts to ensure the availability of very high-
capacity broadband infrastructure nationwide.  

to 

the 

improve 

Limited  Progress  Overall,  there  are  encouraging 
announcements 
nationwide 
broadband infrastructure, but so far only small steps 
have  been  taken  regarding  their  implementation. 
Germany is lagging behind in the deployment of very 
high-capacity  broadband  on  a  national  level,  and 
particularly in rural areas. The market share of fibre 
optics  connections  was  still  at  a  very  low  level  of 
only 2.1 % in July 2017, compared to a significantly 
higher  EU  average  of  almost  12.9 %.  Concerning 
take-up  rates  for  ultrafast  connections  (DAE  target 
III), 11.1 % of German households subscribe to 100 
Mbps or more. This is way below the EU average of 
15.4 %. The Federal Government has acknowledged 
the  problem  and  has  taken  first  steps  to  address  it. 
The  special 
fund  was 
announced  and  EUR 2.4 billion  was  allocated  from 
the  2018  federal  budget.  Moreover,  a  Gigabit 
Investment Fund of EUR 10-12 billion was included 
in the coalition agreement of the parties forming the 

Infrastructure’ 

‘Digital 

61 

 
A. Overview Table 

federal  government,  to  be  spent  by  2021  (i.e.  in  the 
next  four  years) 
to  roll  out  gigabit 
infrastructure.  If  implemented,  this  could  be  a  big 
digital 
step 
infrastructure in Germany. 

future-proof 

a  more 

in  order 

towards 

Improve the efficiency and investment-friendliness of 
the tax system.  

Limited Progress Overall, there is still  more action 
needed  to  improve  the  efficiency  and  investment-
friendliness  of  the  tax  system.  Although  some 
measures  are  expected  to  lead  to  improvements,  the 
most  important  distortions  are  not  fully  addressed, 
the  tax  system  overall  remains  complex  and  the 
marginal  tax  burden  on  new  investments  or  for 
taking up  (additional) work  is  still  high. After  some 
improvements  in  this area  in recent  years, relatively 
little  progress  has  been  made  over  the  past  year. 
Germany  adopted  a  reform  designed  to  modernise 
and automate tax administration procedures in 2017, 
but this is still in the process of being implemented. 
As of 2018, Germany simplified the tax treatment of 
mutual  investment  funds  and  their  investors.  At  the 
same time, it removed some restrictions on offsetting 
losses  when  loss-making  companies  are  bought  by 
new investors. It remains to be seen if these two new 
real 
measures  can  actually 
investment. 

trigger  additional 

Strengthen  competition  in  business  services  and 
regulated professions.  

lead 

to  competition 

Limited  Progress  Barriers 
in 
business  services  remain  high  in  comparison  with 
other EU Member States. Data on business dynamics 
and  profitability  are  suggesting  lower  competitive 
pressures  in  key  business  services  sectors  such  as 
legal,  accounting,  architectural  and  engineering 
activities,  which 
to  higher  mark-ups. 
Professional  services  are  still  overregulated,  where 
exclusive  rights,  compulsory  chamber  membership, 
and regulation  on prices  and  fees  stifle  competition. 
This  is problematic  given  the  high  share  of  services 
inputs 
industry. 
the  German  manufacturing 
Changes  in  the  regulation  of  services  could  boost 
economic  activity  and  investment  in  Germany. 
Policy  actions  to  stimulate  competition  in  business 
services  and  regulated  professions  have  not  been 
recorded, with the exception of minor measures as a 
follow-up  to  individual  court  decisions  concerning 
the professions of lawyers and tax advisors. 

in 

CSR  2:  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 

Germany  has  made  Some  Progress  in  addressing 
CSR 2  

62 

 
A. Overview Table 

social  partners.  Improve  educational  outcomes  and 
skills levels of disadvantaged groups.  

Reduce disincentives to work more hours,  

Some Progress A number of measures were taken to 
reduce disincentives to work more hours. From 2019, 
the  midi-job  earning  threshold  was  raised  from 
EUR 850  to  EUR 1300,  resulting  in  a  more  gradual 
phase-in  of  social  security  contributions.  This  will 
reduce  marginal  tax  rates  for  certain  groups  of  low 
wage earners. Further measures, such as the right to 
return  to full  time  employment,  may  also  contribute 
to higher employment of women. 

including  the  high  tax  wedge,  in  particular  for  low-
wage [earners] 

from 

2019; 

health 

Some  Progress  As  of  2019,  the  social  security 
burden on self-employed people has been reduced, as 
their  monthly  minimum 
insurance 
contribution  will  fall  from  EUR 360  to  EUR 160. 
The  family  benefit  supplement,  responsible  for  high 
marginal effective tax rates for certain family types, 
such  as  single  earners  with  children,  will  be  phased 
out  more  gradually  when  earned  income  increases, 
instead  of  full  withdrawal  at  the  cut-off  point. 
Unemployment contributions will be reduced by 0.5 
pps 
be 
counterbalanced  by  a  0.5  pps  increase  in  the  long- 
term care contribution rate. The reintroduction of the 
rule requiring employers and employees to pay equal 
contributions to statutory health insurance will result 
in  an  average  reduction  of  0.5  pps  in  contributions 
for  employees  and  pensioners,  thereby  increasing 
take-home  pay  and  unit  labour  costs.  However,  as 
this is counterbalanced by an increase in employers’ 
contributions, the effect on the tax wedge is neutral. 
The increase in the basic personal allowance in 2019 
appears  to  roughly  match  inflation,  so  it  will  not 
result in an effective reduction in taxation.  

this  will 

however, 

and second earners.  

Take measures to promote longer working lives.  

Limited  Progress  Some  efforts  have  been  recorded 
to  promote  the  use  of  the  alternative  factor  method 
(Faktorverfahren)  to  tackle  the  high  marginal  tax 
rates on take-home pay for the second earner, given 
the  current  set-up  of  joint  income  taxation  for 
married  couples 
(Ehegattensplitting).  However, 
disincentives  to  working  more  hours  persist.  In 
addition  to  the  joint  taxation  framework,  these 
include  a  persistent  supply  gap  in  the  provision  of 
full-time quality childcare. 

Limited  Progress  The 
in  pension 
entitlements  for  women  with  children  born  before 
1992  (Mütterrente  II)  and  for  people  with  disability 
pensions  (Erwerbsminderungsrente)  are  expected  to 

increases 

63 

 
A. Overview Table 

improve  pension  adequacy  for  these  groups.  Yet 
neither  these  measures,  nor  the  double  pension 
stopline (Doppelte Haltelinie) — setting a minimum 
benefit  rate  and  maximum  contribution  rate  until 
2025  —  are  expected  to  promote  longer  working 
lives.  There  is  no  official  assessment  yet  of  the 
impact of the flexible retirement (Flexirente) reform, 
which  entered  into  force  in  2017,  and  the  Pension 
Commission’s  proposals  for 
increasing  pension 
system sustainability and adequacy are not expected 
until March 2020. 

Create  conditions  to  promote  higher  wage  growth, 
while respecting the role of the social partners.  

Some Progress Nominal wage growth accelerated to 
3.2 %  in  2018.  However,  real  wage  growth  has  not 
yet  picked  up.  Some  measures  have  been  taken  to 
support  wage  growth,  while  the  effect  of  earlier 
measures  has  tended  to  fade  away.  Earlier  policy 
measures,  such  as  the  introduction  of  the  general 
statutory  minimum  wage  in  2015,  had  a  substantial 
impact  on  wage  growth.  However,  by  now,  low 
wages  have  largely  adjusted  and  the  increase  in  the 
minimum  wage  currently  sends 
limited  price 
impulses, which  is also reflected  in  the reduction of 
the  wage  drift.  Collective  bargaining  coverage 
continued to decline in 2017. A collective agreement 
was reached for public employees at the federal and 
the  municipal  level,  affecting  about  2.3  million 
workers  directly  and  300 
thousand  workers 
indirectly. The agreement, which runs for 30 months 
from  March  2018,  stipulates  wage  increases  and 
lump-sum  payments,  which,  taken  together,  will 
yield  about  3.0 %  of  annualised  nominal  wage 
increase. This is about 0.6 pps higher annualised than 
the previous wage agreement for the sector, which is 
somewhat  below  the  increase  in  inflation  since  the 
previous agreement was reached in early 2016.  

Improve  educational  outcomes  and  skills  levels  of 
disadvantaged groups.  

and/or 

implemented  by 

socio-economic 
strongly 
still 

Limited  Progress  Several  measures  to  improve 
the  Länder. 
equity  are  being 
migrant 
However, 
background 
educational 
participation  and  outcomes.  Recent  national  sources 
on  education  mark  insufficient  progress  over  time. 
Remedial measures, such as increasing the number of 
all-day  schools,  are  threatened  by  serious  shortages 
of teaching staff. 

impact 

64 

 
 
 
A. Overview Table 

Europe 2020 (national targets and progress)  

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

79.8 % in the year ending September 2018. 

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

71.0 % in the year ending September 2018. 

Employment rate of women: 73 % 

75.7 % in the year ending September 2018. 

R&D  target:  3.0 %  of  GDP,  of  which  one-third 
public and two-third private  

3.02 % in 2017, of which about one-third public and 
two-third private. 

Greenhouse  gas  (GHG)  emissions  target:  -14  %  in 
2020 compared with 2005 (in sectors not included in 
the EU emissions trading scheme) 

According to the latest national projections submitted 
to  the  Commission  and  taking  into  account  existing 
measures,  the  non-ETS  greenhouse  gas  emissions 
between 2005 and 2020 are expected to decrease by 
10.7 %. This means that the target is expected to be 
missed by a margin of 3.3 pps. Based on preliminary 
data,  the  intermediary  reduction  target  for  2017  of 
9.5 % was missed by 6.8 pps. 

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

15.2 % in 2017 (preliminary)  

2020  Energy  efficiency,  indicative  national  2020 
target:276.6 Mtoe (primary energy consumption) 

Germany  decreased  its  primary  energy  consumption 
between 2005 and 2016 by 6.8 %, to 295.8 Mtoe.  

Early school leaving target: <10 %. 

At 10.1 % in 2017, Germany is close to the European 
target  and  to  the  national  target  and  below  the  EU 
average of 10.7 %. 

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

is 

to 

increase 

continuing 

tertiary 
Germany 
attainment,  which  stood  at  34.0 %  in  2017  but 
remained  below  the  EU  average  of  39.9 %  and  the 
EU  target of  40 %.  The  national  target  of 42 %  also 
includes  ISCED  level 4 (unlike  the  EU  target),    and 
has thus been met (48.8 % in 2017). 

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 
long-term 
reduction  by  320 000 
unemployed). 

(i.e. 

The  number  of  long-term  unemployed  people  (LFS 
definition)  fell  by  950 000  between  2008  and  2017 
(by about 58 %). 

65 

 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

66 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio63.960.156.753.750.748.045.543.441.640.139.038.037.3Changes in the ratio (-1+2+3)-4.0-3.7-3.4-3.0-3.0-2.7-2.4-2.1-1.8-1.5-1.2-1.0-0.7of which(1) Primary balance (1.1+1.2+1.3)2.12.52.01.91.91.81.71.61.51.31.11.00.9(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)1.82.41.81.91.91.81.71.61.51.31.11.00.9(1.1.1) Structural primary balance (bef. CoA)1.82.41.81.91.91.91.91.91.91.91.91.91.9(1.1.2) Cost of ageing0.10.20.40.60.81.11.31.51.6(1.1.3) Others (taxes and property incomes)0.10.10.20.30.40.50.50.60.6(1.2) Cyclical component0.40.30.20.00.00.00.00.00.00.00.00.00.0(1.3) One-off and other temporary measures-0.2-0.20.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-1.4-1.2-1.4-1.1-1.1-0.9-0.8-0.5-0.4-0.20.00.10.2(2.1) Interest expenditure1.00.90.90.80.80.80.90.91.01.01.11.21.2(2.2) Growth effect-1.4-1.1-1.1-0.9-1.0-0.8-0.7-0.5-0.5-0.4-0.3-0.3-0.3(2.3) Inflation effect-1.0-1.1-1.2-1.0-1.0-1.0-0.9-0.9-0.9-0.8-0.8-0.8-0.7(3) Stock-flow adjustments-0.50.00.00.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.DE - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 303540455055606570758020162017201820192020202120222023202420252026202720282029Debt as % of GDP -DEBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario30405060708020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -DEp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline303540455055606570758020162017201820192020202120222023202420252026202720282029Debt as % of GDP -DEBaselineHistorical SPB scenarioSGP scenario303540455055606570758020162017201820192020202120222023202420252026202720282029Debt as % of GDP -DEBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWLOWDebt level (2029)37.339.639.940.039.5Debt peak year20182018201820182018Percentile rank26.0%29.0%Probability debt higher1.0%Dif. between percentiles15.0LOWLong termDSALOWDebt sustainability analysis (detail)Medium termLOWLOWShort termLOW(S0 = 0)(S1 = -2)S2LOW(S2 = 1.7)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
2) Latest data Q2 2018. 
3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

67 

201320142015201620172018Total assets of the banking sector (% of GDP)1)266.4265.5251.4246.6235.3229.9Share of assets of the five largest banks (% of total assets)30.632.130.631.429.7-Foreign ownership of banking system (% of total assets)2)4.14.44.47.16.96.6Financial soundness indicators:2)              - non-performing loans (% of total loans)-3.93.02.61.81.7              - capital adequacy ratio (%)18.717.317.918.118.818.5              - return on equity (%)3)1.32.51.72.22.94.8Bank loans to the private sector (year-on-year % change)1)0.51.32.33.73.94.8Lending for house purchase (year-on-year % change)1)2.02.43.53.74.04.5Loan to deposit ratio2)-97.594.692.689.490.3Central Bank liquidity as % of liabilities1)-1.11.01.11.61.5Private debt (% of GDP)102.798.698.298.5100.1-Gross external debt (% of GDP)2) - public45.848.743.639.834.132.1    - private41.141.344.644.343.944.2Long-term interest rate spread versus Bund (basis points)*------Credit default swap spreads for sovereign securities (5-year)*14.912.77.711.58.15.7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). 
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.   
(3) Long-term unemployed are people who have been unemployed for at least 12 months. 
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
(5) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first three quarters of 2018). 
Source: Eurostat 

68 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)9.89.510.110.310.1:Gender employment gap (pps)9.69.18.78.27.98.1Income inequality, measured as quintile share ratio (S80/S20)4.65.14.84.64.5:At-risk-of-poverty or social exclusion rate1 (AROPE)20.320.620.019.719.0:Young people neither in employment nor in education and training (% of population aged 15-24)6.36.46.26.76.3:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)77.377.778.078.679.279.8Unemployment rate2 (15-74 years)5.25.04.64.13.83.4Long-term unemployment rate3 (as % of active population)2.32.22.01.71.61.4Gross disposable income of households in real terms per capita4 (Index 2008=100) 102.9104.2105.3106.9108.5:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)25413259352652827040::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)0.10.51.11.7::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction534.033.233.534.833.2:Children aged less than 3 years in formal childcare27.027.525.932.630.3:Self-reported unmet need for medical care1.61.60.50.30.3:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::67.068.068.0: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as ‘unadjusted’, as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included. 
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
(4) Average of first three quarters of 2018 for the activity rate, employment growth, employment rate, part-time employment, 
fixed-term employment. Data for youth unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first 
three quarters of 2018). 
Source: Eurostat, OECD 

69 

Labour market indicators201320142015201620172018 4Activity rate (15-64)77.677.777.677.978.278.5Employment in current job by durationFrom 0 to 11 months12.112.012.212.412.5:From 12 to 23 months9.28.88.99.09.4:From 24 to 59 months15.516.215.915.315.6:60 months or over60.860.760.659.959.6:Employment growth* (% change from previous year)0.60.80.91.31.41.3Employment rate of women(% of female population aged 20-64)72.573.173.674.575.275.6Employment rate of men (% of male population aged 20-64)82.182.282.382.783.183.8Employment rate of older workers* (% of population aged 55-64)63.665.666.268.670.171.0Part-time employment* (% of total employment, aged 15-64)26.626.526.826.726.926.8Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)13.413.113.213.212.912.5Participation in activation labour market policies(per 100 persons wanting to work)30.831.130.319.5::Transition rate from temporary to permanent employment(3-year average)36.132.929.130.331.3:Youth unemployment rate (% active population aged 15-24)7.87.77.27.16.86.2Gender gap in part-time employment (aged 20-64)38.337.838.037.937.537.4Gender pay gap1 (in undadjusted form)22.122.322.021.521.0:Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)7.98.08.18.58.4:Underachievement in education2::17.2:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)32.931.432.333.234.0:Variation in performance explained by students' socio-economic status3::15.8::: 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33 %), mobile broadband take up (22 %), speed (33 %) and affordability (11 %), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

70 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare9.49.79.79.89.8:Disability2.22.22.22.22.3:Old age and survivors11.010.910.910.910.9:Family/children3.13.13.13.23.2:Unemployment1.11.11.11.01.0:Housing0.60.60.60.60.5:Social exclusion n.e.c.0.20.20.20.30.4:Total27.627.927.728.028.2:of which: means-tested benefits3.33.33.43.53.7:General government expenditure by function (% of GDP, COFOG)Social protection18.818.918.819.019.3:Health6.87.07.17.17.2:Education4.24.34.24.24.2:Out-of-pocket expenditure on healthcare (% of total health expenditure)13.913.112.612.712.4:Children at risk of poverty or social exclusion (% of people aged 0-17)*18.419.419.618.519.318.0At-risk-of-poverty  rate1 (% of total population)16.116.116.716.716.516.1In-work at-risk-of-poverty rate (% of persons employed)7.88.69.99.79.59.1Severe material deprivation rate2  (% of total population)4.95.45.04.43.73.4Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.50.50.30.70.20.3Tenant, rent at market price3.53.03.63.23.83.5Proportion of people living in low work intensity households4 (% of people aged 0-59)9.99.910.09.89.68.7Poverty thresholds, expressed in national currency at constant prices*107721054410454108621116911462Healthy life years (at the age of 65)Females6.97.06.712.312.4:Males6.77.06.811.411.5:Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.50.50.50.5Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::62.166.969.171.5GINI coefficient before taxes and transfers*50.551.751.651.550.850.0GINI coefficient after taxes and transfers*28.529.730.730.129.529.0 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed. 
(2) Compensation of employees in current prices divided by value added in constant prices. 
(3) The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology. 
(4) 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 if the outcome is not known. 
(5) Percentage population aged 15-64 having completed tertiary education. 
(6) Percentage population aged 20-24 having attained at least upper secondary education. 
(7) 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 
(8) 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). 

71 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-2.00-0.754.232.334.461.34Labour productivity growth in construction-2.60-3.083.190.380.810.77Labour productivity growth in market services0.060.850.310.17-0.441.01Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry3.704.08-1.630.49-2.320.76ULC growth in construction4.782.860.013.341.701.85ULC growth in market services3.590.453.413.152.932.35Business environment201220132014201520162017Time needed to enforce contracts3 (days)394394459479499499Time needed to start a business3 (days)14.514.514.510.58.08.0Outcome of applications by SMEs for bank loans40.280.170.580.350.380.18Research and innovation201220132014201520162017R&D intensity2.872.822.872.912.923.02General government expenditure on education as % of GDP4.204.304.204.204.20:Employed people with tertiary education and/or people employed in science and technology as % of total employment434344444545Population having completed tertiary education5252523242425Young people with upper secondary education6767777777878Trade balance of high technology products as % of GDP1.051.050.900.961.030.97Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall1.801.411.29OECD PMR7, retail3.382.882.71OECD PMR7, professional services3.032.822.65OECD PMR7, network industries81.871.331.27 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (Europe 2020-2030)(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 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  
Industry energy intensity: final energy use in industry (in kgoe) divided by gross value added of industry, including construction 
(in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 00 mWh 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 (GBAORD) for these categories as % of GDP 
Proportion of GHG emissions covered by EU Emission 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 use in transport sector including international aviation, (in kgoe) divided by transport 
industry gross value added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport sector divided by gross value added of the transport activities 
Energy import dependency: net energy imports divided by gross inland energy consumption plus consumption of 
international maritime bunkers 
Aggregated supplier concentration index:  Herfindahl-Hirschman index for net imports of crude oil and NGL, natural gas and 
hard coal. Smaller values indicate larger diversification and hence lower risk. 
Diversification of the energy mix: Herfindahl-Hirschman index of the main energy products in the gross inland consumption of 
energy 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes); Eurostat (all other indicators) 

72 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.120.120.110.110.110.11Carbon intensity kg / €0.340.350.330.320.32-Resource intensity (reciprocal of resource productivity)kg / €0.490.490.490.470.460.44Waste intensity kg / €0.14-0.14-0.14-Energy balance of trade % GDP-3.6-3.4-2.8-2.0-1.5-1.7Weighting of energy in HICP%12.612.411.911.810.410.5Difference between energy price change and inflation %3.63.2-1.6-5.5-5.0-0.2Real unit of energy cost% of value added26.321.021.522.423.5-Ratio of environmental taxes to labour taxesratio0.100.090.090.090.08-Environmental taxes% GDP2.12.12.01.91.91.8Sectoral Industry energy intensity kgoe / € 0.080.080.070.070.070.07Real unit energy cost for manufacturing industry excl. refining% of value added23.817.618.319.420.5-Share of energy-intensive industries in the economy% GDP9.79.59.59.59.7-Electricity prices for medium-sized industrial users€ / kWh0.130.140.160.150.150.15Gas prices for medium-sized industrial users€ / kWh0.040.050.040.040.030.03Public R&D for energy % GDP0.040.050.050.040.040.04Public R&D for environmental protection% GDP0.020.030.030.030.020.03Municipal waste recycling rate%65.263.865.666.767.167.6Share of GHG emissions covered by ETS*%51.551.151.450.349.9-Transport energy intensitykgoe / €0.560.550.570.570.590.59Transport carbon intensitykg / €1.401.411.451.481.50-Security of energy supplyEnergy import dependency%61.963.061.962.263.763.9Aggregated supplier concentration indexHHI13.815.015.218.125.1-Diversification of energy mixHHI0.240.250.250.250.250.25 
 
 
 
 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR GERMANY 

Building on the Commission proposal for the next Multiannual Financial Framework for the period 2021-
2027 of 2 May 2018 (COM (2018) 321), this Annex D presents the preliminary views of the Commission 
services on priority investment areas and framework conditions for effective delivery of the 2021-2027 
Cohesion Policy. (52) These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis for a dialogue between Germany and the Commission services in view of the programming of the 
cohesion policy funds (European Regional Development Fund and European Social Fund Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Germany boasts some of the most innovative regions in the EU, however performance varies between 
regions and the country as a whole has slipped from its former position of 'Innovation Leader' to 'Strong 
Innovator'.  Therefore  priority  investment  needs (53)  have  been  identified  to  'enhance  research  and 
innovation capacities and the uptake of advanced technologies', and in particular to: 

  strengthen innovation performance and foster productivity growth by identifying smart specialisation 

areas on the basis of national and regional needs and potential. 

 

facilitate the transition towards new technologies, based on smart specialisation strategies. 

  boost  expenditure  on  research  and  development  and  innovation,  particularly  private  investment  of  
small  and  medium-sized  enterprises  and  in  the  East  of  Germany.  Continue  investment  in  the 
development of key enabling and emerging technologies. 

  enhance  technology  transfer  between  the  public  and  private  sectors,  in  and  across  regions  and 

beyond borders, especially in new value chains.   

  build synergies and joint projects with other Länder, regions and Member States. 

Widespread adoption of new Information and Communications technology would support productivity 
growth in Germany, leading to more sustainable trajectories. Therefore priority investment needs have 
been  identified  to  'reap  the  benefits  of  digitisation  for  citizens,  companies  and  governments',  and  in 
particular to: 

 

increase  Information  and  Communications  Technology  uptake  in  small  and  medium-sized 
enterprises,  including  supporting  infrastructures  and  services,  supporting  the  development  and 
implementation  of  business  models  based  on  new  technologies,  with  a  special  focus  on  digital 
newcomers and laggards.   

  enhance the provision of public e-services including possible cross-border activities when there is a 

need and improve their uptake by citizens. 

Private  research  and  innovation  in  Germany  is  concentrated  in  large  enterprises  rather  than  small  and 
medium-sized enterprises, the latter having fallen behind their international counterparts, which impacts 
on their competitiveness. Hence, priority investment needs have been identified to 'enhance growth and 
competitiveness  of  small  and  medium-sized  enterprises'  especially  in  the  East  of  Germany,  and  in 

(52)  This Annex is to be considered in conjunction with the Proposal for a Regulation of the European Parliament and of the Council 
on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the Proposal for a Regulation of 
the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382 and in particular as regards  the 
requirements for thematic concentration and urban earmarking outlined in these proposals 

(53)  The intensity of needs is classified in three categories in a descending order -  high priority needs, priority needs, needs. 

73 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Germany 

particular to: 

  support  small  and  medium-sized  enterprises  to  increase  their  own  innovation  competence,  by 
implementing  innovation  and  fostering  cooperation  with  other  small  and  medium-sized  enterprises 
and research organisations, also in other Member States.   

  provide support for small and medium-sized enterprises to bridge the critical stages of development 
(incl.  scale-up),  especially  for  innovative  start-ups,  in  particular  in  transition  regions.  Improve 
possibilities  for  small  and  medium-sized  enterprises  business  succession  by  providing  advice  and 
funding. 

  make the economy more circular and resource-efficient, for example by supporting eco-innovations 

and business models for more sustainable products and production systems.  

The  German  economy  faces  the  challenge  of  a  significant  shortage  in  qualified  workers,  the  risk  of 
automation  and  shortcomings  in  respect  of  life-long  learning  outcomes.  Investment  needs  have  been 
identified to 'develop skills for smart specialisation, industrial transformation and entrepreneurship', and 
in particular to: 

  provide  support  for  upskilling  of  the  workforce,  refining  and  reshaping  of  skill  sets  of  existing 
occupations  and  (re)training  workers  towards  new  demands,  including  the  cross-border  labour 
market. 

  promote  the  good  practises  for  high-tech  leadership  skills  and  develop  measures  within  smart 

specialisation strategies to overcome the shortage of highly-skilled professionals. 

  strengthen  the  integration  of  education  and  training  institutions,  including  higher  education  and 
centres of vocational excellence, within national and regional innovation, technology diffusion and 
skills development ecosystems.  

  develop skills in smart specialisation areas for small and medium-sized enterprises, in particular in 
relation  to  digitalisation,  industrial  transformation  and  entrepreneurship,  in  cooperation  with 
education and training institutions.  

Policy Objective 2: A low carbon and greener Europe – Clean and fair energy transition, Green 
and blue investment, circular economy, climate adaptation and risk prevention 

Germany  is  not  on  track  with  the  European  and  national  indicative  energy  efficiency  targets,  where 
continued  sustained  efforts  are  required.  Priority  investment  needs  have  been  identified  to  'promote 
energy efficiency measures', and in particular to: 

  promote energy efficiency in public buildings. Cohesion policy could continue to be used to renovate 

the existing building stock. 

Germany  is  experiencing  significant  change  in  the  energy  sector,  as  it  moves  towards  renewable 
sources,  but  electricity  networks  are  too  slow  in  adapting  to  renewable  production,  with  insufficient 
progress in transmission and distribution grids and the storage of electricity. Investment needs have been 
identified to 'develop smart energy systems, grids and storage at local level', and in particular to: 

  support research and development, demonstration projects on energy storage and flexible generation 
capacities and smart distribution grids at local level, including cooperation with partners from other 

74 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Germany 

regions and Member States.  

The  challenges  of  climate  change  and  natural  disasters,  especially  floods,  threaten  certain  regions  in 
Germany.  Investment  needs  haven  been  identified  to  'promote  climate  change  adaptation,  risk 
prevention and disaster resilience', and in particular to: 

 

increase cross border and transnational cooperation in finding the most suitable, in particular nature 
based, adaptation and risk prevention measures and applying such measures. 

There is room to improve the circularity of the German economy, particularly in the small and medium-
sized  enterprises  sector.  Investment  needs  have  been  identified  to  'promote  the  transition  to  a  circular 
economy', and in particular to: 

  support  small  and  medium-sized  enterprises  to  make  their  use  of  resources  more  efficient  and 
productive  for  example  with  tools  like  demonstrations  of  new  technologies  or  processes,  and  case 
study databases. 

  support  small  and  medium-sized  enterprises,  especially  in  the  East  of  Germany,  to  make  their 
business processes more circular, particularly by supporting small and medium-sized enterprises in 
implementing circular economy solutions and sharing best-practices with other regions and Member 
States. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

The high share of women in part-time work reflects their not fully used labour market potential. Priority 
investment needs have therefore been identified to promote women’s labour market participation, a 
better work-life balance including access to full-time childcare and all day schools, especially by 
addressing regional disparities in provision, and in particular to:  

  develop  and  implement  work-life  balance  policies  and  support  the  sustainable  labour  market 

reintegration of persons who have been absent due to caring duties;  

  supporting social partners and enterprises to raise awareness and address gender segmentation in the 

labour market and the gender pay gap. 

Germany is experiencing skilled labour shortages with a strong regional dimension, while people with a 
migrant background find it harder to access the labour market. Priority investment needs have therefore 
been  identified  to  improve  the  quality,  equity,  effectiveness  and  labour  market  relevance  of 
education and training, and to promote lifelong learning, notably flexible upskilling and reskilling, 
taking  into  account  digital  skills,  facilitate  career  transitions  and  promote  professional mobility, 
and in particular to:  

  build flexible pathways between education and training and work and improve uptake of basic and 

digital skills; 

  develop  and  implement  methods  and  technologies  delivering  tailored  support  to  disadvantaged 
learners;  address  teachers'  upskilling  to  better  prepare  them  for  an  inclusive  school  system  with  a 
diverse classroom environment;   

  develop and implement access to lifelong learning and guidance services; 

  support  active  labour  market  policies,  upskill  and  reskill  the  labour  force  through  adult  learning 

75 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Germany 

programmes, including for migrants and low-skilled adults. 

The labour market participation of refugees and significant regional differences in the risk of poverty or 
social exclusion remain challenges. Priority investment needs have therefore been identified to promote 
the socio-economic integration of third country nationals and to promote the social integration of 
people  at  risk  of  poverty  or  social  exclusion,  including  the  most  deprived  and  children  and  in 
particular to:  

 

improve  access  to  employment  through  individualised  support,  guidance  and  access  to  vocational 
education and training and support a successful transition from school to employment. 

  support social inclusion and social innovation promoting the social integration and health status of 

children at risk of poverty or social exclusion 

Policy Objective 5 –  A Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated  
development  of urban, rural and coastal areas and local initiatives 

Germany  is  experiencing  varied  territorial  dynamics,  marked  by  growth  of  certain  areas  -  particularly 
regional  urban  centres,  where  urban  and  social  challenges  such  as  integration  of  migrants, 
unemployment  and  poverty  can  be  found.  Investment  needs  have  been  identified  to  'foster  integrated 
social, economic and environmental development, cultural heritage and security in urban areas', and in 
particular to: 

  support  Smart  City  initiatives  in  cities,  in  particular  in  cooperation  with  universities,  experimental 
projects,  smart  urban  mobility  (including  cross-border  connections,  where  appropriate)  as  well  as 
investments in relation to the low-carbon economy agenda.  

  develop urban-rural cooperation, especially around growing major cities. 

  develop deprived neighbourhoods in order to increase attractiveness for enterprises and workforce. 

Tackle social transformation processes, including integration of migrants.  

 

 

improve  access  to  social  housing  through  support  of  community  based  solutions  and  integrated 
services 

increase planning capacity of public administrations, especially by developing or creating specialised 
common capacities, in particular for the roll out of broadband in small and rural municipalities. 

  promote cooperation and the exchange of knowledge and expertise between towns and cities, both 

within the regional and national context, while also reaching out to other EU regions. 

Germany is facing structural transition challenges in the coal mining regions as a result of the planned 
phasing  out  of  coal.  Investment  needs  have  been  identified  to  'foster  integrated  social,  economic  and 
environmental  local  development,  cultural  heritage  and  security,  including  for  rural  and  coastal  areas 
also through community-led local development', and in particular to: 

  develop coal regions, managing structural change in order to increase attractiveness for enterprises 

and the workforce, complementing the EU Coal Regions Initiative.  

76 

 
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Germany 

Factors for effective delivery of Cohesion policy 

 

improved public procurement performance, in particular as regards publication rates and small and 
medium-sized enterprises participation; 

  broader use of financial instruments and /or contributions to a German compartment under InvestEU 

for revenue-generating and cost-saving activities; 

  a balanced number of intermediate bodies and strengthening their performance; 

 

take  into  account  the  lessons  learnt  in  Saxony  during  the  implementation  of  the  Commission  pilot 
project  on  industrial  transition,  in  particular  as  regards  the  impact  of  new  technologies, 
decarbonisation and the promotion of inclusive growth; 

  adequate participation and strengthened capacity of social partners, civil society and other relevant 

stakeholders in the delivery of policy objectives. 

77 

 
 
 
REFERENCES 

Agora Energiewende (2018), Eine Neuordnung der Abgaben und Umlagen auf Strom, Wärme, Verkehr. 
Optionen für eine aufkommensneutrale CO2-Bepreisung, Agora Energiewende, Berlin.  

Autorengruppe Bildungsberichterstattung (2018), Bildung in Deutschland 2018. Ein indikatorengestützter 
Bericht mit einer Analyse zu Wirkungen und Erträgen von Bildung. Bielefeld. 

Bach,  S  (2016),  Erbschaftsteuer,  Vermögensteuer  oder  Kapitaleinkommensteuer:  Wie  sollen  hohe 
Vermögen besteuert werden?, DIW Discussion Papers, 1619, The German Economic Research Institute 
(DIW Berlin), Berlin. 

Bach, S (2018), Familienangelegenheit? Leibniz Magazin 03/2018, Leibniz Gemeinschaft, Berlin. 

Bach,  S.,  Thiemann,  A.  (2016),  Inheritance  Tax  Revenue  Low  Despite  Surge  in  Inheritances,  DIW 
Economic Bulletin 4+5 2016, The German Economic Research Institute (DIW Berlin), Berlin.  

Bach, S., Thiemann, A. and Zucco, A. (2018a), Looking for the missing rich: Tracing the top tail of the 
wealth  distribution,  JRC  Working  Papers  on  Taxation  and  Structural  Reforms  No  4,  The  German 
Economic Research Institute (DIW Berlin), Berlin. 

Bach, S., Buslei, H., and Harnisch, M. (2018b), Midijob-Reform entlastet Geringverdienende, vor allem 
teilzeiterwerbstätige Frauen, DIW-Aktuell, Nr. 16 — 28. August 2018, The German Economic Research 
Institute (DIW Berlin), Berlin. 

Bach,  S.,  Buslei,  H.,  and  Harnisch,  M.  (2018c),  Die  Mütterrente  II  kommt  vor  allem  Rentnerinnen  mit 
geringen  und  mittleren  Einkommen  zugute,  DIW-Wochenbericht,  85(28),  The  German  Economic 
Research Institute (DIW Berlin), Berlin, pp 613-622. 

Bundesarbeitsgemeinschaft  Schienen-Personen-Nahverkehr  (BAGSPNV)  (2018),  Zahlen-Fakten  2018, 
Berlin https://bag-spnv.de/zahlen-fakten 

Federal  Institute  for  Research  on  Building,  Urban  Affairs  and  Spatial  Development  (BBSR)  (2015), 
Wohnungsprognose  2015  Federal  Institute  for  Research  on  Building,  Urban  Affairs  and  Spatial 
Development (BBSR), Berlin. 

Bennedsen, M., Nielsen, K., Pèrez-Gonzàlez, F. and Wolfenzon, D. (2007), Inside the Family Firm: The 
Role  of  Families  in  Succession  Decisions  and  Performance,  Quaterly  Journal  of  Economics  122(2), 
Oxford, Oxford University Press, pp 647–691. 

Bertelsmann Stiftung (2018), Monitor Lehrerbildung, Schwerpunkt Digitalisierung. 

Becker,  J.,  and  Englisch,  J.  (2016),  Reformbedarf  und  Reformoptionen  beim  Ehegattensplitting. 
Deutsches Steuerrecht, 1005. Institut fuer Finanzen and betrieb 

Bloom,  N.,  and  Van  Reenen J.  (2007),  Measuring  and  Explaining  Management  Practices  Across  Firms 
and  Countries  Quarterly  Journal  of  Economics,  122  (4)1351-1408.Bitkom  (2017),  55.000  Jobs  für  IT-
7/11/2017. 
Spezialisten 
(https://www.bitkom.org/Presse/Presseinformation/55000-Jobs-fuer-IT-Spezialisten-sind-unbesetzt.html)  

unbesetzt. 

release 

Press 

sind 

of 

Börsch-Supan,  A.  and  Rausch,  J.  (2018),  Die  Kosten  der  doppelten  Haltelinie.  ifo  Schnelldienst,  71(9). 
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social 
Policy, Munich 

78 

 
 
References 

Buettner, T., Holzmann, C., Kreidl, F. and Scholz, H. (2018), Withholding-tax non-compliance: The case 
of  cum-ex  stock  market  transactions,  available  at  SSRN:  https://ssrn.com/abstract=2960015  or 
http://dx.doi.org/10.2139/ssrn.2960015   

German  Federal  Bank  (Bundesbank)  (2018),  Financial  Stability  Review  2018  German  Federal  Bank 
(Bundesbank), Frankfurt am Main 

Caliendo,  C.,  Fedorets,  A.,  Preuss  M.,  Schroder,  C.,  and  Wittbrodt,  L.  (2017),  The  Short-Term 
Distributional Effects of the German Minimum Wage Reform,  SOEPpapers on Multidisciplinary Panel 
Data  Research,  No.  948,  German  Socio-Economic  Panel  (SOEP),  The  German  Economic  Research 
Institute (DIW)  Berlin.  

Camehl,  G.,  and  Peter,  F.  H.  (2017),  Je  höher  die  Kita-Qualität,  desto  prosozialer  das  Verhalten  von 
Kindern.  DIW-Wochenbericht,  84(51/52),  The  German  Economic  Research  Institute  (DIW),  Berlin,  pp 
1197-1204. 

Centre for European Economic Research (ZEW) (2018a), Effective Tax Rates in an Enlarged European 
Union, TAXUD/2013/CC/120, Project for the EU Commission, Centre for European Economic Research, 
Mannheim.  

Centre  for  European  Economic  Research  (ZEW)  (2018b),  Structural  Reform  in  Germany,  2013-2017. 
Study for the European Commission, Centre for European Economic Research, Mannheim.  

Centre  for  European  Economic  Research  (ZEW)  (2018c),  ZEW-Innovationserhebung  2018,  Centre  for 
European Economic Research, Mannheim. 

Centre  for  European  Economic  Research  (ZEW)  (2019),  The  impact  of  the  CCTB  on  the  effective  tax 
burden  of  corporations:  results  from  the  tax  analyzer  model,  Taxation  Papers  No  75,  Study  for  the 
European Commission, Centre for European Economic Research, Mannheim (forthcoming).   

Coutinho, L., Turrini, A. and Zeugner, S. (2018), Methodologies for the Assessment of Current Account 
Benchmarks,  European  Economy  -  Discussion  Paper  86,  Publications  Office  of  the  European  Union, 
Luxembourg 

Dietz,  M.;  Osiander,  C.,  Stobbe,  H.  (2018),  Online-Befragung  in  Arbeitsagenturen  und  Jobcentern: 
Arbeitsmarktintegration von Geflüchteten aus Sicht der Vermittler. IAB-Kurzbericht, 25/2018, Nürnberg 

Dorn  F,  et  al.  (2017),  Die  Erbschaftsteuer  in  Deutschland  –  Reformbedarf  und  Reformkompromiss.  ifo 
Schnelldienst 1/2017 – 70. Jahrgang – 12. Januar 2017. 

German  Chamber  of  Industry  and  Commerce  (DIHK)  (2017),  DIHK-Innovationsreport  2017: 
Innovationsdynamik rückläufig 

German Chamber of Industry and Commerce (DIHK) (2018), DIHK Economic Survey, February 2018 

Gornig,  M  and  Michelsen,  C.  (2018),  Bauwirtschaft:  Ende  des  Neubaubooms‘  DIW  Wochenbericht 
1+2.2018 

Dutt, V., Spengel, C. and Vay, H. (2018), Dividendenstripping durch Cum/Ex- und Cum/Cum-Geschäfte 
– Analyse aktueller Entwicklungen, Steuer und Wirtschaft 95(3), 229-238, ZEW 

Ecologic Institute (2018), Car Sharing in Germany – A Case Study on the Circular Economy, Aaron Best 
& Marius Hasenheidt. 

79 

 
 
References 

Education  and  Science  Workers’s  Union  (GEW)  (2017),  Erziehung  und  Wissenschaft  Report  11/2017, 
Education and Science Workers’s Union (GEW). 

European Commission (2017a), 2017 Country report Germany, European Commission, Brussels. 

European  Commission  (2017b),  Delivering  TEN-Facts  and  figures  2017,  European  Commission, 
Brussels. 

European  Commission  (2017c),  Aggressive  Tax  Planning  Indicators  –  Final  Report,  Taxation  Papers, 
Working Paper No 71-2017, European Commission, Brussels. 

European  Commission  (2017d),  Employment  and  Social  Developments  in  Europe  –  Annual  Review 
2017,  Luxembourg:  Publications  Office  of  the  European  Union,  2017.European  Commission  (2018a), 
2018 Country report Germany, European Commission, Brussels. 

European  Commission  (2018b),  Alert  Mechanism  Report  2019.  Report  from  the  Commission  to  the 
European  Parliament,  the  Council,  the  European  Central  Bank  and  the  European  Economic  and  Social 
Committee. COM(2018) 758 final  

European  Commission  (2018b),  Taxation  Trends  in  the  European  Union,  European  Commission, 
Brussels. 

European Commission (2018c), Tax Policies in the European Union, European Commission, Brussels. 

European Commission (2018d), The 2018 Ageing Report: Economic and Budgetary Projections for the 
EU Member States (2016-2070), Brussels 2018. 

European Commission (2018e), Labour market and wage developments in Europe, Annual Review 2018, 
Directorate-General for Employment, Social Affairs and Inclusion. European Commission, Brussels. 

European Commission (2018f), Pension Adequacy Report. European Commission, Brussels. 

European Commission (2018g), European Innovation Scoreboard, European Commission, Brussels. 

European  Commission  (2018h),  Digital  Economy  and  Society  Index  (DESI)  1  2018  Country  Report 
Germany, European Commission, Brussels. 

European  Commission  (2018i),  European  Transport  Scoreboard.  European  Commission,  Brussels, 
(https://ec.europa.eu/transport/facts-fundings/scoreboard/countries/germany/energy-union-innovation_en)  

European Commission (2018j), Regional Innovation Scoreboard 2017 European Commission, Brussels 

European  Commission  (2018k),  Evaluation  of  the  EU  Strategy  on  adaptation  to  climate  change. 
Retrieved 
https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52018SC0461&from=EN 

from 

European  Commission  (2018l),  Allocative  efficiency  in  labour  and  product  markets.  Thematic 
discussions on growth and jobs. Technical background note by Commission Staff. Note for the EPC 

European  Commission  (2018m),  Employment  and  Social  Developments  in  Europe  –  Annual  Review 
2018, Luxembourg: Publications Office of the European Union, 2018 

80 

 
 
References 

European Commission (2018n), A new, modern Multiannual Financial Framework for a European Union  
that delivers efficiently on its priorities post-2020. Communication from the Commission to the European 
Parliament, the European Council and the Council, COM(2018) 98 final. 

European  Commission  (2018o), Draft  Joint  Employment  Report  from  the  Commission  and  the  Council 
accompanying the Communication from the Commission on the Annual Growth Survey 2019.  

European  Commission 
[https://ec.europa.eu/digital-single-market/en/news/country-reports-women-digital-scoreboard] 

in  Digital  Scoreboard,  Germany  Country  Report, 

(2018p),  Women 

European Commission (2019), Benchmarking Deployment of eHealth among General Practitioners 2018 
(forthcoming 2019) 

European  Investment  Bank  (EIB)  (2017),  EIB  Group  Survey  on  Investment  and  Investment  Finance: 
Municipality Infrastructure Investment Activities, European Investment Bank, Luxembourg. 

European  Investment  Bank  (EIB)  (2018),  EIB  Group  Survey  on  Investment  and  Investment  Finance 
Country Overview: Germany, European Investment Bank, Luxembourg. 

Expert Commission on Research and Innovation (EFI) (2017), Jahresgutachten zu Forschung, Innovation 
und  technologischer  Leistungsfähigkeit  Deutschlands,  2017  –  Expertenkommission  Forschung  und 
Innovation.  

Federal  Ministry  for  Education  and  Research  (BMBF)  (2018),  Berufsbildungsbericht  2018,  Federal 
Ministry for Education and Research (BMBF) Berlin. 

Federal  Ministry  of  Family  Affairs,  Senior  Citizens,  Women  and  Youth  (BMFSFJ)  (2018), 
Kindertagesbetreuung  Kompakt.  Ausbaustand  und  Bedarf  2017,  Federal  Ministry  of  Family  Affairs, 
Senior Citizens, Women and Youth, Berlin. 

Federal  Ministry  for  Finance  (BMF)  (2012),  Wissenschaftlicher  Beirat:  Die  Begünstigung  des 
Unternehmensvermögens  in  der  Erbschaftsteuer,  BMF,  Berlin,  pp  26-36.Federal  Ministry  for  Finance 
(BMF)  (2018),  Ergebnis  der  Steuerschätzung,  Monatsbericht  des  BMF,    November  2018,  Federal 
Ministry for Finance (BMF), Berlin. 

Federal Ministry for Labour and Social Affairs (BMAS) (2017), Lebenslagen in Deutschland. Der Fünfte 
Armuts-  und  Reichtumsbericht  der  Bundesregierung,  Federal  Ministry  for  Labour  and  Social  Affairs 
(BMAS), Berlin. 

Federal  Ministry  for  Economy  and  Energy  (BMWi)  (2018a),  Jahresbericht  der  Bundesregierung  zum 
Stand der Deutschen Einheit, Federal Ministry for Economy and Energy (BMWi), Berlin. 

Federal  Ministry  for  Economy  and  Energy  (BMWi)  (2018b),  Sharing  Economy  im  Wirtschaftsraum 
Deutschland, Federal Ministry for Economy and Energy (BMWi), Berlin. 

Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety (BMU) (2008), Deutsche 
Anpassungsstrategie  an  den  Klimawandel,  Federal  Ministry  for  the  Environment,  Nature  Conservation, 
and Nuclear Safety (BMU), Berlin. 

Federal  Ministry  for  the  Environment,  Nature  Conservation,  Housing,  and  Nuclear  Safety  (BMUB) 
(2016),  Klimaschutzplan  2050,  Kabinettbeschluss  vom  14.  November  2016.  Federal  Ministry  for  the 
Environment, Nature Conservation, Housing, and Nuclear Safety (BMUB), Berlin. 

81 

 
 
References 

Federal  Ministry 
(2018), 
for  Environment,  Nature  Protection  and  Nuclear  Safety 
Klimaschutzbericht  2017  –  Zum  Aktionsprogramm  Klimaschutz  2020  der  Bundesregierung.  Federal 
Ministry for Environment, Nature Protection and Nuclear Safety (BMU) Berlin. 

(BMU) 

Federal  Ministry  for  Transport  and  Infrastructures  (BMVI)  (2017),  Masterplan  Schienengüterverkehr 
2017, Federal Ministry for Transport and Infrastructures (BMVI), Berlin. 

Federal  Motor  Transport  Authority  (KBA)  (2018),  Jahresbilanz  des  Fahrzeugbestandes  am  1.  Januar 
2018, 
Flensburg. 
[https://www.kba.de/DE/Statistik/Fahrzeuge/Bestand/b_jahresbilanz.html;jsessionid=F4C751ECF2F76C
ED07473B43D68CE2FF.live11293?nn=644526] 

Transport 

Authority 

(KBA), 

Federal 

Motor 

German  regulatory  authority  (“Bundesnetzagentur”)(BNetzA)  (2017),  Market  Analysis  Railway  2017, 
German regulatory authority (“Bundesnetzagentur”)(BNetzA), Bonn. 

Federal Office for Environment Umweltbundesamt (UBA), (2018), Umwelt und Landwirtschaft, Federal 
Office for Environment Umweltbundesamt (UBA), Dessau-Roßlau.   

Federal Office for Migration and Refugees (BAMF) (2018), Unbegleitete Minderjährige in Deutschland, 
Federal Office for Migration and Refugees (BAMF), Nürnberg. 

Federal  Statistical  Office  (Destatis)  (2018),  Bildungsausgaben  -  Budget  für  Bildung,  Forschung  und 
Wissenschaft 2015/2016, 12 April 2018, Federal Statistical Office (Destatis), Wiesbaden. 

Federal  Association  of  German  Housing  and  Real  Estate  Enterprise  Registered  Associations  (GdW) 
(2017),  Wohnungswirtschaft  zieht  stabile  Jahresbilanz  und  fordert  Willkommenskultur  für  Bagger  und 
Neubau, 
Berlin 
[https://web.gdw.de/pressecenter/pressekonferenzen/wohnungswirtschaft-zieht-stabile-jahresbilanz-und-
fordert-willkommenskultur-fuer-bagger-und-neubau-2] 

Wohnungswirtschaft 

Deutschland, 

Die 

German  Economic  Institute  (DIW)  (2018),  Bildungsmonitor  2018,  German  Economic  Institute  (DIW), 
Cologne. 

Gottschalk, S., Egeln, J., Kinne, J., Hauer, A., Keese, D., and Oehme, M. (2017), Die volkswirtschaftliche 
Bedeutung von Familienunternehmen, Stiftung Familienunternehmen, Mannheim/München. 

Grossmann, V. and Strulik, H. (2010), Should continued family firms face lower taxes than other estates?, 
Journal of Public Economics 94, pp. 87-101. 

Hayter,  S.  and  Visser,  J.  (2018),  Collective  agreements:  Extending  Labour  protection.  ILO,  Geneva. 
[https://www.ilo.org/wcmsp5/groups/public/---dgreports/---
dcomm/documents/publication/wcms_633672.pdf]  

Holm, A., Junker, S., Neitzel, K., (2018), Wem nützen wohnungspolitische Maßnahmen? Working Paper 
Forschungsförderung  der  Hans-Böckler-Stiftung,  Nr.  93,  September  2018,  Hans-Böckler-Stiftung, 
Düsseldorf 

Higher  Education  Institution  Rectors’  Conference  (HRK)  (2018),  Befragung:  Immer  mehr  Flüchtlinge 
qualifizieren sich im Studium.  HRK, 10. April 2018, p. 36. 

Hußmann,  A.  et  al.  (2017),  IGLU  2016  Lesekompetenzen  von  Grundschulkindern  in  Deutschland  im 
internationalen Vergleich. Waxmann Verlag GmbH, Münster. 

82 

 
 
References 

Institute  for  Employment  Research  (IAB)  (2019),  IAB  Zuwanderungsmonitor,  Januar  2019.  Iara,  A. 
(2015),  Wealth  distribution  and  taxation  in  EU  Members,  European  Commission  Taxation  Papers, 
Working paper n. 60 -2015, Office for Official Publications of the European Communities, Luxembourg . 

Initiative 21 (2016), Sonderstudie »Schule Digital«, Initiative 21, Berlin. 

Invest Europe (2018), European Private Equity Activity Report 2017, Invest Europe, Brussels. 

International  Monetary  Fund  (IMF)  (2018),  Article  IV  Consultation  Staff  Report  -  Germany.  IMF 
Country Report No. 18/208, July 2018. International Monetary Fund (IMF), Washington D.C. 

Kiziltepe,  C.,  Scholz  B.,  (2016),  „Die  Erbschaftsteuer  auf  Betriebsvermögen  gefährdet  Arbeitsplätze“, 
Steuermythen.de, https://steuermythen.de/mythen/mythos-16/ 

Klemm,  K.,  Zorn  D.,  (2018),  Lehrkräfte  dringend  gesucht.  Bedarf  und  Angebot  für  die  Primarstufe. 
Bertelsmann Stiftung, Gütersloh 

Kopczuk  W.,  (2012),  Taxation  of  intergenerational  transfers  and  wealth,  NBER  Working  Paper  18584, 
November 2012. 

KPMG and GFK (2019), Study on tax compliance costs for SMEs, European Commission, Brussels. [This 
is a forthcoming study – the exact reference might need some updating later] 

Conference  of  the  Ministry  of  Culture  Kultusministeriumkonferenz  (KMK)  (2016),  Bildung  in  der 
digitalen Welt – Strategie der Kultusministerkonferenz. 

OECD (2016), Country Note Germany – Results from PISA 2015, OECD Publishing, Paris 

OECD (2017), Preventing Ageing Unequally, OECD Publishing, Paris 

OECD (2018a), The Role and Design of Net Wealth Taxes in the OECD. OECD Tax Policy Studies No. 
26, OECD publishing, Paris. 

OECD (2018b), OECD Economic Survey of Germany 2018, OECD Publishing, Paris 

Pérez-González, F. (2006), Inherited Control and Firm Performance, American Economic Review 96(5), 
1559–1588. 

Reconstruction  Credit  Institute  (KfW)  (2018),  KfW-Kommunalpanel  2018.  Reconstruction  Credit 
Institute (KfW), Frankfurt am Main 

Rothgang, H., Müller, R., and Unger, R. (2012), Themenreport "Pflege 2030": was ist zu erwarten-was ist 
zu tun?“ Bertelsmann Stiftung, Gütersloh. 

Schwabe,  U.,  Paffrath,  D.,  Ludwig,  W.-D.,  Klauber,  J.  (eds.)  (2018),  Arzneiverordnungs-Report  2018, 
Springer 

Spengel,  C.,  Dutt,  V.  and  Vay,  H.  (2017a),  Schätzung  des  durch  Cum/Ex-Geschätzung  des  durch 
Cum/Ex-Geschäfte mit Leerverkäufen entstandenen Steuerschadens, Universität Mannheim, Mannheim.  

Spengel,  C.,  Dutt,  V.  and  Vay,  H.  (2017b),  Schätzung  des  durch  Cum/Ex-Geschätzung  des  durch 
Cum/Ex-Geschäfte mit Leerverkäufen entstandenen Steuerschadens, Universität Mannheim.  

83 

 
 
References 

Stanat,  P.,  Schipolowski,  S.,  Rjosk,  C.,  Weirich,  S.,  Haag,  N.,  (2017),  IQB-Bildungstrend  (2016): 
Kompetenzen  in  den  Fächern  Deutsch  und  Mathematik  am  Ende  der  4.  Jahrgangsstufe  im  zweiten 
Ländervergleich.  

Standing  Conference  of 
Lehrereinstellungsbedarf  und 
Zusammengefasste Modellrechnungen  der Länder. 

-angebot 

the  Ministers  of  Education  and  Cultural  Affairs 

(KMK)  (2018), 
in  der  Bundesrepublik  Deutschland  2018  –  2030. 

Sutherland,  H.  and  Figari,  F.  (2013),  EUROMOD:  the  European  Union  tax-benefit  microsimulation 
model. International Journal of Microsimulation, 6(1), German Center for Higher Education, pp.4-26.  

Tiefensee, A. and Grabka M. (2017), Das Erbvolumen in Deutschland dürfte um gut ein Viertel größer 
sein als bisher angenommen. DIW Wochenbericht Nr. 27.2017 

Research  and  Science  Studies  (DZHW)  (2018),  Social  and  Economic  Conditions  of  Student  Life  in 
Europe. Eurostudent VI 2016-2018. Synopsis of Indicators. 

Varga  and  in’t  Veld  (2014),  "The  potential  growth  impact  of  structural  reforms  in  the  EU.  A 
benchmarking  exercise,"  European  Economy  -  Economic  Papers  2008  -  2015  541,  Directorate  General 
Economic and Financial Affairs (DG ECFIN), European Commission, Brussels. 

Weaver,  K.  and  A.  Willén  (2014),  "The  Swedish  pension  system  after  twenty  years:  Mid-course 
corrections and lessons", OECD Journal on Budgeting, vol. 13/3, OECD Publications service, Paris 

84