COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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: 2020-02-26
Institutions: European Commission, Secretariat-General
Subjects: Germany, economic situation, green economy, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.2.2020  SWD(2020) 504 final  COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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(2020) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

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

3.1. 

Imbalances and their gravity 

3.2.  Evolution, prospects, and policy responses 

3.3.  Overall Assessment 

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* 

4.5. Environmental sustainability* 

Annex A: Overview table 

Annex B: Commission debt sustainability analysis and fiscal risks 

Annex C: Standard tables 

Annex D: Investment Guidance on Just Transition Fund 2021-2027 for Germany 

Annex E: Progress towards the Sustainable Development Goals (SDGs) 

References 

LIST OF TABLES 

Table 1.1: 
Table 2.1: 
Table 3.1: 
Table 3.1a: 

Key economic and financial indicators — Germany 

Implementation of 2019 CSRs 

Outward spillover heat map for Germany 

Spillover effects of Germany implementing a comprehensive investment package 

over 10 years 

Table 3.2: 
MIP Assessment Matrix 
Table 4.2.1:  Quarterly financial soundness indicators 

1 

4 

8 

15 

18 

18 

19 

22 

23 

23 

33 

38 

48 

57 

63 

70 

71 

77 

79 

84 

14 
16 
19 

20 
21 
34 

 
 
 
Table C.1: 
Table C.2: 
Table C.3: 
Table C.4: 
Table C.5: 
Table C.6: 
Table E.1: 

Financial market indicators 

Headline Social Scoreboard indicators 

Labour market and education indicators 

Social inclusion and health indicators 

Product market performance and policy indicators 

Green growth 

Indicators measuring Germany’s progress towards the SDGs 

LIST OF GRAPHS 

Graph 1.1: 

Demand components of GDP growth 

Graph 1.2: 

Developments in manufacturing 

Graph 1.3: 

New car registrations by fuel type 

Graph 1.4: 

Contributions to headline inflation 

Graph 1.5: 

Net and gross investment in international comparison 

Graph 1.6: 

Real ULC, labour share of GDP/GVA, % 

Graph 1.7: 

Change in GDP per head (2010-2017) in Germany by NUTS-2 region 

Graph 1.8: 

Current account and component balances 

Graph 2.1: 

Overall multiannual implementation of 2011-2019 CSRs to date 

Graph 4.1.1:  Headline balance (HB), structural balance (SB) and fiscal space 

Graph 4.1.2: 

Tax wedge for different income levels, DE, FR, UK, EU-28, 2018 

Graph 4.1.3:  Structure of environmental tax revenues, 2017 

Graph 4.1.3a:  Environmental tax scenarios: distributional and equity effects, with and without 

compensatory measures 

Graph 4.1.4:  Net pension replacement rates for low and high earners (2018) 

Graph 4.2.1:  House prices compared to fundamentals 

Graph 4.2.2:  Current account balance and net lending by sectors 

Graph 4.2.3:  Factors explaining the current account surplus 

Graph 4.3.1:  Employment change by sector, workers in short time work arrangements 

Graph 4.3.2:  Nominal compensation growth: actual and predicted based on economic 

fundamentals 

Graph 4.3.3:  Years of difference in life expectancy between people with highest and lowest 

education (at age 40) 

Graph 4.4.1:  Contribution to labour productivity growth, percentage points 

71 
72 
73 
74 
75 
76 
79 

8 

8 

9 

9 

10 

11 

12 

12 

15 

23 

24 

26 

29 

31 

35 

37 

37 

38 

40 

44 

48 

2 

 
 
 
 
LIST OF BOXES 

Box 2.1: EU funds and programmes to address structural challenges and to foster growth and 

competitiveness in Germany 

Box 3.2: Spillovers of a sustained increase in public investment – the case of Germany 

Box 4.1.3: The 2030 Climate Package 

Box 4.1.4: The distributional and equity effects of introducing a CO2 price 

Box 4.3.5: Monitoring performance in light of the European Pillar of Social Rights 

Box 4.4.6: Investment challenges and reforms in Germany 

Box 4.5.7: Transformation of the transport sector 

17 

20 

27 

29 

39 

50 

58 

3 

 
 
 
 
EXECUTIVE SUMMARY 

increasing  despite 

in 
the  same 

Sustained  structural  reforms  and  long-term 
investment  can  ensure  the  sustainability  and 
inclusiveness  of  Germany’s  growth.  In  its  tenth 
year  of  expansion,  the  German  economy  grew 
significantly  below  potential,  affected  by  an 
industry  and 
interplay  of 
transformations 
adverse  external  factors.  At 
time, 
progress  on  reforms  has  been  only  moderate.  On 
the  positive  side,  the  labour  market  remains  very 
strong,  with  wages 
the 
economic  slowdown,  and  measures  have  been 
taken  to  improve  incentives  to  work.  However, 
including 
significant 
investment  in  education,  sustainable  transport, 
affordable 
digital 
infrastructure.  In  addition,  regulatory  and  other 
incentive  structures,  including  taxation,  do  not 
appear sufficient to boost inclusive and sustainable 
growth.  While  Germany’s  income  inequality  is 
average,  its  wealth  inequality  is  high.  Improving 
equality  of  opportunity,  by  reinforcing  education 
and  training,  and  addressing  inter-  and  intra-
generational  fairness  issues  also  through  social 
security  systems  can  contribute  to  more  inclusive 
growth. (1) 

challenges 

housing, 

remain, 

energy 

and 

Domestic demand is the sole driver of a slowing 
economic expansion. The German economy, with 
is 
export-oriented  manufacturing  base, 
its 
challenged  by  persistent  global  uncertainty,  trade 
tensions  and  weaker  foreign  demand  for  German 
goods, and by the need to make the transport sector 
less  environmentally  harmful.  After  a  1.5% 
increase in 2018, GDP grew by 0.6% in 2019. The 
contribution  of  net  exports  was  negative  as  in  the 
year  before  and  growth  was  driven  by  domestic 
demand.  Despite  weakness 
in  manufacturing, 
unemployment  fell  to  a  record  low  of  3.2%  in 
2019. Wage growth has been so far resilient to the 
economic  slowdown.  Inflation  fell  from  1.9%  in 
2018  to  1.4%  in  2019,  notably  due  to  a  strong 
decline in energy prices.  

The  general  government  budget  surplus,  while 
still considerable, is diminishing on the back of 

(1)  This  report  assesses  Germany’s  economy  in  light  of  the 
European  Commission’s  Annual  Sustainable  Growth 
Strategy,  published  on  17  December  2019.  In 
this 
document, Commission sets out a new strategy  on how to 
address  not  only  the  short-term  economic  challenges  but 
also  the  economy's  longer-term  challenges.  This  new 
economic agenda of competitive sustainability rests on four 
dimensions:  environmental  sustainability,  productivity 
gains, fairness and macroeconomic stability. 

increased 
investment,  and  the  public  debt 
continues to fall. In 2018, the general government 
fiscal  surplus  reached  a  record  1.9%  of  GDP.  In 
2019, the surplus lowered to 1.5% and is expected 
to  decline  further  in  2020,  due  to  increased 
investment and other fiscal measures. For the first 
time  since  2002,  the  gross  debt-to-GDP  ratio  is 
expected to have fallen below the Treaty reference 
value of 60% of GDP. The public debt ratio might 
decline  further  as  a  result  of  the  national  debt 
brake becoming binding also  for the  Länder as of 
2020.  This  will  require  them  to  make  no  new 
reduces 
structural 
sustainability risks. 

deficits,  which 

further 

in  particular 

investment  efforts, 

Meeting sustainability goals and raising growth 
potential at the same time requires steady long-
term 
in 
network  industries  and  in  education,  training, 
research  and  innovation.  Stronger  investment  in 
sustainable  transport  and  electricity  infrastructure 
is  crucial 
to  meeting  climate,  energy  and 
environmental  targets.  Despite  the  key  incumbent 
player  being  largely  state-controlled,  Germany  is 
still  lagging  behind  in  deploying  very  high-
capacity  broadband,  which 
improve 
productivity  growth  and  boost  convergence  in 
regional  living  conditions.  Higher  investment  in 
research and innovation can accelerate the pace of 
transition 
to  a  carbon-neutral  and  circular 
economy.  Higher  expenditure  on  education  and 
skills  could  make  the  future  labour  force  more 
productive 
of 
alleviate 
demographic ageing.  

impact 

could 

and 

the 

Overall, Germany has made limited (2) progress 
in  addressing 
country-specific 
the  2019 
recommendations. 

There has been some progress in:  

  achieving  an  upward  trend  in  investment, 

including in research and innovation; 

  strengthening  conditions  for  wage  growth, 
reducing disincentives to work more hours and 
reducing the high tax wedge. 

Germany has made limited progress in:  

(2)  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 A. 

4 

 
                                                           
                                                           
 

 

increasing  expenditure 
in  education  and 
improving  the educational outcomes and skills 
levels of disadvantaged groups;  

improving investment in digitalisation and very 
high-capacity  broadband,  in  energy  networks, 
sustainable transport and affordable housing; 

  shifting  taxes  away  from  labour  to  sources  of 
revenues the taxation of which would be  more 
supportive to inclusive and sustainable growth, 
and  reducing  disincentives  to  work  for  second 
earners; 

 

reforming the pension system. 

Germany has made no progress on:  

  business services and regulated professions. 

Germany continues to perform very well on the 
indicators  of  the  Social  Scoreboard  supporting 
the European Pillar of Social Rights. It has one 
of  the  highest  employment  rates  in  the  EU,  low 
unemployment,  including  youth  and  long-term 
unemployment,  and  access  to  healthcare  is  good. 
Germany has one of the highest employment rates 
of  women,  but  the  gender  gap  in  part-time 
employment  is  high.  Educational  outcomes  differ 
considerably across regions. 

is  performing  very  well  on 

Regarding  progress  in  reaching  the  national 
the  Europe  2020  strategy, 
targets  under 
the 
Germany 
employment  rate,  on  reducing  poverty  and  on 
investment in R&D. In addition, Germany is close 
to  its  national  target  for  early  school  leaving  and 
share  of  renewable  energy.  However,  despite  the 
recently  adopted  Climate  Package  Germany  is 
unlikely 
its  2020  national  energy 
efficiency and climate targets by 2020. Germany is 
not on track to reduce its emissions not covered by 
the  EU  Emissions  Trading  System  as  set  in  EU 
law. 

to  reach 

With  regard  to  Germany’s  progress  towards 
the  United  Nations  Sustainable  Development 
Goals  over  the  past  5  years,  Germany  shows  a 
declining  trend  in  reducing  inequality,  but  has 

Executive summary 

further improved its strong institutions and justice 
system. (3)  

findings  of 

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

in-depth 

the 

  The  current  account  surplus  declined  from 
its  peak  in  2015.  The  current  account  surplus 
declined from 8.6% of GDP in 2015 to 7.4% in 
2018.  In  2019,  the  downward  adjustment 
paused and the overall current account  surplus 
was  7.7%  of  GDP  (according  to  preliminary 
data).  Vis-à-vis  the  euro  area  it  declined  to 
2.2%,  from  2.7%  in  2015.  The  domestic 
imbalance  between  savings  and  investment, 
which has been growing since 2008, reached a 
turning point in 2016. Since then, private sector 
net  lending  has  been  coming  down,  mainly 
reflecting the decline in the net lending position 
of non-financial corporations, but was partially 
offset  by  an  increasing  public  surplus  until 
2018. 

  Private investment remains solid despite the 
economic  slowdown,  but  still  lags  behind 
infrastructure  and  housing  needs.  In  2018 
and  2019,  private  investment  increased  by  3% 
in  real  terms  (i.e.  adjusted  for  inflation). 
Altogether,  the  private  investment  share  of 
GDP increased from 18% in 2011-2017 to 19% 
in 2018-2019. The fastest growing components 
in  recent  years  have  been  housing  and 
investment  in  intellectual  property.  However, 
investment is still lagging behind infrastructure 
(e.g.  energy  and  digital)  and  housing  needs, 
and the  need to adapt to tighter environmental 
requirements. 

  Public  investment  has  continued  increasing 
against 
the  backdrop  of  a  significant 
investment  backlog.  Gross  public  investment 
increased  by  around  6%  annually  in  2015-
2017,  by  close  to  9%  in  2018  and  by  close  to 

(3)  Within the scope of its legal basis, the European Semester 
can help drive national economic and employment policies 
towards the achievement of the United Nations Sustainable 
Development  Goals  (SDGs)  by  monitoring  progress  and 
ensuring  closer  coordination  of  national  efforts.  The 
present report contains reinforced analysis and monitoring 
on the SDGs. A new annex (Annex E) presents a statistical 
assessment  of  trends  in  relation  to  SDGs  in  Germany 
during  the  past  5  years,  based  on  Eurostat’s  EU  SDG 
indicator set. 

5 

 
                                                           
Executive summary 

generate  cost  savings  and  create  jobs,  while 
reducing the environmental footprint. 

the  marked  slowdown 

as 
low 
remained 

  Despite  the  GDP  slowdown,  overall  wage 
unemployment 
growth 
continued, 
levels.  Labour 
reached  historically 
remarkably 
market  performance 
strong,  despite 
in 
economic  growth.  This,  however,  hides  some 
labour  hoarding  and  diverging  trends  between 
services and manufacturing. While job creation 
in  manufacturing  and  related  services  halted, 
hiring  continued  in  construction  and  most 
services, particularly in public services. Despite 
decelerating employment growth and declining 
labour productivity, growth of nominal and real 
compensation  per  employee  has  accelerated 
between  2018  and  2019.  However,  the  labour 
market  potential  of  women  and  people  with 
migrant background remained underused. 

  The tax system relies strongly on labour tax 
revenues,  while  taxes  supporting  inclusive 
and  sustainable  growth  remain  underused. 
The  share  of  labour  tax  revenues  (56.9%  of 
total  tax  revenue)  is  among  the  highest  in  the 
EU.  Despite  measures  taken,  disincentives  to 
work  persist,  including  for  second  and  low-
wage  earners.  At  the  same  time,  revenues  are 
low  from  taxes  supporting  sustainability  and 
inclusiveness  goals,  such  as  environmental 
taxes  (4.5%),  recurrent  taxes  on  immovable 
property  (1.1%)  and  wealth  and  inheritance- 
related taxes (0.4%).  

and 

change 

  The tax system is not sufficiently addressing 
climate 
environmental 
degradation.  Germany’s  environmental  tax 
revenues  remain  among  the  lowest  in  the  EU, 
stemming  primarily  from  energy-related  taxes, 
while  revenues  from  transport  fuel  taxes  and 
taxes on resources are particularly low. Current 
price  signals  across  energy  carriers  and  users 
limit the potential  for clean energy technology 
deployment  and  emissions 
reduction.  As 
environmental  taxes  are  typically  regressive, 
their  increased  use  needs  to  be  coupled  with 
policy  measures  mitigating  the  impact  on  the 
vulnerable population groups.  

  The  energy  transition  requires  investments 
in 
sector 
integration  and  energy  efficiency,  and 

electricity  networks, 

smart 

for 

inflation 

7% in 2019 in nominal terms. In real terms, the 
increase  averaged  about  4%  in  2015-2019  as 
price 
construction  works 
accelerated  in  recent  years.  This  brought  the 
public  investment  rate  from  2.1%  of  GDP  in 
2015  to  2.5%  in  2019.  Since  2017,  total 
government net investment has turned positive, 
but it is still negative at municipal level, where 
the  investment  backlog  remains  high  at  4%  of 
GDP.  

rate 

and 

domestic 

can  boost  output 

  Higher  public  investment  would  generate 
cross-border 
positive 
spillovers.  Substantially  increasing  the  public 
investment 
and 
employment  in  both  Germany  and  the  rest  of 
the euro area. Germany also plays an important 
role  in  advancing  the  single  market.  However, 
it  is  performing  below  the  EU  average  in  the 
transposition  of  single  market  rules.  Obstacles 
in  business 
include 
services and public procurement practices. 

regulation 

restrictive 

in 

  Labour  productivity  growth  in  Germany 
long-term  declining  trend  and 
shows  a 
turned  negative  in  2018,  due  to  cyclical 
factors as well as structural weaknesses. The 
recent  decline 
labour  productivity  was 
mainly  driven  by  a  decline  in  output  in 
manufacturing, and in the automotive sector in 
particular.  Structural  factors  explaining  the 
long-term decline in productivity include weak 
growth-enhancing 
intangible 
assets  and  among  small  and  medium-sized 
businesses  (SMEs) 
lack  of 
modern  digital 
infrastructure,  demographic 
developments and shortages of skilled labour, a 
decline in business dynamism, slow technology 
diffusion,  weaknesses  in  eGovernment,  and 
low competition in business services.  

in  particular, 

investment, 

in 

  Improving  resource  productivity  can  be  an 
important driver for future competitiveness, 
while  minimising  negative  environmental 
impacts. Despite resource efficiency gains and 
a  relative  decoupling  of  raw  material  use  and 
economic growth, natural resource use remains 
at  an  environmentally  unsustainable 
level. 
Germany  will  miss  its  target  of  doubling  raw 
its 
material  productivity  by  2020,  and 
secondary  raw  material  use  rate  is  below  the 
EU average. Moving to a circular economy can 

6 

 
Executive summary 

initiated  by  fintech  and  bigtech  may  further 
squeeze  revenues.  There  is  also  a  need  to 
strengthen macro-prudential tools. 

is 

to 

expected 

challenge 

  Overall, Germany’s social protection system 
is  well-developed,  but  increasingly  affected 
by demographic developments. Demographic 
change 
the 
sustainability  and  the  adequacy  of  pensions. 
Furthermore,  the  large  gap  in  life  expectancy 
across  socio-economic  groups,  combined  with 
the relatively low pension net replacement rates 
for  low-income  earners  compared  to  other 
countries,raises  the  issue  of  intra-generational 
fairness..  Healthcare 
can  be 
improved  by  consolidating  the  hospital  sector, 
focusing more strongly on prevention and care 
integration, providing the same price signal for 
the same treatment, and better use of eHealth. 

efficiency 

  Challenges in equality of opportunity persist 
also  in  the  education  and  training  system. 
Germany  is  spending  less  of  its  resources  on 
education  than  it  did  in  the  past  and  also  at  a 
rate  below  the  EU  average,  even  though  the 
country  is  particularly  affected  by  automation 
and  immigration.  Inequalities  in  educational 
attainment  persist,  with  socio-economic  and 
migrant  backgrounds  still  exerting  a  strong 
influence.  Teacher  shortages 
the 
provision of quality education.  

threaten 

to  congestion  and 

expansion  of  renewable  energy.  The  lack  of 
appropriate  transmission  and  distribution  grid 
infrastructure  is  causing  financial  losses  and 
market  distortions  in  Germany  and  other  EU 
countries  due 
limited 
flexibility  of  the  electric  system.  The  need  for 
investment  in  additional  transmission  capacity 
is  growing.  Taxes  and  levies  limit  the  smart 
integration  of  electricity 
the  heating, 
transport  and  industry  sectors.  The  installation 
of wind turbines show a declining trend.  

in 

  Transformation  of  the  transport  sector  can 
address  air  pollution,  mitigate  climate 
change  and 
improve  productivity.  The 
transport  sector  has  done  particularly  badly  at 
cutting emissions of both greenhouse gases and 
local  air  pollutants,  which  has  meant  that 
Germany has fallen behind in meeting its target 
under  the  Effort  Sharing  Decision  setting 
national  emission  targets  for  EU  countries 
between 2013 and 2020. The transformation of 
the  transport  sector  can  be  facilitated  by 
stronger  investment  in  clean  public  transport 
and infrastructure, including in alternative fuels 
such  as  hydrogen  and  e-fuels.  In  addition, 
appropriate  incentive  structures  are  needed  for 
clean,  safe  and  better-performing  mobility 
encourage 
solutions, 
technological competition and spur innovation.  

would 

which 

just 

 The  Commission’s  proposal 
for  a  Just 
Transition  Mechanism  under  the  next  multi-
annual  financial  framework  for  the  period 
2021-2027,  includes  a  Just  Transition  Fund,  a 
dedicated 
scheme  under 
transition 
InvestEU, and a new public sector loan facility 
with  the  EIB.  It  is  designed  to  ensure  that  the 
transition towards EU climate neutrality is fair 
by  helping 
in 
Germany  to  address  the  social  and  economic 
consequences. Key priorities for support by the 
Just Transition Fund, set up as part of the Just 
Transition Mechanism, are identified in Annex 
D,  building  on  the  analysis  of  the  transition 
challenges outlined in this report. 

the  most  affected  regions 

 

  The lack of affordable housing has become a 
major challenge. The housing cost overburden 
rate  is  one  of  the  highest  in  the  EU.  House 
prices  rose  by  half  over  the  last  decade, 
suggesting  overvaluation  in  the  bigger  cities 
and  an  increasing  risk  of  a  housing  bubble. 
Policy measures mitigate rental price increases, 
but  do  not  keep  pace  with  the  demand  for 
affordable  housing.  The  annual  target  for  new 
housing  agreed  on  by  the  country’s  governing 
coalition was not met. 

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

  The  banking  sector  suffers 
low 
profitability.  Capitalisation 
are 
satisfactory, but German banks face challenges 
related  to  their  cost  structure.  Consolidation 
efforts  are  needed,  as  a  fragmented  market 
structure  weighs  on  profits.  The  disruption 

from 
ratios 

7 

 
1.  ECONOMIC SITUATION AND OUTLOOK 

Economic growth 

The  economic  expansion  slowed  sharply  in 
2019.  Growth  has  been  uneven  and  fragile  since 
2018,  following  the  pattern  of  export  growth  and 
held  back  by 
the  pronounced  weakness  of 
manufacturing activity. After a rebound to 0.5% in 
Q1 2019,  the  economy  contracted  by  0.2%  in  Q2 
and  narrowly  avoided  a  technical  recession  in  Q3 
(+0.1%).  Overall  investment  increased  robustly 
early  in  the  year  (by  1.6%),  but  weakened  in  the 
subsequent  quarters  (-0.3%  and  -0.1%).  For  the 
year  as  a  whole  GDP  increased  by  just  0.6%, 
slowing  further  compared  to  the  buoyant  growth 
averaging 2.2% in 2014-2017. 

Graph 1.1:  Demand components of GDP growth 

Germany’s  economy  is  expected  to  see  muted 
growth  in  2020  and  2021.  Consumption  should 
continue  benefitting  from  stable  employment  and 
ongoing  wage  increases.  Even  if  constrained  by 
capacity,  construction  activity  is  expected  to 
continue expanding. Equipment investment should 
strengthen  as  export  activity  normalises  as 
expected in a few quarters. The ten-year expansion 
is set to continue. However growth is expected to 
remain subdued at just above 1% in 2020 and 2021 
and  thus  well  below  the  potential  estimated  at 
1.4% for 2019-2021. 

These  prospects  are  subject  to  downside  risks. 
Risks  for  exports  and  investment  relate  to  global 
growth  and  trade  uncertainty,  sectoral  structural 
issues  (e.g.  in  the  auto  sector).  Planning  and 
implementation capacity in the public sector could 
constrain 
further  expansion  of  public 
investment.  Recent  strong  wage  growth  has 
boosted  the  saving  rate  and  this  trend  could  be 
reinforced if consumer confidence deteriorates. 

the 

Graph 1.2:  Developments in manufacturing 

[1] GDP growth and contributions to annual growth 
Source: European commission 

The  domestic  side  of  the  economy  remained 
resilient and employment reached a new record 
high.  Despite 
in  activity  and 
the  weakness 
deteriorating business sentiment, the labour market 
remained  strong.  Job  growth  continued  in  the 
services  sector.  Layoffs  in  industry  remained 
contained, as companies try to avoid losing skilled 
workers  and  to  stay  fit  for  an  upswing.  Wages 
continued  to  grow.  This  helped  consumption 
growth  stay  relatively  steady  at  0.4%  quarter  on 
quarter on average. Public consumption supported 
growth.  The  buoyant  growth 
in  construction 
continued.  There  was  a  mixed  picture  in  services, 
with  public  and  consumer  services  showing 
resilience,  while 
services, 
including transport, remaining weak. 

business-related 

[1] C29 refers to the manufacturing of motor vehicles, trailers 
and semi-trailers. 
[2] The period 2008-2011 has been concealed because of 
extraordinary abrupt dynamics. 
Source: Eurostat, German Association of the Automotive 
Industry (VDA) 

is  weighing  on 
Manufacturing  weakness 
economic  growth.  Export  growth 
slowed 
considerably  and  the  production  side  of  the 
economy  weakened  further 
in  2019.  In  Q4 
manufacturing  continued  to  decline  for  the  sixth 
consecutive  quarter  since  early  2018.  The  car-

8 

-2-10123-2-1012312131415161718192021Output gap (rhs)Net exportsInvestmentPriv. consumptionGov. consumptionInventoriesReal GDP (y-o-y%)% of pot.GDPforecastpps. 4.04.24.44.64.85.05.25.45.65.86.0-15-10-5051015202500010203040506071213141516171819% y/yProduction C29Manufacturing value addedCars produced (millions, 12MMA, rhs) 
  
  
1. Economic situation and outlook 

manufacturing  sector  is  undergoing  a  structural 
transformation  and  production  is  depressed  while 
equipment manufacturers are adversely affected by 
the impact of trade conflicts and weakening global 
trade on investment demand. 

Graph 1.3:  New car registrations by fuel type 

[1] % of total 
Source: German Federal Motor Transport Authority 

in  Germany  has  shrunk 
Car  production 
considerably,  while  German 
carmakers 
produced more abroad. The automotive industry 
is Germany's most important manufacturing sector 
and  accounts  for  about  22%  of  manufacturing 
value  added,  4.7% of  total  value  added  and  about 
4%  of  employment.  Through  its  complex  value 
chain,  it  has  a  significant  impact  on  the  overall 
dynamics  of  manufacturing  (Graph  1.2).  The 
industry  is  experiencing  a  significant  decline  in 
domestic production. The production of 5.1 million 
vehicles  in  2018  represented  a  9.3%  decline  from 
2017.  At  the  same  time,  German  companies 
increased their production abroad by 3.7%, to 11.2 
million.  The  domestic  trend  continued  in  2019: 
domestic production tumbled by another 5% to 4.7 
million and reached a  level close to the lows seen 
in  2009  (Graph  1.2),  while  production  abroad 
continued  at  the  same  level  of  11.2  million  cars. 
The prospect of a swift recovery is dimmed by the 
current  “wait-and-see”  attitude  of  potential  car 
buyers.  The  decline  in  new  car  registrations  in 
Germany  and  the  EU  in  general  has  been  driven 
largely by falling demand for diesel cars. 

traditional 

for  cars  with 

Demand  for  diesel  cars  has  declined  while  the 
share  of  alternative-fuelled  cars  is  increasing 
slowly. In the first half of 2019, registration of new 
diesel  cars  in  the  EU  dropped  17%  year  on  year, 
after an 18% year on year drop in 2018. Following 
the  2015  diesel  scandal  and  reinforced  plans  for 
reducing emissions through stricter regulations, the 
internal 
demand 
combustion  engines,  and  diesels  in  particular,  is 
falling.  Several  Member  States  and  cities  have 
adopted  ambitious  plans  to  reduce  air  pollution, 
including by restricting diesel entry into city zones. 
Some countries plan to ban sales of new petrol and 
diesel  cars  in  a  decade  or  two.  In  Germany  the 
number  of  new  registrations  of  diesel  cars 
stabilised  in  2019  after  a  drop  since  the  diesel 
scandal  (Graph  1.3).  Hybrid  vehicles  and  electric 
vehicles are clearly the fastest growing segment in 
new  car  registrations,  but  as  a  proportion  of  total 
cars in use, their share is still very low, below 1%. 
Demand is  switching above all to hybrid cars, (of 
which plug-in hybrids are a small part), rather than 
purely  electric  driven  models.  This  could  help 
bridge 
the  electric 
vehicles  currently  available  while  still  getting  the 
transition  to  low-emission  local  and  long-distance 
road transport underway (see Box 4.5.7). 

the  performance  gaps  of 

Graph 1.4:  Contributions to headline inflation 

Source: European Commission 

Inflation 

Inflation  should  remain  moderate.  Consumer 
price  inflation  has  been  running  below  wage 
growth,  which  is  supportive  of  purchasing  power. 

9 

0102030405060708090100200020052010201420152016201720182019DieselPetrol, gasElectricHybrid-2.0-1.00.01.02.03.010Q111Q112Q113Q114Q115Q116Q117Q118Q119Q1y-o-y % changeEnergyUnprocessed foodServicesProcessed food incl.alcohol, tobaccoNon-energy industrial goodsHICP all itemsOverall index excluding energy and unprocessed food  
  
1. Economic situation and outlook 

total government net investment turned positive for 
the  first 
time  since  2012  (0.12%  of  GDP, 
compared to 0.03% for the euro area). In 2018, this 
development was driven by municipal investment, 
where,  however,  net  investment  remains  negative 
and  needs  to  catch  up  with  depreciation.  The 
investment  gaps 
identified  by  municipalities 
remain  high  at  € 138.4  billion.  Data  for  January-
September  2019  suggest  that,  investment  growth 
intensified at the level of municipalities. 

investment  remains 

Private 
solid  despite 
slowing  economic  growth.  Private  investment 
increased  strongly  in  real  terms  in  total  (3%)  and 
across  most  asset  types  in  2018  (housing  3%, 
equipment  3.9%,  other  investments  4.7%).  Only 
non-residential  construction  investment  growth 
remained  subdued.  In  2019,  real 
investment 
increasing  somewhat  more  slowly 
continued 
investment  picked  up 
(2.4%).  Non-residential 
investment  growth 
speed,  while  equipment 
weakened.  Altogether,  private  investment’s  share 
of  GDP  increased  to  19.2%  in  2019.  The  fastest 
growing  components  in  recent  years  have  been 
housing  (see  Section  4.4)  and  other  investment 
(comprising  essentially  research  and  development 
and  other  intellectual  property).  Equipment  and 
non-residential construction have seen their shares 
of investment change little. 

rapid 

factors 

The  aggregate  net  investment  rate  remains 
relatively  low  by  historical  and  international 
standard.  The  gross  investment  rate  increased  to 
21.7% in 2019, the highest level since 2001. It has 
also  been  above  the  level  in  the  rest  of  the  euro 
area since 2010. By contrast,  following a globally 
relevant  trend,  Germany’s  net  investment  rate  has 
long  term,  possibly 
been  declining  over  the 
reflecting 
capital 
the 
like 
accumulation  as  economies  were  rebuilt  after  the 
Second World War. It has remained subdued since 
the  turn  of  the  century  after  an  initial  post-
unification  surge.  Currently  it  ranges  around  the 
average for the rest of the EU15 (the 15 countries 
which  were  Member  States  before  the  2004 
enlargement of the EU) but significantly below the 
levels  for  peers  like  the  US  or  France.  For 
example, irrespective of the generally high quality 
of 
effects  of 
insufficient  infrastructure  investment  in  recent 
years continue to be felt, adding to concerns about 
road  maintenance  and  congestion,  also  in  view  of 
Germany’s  role  as  a  transit  country,  north-south 

infrastructure, 

transport 

the 

Having been close to 2% in 2018, the Harmonised 
Index of Consumer Prices inflation declined to just 
above  1%  in  the  second  half  of  2019.  Not  taking 
into account volatile energy and unprocessed food 
prices,  it  hovered  around  1.4%  throughout  2019. 
Inflationary  pressure 
remain 
contained and inflation not to change significantly, 
reflecting  the  moderate  level  of  domestic  demand 
projected. 

is  expected 

to 

Graph 1.5:  Net and gross investment in international 

comparison 

Source: European Commission, AMECO database 

Investment 

Public  investment  has  continued  increasing 
against the backdrop of a significant investment 
backlog,  and  is  likely  to  increase  further  with 
the  2020  budget.  Gross  public 
investment 
increased by around 6% annually in 2015-2017. It 
then grew by close to 9% in 2018 and close to 7% 
in  2019  in  nominal  terms.  In  real  terms  the 
increase averaged about 4% in 2015-2019 as price 
inflation  for  construction  works  was  high  (more 
than  4.5%  on  average)  in  2017-2019.  This  raised 
the  public  investment  rate  from  2.1%  of  GDP  in 
2015 to 2.5% of GDP in 2019. In 2017 and 2018, 

10 

-505101520256063666972757881848790939699020508111417Net Investment, % of GDPDEUEU15xDEFRAJPNUSAD_W1520253035406063666972757881848790939699020508111417Gross Investment, % of GDP  
1. Economic situation and outlook 

prolonged  period  of  wage  moderation  during 
which wages did not keep up with productivity and 
external imbalances accumulated (see Section 4.3) 
and  wage  growth,  both  nominal  and  real,  is 
expected to ease again slightly in 2020. 

in 

declined 

production 

A  drop  in  labour  productivity  growth,  coupled 
with  wage  increases,  contributed  to  increasing 
unit labour costs. As employment levels remained 
high  while 
the 
manufacturing sector and job growth continued in 
the  non-tradable  sector,  overall  productivity 
growth  turned  negative  in  early  2018  (see  also 
Section 4.4.1). While labour productivity declined 
by  0.3%  in  2019,  nominal  compensation  of 
employees  increased  by  3.3%,  leading  to  a  unit 
labour  cost  increase  of  3.6%.  This  contributed  to 
some rebalancing of the German economy vis à vis 
the  rest  of  the  euro  area.  The  real  effective 
exchange  rate  appreciated,  due  partly  to  the 
nominal effective appreciation of the euro. 

Social developments 

While  the  risk  of  poverty  or  social  exclusion 
continues  to  decline  moderately,  rising  income 
inequality raises concerns. In 2018, 18.7% of the 
population  were  at  risk  of  poverty  or  social 
exclusion.  This  was  a  further  small  improvement 
from  2017  (19%)  and  the  peak  reached  in  2014 
(20.6%).  In  addition,  in  the  past  five  years 
Germany made significant progress in reaching the 
SDG  1  (People  at  risk  of  poverty  or  social 
exclusion).  Similarly,  the  disposable  income  of 
households  continued  to  grow.  Yet,  in  2018  the 
income share of the bottom 60% of the population 
fell by 2.5% compared to the previous year, while 
the  top  20%  saw  their  income  share  increase  by 
3.7%. In 2018, the richest 20% of households had 
a disposable income five times higher than that of 
the  poorest  20%,  with  an  increase  in  this  gap 
observed  since  2017,  flagging  as  “to  watch” 
according to the Social Scoreboard. Still, this ratio 
is  in  line  with  the  euro  area  average.  Wealth 
inequality  remains  high:  in  2017,  the  richest  10% 
of  households  possessed  around  55%  of  total  net 
wealth, and the Gini coefficient for household net 
wealth was 74%. This was slightly below its value 
in  2014  (76%)  but  remained  well  above  the  level 
for  the  euro  area  as  a  whole  (68.5%  in  2014) 
(Bundesbank,  2019).  The  uneven  profile  of 
property ownership and steeply rising house prices 
(see  Section  4.2  and  4.4)  are  likely  to  have  been 

in 

Investment 

but  also  east-west. 
transport 
infrastructure  in  recent  years  has  stayed  constant 
below 0.6% of GDP. Germany’s highly developed 
infrastructure  would benefit from a  consistent and 
long-term-oriented effort to maintain it and keep it 
up-to-date. 

Labour market  

rate 

continued 

economic 

performance 

growth. 
to 

strong,  despite 
in 

Labour  market 
remained 
remarkably 
the  marked 
slowdown 
The 
decline, 
unemployment 
stabilising  at  a  post-reunification  low  of  around 
3.2% 2019. The employment rate for the 20-64 age 
group  is  up  by  about  1 percentage  point  from  a 
year before, at 80.5% in the third quarter of 2019, 
one  of  the  highest  in  the  EU.  Still,  employment 
growth  has  been  slowing,  and  companies  in  the 
manufacturing  sector  increasingly  rely  on  short-
time-work  arrangements  to  avoid  dismissals  (see 
Section  4.3).  While  labour  shortages  are  still 
apparent in some  sectors, Germany does  not  fully 
use the labour market potential of some groups and 
female  part-time  work remains among the  highest 
in Europe. 

Graph 1.6: 

Real ULC, labour share of GDP/GVA, % 

Source: Destatis, European Commission 

Aggregate  wage  growth  increased  in  2018  and 
2019, while a deceleration is expected for 2020. 
Gross  nominal  wages  and  salaries  per  employee 
increased by 2.5% in 2016, 2.6% in 2017 and 3.2% 
in 2018 and 2019, driven by the increasingly tight 
labour  market.  These  developments  come  after  a 

11 

626466687072747678808255565758596061626364650001020304050607080910111213141516171819TotalManufacturing, rhs  
1. Economic situation and outlook 

strong contributing factors to this trend,  while  the 
tax  system  plays  some 
in  addressing 
Germany’s  high  wealth  inequality  (see  Section 
4.1). 

role 

Graph 1.7:  Change in GDP per head (2010-2017) in 
Germany by NUTS-2 region 

Graph 1.8:  Current account and component balances 

[1] 4 quarter moving average 
Source: German Bundesbank, European Commission 

External sector 

The  gradual  decline  in  the  current  account 
surplus since  2015 temporarily paused in 2019. 
The current account surplus for 2019 stood at 7.7% 
of  GDP.  Compared  to  2018,  the  trade  surplus 
increased  by  0.3  pp.  of  GDP  reflecting  cheaper 
energy  imports  and  weak  demand  for  imported 
inputs  by  the  manufacturing  sector.  The  primary 
income balance increased by 0.1 pps. The services 
income  balance 
balance  and 
remained unchanged. 

the  secondary 

The  transformation  of  the  automotive  sector  is 
reflected  in  the  evolution  of  the  trade  balance. 
Net  automotive  exports  continued  to  decline  and 
account  for  much  of  the  decline  in  the  trade 
surplus since 2015. This trend continued in recent 
quarters  as  automotive  imports  increased  further 
while  exports  declined  or  stagnated  relative  to 
GDP.  This  reflects  both  the  global  slowdown  in 
overall demand for cars and the relocations abroad 
of  a  sizeable  share  of  the  production  of  German-
branded cars. 

Public finances 

Despite  weakening  growth,  the  budget  surplus 
remains  considerable  and  the  fiscal  position 
favourable, while government debt continues its 
downward  path.  Germany’s  public  finances 
benefited  over  recent  years  from  the  favourable 
economic  situation,  with  tax  revenues  growing 
more strongly than expected and interest payments 

(1) in PPS 
(2) Index, EU28=100 in 2010 and 2017 
Source: Eurostat 

Regional disparities 

regions 

the  eastern 

Regional  disparities  in  Germany  have  steadily 
decreased  since  2001,  especially  between  the 
east  and  west  of  the  country,  but  the  gap 
between the most and least developed regions of 
the country remains wide. Even though they have 
caught  up  in  the  last  three  decades,  the  least 
developed  regions  remain  in  the  east.  GDP  per 
in  2018 
inhabitant  of 
represented 74.7% of the west German level, with 
the  difference  narrowing  over  the  last  decade. 
Nevertheless, between 2010 and 2017 GDP growth 
per  capita  exceeded  2.3%  in  several  German 
regions,  such as  Oberfranken and Unterfranken in 
Bavaria, Chemnitz and Thuringia. However, other 
Eastern 
like  Mecklenburg-Western 
Pomerania  (1.0%)  and  Berlin  (1.1%)  have  been 
growing  at  a  slower  pace  than  the  rest  of  the 
country (1.8%)  and the EU economy (1.2%). (see 
Graph  1.7).  Regional  disparities  across  Germany 
also  exist  with 
to  competitiveness, 
productivity,  investment,  unemployment  rates  and 
demographic developments (see Section 4.4). 

regions 

regard 

12 

-4-202468101205060708091011121314151617181920% of GDPGoods, EAGoods, non-EAPrim. income, EAPrim. income, non-EAServices, EAServices, non-EASec. income, EASec. income, non-EACurrent accountCurrent Account, EAForecast 
  
1. Economic situation and outlook 

to 

the 

low 

declining  fast  due 
interest  rate 
environment.  Having  peaked  at  1.9%  of  GDP  in 
2018,  the  headline  balance  declined  to  1.5%  in 
2019, reflecting the effects of fiscal  measures and 
to  some  extent  the  slowdown  in  the  economy. 
Nevertheless,  in  2019  the  fiscal  position,  as 
measured by the structural budget balance over the 
at 
medium-term 
currently -0.5% of GDP, remained favourable. It is 
set to decline gradually in the coming years, as tax 
revenues are projected to increase less strongly and 
implementation  of  government  measures 
the 
(European 
increases 
Commission, 2019a) (see also Section 4.1). 

expenditure 

budgetary 

objective 

overall 

Overall,  Germany  performs  well  in  achieving 
the  Sustainable  Development  Goals.  According 
to  Eurostat’s  Sustainable  Development  Goals 
(SDGs)  indicators  (see  Annex  E),  Germany  has 
been  making  progresses  on  most  goals  over  the 
past  5  years.  It  is  particularly  the  case  for  “Peace 
and  justice”  (SDG  16)  and  “Decent  work  and 
economic  growth”  (SDG  8)  and  “Partnerships  for 
the  goals”  (SDG  17).  In  addition,  most  outcomes 
are  above  the  EU  average  for  “Good  health  and 
well-being”  (SDG  3).  On  the  other  hand,  some 
deterioration  can  be  observed 
reducing 
inequality (SDG 10), in sustainable transport (SDG 
9)  and  most  indicators  remain  below  the  EU 
average 
for  “Responsible  consumption  and 
production” (SDG 12). 

in 

13 

 
1. Economic situation and outlook 

Table 1.1: 

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 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for 
real GDP and HICP, Autumn forecast 2019 otherwise); Deutsche Bundesbank; Destatis 

14 

2004-072008-122013-1620172018201920202021Real GDP (y-o-y)2.20.71.72.51.50.61.11.1Potential growth (y-o-y)1.31.01.61.61.51.4 f1.41.4Private consumption (y-o-y)0.60.91.41.31.31.6..Public consumption (y-o-y)0.72.12.52.41.42.5..Gross fixed capital formation (y-o-y)2.90.71.92.43.52.5..Exports of goods and services (y-o-y)9.82.23.44.92.10.9..Imports of goods and services (y-o-y) 7.82.34.25.23.61.9..Contribution to GDP growth:Domestic demand (y-o-y)1.01.01.61.71.71.8..Inventories (y-o-y)0.0-0.40.10.50.3-0.9..Net exports (y-o-y)1.10.1-0.10.2-0.4-0.4..Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.20.10.60.60.50.3 f0.30.2Capital accumulation (y-o-y)0.30.20.30.30.40.4 f0.40.4Total factor productivity (y-o-y)0.80.60.70.70.70.7 f0.70.7Output gap-0.3-0.8-0.21.21.20.2 f-0.2-0.6Unemployment rate10.16.64.73.83.43.23.43.5GDP deflator (y-o-y)0.91.21.71.01.52.12.01.7Harmonised index of consumer prices (HICP, y-o-y)1.91.70.91.71.91.41.51.6Nominal compensation per employee (y-o-y)0.72.22.52.62.93.32.52.5Labour productivity (real, person employed, y-o-y)1.5-0.10.71.10.1-0.3..Unit labour costs (ULC, whole economy, y-o-y)-0.82.31.81.52.73.61.61.7Real unit labour costs (y-o-y)-1.71.10.10.41.21.5-0.4-0.1Real effective exchange rate (ULC, y-o-y)-1.9-0.31.01.92.80.0 f-1.1-0.3Real effective exchange rate (HICP, y-o-y)-0.1-1.60.01.12.6-1.4 f-1.2-0.7Net savings rate of households (net saving as percentage of net disposable income)10.610.39.810.411.010.9..Private credit flow, consolidated (% of GDP)0.30.72.04.56.5...Private sector debt, consolidated (% of GDP)115.8107.099.4100.0102.1...of which household debt, consolidated (% of GDP)65.959.054.253.353.6...of which non-financial corporate debt, consolidated (% of GDP)49.948.045.246.748.5...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).2.12.01.61.2...Corporations, net lending (+) or net borrowing (-) (% of GDP)1.62.42.01.30.0-0.4 f0.00.1Corporations, gross operating surplus (% of GDP)26.425.124.124.123.422.4 f22.923.0Households, net lending (+) or net borrowing (-) (% of GDP)5.95.45.05.45.76.1 f6.16.1Deflated house price index (y-o-y)-2.00.74.84.65.1...Residential investment (% of GDP)5.25.45.96.06.36.6..Current account balance (% of GDP), balance of payments5.56.17.78.17.47.76.66.2Trade balance (% of GDP), balance of payments5.65.56.87.86.76.9..Terms of trade of goods and services (y-o-y)-0.7-0.51.6-0.9-0.90.91.00.2Capital account balance (% of GDP)-0.10.00.0-0.10.10.0..Net international investment position (% of GDP)14.124.243.455.262.0...NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)9.619.033.442.044.7...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)125.9164.3155.6141.5135.9...Export performance vs. advanced countries (% change over 5 years)15.6-0.8-3.12.81.0...Export market share, goods and services (y-o-y)-0.4-3.61.7-1.1-1.4-0.4 f-1.5-1.6Net FDI flows (% of GDP)1.71.21.61.51.31.7..General government balance (% of GDP)-2.0-1.70.71.21.91.50.60.2Structural budget balance (% of GDP)..0.90.91.41.1 f0.70.5General government gross debt (% of GDP)65.876.473.965.361.959.2 f56.855.0Tax-to-GDP ratio (%) (3)39.239.540.041.041.541.8 f41.641.5Tax rate for a single person earning the average wage (%) (4)42.340.439.639.839.8...Tax rate for a single person earning 50% of the average wage (%) (4)31.831.130.931.131.1...forecast 
  
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

recommendations 

Since  the  start  of  the  European  Semester  in 
2011,  Germany  has  made  at 
least  “some 
progress”  with  54%  of  all  its  country-specific 
recommendations. However, 46% of the country-
specific 
recorded 
‘limited progress‘ or ‘no progress‘ (see Graph 2.1). 
Compared 
Germany’s 
implementation  of  CSRs  has  improved  recently, 
though only to a limited extent, and is now roughly 
in  line  with  the  average  progress  made  by  other 
Member States. 

2014-2017, 

(CSRs) 

to 

Graph 2.1:  Overall multiannual implementation of 2011-

2019 CSRs to date 

* The overall assessment of the country-specific recommen-
dations 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 2020 Country report.  
Source: European Commission 

regarding  compliance  with 

improving  and 
Public  finances  have  kept 
measures  have  been  taken  to  increase  public 
investment.  Yet,  further  efforts  to  address  the 
savings investments imbalance would be welcome. 
Between 2011 and 2019, Germany’s fiscal position 
improved considerably, in line with CSRs from the 
early  2010s 
the 
medium-term  budgetary  objective  and  reducing 
debt. The good fiscal position also created room to 
intensify  investment,  and  the  public  investment 
rate increased from 2.1% of GDP in 2015 to 2.5% 
of  GDP  in  2019.  Still,  a  significant  investment 
backlog  remains,  with  investment  gaps  persisting 
in  particular  at  municipal  level  in  education  and 
infrastructure.  

limited 

reduced  only 

into  business  services  and  regulated  professions, 
even  though  complaints  abound  about  a  lack  of 
capacity.  Barriers  to  competition  in  railways  have 
extent. 
a 
to 
been 
Improvements 
industries  such  as 
in  network 
telecommunications,  energy  and  transport,  have 
been  limited  overall,  reducing  consumer  welfare 
future  competitiveness  and 
and  endangering 
sustainability  targets.  Investment  needs  in  energy 
transmission  and  distribution  infrastructure  are 
increasing, but there is currently no systematic and 
comprehensive  tracking  of  investment  needs  in 
different types of energy networks and at different 
levels of government. 

trend 

The  labour  market  has  performed  well  ,  but 
more efforts are needed in view of demographic 
change.  Continuing 
since  2011, 
the 
employment  and  wage  levels  improved  in  2019 
even  as  the  economy  slowed.  Labour  market 
incomes  have  improved  through  the  introduction 
of the statutory general minimum wage, as well as 
through  efforts  to  reduce  taxes  on  labour  and 
disincentives to work.  

to 

to 

the 

euro 

related 

closely 

Overall,  Germany  has  made  limited  progress 
with  regard 
the  2019  country-specific 
recommendations (CSRs) (4). Some  progress has 
been  made towards achieving sustained  growth  in 
public  and  private  investment  and  strengthening 
conditions  to  support  higher  wage  growth  —  two 
CSRs 
area 
recommendations  about  fostering  investment  and 
supporting  wage  growth  (see  Table  2.1).  There 
have  been  certain  efforts  to  reduce  the  labour  tax 
wedge, most notably the abolition of the solidarity 
surcharge for most taxpayers from 2021. Yet taxes 
on labour remain high, while some of the potential 
remains  underused  to  raise  tax  revenue  from 
sources  more 
inclusive  and 
supportive  of 
sustainable  growth,  such  as  environmental  and 
wealth-related taxes. There has been no progress in 
promoting competition in business services and the 
regulated  professions.  A  pending 
to 
reintroduce  conditions  for  practising  12  craft 
professions  even  reverses  a  reform  of  2004. 
Limited  progress  has  been  recorded  in  improving 

law 

Progress  towards  efficient  market  structures 
has  been  moderate.  While  the  competition  law 
framework  was  improved,  little  has  been  done  to 
open up public procurement and allow more entry 

(4)  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  Annex  A.  This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

15 

No Progress2%Limited Progress44%Some Progress37%Substantial Progress7%Full Implementation10% 
  
                                                           
2. Progress with country-specific recommendations 

the  educational  outcomes  and  skill  levels  of 
disadvantaged  groups.  The  results  of  the  2018 
OECD  Programme 
International  Student 
for 
Assessment (PISA) underlined the need for further 
action  in  this  regard  as  underachievement  in  all 
disciplines increased compared to 2015. 

the 
the  request  of  a  Member  State 
At 
Commission  can  provide  tailor-made  expertise 
through 
the  Structural  Reform  Support 
Programme  to  help  design  and  implement 
2018, 
growth-enhancing 

reforms. 

Since 

Germany has received such support in the form of 
three  projects.  In  2019,  the  Commission  provided 
the  authorities  with  support  to  establish  a  large-
cases  unit  in  the  German  statistical  system  to 
ensure adequate  coverage in the  national statistics 
of  multinational  business  groups  with  high 
economic  impact.  Also  in  2019,  work  started  on 
defining the IT infrastructure for this solution and 
building 
successful 
implementation.  

capacity 

for 

its 

Table 2.1: 

Implementation of 2019 CSRs 

(1) This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 
(2)  The  assessment  of  CSR1  does  not  take  into  account  the  contribution  of  the  EU  2021-2027  cohesion  policy  funds.  The 
regulatory framework underpinning the programming of  the 2021-2027 EU cohesion policy funds has not yet been adopted 
by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF.) 

16 

  Germany Overall assessment of progress with 2019 CSRs:   Limited CSR 1: While respecting the medium-term budgetary objective, use fiscal and structural policies to achieve a sustained upward trend in private and public investment, in particular at regional and municipal level. Focus investment-related economic policy on education; research and innovation; digitalisation and very-high capacity broadband; sustainable transport as well as energy networks and affordable housing, taking into account regional disparities. Shift taxes away from labour to sources less detrimental to inclusive and sustainable growth. 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 increasing expenditure in education.  Some progress in improving investment in research and innovation.   Limited progress in improving investment in digitalisation and very high-capacity broadband.  Limited progress in improving investment in sustainable transport.  Limited progress in improving investment in energy networks.  Limited progress in improving investment in affordable housing.  Limited progress in shifting taxes away from labour to sources less detrimental to inclusive and sustainable growth.  No progress in strengthening competition in business services and regulated professions. CSR 2: Reduce disincentives to work more hours, including the high tax wedge, in particular for low-wage and second earners. Take measures to safeguard the long-term sustainability of the pension system, while preserving adequacy. Strengthen the conditions that support 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 safeguarding the long-term sustainability of the pension system, while preserving adequacy.  Some progress in strengthening conditions to support 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 to address structural challenges and to foster growth 
and competitiveness in Germany 

In  absolute  numbers,  Germany  is  one  of  the  main  beneficiaries  of  EU  support.  EU  cohesion  policy 
funds(1) amount to €30.3 billion under the current Multiannual financial Framework (covering 2014-2020), 
equivalent to around 0.1% of Germany’s annual GDP. By the end of 2019, some €27.6 billion (around 91% 
of the total amount planned) was allocated to specific projects and €13.7 billion (45% of the total amount 
planned) was reported as spent by the selected projects, showing  a level of implementation above the EU 
average. (2)  The  allocation  from  the  rural  development  policy,  including  the  national  contributions,  totals 
€14 billion(3). By the end of 2019, €7.4 billion (52%) was reported as spent, in line with the EU average. 

While  reducing  economic,  social  and  territorial  disparities,  EU  cohesion  policy  funding  also  tackles 
structural challenges in Germany. Cohesion policy programmes for Germany have allocated €6.2 billion 
for smart growth, €3.5 billion for sustainable growth and sustainable transport and €7.9 billion for inclusive 
growth.  In  2019,  following  the  performance  review(4),  an  additional  €1.5  billion  were  made  available  for 
Germany for performing priorities. 

EU cohesion policy funding has made a valuable contribution to Germany’s economic transformation. 
Through  the  promotion  of  research,  technology  and  innovation,  but  also  environment-friendly  economic 
development  and  SMEs,  substantial  progress  has  been  made  since  2014.  By  end  2018  the  European 
Regional Development Fund (ERDF) has supported 18,300 businesses and 2,000 start-ups. Furthermore, it 
has contributed to the creation of over 6,700 new jobs in enterprises and improved infrastructures for more 
than  2,400  researchers.  Cohesion  policy  has  also  helped  de-carbonise  Germany’s  economy  as  projects 
decreased emissions with 73,500 tonnes of CO2-equivalent annually. In addition, EU support has promoted 
integrated  urban  development  for  over  1.4  million  people  in  130  cities.  The  European  Social  Fund  (ESF) 
provided EU added value in fostering sustainable and quality employment, combating social exclusion and 
discrimination and boosting investments in skills and education. Funds disbursed between 2015 and 2018, 
have  helped  more  than  1.3 million  beneficiaries,  mainly  long  term  unemployed  people  (over  180,000), 
disadvantaged people (over 150,000), people with a migrant background (over 390,000) and young people/ 
those not in education, employment or training (over 100,000). 

EU  rural  development  policy  has  contributed  to  strengthening  of  rural  economies  in  Germany. 
Between  2015  and  2018,  the  EAFRD  supported  more  than  5,000  farmers  invest  in  restructuring  and 
modernisation of their agricultural holdings, thus enhancing the competitiveness of the agricultural sector. 
Furthermore,  321  local  action  groups  have  been  established  to  foster  local  development  in  rural  areas, 
covering over 63% of the German rural population. 

The fisheries fund and other EU programmes also contribute to addressing the investment needs. The 
European  Maritime  and  Fisheries  Fund  (EMFF)  is  supports  Germany  with  €286  million  (including  the 
national co-financing). In addition, Germany benefits  from other  EU programmes, such as the Connecting 
Europe Facility, which has allocated €2.2 billion to strategic transport networks, and Horizon 2020, which 
allocated EU funding of €7.1 billion (of which about €921 million to 1,500 SMEs). 

EU  funds  already  invest  substantial  amounts  on  actions  in  line  with  the  Sustainable  Development 
Goals (SDGs). In Germany the ESI funds are supporting 12 of the 17 SDGs. Up to 97% of the expenditure 
is contributing to these.  

(1)  European Regional Development Fund (ERDF) and European Social Fund (ESF). Data include national co-financing.  
(2)  https://cohesiondata.ec.europa.eu/countries/DE 
(3)  European Agricultural Fund for Rural Development (EAFRD), including national co-financing. 
(4)  The  performance  review  is  regulated  by  Article  22  of  Regulation  (EU)  No  1303/2013,  whereby  5-7%  of  overall 

resources allocated are released to performing priority axes of the operational programmes. 

17 

 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

to  assess 

for  Germany 

in-depth  review 

The  2020  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken 
the 
persistence or unwinding of the imbalances that 
affect 
it.  In  February  2019,  Germany  was 
identified  as  having  macroeconomic  imbalances 
(European  Commission,  2019b).  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  the  macroeconomic  imbalance 
procedure (MIP) in-depth review that are set out in 
various sections of this report. (5) 

3.1. 

IMBALANCES AND THEIR GRAVITY  

The  German  economy’s  persistently 
large 
current account surplus reflects among others a 
subdued  level  of  domestic  demand  relative  to 
income. While there is a continuing shift towards 
more domestic demand-driven  growth, the overall 
shares  of  consumption  and  investment  remain 
relatively  low,  given  the  resilient  labour  market, 
favourable  financing  conditions  and  infrastructure 
investment  needs.  As a result, the current account 
surplus remains considerably above what could be 
inferred  from  fundamental  factors,  in  particular 
population ageing and the associated provision for 
old  age,  Germany’s  high  manufacturing  intensity 
and its competitive exports (see Section 4.2).  

The  subdued  net  investment  share  of  GDP 
continues  to  put  at  risk  Germany’s  future 
growth  potential,  and  has  implications  for  the 
euro  area.  Private  investment  is  lagging  behind 
infrastructure and housing  needs. This is reflected 
in  short-term  pressures,  observed  for  example 
through  increases  in  house  prices  and  rents.  Even 
if  the  gross  investment  rate  in  2018  exceeded  the 
euro  area  average  (21.2%  vs  20.8%),  the  net 
investment 
and 
significantly  below  that  of  leading  developed 

subdued 

remains 

share 

(5)  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),  investment  (Section  4.4)  and  climate 
adjustment  (Section  4.5).  An  asterisk  shows  that  the 
analysis  in  that  section  contributes  to  the  in-depth  review 
under the MIP. 

economies (e.g. US and France). This could act as 
a drag on potential  growth. Public investment  has 
picked  up,  but  a  still  large  investment  backlog, 
with depreciation still exceeding new investment at 
municipal level, will take longer to make up.  

continued 

and  disposable 

Meanwhile, the savings rate has been increasing 
even as interest rates fell to historic lows. Wage 
growth 
incomes 
expanded, but a large part of these impulses fed to 
savings rather than consumption, despite the lower 
return  on  savings.  Precautionary  saving  for  future 
risks (Rodriguez-Palenzuela, 2016) is an important 
savings  motive.  In  addition,  inequality  of  income 
and  wealth  contribute  to  high  private  savings,  as 
high  earners  have  a  particularly  high  savings  rate 
(Brenke  and  Pfannkuche,  2018).  Moreover  high 
corporate  savings  partly  reflect  the  savings  of 
wealthy  German  households  accumulated  within 
firms  due 
treatments  for 
example within the inheritance and gift tax system 
(IMF,  2019).  Enhancing  confidence  in  the  future, 
reducing 
and 
inequality,  could  be  thus  ways  to  strengthen 
consumption. 

to  preferential 

tax  system, 

recalibrating 

the 

tax 

in 

reforms 

Combining  investment  policies  with  structural 
reform  is  a  potentially  powerful  tool.  Stronger 
investment  in  innovation,  quality  education  and 
skills,  very  high-speed  broadband  networks, 
sustainable transport, electricity infrastructures and 
affordable  housing,  could  be  combined  with  a  set 
of  structural 
to  unleash  productive 
potential. Reducing taxes on labour could increase 
the  labour  supply.  This  would  contribute  to 
two  ways:  directly,  by 
potential  growth 
labour’s  growth  contribution,  and 
improving 
indirectly, 
of 
the 
by 
investments  at  a  time  when  the  availability  of 
for 
labour 
production. Reducing barriers to competition in the 
related  professional 
construction 
services 
capacity 
constraints,  and  raise  both  short-term  growth  and 
long-term  potential.  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. 

could  help 

constraining 

sector  and 

realisation 

alleviate 

remains 

helping 

factor 

to 

a 

18 

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

Table 3.1: 

Outward spillover heat map for Germany 

Note: cross-border figures for Gemany 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 — 2017, Imports (in value added) — 2015, Financial liabilities — 2017, Financial assets — 2017, 
Liabilities (to banks) — 2019-Q2, Bank Claims — 2019-Q2. 
Source: IMF, OECD, TiVa, BIS and Commission services 

3.2. 

EVOLUTION, PROSPECTS, AND POLICY 
RESPONSES 

The  current  account  surplus  remains  at  levels 
still considerably above 6%. Following a gradual 
decline since 2015, the trade balance has widened 
again  in  2019,  due  to  weak  demand  for  imported 
in  manufacturing  and  cheaper  energy 
inputs 
imports.  The  primary 
income  balance  also 
improved  somewhat,  while  the  negative  services 
balance  and  secondary  income  balance  remained 
unchanged. The current account surplus continued 
to edge down vis-à-vis the euro area to 2.2%, from 
2.7% in 2015. 

in  corporate 

The  large  current  account  surplus  currently 
reflects  savings  in  the  household  and  public 
sectors  alone,  as  the  non-financial  corporate 
sector  no  longer  has  a  positive  net  savings 
position. While companies’ savings contributed to 
the current account surplus before 2017, now they 
have  a  slightly  moderating  impact.  This  reflects 
increases 
lending  and  corporate 
investment and a reduction in corporate savings as 
a  result  of  rising  unit  labour  costs,  compounded 
lately  by  the  recession  in  manufacturing.  By 
contrast,  while  consumption’s  share  of  GDP 
remained  unchanged,  the  household  savings  rate 
increased,  propped  up  by  rising  labour  incomes, 
and  is  expected  to  stay  high  in  the  coming  years, 
remaining  the  highest  in  the  euro  area.  Wage 
growth is expected to slow down closer to the euro 
area average, being less conducive to rebalancing. 
The public sector’s net lending position peaked at 
1.9% in 2018, and is expected to gradually decline, 
while remaining in surplus. 

Given  the  size  of  the  German  economy  and  its 
strong  trade  and  financial  linkages,  there  are 
potentially  sizeable  spillovers  to  other  EU 

invest 

countries. Germany’s strong exports make it a key 
trading  partner  for  all  EU  countries.  Indeed, 
imports  from  Germany  exceed  20%  of  GDP  in 
some  countries,  including  Luxembourg,  Czechia, 
Hungary and the Netherlands, and are  above 10% 
of  GDP  in  Austria,  Slovakia,  Belgium,  Slovenia 
and  Poland  (see  Table  3.1).  High  trade  volumes 
also  reflect  the  fact  that  German  companies 
in  other  Member  States, 
operate  and 
resulting in integrated value chains. Developments 
in the car industry reveal the complex nature of the 
resulting  linkages  across  countries:  the  weak 
demand  for  cars  in  2018  resulted  in  a  production 
decline  in  Germany,  while  German  companies 
actually 
in  other  EU 
countries. This production shift now seems to have 
bottomed  out  but  it  is  clear  that  the  ongoing 
structural  change  in  the  car  industry  will  have 
significant 
for  production 
facilities  across  the  EU.  Financial  linkages  are  on 
average  smaller  than  trade  linkages,  yet  for  some 
countries they are  very  strong. The countries  with 
the  strongest  financial  links,  Luxembourg  and  the 
Netherlands, 
strengthen 
their 
considerably further. 

increased  production 

implications  also 

linkages 

saw 

to 

address 

More  recently,  Germany  has  taken  some 
important  policy 
its 
steps 
macroeconomic  imbalances,  but  more  efforts 
will  be  needed  in  the  coming  years  to  fully 
address them. 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 
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.  

infrastructure, 

in  digital 

19 

ATBEBGHRCYCZDEDKEEELESFIFRHUIEITLTLULVMTNLPLPTROSESISKUKImports16.715.36.43.30.626.56.44.833.64.33.923.36.53.66.332.843.220.314.24.36.83.915.317.72.5Imports (in value added)7.33.73.34.81.97.92.92.61.72.01.92.06.74.01.93.38.22.15.24.45.61.93.12.14.76.11.5Financial liabilities32.534.12.84.128.17.4 36.32.84.05.912.516.56.255.88.50.81208.13.153.384.51.77.41.214.77.04.124.8Financial assets60.230.98.212.538.119.4 25.04.455.023.131.629.620.275.416.013.21732.013.2141.0107.018.820.38.226.524.319.629.2Liabilities (to banks)10.11.51.64.73.76.60.48.4191.13.66.2Bank claims9.45.40.55.52.94.70.52.64.67.46.12.59.84.40.9123.01.410.68.19.22.80.25.02.02.310.7EU partner 
 
  
 
3. Summary of the main findings from the MIP in-depth review 

Box 3.2: Spillovers of a sustained increase in public investment – the case of Germany 

The European Commission’s QUEST model(1) was applied to simulate the impact of increasing public 
investment by 1 percentage point of GDP over a period of 10 years. Such a policy would largely go in 
the  direction  of  the  proposal  of  a  study  commissioned  by  the  German  Trade  Unions  and  the  Employers’ 
Association (Bardt et al., 2019) to implement an investment programme totalling €450 billion over the next 
10  years  (around  1.3%  of  GDP  annually).  This  is  the  estimated  additional  investment  required  to  meet 
Germany’s investment needs in the areas of decarbonisation, digitalisation, transport, education and research 
and  development.  The  simulation  assumes  that  no  neutralising  fiscal  measures  (e.g.  tax  increases  or 
expenditure  cuts)  are  implemented(2).  The  output  elasticity  with  respect  to  the  public  capital  stock  is 
assumed to be 0.12, which is a mid-range estimate (Arslanalp et al., 2010). Monetary policy is assumed to 
retain  its  accommodative  stance  at  the  zero  lower  bound  for  the  first  2  years  and  gradually  normalise 
afterwards. 

A sustained increase in public  investment would  have  positive domestic and cross-border spillovers. 
Public  investment  tends  to  have  a  larger  output  multiplier  than  public  consumption  due  to  the  impact  on 
long-term  output  and  wealth.  As  illustrated  in  Table  1,  under  the  stipulated  assumptions,  increasing  the 
public investment rate in Germany boosts output, employment and price dynamics in both Germany and the 
rest of the euro area, without exacerbating imbalances. There is also a frontloading of GDP effects. It derives 
from a real interest rate decline under the zero lower bound and expected positive long-term income effects 
from capital build-up even under an evenly distributed stimulus. It would weaken if the duration of stimulus 
were reduced. 

The  accommodative  monetary  policy  is  essential  to  realising  of  sizeable  positive  spillovers  in  this 
simulation exercise. Assuming a prolongation of the accommodative stance beyond 2 years could result in 
even stronger effects on the GDP of the rest of the euro area. This gain is associated with the export demand 
effects  from  a  stronger  depreciation  of  the  euro,  and  with  a  strengthening  of  the  real  interest  rate decline. 
Conversely,  a  monetary  contraction  would neutralise  the  spillovers  onto  the  rest of  the  euro  area or  make 
them negative. On the other hand, at typical average debt maturity, debt costs would be affected only slowly 
by a gradual normalisation of monetary policy. The debt stock increases during the 10 years of stimulus, but 
(together with the assumed low financing costs) the impact of the package on the debt-to-GDP is strongly 
mitigated in the long term by rising tax revenue and growth in nominal GDP. 

Table 3.1a:Spillover effects of Germany implementing a comprehensive investment package over 10 years 

Note: Results in % or pps (current account balance) deviation from baseline. 
Source: European Commission 

This  simulation  complements  earlier  QUEST  simulations  designed  to  model  a  demand  stimulus  or 
structural reforms. Earlier simulations include an increase in public investment and a reduction in personal 
income  tax  (European  Commission,  2017a),  increases  in  expenditure  on  R&D  and  education  (European 
Commission,  2018a),  and  implementation  of  structural  reforms  to  close  performance  gaps  (European 
Commission, 2019b).  

(1)  For 

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

information 

QUEST 

detailed 

the 

on 

and 

applications, 

see: 

(2)  Based on the most recent fiscal projections for Germany (European Commission, 2019a), such an increase in public 

investment would be consistent with SGP requirements. 

20 

2020202120222023202420252026202720282029GermanyGDP1.10.90.80.80.80.91.11.21.31.4Employment0.50.30.10.00.00.00.00.00.00.0Consumer price inflation0.30.30.10.10.00.00.00.00.00.0Current account balance (% GDP)0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1Rest of euro areaGDP0.40.40.30.10.10.10.10.10.10.1Employment0.20.20.10.00.00.00.00.00.00.0Consumer price inflation0.30.40.30.20.20.10.10.10.10.1Current account balance (% GDP)0.10.00.00.00.00.00.00.00.00.0 
  
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.2: 

MIP Assessment Matrix 

Source: European Commission 

21 

 Gravity of 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 level of 3% of GDP suggested by empirical benchmarks. Accumulated surpluses have resulted in a large positive net international investment position of 68.6% of GDP in the third quarter of 2019. The surplus reflects saving and deleveraging by households, as well as the public sector.  Weak domestic investment has resulted in bottlenecks in taking up renewable energy sources, in making transport and mobility more sustainable, in expanding the housing supply; in slow progress in digitalisation; and in a significant municipal investment backlog. All of this poses risks to Germany’s future growth prospects. In addition, considering the strong economic links, strengthening investment in Germany would benefit both Germany and its euro area and EU partners. The current account surplus has declined somewhat from its peak of 8.6% of GDP in 2015, but recently the decline has paused. With the manufacturing sector exposed to an increasingly challenging external environment and going through structural change, export growth has slowed. Still, due to cheaper energy prices and weak imports of intermediate goods, the surplus for 2019 stood at 7.7% of GDP. It is projected that the decline will resume after the current pause, but the balance will remain above 6% of GDP until 2021. Households' savings remain significantly above their investment. The share of households’ disposable income in GDP has improved, benefiting from an increase in government transfers and resilient labour market, and the latter helped also a further recovery of the labour income share. However, in 2018, only two thirds of disposable income growth trickled down to consumption, while the rest led to higher savings. In addition, wage growth is expected to slow and get closer to the euro area average, which may reduce the pace of rebalancing. The net lending of corporates declined from 1.4% of GDP in 2017 to about zero in 2018, with the net lending of non-financial corporations at 0.2% of GDP and that of financial corporations at -0.2% of GDP. Hence, corporates did not contribute anymore to the current account surplus. In 2016-2019, private investment expanded by close to 3% on average. Further developments will merit attention, as private investment slowed from the second quarter of 2019, reflecting economic and trade uncertainty. Public sector investments have expanded, yet net public savings have also increased in 2018 as a share of GDP thanks to strengthening tax revenues and savings on interest expenditure, driving up the fiscal surplus up in 2018. In 2019, the resilience of the labour market helped containing social expenditure and contributed to persistently high revenues. It is expected that the government will gradually reduce its net savings, while remaining in surplus. Germany has taken some policy steps to address its imbalances. Gross public investment increased by around 6% annually in 2015-2017 by close to 9% in 2018 and close to 7% in 2019 in nominal terms. In real terms it increased by about 4% on average over 2015-2019, as price inflation for construction works accelerated in 2017-2019. This raised the public investment rate from 2.1% of GDP in 2015 to 2.5% of GDP in 2018. However, the backlog remains considerable, especially at municipal level where it is estimated to about 4% of GDP.  The statutory minimum wage was increased, although it sent only limited price signals to wage formation in the whole economy. Wages were resilient to the economic slowdown. A number of measures have been taken to improve investment in various areas, in particular education, R&D, digitalisation, sustainable transport, energy networks and affordable housing. Still, as progress in these areas requires time and further efforts, considerable need for action remains. The almost total abolition of the solidarity surcharge represents a notable step towards shifting taxes from labour and reducing the tax wedge, but major disincentives to work longer hours remain in place. 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 the public sector. The investment rate has improved, yet further increases could improve potential growth in Germany and also in the rest of the euro area.  While private consumption has increased, this has been limited by households’ higher propensity to save. A slowdown in wage and employment growth as well as heightened economic uncertainty may limit consumption growth. Disincentives to work for certain groups continue to reduce labour supply, thus limiting growth in disposable income. Regulatory restrictiveness is also contributing to capacity constraints.  Public savings have increased up until 2018, while a decline is expected. Public investment has increased, yet remains below the level that appears necessary for closing the infrastructure investment gap.   
  
 
3. Summary of the main findings from the MIP in-depth review 

3.3.  OVERALL ASSESSMENT  

The  adjustment  of  the  current  account  surplus 
has been limited so far, but a gradual decline is 
set  to  continue  while  the  surplus  level  remains 
elevated.  With 
the  persistent  weakness  and 
uncertainty in the external environment, growth is 
expected  to  be  driven  primarily  by  domestic 
demand  in  2019-2021.  According  to  the  draft 
budgetary  plan,  implementation  of  measures  to 
increase  public  investment  is  set  to  continue. 
Private investment is also expected to remain solid 
and,  more 
amid 
importantly,  due 
to  adopt  new 
technologies.  

strong  housing  demand 
to 

the  need 

long-term 

comprehensive, 

investment 
A 
programme 
in  Germany  could  reduce  the 
external  imbalance  and  would  considerably 
increase GDP. More progress is needed to reduce 
the  investment  backlog  and  to  support  the  long-
term  prosperity  of  the  country.  An  investment 
programme could contribute to these. Moreover it 
could  largely  counterbalance  an  expected  decline 
in potential growth. In addition, it would also have 
positive  spillover  effects  on  other  euro  area 
countries (see Box 3.2) (6).  

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

2020 Council Recommendations for the euro area. 

22 

                                                           
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION* (7) 

Public finances  

Despite 
in  2019, 
the  economic  slowdown 
German  public  finances  recorded  a  solid 
general government surplus and public debt fell 
below  the  60%  of  GDP  reference  value,  thus 
complying  with  the  Stability  and  Growth  Pact. 
Since  2014, 
the  government  sector  achieved 
headline  balance  surpluses  that  have  increased 
over  time  to  peak  at  1.9%  of  GDP  in  2018.  This 
surplus  has  declined  to  1.5%  in  2019,  and  is 
projected to decline markedly further in the next 2 
years,  to  a  nearly  balanced  budget  position.  The 
structural balance is also expected to decline over 
the  same  period,  but  to  remain  in  a  clear  surplus. 
Several  government  measures to reduce taxes and 
increase  spending  are  projected 
to  have  an 
expansionary  fiscal  stance  over  the  period  2019-
2021,  according  to  the  Commission  2019  autumn 
forecast  (European  Commission,  2019a).  Public 
debt continues its downward  path and is expected 
to  have  fallen  below  the  60%  of  GDP  Maastricht 
threshold  in  2019,  for  the  first  time  since  2002. 
Public  debt  is  expected  to  decline  further  in  the 
coming  years.  For  a  debt  sustainability  analysis 
and associated fiscal risks see Annex B. 

Germany  has  accumulated  considerable  fiscal 
space  in  recent  years,  which  starts  being  used 
and could be used further to sustain the upward 
trend in public investment. 2018 also marked the 
peak in fiscal space of 1.9% of GDP, calculated as 
the  difference  between  the  structural  balance  of 
1.4%  of  (potential)  GDP  and  the  medium-term 
budgetary objective (MTO) of -0.5% of (potential) 
GDP.  Fiscal  space  is  on  average  present  at  all 
levels  of  government.  While 
federal 
government is expected to largely use its headline 
surplus  and  return  to  balanced  budgets,  the  state 
and  local  governments,  at  aggregate  levels,  still 
have  reserves  to  boost  public  investment  and 
overcome  the  investment  backlog  especially  at 
municipal  level.  However,  investment  barriers  in 
in  planning  and 
the 
construction  capacities  persist.  With  the  measures 
announced  by  the  government  up  until  2021,  the 
fiscal  space  could  be  reduced  to  1.0%  of  GDP, 

form  of  constraints 

the 

which  could  be  used  to  further  strengthen  public 
investment.  The  latter  reached  2.5%  of  GDP  in 
2019,  above  the  long-term  average  since  2000  of 
2.2%  of  GDP.  However,  more  efforts  are  needed 
to  reduce  the  investment  backlog,  especially  at 
municipal level,  including increased absorption of 
federal 
investment 
provided 
support (8).  

funding 

for 

Graph 4.1.1:  Headline balance (HB), structural balance (SB) 

and fiscal space 

Source: European Commission, Destatis, Draft Budgetary 
Plan 2020 

Having a long-term vision for investment could 
facilitate  sustainable  and  inclusive  growth  and 
help 
improve  predictability  and  planning 
certainty for businesses and local communities. 
Trade  unions  and  employer  associations  have 
recently  agreed  on  the  need  for  a  long-term 
perspective on public investments in areas such as 
transport 
decarbonisation,  digitalisation, 
and 
investment  need  was 
education.  The  yearly 
estimated at €45 billion over 10 years (Bardt et al., 
2019).  This  represents  an  increase  by  more  than 
half  of  the  current  public  investment  total  of 
around  €85 billion  in  2019.  The  €450 billion 
package over 10 years would need to be specially 
allowed  for  and  permitted  to  increase  the  current 
federal debt, which stands at €1 trillion. According 
to  the  social  partners  and  their  research  institutes, 
the  low  interest  rate  environment  offers  a  unique 
opportunity 
investment 
for  a  debt-financed 
programme.  Furthermore,  capacity  constraints 
to 
could  be  alleviated  by  giving 

incentives 

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

(8)  Municipalities  in  2018  planned  investment  expenditure  of 
nearly €35 billion but spent only around €23 billion (KfW, 
2019).  

23 

-1.5-1.0-0.50.00.51.01.52.01112131415161718192021% of GDPFiscal space current MTOHB - Social security fundsHB - Local governmentHB - State governmentHB - Central governmentSB - General governmentHB - General governmentMTO (-0.5%)-0.5%Forecast 
                                                           
  
                                                           
4.1. Public finances and taxation* 

among  the  highest  in  the  EU  (51.3%  against  the 
EU  average  of  43.8%  for  a  single  worker  earning 
the  average  wage),  see  Graph  4.1.2.  In  particular, 
the  tax  wedge  for  low-income  earners  (42.3% 
against  the  EU  average  of  31.8%  for  a  single 
worker earning 50% of the average wage) is high. 
The progressivity of Germany’s labour taxation is 
lower  than  in  most  EU  Member  States  (European 
Commission,  2020).  This  is  largely  due  to  the 
limited 
security 
contributions.  

progressivity 

social 

in 

Graph 4.1.2:  Tax wedge for different income levels, DE, FR, 

UK, EU-28, 2018 

Source: European Commission Tax and benefits indicators 
database 

Despite 

segment. 

Certain  features  of  the  German  tax-benefit 
system  result  in  disincentives  to  work  in  the 
lower-income 
some 
improvements  in  recent  years,  the  interplay  of 
income  taxes,  social  security  contributions  and 
transfer  withdrawals  leads  to  very  high  effective 
marginal tax rates (9) of 100% and more for certain 
income categories (Peichl et al., 2017). This results 
in strong disincentives for people to increase their 
working hours (the intensive margin), or — for the 
jobless — to start working (10). This is particularly 
an  issue  for  people  in  part-time  occupations 

(9)  The  effective  marginal  tax  rate  is  the  key  measure  of  the 
incentivising  effect  of  a  tax-and-transfer  system.  This 
indicates what proportion of every additionally earned euro 
has to be deducted, whether in the form of the withdrawal 
of social welfare benefits, through income tax, or as social 
security  contributions,  from  the  total  amount  of  income 
directly available to the earner. 

(10)  The extensive margin is affected by the marginal tax rates 

via the increase in the average tax rate. 

to 

budget 

investment 

companies from all over the EU to bid for lucrative 
German  contracts.  According 
the  German 
Economic  Institute  (IW),  the  creation  of  a  special 
(‘Föderaler 
federal 
Investitionshaushalt’)  responsible  for  the  €450 
billion  investment  package  would  not  require  a 
change  in  the  constitution,  as  it  would  be  in  line 
with  the  debt  brake.  According  to  the  social 
partners  and  their  research  institutes,  the  legally 
independent  special  budget  should  be  bound  to 
new,  additional  tasks,  and  there  should  not  be 
expenditure  shifts  from  the  main  federal  budget 
(Hüther,  2019).  Having  a  long-term  investment 
plan  could  create  continuous  demand  for  public 
construction  projects.  It  could  give  planning 
certainty 
and 
municipalities  to  increase  their  capacities  for 
managing  public  investment  projects,  also  by 
hiring  engineers  at  competitive  salaries.  It  could 
also ensure that public investment does not decline 
in  an  economic  slowdown  due  to  consolidation 
efforts. 

construction 

companies 

to 

Taxation 

tax 

averages.  Germany’s 

Tax  revenues  in  Germany  continued  to  grow, 
with a major part coming from labour taxation, 
while  taxes  more  supportive  of  inclusive  and 
sustainable  growth,  such  as  environmental  and 
wealth-related  taxes,  remain  underused.  In 
2018, tax revenues reached 40.1% of GDP, which 
was  the  highest  level  since  2000,  slightly  below 
the  euro  area-19  (40.5%)  and  above  the  EU-28 
(39.2%) 
revenue 
structure  is  characterised  by  its  relatively  high 
reliance on labour tax revenue (56.9% of total tax 
revenue,  which  remained  relatively  stable  over 
recent years). This is among the highest in the EU 
(the EU average is 49.4%), and is largely driven by 
the  level  of  social  contributions  (39.3%).  At  the 
same  time,  revenues  from  indirect  taxes  are 
relatively  low  (27.0%),  including  VAT  (17.5%) 
and  environmental  taxes  (4.5%,  with  revenues 
slightly  but  continuously  decreasing  since  2005). 
The same is true for recurrent taxes on immovable 
property (1.1%) and inheritance taxes (0.4%). The 
share  of  revenues  from  taxes  on  capital  stock  and 
on  capital  income  of  households  is  significantly 
below the EU average. 

Germany’s  tax  burden  on  labour  is  high, 
particularly  for  low-income  earners.  The  tax 
burden on labour, as measured by the tax wedge, is 

24 

0102030405060DEFRUKEU-28DEFRUKEU-28DEFRUKEU-28DEFRUKEU-2850% ofaveragewage67% ofaveragewage100% ofaveragewage167% ofaveragewage% of total labour costsTotalSocial contributionsPersonal Income tax  
                                                           
4.1. Public finances and taxation* 

and  goes 

(predominantly  women), 
against 
considerations  of  efficiency  and  fairness  (see 
Section  4.3).  The  2019  increase  in  the  midi-job 
full  social  security 
threshold,  above  which 
contributions are paid lowers the tax burden below 
the  threshold,  yet  effects  merit  monitoring,  as  for 
some  groups  the  marginal  effective  tax  rates 
increase (European Commission, 2019b). 

to 

improve 

taxation  could  help 

tax  revenues  relative 

Germany’s environmental tax revenues remain 
among  the  lowest  in  the  EU.  Increased  use  of 
environmental 
internalise 
environmental costs, incentivise more efficient use 
of  resources  and  contribute  to  the  achievement  of 
SDGs 3, 7, 11 and 13. It could also provide short-
term 
tax  revenues,  which  can  be  used  for 
the 
compensatory  measures 
distributional  impact  of  environmental  taxes  and 
their acceptance among the population. Germany’s 
environmental 
to  GDP 
remain among the lowest in the EU (in 26th place 
in  2018),  accounting  for  1.8%  of  GDP  (EU 
average  2.4%  of  GDP),  a  decline  from  2.4%  in 
2005.  Environmental  tax  revenues  in  Germany 
stem  primarily  from  energy-related  taxes  (82.8% 
of  environmental 
tax  revenue),  including  the 
energy  tax  (69.2%)  and  electricity  tax  (11.8%). 
The  implicit  tax  rate  on  energy  in  Germany  fell 
from  €222.2  per  tonne  of  oil  equivalent  (toe)  to 
€202.9  between  2006  and  2017,  while  the  EU 
average  grew  from  €192.9  to  €236.1  per  toe.  Tax 
revenues  from  transport  fuel  taxes  and  taxes  on 
in  Germany 
resources  are  particularly 
compared  with  other  EU  countries.  Germany  has 
no pollution-related tax revenue (Graph 4.1.3). As 
environmental 
regressive 
(European  Commission,  2020),  it  is  important  to 
increased  use  with  policy 
accompany 
measures,  including  labour  tax  cuts  and  cash 
benefits,  that  alleviate  their  impact  on  vulnerable 
populations.  Box  4.1.4  models  the  introduction  of 
including  possible  compensation 
a  CO2 
mechanisms,  which  goes  beyond  the  CO2  pricing 
chosen  by 
the  government.  Furthermore,  as 
environmental  taxes  aim  to  change  behaviour, 
which would, over time, result in the erosion of the 
associated  tax  base,  an  expansion  of  the  tax  base 
and  a  gradual  increase  in  tax  rates  could  ensure 
stable revenues.  

taxes  are 

typically 

their 

low 

tax, 

for 

Taxes  and  levies  (including  the  levy  to  finance 
subsidies for the producers of renewable energies) 
on  electricity  are  currently  higher  per  unit  of 
energy than those on other energy carriers such as 
petrol  and  diesel,  natural  gas  and  heating  oil  in 
Germany  (Kemfert  et  al.,  2019).  This  limits  the 
smart  integration  of  electricity  into  the  heating, 
transport  and  industry  sectors.  The  situation  is 
unlikely  to  change  significantly  over  the  coming 
years,  despite  planned  reductions  in  electricity 
charges in support of the production  of renewable 
energies.  Exemptions 
energy-intensive 
companies  from  the  renewable  surcharge  add  to 
the  electricity  bill  of  other  industrial  consumers 
and households. Furthermore, like many other EU 
Member  States  (11),  Germany  imposes  a  lower 
nominal marginal tax rate on diesel fuel for private 
road usage than on unleaded petrol and the ratio of 
diesel  to  petrol  excises  is  significantly  below  the 
EU  average.  This  is  done  even  though  the  former 
has  a  higher  carbon  content  and  greater  negative 
impact on ambient air quality (12). This is true for 
both the tax per litre and the tax per tonne of CO2 
emissions  (European  Commission,  2020). One 
might  argue  that  the  German  tax  system  offsets 
this  advantage  for  diesel  fuel  (at  least  partially) 
through higher car circulation taxes on diesel cars. 
According  to  the  Federal  Audit  Office,  the  diesel 
privilege triggers revenue shortfalls in the amount 
of  €9.5  billion  annually,  of  which  roughly  €8 
billion  can  be  attributed  to  the  lower  energy  tax 
rate for Diesel and €1.5 billion to the value added 
into 
tax  (Bundesrechnungshof,  2017).  Taking 
account  the  higher  circulation  tax  for  diesel  cars, 
the  net  revenue  shortfall  from  the  diesel  privilege 
is  estimated  at  about  €1.5  billion  annually. 
However,  the  circulation  taxes  do  not  affect  the 
extent  to  which  a  car  is  actually  used  once  it  is 
owned  and  available  (i.e.  the  marginal  cost  of 
driving  a  car).  To  serve  policy  objectives  of 
environmental 
be 
sustainability, 
preferable  to  tax  transport  fuel  consistently  based 
on 
associated 
externalities  in  terms  of  carbon  emissions  and  air 
pollution.  

consumption, 

it  would 

reflecting 

the 

Simplifying  Germany’s  tax  system  could  help 
environment  more 
make 

business 

the 

Current  price  signals  across  energy  carriers 
and users limit the potential for deploying clean 
energy  technologies  and  reducing  emissions. 

(11)  With the exception of Belgium and the UK, where rates are 

equal per volume of fuel consumed. 

(12)  It should be noted that diesel engines are on average more 

efficient than petrol engines.  

25 

                                                           
high 

compliance 

complex,  which 

tax  system  remains 
investment-friendly.  The 
to 
contributes 
relatively 
comparatively 
for 
costs 
businesses.  Both  statutory  rates  and  effective 
income  are 
average 
relatively 
(European 
Commission,  2019c).  Given  that  many  businesses 
will not benefit from the abolition of the solidarity 
surcharge, 
remains  unchanged. 
Similarly,  the  debt  bias  in  corporate  taxation 
remains high (European Commission, 2019b).  

tax  rates  on  corporate 
in  Germany 

this  situation 

high 

Graph 4.1.3:  Structure of environmental tax revenues, 2018 

[1] Energy taxes also include taxes on CO2 emissions and 
Member States’ revenues from the EU emission trading 
system. Transport taxes include taxes on owners and users of 
means of transport. Pollution taxes include taxes on 
emissions, waste management and noise. Resource taxes 
include any taxes linked to the extraction or use of a natural 
resource. They do not include other levies, e.g. those levied 
to subsidise the production of renewable electricity. 
[2] EU-28 values are weighted averages by GDP size. 
Source: Eurostat  

Recent tax reforms  

The  government  agreed  on  the  abolition  of  the 
solidarity  surcharge  for  large  parts  of  the 
population, and this is expected to help spur job 
creation and private consumption. The solidarity 
surcharge  (an  additional  5.5%  on  top  of  the 
personal/corporate income tax rate) was introduced 
in  response  to  additional  fiscal  needs  stemming 

4.1. Public finances and taxation* 

the  surcharge 

from  German  unification  (13)  and  was  intended  to 
be  temporary  in  nature.  The  German  Bundestag 
abolished 
for  about  90%  of 
taxpayers currently paying it, and reduced it for a 
further  6.5%  of 
taxpayers  by  substantially 
increasing the threshold of the tax-free allowance, 
starting  from  2021 (14).  The  reform  is  expected  to 
create  more  than  100,000  additional  jobs  (in  full 
time  equivalents)  and  generate  a  substantial  fiscal 
stimulus. While this reform will through these cuts 
increase  the  progressivity  of  the  upper  tail  of  the 
income tax system, income inequality as measured 
by  the  Gini  index  will  likely  increase  slightly,  as 
the  reform  will  benefit  the  (upper)  middle  class 
more  than  the  bottom  of  the  income  distribution 
(Blömer et al., 2019). 

of 

types 

heating 

As part of the recently agreed Climate Package, 
Germany  will  introduce  a  CO2  price  with  a 
proposed  price  path  which  can  help  the 
attainment  of  its  medium-term  climate  targets, 
but  which  might  also  have  a  regressive  effect. 
The  Climate  Package  is  expected  to  increase  the 
cost  of  pollution,  lower  costs  for  less-polluting 
transport  modes  and  give  more  incentives  to 
promote  the  use  of  building  insulation  and  less-
polluting 
(Projektgruppe 
Gemeinschaftsdiagnose,  2019).  While  initially  set 
at a low entry price for 2021 (10 €/tCO2), the CO₂  
price  was  raised  to  €25,  gradually  increasing  in 
stages  to  €55  by  2025.  Evaluations  by  economic 
research  institutes  found  that  the  moderate  CO2 
price  initially  proposed  by  the  government  for 
transport  and  buildings  would  not  be  sufficient  to 
reach  the  2030  target  for  reducing  emissions  not 
covered by the EU emission trading system (DIW, 
2019).  Evaluations  also  pointed  out  a  regressive 
effect  of  the  proposed  CO2  pricing  mechanism 
(DIW,  2019). The  regressive  effect  is  expected  to 
be partially reduced through a substantial reduction 
in the renewable electricity surcharge.  

(13)  Initially it was introduced for 1 year in 1991 to finance the 
fiscal  needs  in  response  to  the  Gulf  War,  in  support  of 
central  and  eastern  European  countries  and  German 
unification.  In  1995,  it  was  reintroduced  for  an  unlimited 
period  with  the  sole  purpose  of  financing  the  long-term 
costs of German unification. 

(14)  Alternatively,  the  legislator  could  have  abolished  the 
solidarity  surcharge  altogether  and  –  in  return  for  not 
keeping it at the upper end of the income scale  – increase 
for that part the income tax correspondingly. However, the 
revenues from the solidarity surcharge accrue in full to the 
federal level while revenues from the income tax are shared 
between the federal and the Länder level. 

26 

0.00.51.01.52.02.53.03.54.04.5ELSIDKLVHRNLITFICYEEPLMTBGPTHUUKATFRBESECZLTROESDESKIELUEU-28% of GDPPollution/resourcesTransport (excluding fuel)Energy (transport fuel)Energy (other than transport fuel)  
                                                           
4.1. Public finances and taxation* 

Box 4.1.3: The 2030 Climate Package 

The coalition government  agreed on  a 2030 Climate Package  that is  mainly composed of a  proposal 
for a federal law on climate protection and a 2030 climate protection programme that  contains a list 
of sectoral policies aimed at achieving Germany’s 2030 greenhouse gas emission reduction target. In 
the meantime, most of the corresponding legislation has been adopted by the German Parliament. The law 
on climate protection makes legally binding the national greenhouse gas reduction target of at least 55% by 
2030, compared to 1990. The law also sets the long-term objective of climate neutrality by 2050. The law 
further apportions the overall emissions reduction targets into sectoral emission budgets between key sectors 
of  the  economy,  in  particular,  energy,  buildings,  transport,  industry,  agriculture  and  waste  management. 
Compliance with these sectoral annual emission budgets is allocated to the federal ministry responsible for 
the respective sector. In case of failure, the lead ministry must present an emergency adjustment programme 
of  measures  to  reach  future  targets.  The  law  also  provides  for  an  annual  monitoring  process  under  the 
leadership  of  a  governmental  body  (‘Klimakabinett’) (1)  as  well  as  the  creation  of  a  commission  of 
independent  experts  to  monitor progress  in  reducing  emissions  and  advise  the  government  on  actions  and 
impact assessments. 

As part of the 2030 federal climate protection programme, a CO2 pricing system will be introduced in 
the  transport  and  heating  sectors  -  the  so-called  national  emission  trading  scheme  (nETS).  The 
government’s  proposal  was  criticised  for  its  lack  of  ambition  and  its  distributional  impact  (DIW,  2019; 
MCC and PIK, 2019). The German Parliament agreed to raise the level of environmental ambition and the 
volume of compensatory measures. The CO2 price will be phased in gradually, starting in 2021 at €25/ t-CO2 
(initial proposal €10). Afterwards, the fixed price will annually increase to reach €55/t-CO2 in 2025 (initial 
proposal €35). The maximum amount of emissions decided in 2026 will be set to decrease annually in line 
with German climate targets. The emission certificates will be traded on a national emission market, separate 
from  the  EU  ETS.  From  2026  the  price  of  the  emission  certificates  will  be  set  by  the  market  between  a 
minimum  of  €55/t-CO2  and  a  maximum  of  €65/t-CO2.  An  evaluation  of  the  law  is  foreseen  for  2025  to 
determine whether a price corridor for the following years after 2026 is reasonable or necessary 

Several  initiatives  listed  in  the  2030  Climate  Package  aim  to  partly  compensate  final  consumers  and 
economic  agents  for  increased  energy  prices.  First,  a  large  part  of  the  income  generated  by  the  nETS  is 
planned  to  be  used  to  reduce  electricity  charges  and  levies  In  particular,  the  surcharge  on  renewable 
electricity for households and small businesses will be gradually decreased. Second, between 2021 and 2026 
long-distance  commuters  (as  of  21km  of  distance)  will  have  an  additional  possibility  to  reduce  their  taxed 
income (‘Pendlerpauschale’). This extra fiscal benefit of 5 eurocents per km will be increased to 8 eurocents 
per  km  in  2024  to  2026.  Third,  housing  benefits  will  be  increased  by  10%.  However,  a  large  part  of  the 
additional revenue will go to the federal budget to finance additional climate and energy measures.  

In  addition,  the  Climate  Package  includes  a  long  list  of  sectoral  policies  aimed  at  reducing  sectoral 
emissions. For example, in the buildings sector, Germany plans to increase tax support for refitting heating 
systems. To facilitate the exchange of old heating oil burners, new heating systems will get a subsidy of 40% 
of the cost. At the same time, after 2026 it will not be allowed to fit a new oil heating system (as long as an 
alternative exists). In the transport sector, electro-mobility will be supported across the board. The goal is to 
have 1 million electric vehicle (EV) charging points available across Germany by 2030. The creation of EV 
charging  infrastructure  at  commonly  used  private  properties  will  be  supported.  The  premium  scheme  for 
electric,  hybrid  and  fuel  cell  vehicles  will  be  extended  to  cover  the  purchase  of  vehicles  costing  less  than 
€40,000.  Public  transport  investment,  creation  of  new  cycling  routes,  modernisation  of  ports  and  inland 
waterways, support to rail transport (Deutsche Bahn), digitalisation and development of new motor fuels (e.g. 
based on hydrogen) are among the initiatives listed. From 2021, the motor vehicle tax for newly  registered 
vehicles  will  be  related  to  their  CO2  emissions  per  km.  To  make  train  journeys  cheaper  and  flying  more 
expensive, VAT on train tickets are reduced from 19% to 7% from 2020 on and it will not be possible to sell 
air tickets below a  minimum price (to prevent the price falling below the levels of charges and taxes). The 
transformation  of  German  industry  will  be  supported  by,  among  other  things,  investment  programmes, 
higher  minimum  standards  in  eco-labelling  and  the  national  decarbonisation  program,  which  targets  in 
particular high-emitting sectors. Battery cell production will be supported. With regard to  energy, Germany 
will  phase  out  coal  in  power  stations  by  2038.  By  2030,  Germany  should  get  65%  of  its  energy  from 
renewable  energy  sources.  The  Climate  Package  includes  also  initiatives  in  other  sectors,  such  as  (more 
climate-friendly) agriculture, waste management, an increased role for R&D and hydrogen, CO2 storage and 
implementation of the sustainable finance strategy.  

27 

 
 
4.1. Public finances and taxation* 

The 2030 Climate Package has been welcomed  as a step into the right direction but criticised for its 
distributional  impact,  showing  that  low-income  households  would  be  more  affected  than  those  with 
high incomes. Germany’s Council of Economic Experts has advocated carbon pricing for some time as the 
most  cost-effective  measure  to  reduce  greenhouse  gas  emissions,  but  warned  against  a  too-low  CO2  price 
strategy (German Council of Economic Experts, 2019a). Germany’s leading economic institutes called for 
CO2  prices  in  line  with  those  of  the  EU’s  emissions  trading  scheme  (EU  ETS)  for  economic  efficiency 
reasons. According to the German Institute for Economic Research, the low price of CO2 and low price cap 
initially proposed would not have reduced emissions in line with the proposed climate objectives for 2030 
(DIW,  2019) (2).  The  study  also  analysed  the  distributional  impact  of  the  programme  and  revealed  that 
despite  compensatory  measures  such  as  the  reduction  in  the  surcharge  on  renewable  electricity  or  the 
increase  in  the  commuting  allowance,  low-income  households  would  be  more  impacted  than  high-income 
households.  Although  this  study  assessed  a  government  proposal  with  a  considerably  lower  level  of 
ambition,  concerns  about  the  distributional  effects  remain.  This  is  mainly  due  to  the  further  increased 
Pendlerpauschale  which  benefits  richer  households proportionally  more  than  those  on  lower  incomes.  An 
assessment made by the Berlin climate research institute MCC and the Potsdam Institute for Climate Impact 
Research (PIK) came to a similar conclusion that the climate protection programme initially proposed by the 
federal  government  is  unlikely  to  be  sufficient  to  achieve  the  2030  climate  targets.  Policymakers  were 
advised to make four specific adjustments: (i) raise the level of ambition for the carbon price; (ii) improve 
the  social balance;  (iii)  integrate  the programme  more  closely  with  EU-level  action;  and  (iv) introduce  an 
effective monitoring process (MCC and PIK, 2019).  

(1)  The climate committee of the government consists of the chancellor and six ministers (environment, finance, economy, 

construction, transport and agriculture). 

(2)  It  should  be  noted  that  the  study  focused  only  on  CO2  pricing  and  did  not  include  the  effect  of  additional  specific 

sectoral measures included in the programme, whose impact was considered difficult to quantify. 

However, the net effect might still be regressive as 
the  long-distance  commuter  tax  rebate,  which 
increase 
benefits  high-income  earners,  will 
significantly. 

The  success  of  the  Climate  Package  will  also 
depend  on  a  multitude  of  additional  measures. 
The  package  includes  numerous  measures  beyond 
CO2 pricing (see Box 4.1.3), but their effectiveness 
and  efficiency  are  unclear.  The  new  approach  of 
‘ex  post’  adjustment  for  meeting  sector  targets 
might  lead  to  delayed  action.  In  addition,  the 
intended beneficial effect will be dampened by the 
continuation of environmentally problematic fossil 
fuel subsidies. In 2016, €9.5 billion  went to fossil 
fuel energy support (BMF, 2019).  

In  2019 
the  government  adopted  draft 
legislation  to  reform  Germany’s  immovable 
property  tax  in  response  to  a  ruling  by  the 
Constitutional  Court.  In  its  ruling  of  10 April 
2018, the Federal Constitutional Court declared the 

the 

ramifications. 

immovable  property 

that  would  comply  with 

way  in  which  properties  are  valued  for  the 
purposes  of 
tax 
(Grundsteuer) to be unconstitutional as the tax had 
been calculated based on outdated property values 
(15).  The  government  aimed  at  a  revenue-neutral 
reform 
the  ruling. 
Furthermore,  the  administration  of  the  reform  is 
intended  to  remain  relatively  simple,  with  limited 
the 
distributional 
amounts  of  immovable  property  tax  due  will 
continue to be based on property values,  although 
regional  governments  may  opt  out  and  apply  a 
different  valuation  method.  The  draft  legislation 
envisages  a  fundamentally  unchanged  valuation 
method.  First,  the  immovable  property  will  be 
valued  for  tax  purposes  (16).  Then,  this  value  will 
be  multiplied  by  a  uniform  factor  (basic  federal 
rate:  Steuermesszahl)  and  another  multiplier 
(Hebesatz).  

In  principle 

(15)  The assessed values date from 1964 in the states (Länder) 
of  the  former  West  Germany  and  1935  in  those  of  the 
former East Germany. 

(16)  Various  simplified  valuation  methods  will  be  applied  to 
avoid costly valuation of each real estate individually. 

28 

 
 
 
                                                           
4.1. Public finances and taxation* 

Box 4.1.4: The distributional and equity effects of introducing a CO2 price 

This  box  presents  hypothetical  CO2  tax  scenarios  in  transport  and  heating  and  discusses  their 
distributional  effects.  Environmental  taxation,  including  CO2  pricing,  can  help  internalise  externalities 
from environmental degradation, incentivise more efficient use of resources and contribute to sustainability 
goals  (see  Section  4.5).  Transport  and  heating  were  also  targeted  by  the  recently  adopted  carbon  pricing 
policy  as  part  of  the  2030  Climate  Package.  While  the  aim  of  this  box  is  not  to  assess  the  exact  policies 
included in that package (for the assessment, see Box 4.1.3), it nevertheless provides an illustration on the 
effects of the introduction of a CO2 price and ways to design it to avoid regressivity. Studies show that such 
taxes  are  typically  regressive,  as  those  on  low  incomes  spend  a  higher  proportion  of  their  income  on 
environmental taxes (Hassett et al., 2009; Grainger and Kolstad, 2010; Edenhofer et al., 2019; DIW, 2019; 
German Council of Economic Experts, 2019a), and high-income earners have a much higher CO2 footprint 
than low-income earners. While the average household in the lowest income decile emits on average about 7 
tonnes of CO2 per year, the average household in the fifth income decile emits almost twice that amount. In 
the  top  income  decile,  the  carbon  emissions  are  almost  three  times  higher  than  in  the  lowest  decile. 
However, this increase in CO2 emissions is disproportionate to income, as the average net equivalent income 
of  the  top  income  decile  is  almost  six  times  that  of  the  bottom  decile  (1)  (German  Council  of  Economic 
Experts,  2019a).  These  findings  justify  redistributive  measures  to  counteract  the  regressive  distributional 
effects of environmental taxes.  

Based  on  the  EUROMOD  Indirect  Tax  Tool,  the  distributional  effects  of  the  introduction  of  CO2 
prices of €60, €120 and €350 per tonne are simulated, with and without compensatory measures (2). As 
the aim is to assess the ‘overnight’ distributional effect of introducing a CO2 tax, the simulation assumes that 
households  continue  to  consume  the  same  quantities  of  all  goods  as  before.  While  this  assumption  is 
plausible in the short term, the tax is intended to have steering effects that will ultimately lead to behavioural 
change and a reduction in CO2 emissions, and hence in tax revenues. The first scenario uses an average price 
of  €60  per  tonne  of  CO2 that  comes  on  top of  the  excises  currently  in  place,  in line  with  the  current  CO2 
price in Finland. In the second scenario a more ambitious price of €120 per tonne of CO2 is introduced on 
top of the excises, in line with the CO2 price for example in Sweden. The third scenario of €350 per tonne of 
CO2 existing excises are replaced by a CO2 price, reflecting a scenario that achieves net zero greenhouse gas 
emissions  in  ETS  sectors  by  2050  (European  Commission,  2018b).  The  additional  revenue  in  the  first 
scenario is spent entirely on compensatory measures in a budget-neutral way. Two types of compensations 
are considered: a lump-sum cash benefit to all households and a targeted cash benefit  for households that 
spend  at  least  15%  of  their  disposable  income  on  energy  consumption.  The  benefits  for  a  one-person 
household amount to €18.0 per month in the lump-sum scenario and €42.1 in the targeted scenario (3). 

Graph 4.1.3a: Environmental tax scenarios: distributional and equity effects, with and without compensatory 

measures 

[1] The simulation uses German tax-benefit rules in place in 2016. 
[2] Adjusted disposable income is defined as disposable income minus indirect tax payments. 
Source: European Commission, Joint Research Centre, based on the EUROMOD model 

The  results  confirm  that  the  impact  of  a  CO2  tax  is  regressive,  but  also  indicate  that  well-designed 
compensatory  mechanisms  can  lead  to  an  overall  progressive  effect.  Without  compensatory  measures, 
the regressive effect is stronger the higher the CO2 price. As a result, adjusted disposable income decreases 

29 

At-risk-of-povery-rateCurrent excises€60 / tonne CO2€120 / tonne CO2€350 / tonne CO2€60 / tonne CO2 + lump-sum benefit€60 / tonne CO2 + targeted benefit15.7%16.3%17.0%17.7%15.5%15.1%Gini coefficientCurrent excises€60 / tonne CO2€120 / tonne CO2€350 / tonne CO2€60 / tonne CO2 + lump-sum benefit€60 / tonne CO2 + targeted benefit0.28420.28580.28730.28900.28360.2797Note: Poverty line is set to 60% of median equivalised adjusted disposable income.Note: Gini coefficient of adjusted disposable income.050100150200250300350400450Petrol(unleaded)GasoilGasoilNatural gasCoalElectricityCO2 price of EUR 120 / tonne CO2CO2 price of EUR 60 / tonne CO2Current excisesCO2 price of EUR 350 / tonne CO2TransportHeatingEUR / tonne CO2No CO2price on electricity as consumption is emission free.-5-4-3-2-10123412345678910Deciles of equivalised disposable income€60 / tonne CO2€120 / tonne CO2€350 / tonne CO2 €60 / tonne CO2 + lump-sum benefit€60 / tonne CO2 + targeted benefit% change of adjusted disposable income  
4.1. Public finances and taxation* 

in  the  range  of  0.7%-1.9%  in  the  tenth  decile  and  in  the  range  of  1.7%-5.2%  in  the  bottom  decile  in  the 
scenarios without compensation. The introduction of a cash benefit renders the reform progressive, leading 
to  a  gain  in  adjusted  disposable  income  for  households  until  the  third  decile  in  the  case  of  a  lump-sum 
benefit and until the fifth decile in the case of a targeted benefit (see Graph 1).  

Inequality  and  the  at-risk-of-poverty  rate  are  reduced  where  compensatory  measures  are  in  place. 
Inequality, as measured by the Gini coefficient, increases in the scenarios without compensatory measures as 
the price of CO2 rises. It decreases in the case of the targeted cash benefit and stays roughly the same if a 
lump-sum compensation is in place. The at-risk-of-poverty rate evolves in a similar way (see Graph 1). 

(1)  If  regression  models  are  used  to  control  for  other  socio-demographic  characteristics,  the  annual  CO2  emissions  per 
€100  of  available  monthly  income  increase  by  an  average  of  2%.The  heterogeneity  between  the  deciles  is  not  only 
reflected in the absolute amount of CO2 consumed. In the lowest income decile, almost half of CO2 emissions come 
from heating and electricity consumption, while individual mobility and the consumption of goods or services play a 
more important role in higher income deciles 

(2)  In a first step, the tool imputes private household expenditures for 16 commodity groups to EUROMOD data (based on 
EU-SILC) by means of Engel curves, which were estimated using national Household Budget Surveys. The data allow 
the  simulation  to  capture  solely  the  energy  consumption  of  private  households  for  heating  and  transport  and  can  be 
affected  by  over-  and under-reporting  of  expenditures.  In  a  second  step, the  tool  applies  estimated  implicit  tax  rates 
(relative to consumer prices) to compute households’ indirect tax liabilities for the different commodity groups. The 
tool  rests  on  the  assumption  of  full  tax  compliance  and  that  changes  in  indirect  taxes  are  entirely  passed  on  to 
consumers. For detailed methodological descriptions see De Agostini et al. (2017). 

(3)  The  amount  per  household  is  evaluated  as  a  weighted  share,  taking  into  account  its  composition  according  to  the 
OECD equivalence scale (a weight of 1 is assigned to the household head, 0.5 to other members aged over 14 and 0.3 
to children under 14). The benefit does not interact with the rest of the tax-benefit system, so that the entitlement to 
other cash social benefits remains unchanged. 

While the basic federal rate will be the same across 
all of Germany, the multiplier — and therefore the 
amount of tax ultimately due — will be determined 
by local authorities. Still, the Länder will have the 
possibility to diverge  from  federal legislation. For 
example, Bavaria has already stated its intention to 
use  land  values  instead  of  property  values  to 
determine the relevant tax base. 

The  reform  did  not  aim  to  raise  additional  tax 
revenues  from  property  owners,  and  thus 
missed the opportunity to shape the tax system 
in  a  way  that  is  more  conducive  to  inclusive 
growth.  Recurrent  taxes  on  immovable  property 
are  generally  considered  a  relatively  efficient  tax, 
given  the  immobility  of  the  tax  base  (European 
Commission, 2020). In addition, taking account of 
the  relatively  low  rate  of  home  ownership  in 
Germany  and  its  unequal  distribution,  recurrent 
property  taxes  may  also  contribute  to  a  fairer 
distribution of the tax burden. However, even after 
the  reform,  tax  revenue  from  immovable  property 
is  expected  to  remain  relatively  low  as  the 
government  envisaged  a  revenue-neutral  reform. 
the 
Furthermore, 
possibility for the owner to include the taxes due in 
the  utilities  to  be  paid  by  the  tenant.  This  makes 

the  reform  did  not  restrict 

the  tenant  the  de  facto  entity  on  whom  the  tax  is 
imposed. (17).  

Wealth-related taxes account for a small part of 
revenues. The inheritance and gift tax in Germany 
yields only about €6 billion a year, corresponding 
to  an  average  effective  tax  rate  of  only  about  2% 
(18)  largely  due  to  exemptions  for  business  assets. 
Also,  since  1997  Germany  no  longer  applies  its 
wealth  tax  legislation  as  it  discriminated  against 
non-real-estate  wealth. Thus,  while revenues  from 
wealth-related  taxes  in  Germany  have  declined 
over  the  years,  the  accumulation  of  wealth  has 
increased  substantially,  wealth  concentration  is 
very  high  in  international  comparision  (Bach  and 
Thiemann,  2016;  Bach  et  al.,  2019)  and  also  the 
share  of  wealth  that  is  inherited  as  opposed  to 
increased  significantly  from 
accumulated  has 
about 20% (as a percentage of total wealth) in the 
1970s to about 50% in 2010 (Brülhart et al., 2018). 

(17)  Whether introducing such a legal restriction would result in 
a  shift  of  the  tax  burden  from  tenants  to  landlords  is  not 
clear-cut,  as  landlords  may  increase  net  rental  prices. 
However, those adjustments would take time and might be 
further slowed down by regulative measures limiting rental 
price increases. 

(18)  Calculated  as  the  ratio  between  tax  revenues  and  the 

estimated total of wealth transfers. 

30 

 
 
                                                           
4.1. Public finances and taxation* 

Healthcare 

Graph 4.1.4:  Net pension replacement rates for low and 

high earners (2018) 

Inefficiencies  in  healthcare  persist.  In  2017, 
Germany  spent  €4,300  per  person  on  healthcare 
(11.2%  of  GDP),  the  highest  in  the  EU  (EU 
average  €2,884).  At  the  same  time,  avoidable 
deaths  from  preventable  and  treatable  causes  are 
close  to  the  EU  average  and  higher  than  in  many 
other  western  European  countries.  The  German 
healthcare  system  continues  to  be  very  hospital-
centric.  Hospital  bed  density  in  2017  (8  beds  per 
1,000 people) was higher than the EU average (5). 
Also  the  average  hospital  stay,  at  8.9  days,  is 
comparatively  long  and  day  surgery  is  not  as 
common as in the majority of EU Member States. 
The  quality  of  healthcare  suffers  from  a  highly 
fragmented  system,  with  many  services  provided 
in small and often inadequately equipped hospitals. 
focus  on  prevention  and  care 
A  stronger 
integration 
gains. 
bring 
could 
Inefficiencies  in  the  healthcare  system  also  arise 
from the legal framework, which allows people on 
higher 
the  self-
employed 
the  solidarity-based 
statutory  health  insurance  scheme.  It  also  allows 
doctors  to  charge  patients  with  private  health 
insurance more than those covered by the statutory 
scheme, which incentivises overprovision of health 
services.  

incomes,  civil  servants  and 

to  opt  out  of 

efficiency 

Pension system 

The  retirement  of  the  baby  boomer  generation 
is  affecting  Germany  more  than  other  EU 
countries,  putting  considerable  pressure  on 
public finances. 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 to 37.6%, according to the 
2018  Ageing  Report.  The 
fiscal 
sustainability  risk  has  increased  from  low  to 
medium,  reflecting  a  softening  of  the  initial 
budgetary  position,  which  however 
remains 
favourable. This yields an increase in the S2 level 
(by 0.5 pps) to 2.2, slightly above the 2.0 medium 
risk threshold (Annex B) (19).  

long-term 

(19)  The  pension  measures  of  2018-2019  do  not  translate  into 
significant revisions of the cost of ageing component, while 
anticipated  future  significant  policy  changes  are  to  be 
reviewed in future updates of the Ageing Report. 

[1] Low-earners are defined here as workers earning half of 
average worker earnings (in Germany in 2018, average 
earnings were €50,546). 
Source: OECD, 2019a 

also 

sustainability 

the  pension 

Demographic 
have 
developments 
implications  for  the  adequacy  and  fairness  of 
pensions. Since 2005, pension increases are linked 
factor,  which 
to 
measures the change in the number of contributors 
relative  to  the  number  of  pensioners.  While  in 
2019  this  led  to  an  additional  pension  increase  of 
0.6%, from 2020 it is projected to be negative with 
an average reduction in pensions of 0.5% per year 
until  2033  (BMAS,  2019).  At  the  same  time,  net 
pension  replacement  rates  are  already  relatively 
low,  especially  for  low-wage  earners  (56.1%, 
against an EU average of 69.8%, see Graph 4.1.4). 
Furthermore, life expectancy varies between socio-
demographic  groups  and  is  lower  for  low-income 
earners  than  for  high-income  earners,  as  also 
reported  in  the  Federal  Government  Report  on 
Poverty  and  Wealth  (BMAS,  2017).  As  a  result, 
the  annualised  compound  return  of  expected 
pensions compared to their earlier contributions is 
currently  higher  for  high-income  earners  than  for 
low-income earners (Haan et al., 2019; Breyer and 
Hupfeld, 2009). The latest reform from July 2019, 
which  maintained  benefits  for  certain  low-income 
reducing 
earners 
contributions,  and  the  planned  introduction  of 
Grundrente  that  aims  at  providing  a  contribution-
period  based  top  up  to  benefitlong-term  insured 
low-income earners, are partly addressing the issue 
of intra-generational fairness as they entail benefits 
for  low-income  earners  above  the  normal  accrual 

(‘midijobbers’) 

while 

31 

020406080100120DKLUITCZATPTHUESNLSKFRBEEUEEFISISEIEELDELVUKLTPLLow  earnersHigh earners                                                           
  
4.1. Public finances and taxation* 

rate.  The  principle  of  intra-generational  fairness 
could be further strengthened in the Grundrente by 
basing 
full-time 
the  contribution  years  on 
equivalents.  This  would  avoid  treating  those  that 
worked  part-time  in  relatively  well-paid  jobs  the 
same as those that have worked their entire life full 
time in badly paid jobs.  

Fiscal framework 

Through  extension  to  the  Länder  level,  the 
national  debt  rules  are  becoming  even  more 
binding. Since 2016 the fiscal rules of the national 
‘debt  brake’  (Schuldenbremse)  were  already  fully 
applicable 
level,  requiring  a 
structural  deficit  not  higher  than  0.35%  of  GDP. 
From 2020 on, the ‘debt brake’ applies also to the 
Länder level, requiring the budgets of the states to 
be  balanced  without  new  debt.  Structural  deficits 
are no longer allowed.  

the  federal 

to 

the 

increase 

to  conduct 

spending 
Germany  continues 
efficiency  and 
to 
reviews 
effectiveness  of  government  spending.  Since 
2015,  the  country  has  held  yearly  cycles  of 
spending  reviews  targeting  specific  policy  areas 
and  ministries.  The  review  cycle  for  2018-2019 
analysed 
receivables’, 
‘management  of 
whereas  the  ongoing  fifth  review  cycle  for  2019-
2020  focuses  on  ‘further  education,  re-entry  and 
start-up of a new business’.  

the 

the  case 

‘Green’ budgeting does not seem to be factored 
into  budget  planning  in  Germany.  Although 
internationally there is a trend towards identifying 
the  ‘green’  contribution  of  fiscal  policy  measures 
within budgetary documents, this does not seem to 
be 
in  Germany  yet.  While  a 
comprehensive  view  may  be  missing,  the  policy 
impact could  still be analysed for specific climate 
and  environment  policy-related  actions.  This  is  a 
much more restricted approach than for example in 
France,  where  a  first  attempt  is  being  made  to 
coherently present  how  ‘green’ the  French budget 
is.  The  French 
‘yellow  book’  covers  both 
budgetary  information  and  policy  strategies,  and 
also  features  an  impact  assessment  on  households 
and  businesses  (République  française,  2019). 
Similarly, in Italy the presentation of ‘green’ items 
represents  a 
the 
budgetary documents.  

long-standing  practice 

in 

32 

 
4.2.  FINANCIAL SECTOR* 

4.2.1.  BANKING SECTOR 

infrastructure 

The  banking  industry  needs  to  adapt  to  the 
challenging  times  ahead.  Banks  will  have  to 
accelerate consolidation and reorient their business 
strategy  in  the  foreseeable  future  of  ultra-low 
interest  rates  (20).  While  further  cost-cutting  is 
necessary, the financial sector needs to invest more 
in  IT 
to  modernise  day-to-day 
business.  The  disruption  initiated  by  fintech  and 
bigtech  may  squeeze  revenues,  while  consumer 
preferences  and  the  regulatory  environment  may 
also  change  (21).  The  sector  as  a  whole  needs  to 
adapt  to  a  rapidly  changing  environment  and 
develop  a  strategic  vision  in  order  to  remain 
viable. 

Profitability in the banking system remains low 
on  aggregate,  despite  Germany’s  years  of 
continued economic expansion. The past years of 
economic  growth  have  helped banks  to keep  non-
performing  loan ratios low,  while the low  interest 
rate  environment  contributed  to  lower  funding 
costs.  However,  profitability  has  been  dented  by 
the decline in lending interest rates combined with 
an  over-reliance  on  intermediation  income,  over-
capacity stemming from splintered bank networks, 
compliance cost, an old IT infrastructure that needs 
costly  overhauls.  Still,  banks  have  managed  to 
remain profitable on aggregate by realising hidden 
reserves,  increasing  the  maturity  transformation, 
increasing  credit  flows  and  taking  on  higher  risks 
during  the  past  years.  Relying  on  these  factors 
appears more difficult in the future.  

Profitability  differs  widely  between  banking 
types.  German  banks’  profitability  has  been  low 
for  decades,  as  saving  banks  and  cooperatives  are 
stakeholder banks that do not operate primarily for 
profit. By contrast, savings banks and cooperatives 
are  currently  more profitable than big commercial 
banks  and  Landesbanken.  For  the  banking  system 
as  a  whole,  the  return  on  assets  in  2018  was 

in  previous  country 

(20)  Low interest rates also very much impact the life insurance 
sector. The challenges related to this sector were discussed 
extensively 
reports:  European 
Commission (2015) and European Commission (2016). 
(21)  Among  other  things,  the  increased  focus  on  sustainable 
finance,  e.g.  how  finance  can  contribute  to  achieving 
climate objectives, is expected to impact banks. The federal 
government  is  now  developing  a  sustainable  finance 
strategy  in  cooperation  with  financial  institutions.  As  part 
of  this,  the  federal  development  bank  KfW  will  further 
concentrate on the environmental sustainability of projects. 

0.23%,  the  lowest  in  Europe  after  Greece. (22)The 
return  on  equity  (RoE)  after  tax  was  2.4%,  with 
pronounced  differences  between  banking  groups: 
8.2% for cooperatives, 7.3% for savings banks and 
1.1%  for  commercial  banks,  while  Landesbanken 
recorded a loss in aggregate, with -3.9%. The latter 
has  been  influenced  by  Nord  LB’s  2018  €2.4 
billion  loss  mainly  stemming  from  off-loading 
non-performing  shipping  loans.  Consequently,  the 
public  bank  received  a  capital  injection  of  €2.8 
billion23.  

Low  profitability  calls  for  an  overhaul  of  cost 
structure.  High  costs  were  a  major  driver  of  low 
profitability. German banks’ cost/income ratio fell 
from  75.9%  in  June  2018  to 73.6%  in  June  2019, 
still somewhat above the EU average of 64.5% in 
both  years.  Over  those  12  months,  Landesbanken 
and big commercial banks’ cost/income  ratio rose 
130  basis  points 
to  83.2%.  Consolidation 
progresses still have a long way to go. With 1,603 
banks,  Germany  has  a  crowded  banking  market, 
which  is  shrinking  by  around  3%  annually,  while 
the  number  of  branches  is  falling  faster  (by  7.4% 
in  2018)  (Bundesbank,  2019).  Over  2018,  the 
number  of  savings  banks  (386)  and  cooperative 
banks (878) declined by 1%  and 4% respectively, 
while  Germany  now  only  counts  5  Landesbanken 
as  2  changed  their  legal  nature  and  are  now 
classified  differently  by  the  Bundesbank.  Mergers 
across  pillars  remain  difficult,  also  because  their 
legal set-up differs. Salaries and pension liabilities 
account  for  half  of  banks’  expenses.  In  2018, 
pension liabilities’ discount rate  was reviewed  for 
the  first  time  since  2005.  Given  the  much  lower 
discount 
increased 
commensurately.  Yet,  thanks  to  limited  bankers’ 
bonuses,  and  shrinking  headcounts,  overall  staff 
cost fell 0.7% over 2018. 

rate,  pension 

liabilities 

(22)  Germany’s  three-pillar  model’s  heterogeneousness  makes 
international  comparison  difficult.  Deutsche  Bank  is  a 
global  systemically  important  bank  (G-SIB)  and  the 
world’s  15th  biggest  bank.  Its  total  assets  are  larger  than 
those  of  the  386  savings  banks  combined  (€1.4  versus 
€1.25  trillion).  Therefore,  that  bank’s  results  impact 
national  averages  disproportionally.  Whilst 
in  other 
Member  States 
individual  banks’  key  performance 
indicators  are  usually  closer  to  the  average,  in  Germany 
they often lie further away from the median. 
number 
to 

SA.49094 
case 
https://ec.europa.eu/competition/state_aid/cases1/20203/28
3125_2123117_150_5.pdf 

23  Please 

refer 

33 

 
                                                           
 
                                                           
4.2. Financial sector* 

Table 4.2.1:  Quarterly financial soundness indicators 

(1) Annualised data. o/w: out of which. For the EU and euro area data includes domestic banking groups and stand-alone 
banks, foreign (non-EU) controlled subsidiaries and foreign (non-EU) controlled branches. 
Source: ECB-CBD2 Consolidated Banking, data 

has 

private 
facilitated 
growth 
Credit 
increasing  banks’ 
investment,  while  also 
leverage.  In  2018, 
the  stock  of  mortgages 
increased  by  4.6%,  consumption  loans  by  5.1% 
and  corporate  loans  by  5.3%.  Outstanding  bank 
credit to the private non-financial sector increased 
to EUR 1,1 trillion at the end of September 2019. 
Growth  accelerated  to  5.4%  from  4.5%  a  year 
earlier. Outstanding credit increased by 3.2 pps to 
89.3%  of  GDP  in  the  year  ending  in  September 
2019. Thus, private debt is growing again relative 
to  GDP  while  it  remains  well  below  its  peak  in 
2001 at 103% of GDP. 

go 

that 

loan 

stock 

given 

deposits 

German  banks  still  depend  predominantly  on 
intermediation  income.  It  accounts  for  three 
quarters  of  their  total  income,  while  in  several 
other  euro  area  jurisdictions  non-interest  income 
constitutes  about  half  of  aggregate  revenue.  Over 
2018, 
increased  by  4.9%  but 
intermediation  income  rose  by  only  1.3% -  feeble 
largely 
growth 
unremunerated.  Although  the  German  banking 
system as a whole kept the average intermediation 
margin  above  1%,  there  were  stark  differences 
across  banking  pillars.  Savings  banks  and 
cooperatives had an average margin of 1.73% and 
1.8%,  respectively,  whereas  commercial  banks’ 
to  0.77%.  Banks  pass  on 
margin  amounted 
larger  corporate 
to 
rates 
interest 
negative 
customers,  but  only  very 
large 
to 
timidly 
household  depositors.  During  2018,  the  interest 
offered on corporate deposits was -0.03%, whereas 
banks  remunerated  new  household  deposits  with 
0.02% on average.  

Risk-adjusted  capital  ratios  are  still  somewhat 
above 
the  European  average.  Germany’s 
leverage  ratio,  which  divides  capital  through 
unweighted  assets,  is  one  of  Europe’s  lowest. 
German  banks’  CET1  ratio  (Common  Equity 
Tier 1  divided  through  risk-weighted  assets)  of 
15.4% is respectively 40 and 60 basis points above 
the  EU  and  euro  area  average.  With  1.3%, 
Germany  has  been  having  one  of  the  lowest  non-
performing  loan  ratios  in  the  euro  area.  (Table 
4.2.1)  Very  low  default  rates  over  the  last  decade 
have  influenced  banks’  internal  risk  models,  and 
issue  whether  credit  risk  may  be 
raise 
underestimated.  Indeed,  once  Basel  III  is  fully 
implemented,  capital  requirements  might  rise 
significantly for German banks (EBA, 2019). 

the 

The  Bundesbank’s  stress  test  on  smaller  banks 
confirms  that  financial  stability  ratios  are 
generally  satisfactory.  Whilst 
the  European 
Banking  Authority  conducted  a  stress  test  on 
Europe’s  bigger  banks  in  2018  (EBA,  2018),  the 
Bundesbank  ran  a 
test  on  Germany’s  1,412 
smallest  banks  holding  38%  of  bank  assets  in 
2019.  In  EBA’s  stress  test  scenario,  the  German 
institutions’  CET1  ratio  would  fall  to  7-34%  by 
end  2020.  In  the  Bundesbank’s  baseline  scenario, 
Return  on  Assets  would  rise  from  0.42%  in  2018 
to 0.46% in 2023 and banks’ end 2018 CET1 ratio 
of  16.5%  would  grow  slightly  to  16.7%,  whereas 
for 1/3 of the banks, capital ratios would fall even 
in  the  baseline.  The  stress  scenario  implies  a 
severe  downturn causing the  CET1 ratio to fall to 
13.0%  in  2023.  Hence,  smaller  banks  would,  on 
average,  remain  above  regulatory  minima,  which 
does obviously not preclude individual institutions 
from falling below that threshold.  

34 

EUEuro area2014q42015q42016q22016q32016q42017q12017q22017q32017q42018q12018q22018q32018q42019q12019q22019q22019q2Non-performing loans3.93.02.82.72.62.52.32.11.81.71.71.61.41.21.32.93.4o/w foreign entities0.70.73.13.00.70.70.70.61.72.22.32.22.01.41.2--o/w NFC & HH sectors6.74.95.04.94.64.64.34.03.02.92.82.62.22.12.0--o/w NFC sector8.96.56.66.56.46.36.05.64.13.83.63.32.72.62.55.56.1o/w HH sector2.92.32.12.01.81.81.81.71.81.91.91.81.71.51.43.13.6Coverage ratio34.836.737.438.136.937.138.438.456.555.154.354.456.656.756.446.247.7Return on equity(1)2.51.71.61.32.22.41.92.02.94.14.84.42.44.93.86.76.4Return on assets(1)0.10.10.10.10.10.10.10.10.20.30.30.30.20.30.30.50.4Total capital ratio17.317.917.817.918.117.918.418.718.818.318.518.618.418.418.018.818.1CET 1 ratio14.314.914.814.915.014.915.415.815.915.415.815.815.715.815.415.014.8Tier 1 ratio14.815.415.415.515.615.616.016.416.416.016.316.416.316.315.916.315.8Loan to deposit ratio97.594.694.295.292.692.591.091.289.490.590.390.590.290.187.699.597.2Germany 
  
 
4.2. Financial sector* 

higher  interest  rates.  Over  2018,  interest  rates 
increased  from  1.76%  to  1.84%  whereas  in  the 
euro area they generally fell by 10bp to 1.62%. Yet 
over  2019,  mortgage  rates  fell  faster  in  Germany, 
and in September they stood 17bp below the euro 
area  average  of  1.29%.  In  Germany,  most 
homebuyers  choose  fixed  interest  rates  insulating 
interest  rate  changes.  The  home 
them  from 
ownership  rate  is  the  lowest  in  the  EU,  yet  a 
quarter of the German population has a mortgage, 
which  is  close  to  the  EU  average.  Despite  stark 
mortgage  growth,  household  indebtedness  has 
remained around 36% of GDP over the past decade 
and  can  be  considered  moderate  by  comparison 
with  the  rest  of  the  EU.  Households’  non-
performing loan ratio is less than half the European 
average. 

The  macro-prudential  tools  are  only  partially 
appropriate.  Adding  debt-based  limits  to  the 
toolkit would enhance its effectiveness as currently 
only  loan-to-value  and  maturity  limits  could  be 
activated.  In  its  warning,  the  European  Systemic 
Risk Board identifies loosening lending standards, 
urban 
accelerating  mortgage 
overvaluation  as  systemic  risk  sources  (ESRB 
2019).  Even  though  Germany  will  introduce  a 
0.25%  Counter  Cyclical  Capital  buffer  from  July 
2020  onwards,  the  Board  argues  for  further 
measures. 

growth 

and 

Graph 4.2.1:  House prices compared to fundamentals 

The share of hard-to-value Level 2 and Level 3 
assets has been falling in the last decade. Assets 
held  for  trading  are  classified  in  three  levels 
the  progressing  complexity  of 
depending  on 
valuing  the  asset.  Accounting  rules  (IFRS  13) 
oblige banks to report gross positions, which might 
be  partly  hedged  against  each  other,  and  are 
therefore  of  limited  explanatory  power  compared 
to  net  positions.  Gross  level  2  and  level  3  assets 
amount to 18.7% and 1.6% of those banks’ assets. 
In  France,  these  figures  are  17.2%  and  0.9%, 
respectively.  Their  share  in  Germany  has  been 
falling  slightly  over  the  past  decade.  Given  their 
complexity, these assets are rather concentrated in 
the bigger banks. The European Banking Authority 
stress-tested the 48 biggest European banks’ Level 
2 and 3 assets’ net positions in 2018 (EBA, 2018). 
For 31 of the banks tested the impact on Common 
Tier  1  capital  levels  would  be  less  than  20bp,  10 
banks would see their CET1 ratio fall 20-40bp, and 
only  7  banks  would  face  a  capital  impact  ranging 
from 73 to 40bp. 

4.2.2.  HOUSING MARKET 

House prices rose by half this  decade, catching 
up  after  years  of  stagnation.  Most  of  the 
available  residential  real  estate  price  indicators 
point  to  an  overvaluation  in  the  bigger  cities. 
Following  a  period  of  mainly  nominal  increases 
since 2000, real house price growth has accelerated 
in  recent  years,  slightly  outpacing  the  growth  in 
household 
prices 
income. 
considerably  exceed 
long-term  average, 
their 
compared  to  both  rents  and  incomes,  suggesting 
increasing  risks  of  a  housing  bubble. House  price 
increases  in  urban  areas  reflect  a  shortage  of 
housing  supply  relative  to  demand.  The  federal 
government  has introduced a  number of  measures 
aimed  at  alleviating  this  shortage.  Future  price 
movements are therefore likely to depend on these 
measures’ effectiveness. (See also Section 4.4.)  

Today 

house 

New  mortgage  attribution  is  still  accelerating, 
outweighing  redemptions  quite  significantly.  In 
September  2019  the  mortgage  stock  was  5.0% 
higher  than  12  months  earlier.  Rising  housing 
prices  have  led  to  a  higher  number  of  mortgages. 
Over 2018, average annuities increased by 5.5% to 
€7,041. The loan to value at  origination increased 
by  170  basis  points  (bp)  to  86.5%,  reflecting 
easing  credit  standards.  Riskier  loans  also  led  to 

Source: Eurostat, OECD, ECB, BIS and Commission services 
calculations 

35 

-15-10-5051015202504Q205Q206Q207Q208Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q2% deviation from averagePrice to rent vs long term averagePrice to income vs long term average  
4.2. Financial sector* 

4.2.3.  CAPITAL MARKETS 

Germany’s venture capital funds are somewhat 
less  developed  than  the  European  average.  
Venture capital funds amount to 4.3bp (0.04%) of 
German  GDP,  below 
the  EU  average  and 
considerably  below  the  UK  or  France  (Invest 
Europe,  2019).  There  is  a  strong  concentration  of 
venture capital in two major hubs across all stages 
of financing. Berlin accounts for two thirds of total 
venture capital investments and Munich for around 
12%. This concentration is related to the relatively 
strong  innovation  performance  by  both  regions. 
Regarding  the  sectoral  distribution  of  venture 
capital  investments,  ICT  and  manufacturing  stand 
out (Flachenecker et al., 2020).  

Public  financing  programmes  have  improved 
access  to  early-stage  finance.  The  High-Tech 
Start-up Fund appears to have emerged as the most 
active seed stage investor in Germany and has led 
to  substantial  crowding  in  of  private  investment, 
mainly  through  the  signalling  effect  of  the  fund’s 
investments.  Unlike  other  public  programmes 
aimed  at  promoting  venture  capital  investments, 
the  INVEST  programme  allows  private  investors 
to  choose  which  businesses  to  invest  in.  Tighter 
links between entrepreneurs and investors through 
investment in incubators, accelerators and business 
angel networks have improved the entrepreneurial 
culture and made Germany more attractive to local 
and  international  investors.  However,  access  to 
early-stage  and  growth  finance  is  still  a  major 
impediment  for  high-growth  businesses  (EFI, 
2019; Flachenecker et al., 2020).  

Recent initiatives focus on providing finance  to 
high-tech  and  innovative  sectors.  Other  relevant 
initiatives  include  the  expansion  of  the  Tech 
Growth Fund  with Venture Tech Growth, and the 
expansion  of  the  Collective  Industrial  Research 
Programme. In October 2018, KfW’s programmes 
were  pooled  in  KfW  Capital  as  an  independent 
growth-oriented  venture  capital  company,  which 
committed  €147 million  of 
investment  until 
October 2019. 

Private  placements  of  debt  add  an  important 
layer  to  Germany’s  capital  market.  Issuing 
private  placements  of  debt  (promissory  notes, 
Schuldscheine)  is  considerably  less  costly  than 
issuing  a  bond.  Disclosure  requirements  are  also 
less burdensome, interest rate spreads are low and, 

contrary  to  bondholders,  promissory  note  holders 
are  protected  by  Germany’s  deposit  guarantee 
scheme. If interest rates rose, fixed income bonds’ 
net present value would fall and banks would need 
to adjust the bonds’ value in their books according 
to  fair  value  accounting  principles.  Promissory 
notes  do  not  need  to  be  marked  to  market  and 
therefore  banks  prefer  holding  them  over  classic 
bonds which are subject to valuation changes. 

4.2.4.  SECTORAL SAVING-INVESTMENT 

BALANCES 

The high current account surplus is reflected in 
household  and  public  savings,  while  corporate 
deleveraging  has  halted.  Until  recently,  all 
sectors  of  the  economy  contributed  to  the  current 
account  surplus.  This  now  only  holds 
for 
households  and  the  general  government.  Since 
2018,  non-financial  corporations  have  turned  into 
net  borrowers:  the  net  lending  of  corporations 
declined from 1.4% of GDP in 2017 to about zero 
(24)  in  2018.  This  reflects  a  consistent  increase  in 
corporate  investment  since  2016  in  response  to 
high 
capacity  utilisation.  Households  have 
benefited from an increase in government transfers 
and the resilient labour market. The share of labour 
income  has been recovering  further, reflecting the 
continuation  of  employment  growth  and  resilient 
wages.  Only  a  part  of  the  disposable  income 
increase  found  its  way  into  consumption  and 
investment:  the  household  savings  rate  increased 
further  to  18.8%  in  2018,  the  highest  in  the  euro 
area (average at 11.9% in 2018) while net lending 
stayed stable relative to GDP. By contrast, general 
government savings increased in the years to 2018 
as  a  share  of  GDP,  reflecting  strengthening  tax 
revenues.  This  has  driven  the  fiscal  surplus  up, 
creating  room  for  more  public  investment  and 
other  long-term  growth-enhancing  expenditure. 
The  public  sector  net  lending  position  peaked  at 
1.9%  in  2018  and  came  down  to  1.5%  in  2019, 
reflecting  higher  public  investment,  transfers  and 
to  some  extent  the  slowdown  in  the  economy. 
Further reductions are expected in the  future, to a 
broadly balanced balance by 2021. 

(24)  Not  taking  into  account  capital  transfers,  nonfinancial 

corporations have been net borrowers since 2018. 

36 

                                                           
4.2. Financial sector* 

Graph 4.2.2:  Current account balance and net lending by 

sectors 

decrease  of  0.05  pps).  Still,  compared  to  the  high 
international  investment  position,  the  profitability 
of  external  investments  appears  relatively  low 
(Hünnekes et al, 2019). 

Graph 4.2.3:  Factors explaining the current account surplus 

[1] 4 quarter rolling average 
Source: German Bundesbank European Commission 

Source: European Commission 

‘norm’ 

calculations, 

intensity  and 

investment  position 

The  current  account  surplus  and  the  net 
international 
remain 
considerably above what fundamentals suggest. 
According  to  the  European  Commission’s  current 
account 
fundamental 
determinants  of  savings  and  investment  currently 
suggest  a  surplus  of  3.0%  of  GDP  (compared  to 
the 2018 surplus of 7.4% of GDP). Though this is 
mostly  due  to  population  ageing  (25),  (+1.7  pps), 
the  high  manufacturing 
the 
competitiveness  of  German  exports  is  another 
relevant factor (+0.9 pps) (26). Yet, a large  part of 
its  dynamics  are 
the  surplus  (3.0  pps)  and 
explained  by  factors  that  can  be  more  directly 
influenced  by  policies.  The  contribution  of  these 
policy-driven  factors  turned  positive  in  2005  and 
has  been  around  3%  since  2011.  Private-sector 
deleveraging  since  2000  explains  a  considerable 
part of the surplus, although its impact declined in 
2018  (+1.0  pps,  down  from  +1.3  pps)  along  with 
the  fiscal  stance  (+0.9  pps,  a  slight  decrease  of 
0.05  pps).  An 
international 
investment  position  continued  to  contribute  to  a 
sizeable positive income balance (1.4 pps, a slight 

increasing  net 

(25)  European  Commission,  2018  discussed  the  importance  of 
provision for old age and other ageing-related factors as a 
driver of the high household saving rate. 

(26)  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. 

37 

-6-4-2024681012101112131415161718192021% of GDPNonfin. corporationsFinancial corporationsGeneral governmentHouseholdsTotal economyForecast-5051000020406081012141618% of GDPResidualCycleCredit/constructionStruct. fiscal bal.Other policy factorsGlobal fin. factors / NIIPDemographicsManuf. intensityRes. currency statusOther fundamentalsCurrent account % of GDPFundamentals  
                                                           
  
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES* 

employee accelerated, from 2.9% in 2018 to 3.3% 
in  2019.  Wage  increases  in  services  contributed 
considerably to overall wage growth, while wages 
in  manufacturing  slowed  along  with  the  declining 
production. Despite relatively strong wage  growth 
(Graph  4.3.2), 
the  accumulated  gap  between 
productivity  and  real  wage  growth  since  2000 
persists  and  is  not  expected  to  close  rapidly  in 
2019  and  2020.  In  general,  wage  growth  may 
decelerate as employers see their bargaining power 
increasing  due  to  a  softer  labour  market  and  also 
react  to  low  productivity  growth  and  squeezed 
profit margins. Effective collective bargaining may 
be  a  tool  for  finding  the  right  balance  between 
wage  increases  and  maintaining  employment.  In 
this respect the situation is roughly unchanged, as 
the  proportion  of  workers  covered  by  collective 
bargaining agreements stagnated in 2018 (Kohaut, 
2019)  at  a  relatively  low  level  compared  to  the 
past. 

Graph 4.3.1:  Employment change by sector, workers in 
short time work arrangements 

4.3.1.  LABOUR MARKET (27) 

to 

contributing 

The  remarkably  strong  labour  market  masks 
labour  hoarding  and  diverging  trends  between 
services  and  manufacturing. The  unemployment 
rate  stabilised  at  around  3.2%  in  2019  and 
employment, albeit more slowly, increased further 
significant 
(see  Chapter 1), 
progress towards SDG 8. While manufacturing and 
related  business  services  have  contributed  about 
half  of  the  employment  growth  in  recent  years, 
since  the  second  quarter  of  2018  job  creation  in 
these  sectors  slowed  noticeably  and  it  even  came 
to  a  halt  in  2019  (Graph  4.3.1).  Still,  dismissals 
were  limited  as  many  manufacturing  companies 
hoarded labour, reducing hours worked by winding 
balances 
down  working 
(Arbeitszeitkonten)  and  using  short-time  work 
arrangements (Kurzarbeit). The number of workers 
participating 
short-term  work 
cyclical 
arrangements  increased  markedly  from  its  lowest 
level of about 10,000 to about 84,000 in November 
2019 (remaining nonetheless far below the peak of 
1.4 million reached in spring 2009). This suggests 
considerable  further  room  for  labour  hoarding 
against  a  cyclical  shortage  of  demand.  Kurzarbeit 
however  is  not  a  general  remedy  for  structural 
transformation  needs,  which  in  the  car  sector  are 
already leading to dismissals. Even as job creation 
in  manufacturing  and  related  services  halted, 
hiring  continued  in  construction  and  the  large 
majority  of  services,  notably  public  services, 
healthcare and education. 

account 

time 

in 

Overall  wage  growth  has  been  resilient  so  far 
but  is  expected  to  slow  this  year  towards  the 
euro  area  average.  Even  as  the  labour  market 
started  to  show  signs  of  stress,  with  employment 
growth  decelerating  and  productivity  declining 
(28),  growth 
in  nominal  compensation  per 

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

(28)  Productivity per employee increased by only 0.1% in 2018 

and declined by 0.3% in 2019. 

Source: Eurostat 

38 

051015202530354045500.00.10.20.30.40.50.617Q118Q119Q1Thousands%Other servicesPublic services, education, healthConstructionIndustry, business servicesShort-time workers (rhs) 
                                                           
  
4.3. Labour market, education and social policies* 

Box 4.3.5: Monitoring performance in light of the European Pillar of Social Rights 

The European Pillar of Social Rights is a compass  for a renewed  process of upward convergence towards 
better working and living conditions in the European Union. It sets out 20 essential principles and rights in 
the  areas  of  equal  opportunities  and  access  to  the  labour  market,  fair  working  conditions  and  social 
protection and inclusion.  

The  Social  Scoreboard  supporting  the  European 
Pillar  of  Social  Rights  points  to  relatively  few 
employment  and  social  challenges  in  Germany. 
While  it  has  one  of  the  highest  employment  rates  for 
women in the EU and a gender employment gap below 
the  EU  average,  Germany  also  has  one  of  the  EU’s 
highest part-time employment rates for women. This is 
accompanied  by  a  wide  gender  pay  gap,  reflecting 
differences  in  the  number  of  hours  worked  and  in  the 
sectoral  composition  of  employment  across  genders. 
Germany has one of the highest proportions of women 
working for low wages.  

the  NEET 

Educational  outcomes  differ  considerably  across 
regions. Early  school leavers  account for 14.6% of all 
18-24  year  olds  in  Bremen,  against  on  average  10.3% 
in  Lower  Bavaria 
nationwide  and  only  5.2% 
(Niederbayern).  Moreover, 
(the 
proportion  of  young  people  who  are  not  in  education, 
training)  varies  by  almost  6 pps 
employment  or 
between  the  best-  and  worst-performing  regions.  In 
Berlin,  9.1%  of  young  people  aged  15-24  are  NEETs, 
against a national average of 5.9% and only 3.5% in the 
best  performing  region,  Unterfranken  in  Bavaria.  The 
tertiary  education  attainment  rate  among  30-34  year-
olds  also  differs  significantly  (by  30pps)  between 
regions.  

rate 

long-term 
The  proportion  of  people  who  are 
unemployed  has  decreased  in  recent  years.  On  the 
back of a strong labour market performance, long-term 
unemployment  stood  at  3.4%  in  2018,  half  the  EU 
average  of  6.8%.  Further 
improvements  can  be 
expected,  due  partly  to  government  measures  like  the 
Teilhabechancengesetz.  Under  this  law,  when  a  long-
term unemployed person is hired, the state pays 75% of 
their wage in the first year and 50% in the second year. 
In  addition,  the  ‘Qualifications  Opportunities  Act’  (Qualifizierungschancengesetz)  and  the  Act  on 
Strengthening Continuing Vocational Training and Insurance Protection improve access for low-skilled and 
long-term unemployed people to education that is relevant for the labour market.  

Following  past  increases  in  negotiated  wages, 
minimum  wage  updates  appear  to  have  lagged 
behind general wage developments. In 2018, the 
Minimum  Wage  Commission 
(Mindestlohn-
kommission)  proposed  increasing  the  minimum 
wage  to  €9.19  per  hour  for  2019  (a  nominal 
increase  of  about  4%  compared  to  2018,  after  no 
increase from 2017) and to €9.35 per hour for 2020 

the 

legal  force  by 

increase  of  about  1.7%).  These 
(a  nominal 
increases,  given 
federal 
government,  were  based  on  developments  in 
negotiated  wages  in  2016-2017  (for  the  2019 
increase)  and  the  first  half  of  2018  (for  the  2020 
increase).  Linking  minimum-wage  increases  to 
past developments in  negotiated  wages appears to 
have  resulted  in  a  gradual  erosion  of  the  relative 

39 

Social Scoreboard for GERMANY SOCIAL SCOREBOARD SDGs Equal opportunities and access to the labour market  Early leavers from  education and training  (% of population aged 18-24)      Youth NEET  (% of population aged 15-24) Gender employment gap Income quintile ratio (S80/S20) At risk of poverty or social exclusion (in %) Dynamic labour markets and fair working conditions   Employment rate  (% of population aged 20-64)  Unemployment rate  (% active population aged 15-74) Long-term unemployment rate  (% active population aged 15-74) GDHI per capita growth  Net earnings of a full-time single worker earning AW Social protection and inclusion  Impact of social transfers (other than pensions) on poverty reduction    Children aged less than 3 years in formal childcare Self-reported unmet need for medical care  Individuals' level of digital skills Critical situation To watch Weak but improving Good but to monitor On average Better than average Best performers Members States are classified on the Social Scoreboard according to a statistical methodology agreed with the EMCO and SPC Committees. It looks jointly at levels and changes of the indicators in comparison with the respective EU averages and classifies Member States in seven categories. For methodological details, please consult the proposal for a Joint Employment Report 2020, COM(2019) 653 final; NEET: neither in employment nor in education and training; GDHI: gross disposable household income. Update of January 2020.  4.3. Labour market, education and social policies* 

level  of  the  minimum  wage  since  2015.  While  in 
2015  the  minimum  wage  was  about  48%  of  the 
median  and  43%  of  the  average  wage,  by  2018  it 
had  decreased  to  46%  of  the  median  and  40%  of 
the  average  wage  (OECD  data).  According  to 
European Commission calculations, the ratio to the 
median is expected to stay unchanged in 2019, but 
the ratio to the average wage is expected to further 
decrease. 

Graph 4.3.2:  Nominal compensation growth: actual and 

predicted based on economic fundamentals 

relatively low at 60.7%, 19.2 pps below the overall 
employment  rate  (against  an  EU-28  average  of 
17.0 pps). In 2018, 14.2% of Germans aged 20-64 
(that  is  7  million  people)  had  low  qualifications. 
Atypical employment and low pay are particularly 
widespread in this  group. While in Germany 50% 
of the low-qualified earned an hourly wage below 
2/3 of the median wage, the proportion was 33% in 
the  UK,  25%  in  Denmark,  18%  in  France  and  a 
mere  5%  in  Sweden  (Eichhorst  et  al.,  2019). 
Participation  in  adult  learning,  at  8.2%,  is  well 
below the EU average of 11.1%, suggesting room 
for  improvement.  On  average,  4.3%  of  the  low-
skilled  participated  in  training  (in  the  4  weeks 
before  being  asked),  which  matches  the  EU 
average  but is  well below the participation rate  in 
countries performing better in terms of upskilling, 
including 
(9.9%),  Denmark 
(14.9%)  and  Sweden  (20.7%).  Strengthening  the 
upskilling  of  low-skilled  workers  would  also  be 
beneficial given that Germany is estimated to have 
only  3.2  million  jobs  requiring  low  skills  levels 
(2017) (BIBB, 2019).  

the  Netherlands 

Source: European Commission calculations based on the 
AMECO database 

Shortages of skilled labour are acting as a drag 
on  growth.  Despite  slowing  economic  activity, 
labour shortages remain considerable. The share of 
firms  in  industry  reporting  labour  shortages  as  a 
factor limiting production has fallen from a high of 
27%  in  the  second  quarter  of  2018,  but  remains 
sizeable, at 18% in the third quarter of 2019. At the 
same time, the vacancy rate (the number of vacant 
jobs  as  a  proportion  of  all  jobs)  is  close  to  its 
historical  highs  at  3.2%  (2019-Q3),  against  2.3% 
on average  in the EU and 2.2% on average in the 
euro  area.  Demographic  ageing  and  technological 
transformation  are  making  securing  a  skilled 
workforce  also  a  structural  challenge.  Without 
additional  measures, potential growth in Germany 
is expected to decline from 1.6% in 2018 to 1.2% 
in 2022 (European Commission, 2019a).  

Upskilling and reskilling of the labour force can 
help  relieve  labour  shortages.  While  Germany 
has one of the highest employment rates in the EU, 
the  employment  rate  for  the  low-qualified  is 

for 

the 

Act’ 

include 

support 

In  2019  Germany  started  some  promising 
reforms  to  improve  upskilling  and  reskilling, 
yet  there  is  potential  to  do  more.  Promising 
initiatives 
‘Qualifications 
(Qualifizierungs-
Opportunities 
chancengesetz), which  improves  access  to  and 
financial 
further  education  of 
employees whose occupational activities are at risk 
of being replaced by new technologies. Another is 
the 
Act’ 
‘Vocational 
in  2019.  The 
(Berufsbildungsgesetz),  updated 
national 
(Nationale 
strategy 
skills 
Weiterbildungsstrategie),  adopted  in  2019,  is  a 
substantial component of the federal government’s 
skills  strategy,  combining  federal  adult  learning 
programmes  with  the  Länder  programmes  (29).  It 
is, inter alia, expected to improve transparency and 
accessibility,  better  recognise  informal  skills  and 
guide  the  low-skilled  to  formal  qualifications, 
including  through  partial  qualifications.  As  a 
response  to  skill  shortages  and  the  projected 
the  working-age 
decline  by  10.2  million 

Training 

in 

in  2021 

implementation 

(29)  A  joint  report  by  the  OECD  and  German  ministries  will 
analyse 
if 
necessary,  further  develop  the  national  training  strategy. 
The national partners of the national development strategy 
will  implement  these  in  a  continuous  exchange.  In  a 
committee 
implementation 
the 
activities are coordinated and networked. 

that  meets  regularly, 

to  review  and, 

40 

-3-2-101234569901030507091113151719%Prediction based on inflation, productivity andunemploymentActual nominal compensation growth  
                                                           
4.3. Labour market, education and social policies* 

work part-time cite caring responsibilities as a key 
factor in why they do not work full time, compared 
to 27.7% in the EU as a whole. Germany is taking 
ambitious  measures  to  respond  to  the  increasing 
demand  for  childcare  and  more  places  in  all-day 
schools (31), but with 29.8% of children under 3 in 
formal  childcare  in  2018,  the  country  remains 
below the EU average of 35.1% and the Barcelona 
target  of  33%.  Ensuring  the  quality  of  childcare 
provision  also  remains  an  issue.  The  participation 
rate  for  children  aged  between  3  and  compulsory 
school  age  is  87.6%,  above  the  EU  average 
(85.7%), but it remains below the Barcelona target 
(90%).  Measures  such  as  the  Good  Kindergarten 
(by 
Law 
€5.5 billion) 
for  childcare 
provision  (2019-2022)  in  the  Länder,  and  could 
help  women  to  work  longer.  So  could  the  law  on 
the  right 
the  former  full-time 
to 
employment  from  part  time  employment,  which 
came  into  force  in  January  2019  Considering  that 
the  affordability  and  quality  of  childcare  both 
require  considerable  additional 
funding,  an 
assessment  of  whether  funding  needs  are  indeed 
covered  would  have  merits.  Recent  reforms  will 
need  to  be  followed  up  and  their  effects  properly 
evaluated.  

(Gute  Kita  Gesetz), 
increases 

substantially 

to  return 

support 

taxation 

Further  reducing  tax  disincentives  for  second 
and  low-wage  earners  may  also  increase  hours 
worked.  More  than  a  quarter  of  women  earned 
low  wages  (28.7%,  while  only  about  one  sixth  of 
men  did  (16.9%),  as  of  2014.  Women  are  thus 
particularly  affected  by  the  high  tax  wedge  for 
low-wage  and  second  earners,  a  considerable 
proportion  of  whom  are  women.  Tax  and  social 
security  rules  such  as  the  specific  arrangement  of 
create 
joint 
disincentives  to  working  more  hours  (see  also 
Section 4.1). The low-wage trap for second earners 
has not improved for years and remains one of the 
highest  in  the  EU.  The  continuing  application  of 
the 
that 
rearranges tax liabilities within the couple has had 
only  limited  success  in  creating  better  work 
incentives for second earners. As of July 2019, the 
midi-job threshold  from  which  full  social security 
contributions are paid was increased from €850 to 
€1,300,  resulting  in  a  more  gradual  phase-in  of 

(Ehegattensplitting) 

(Faktorverfahren) 

factor  method 

a 

by 

2060, 

government 

the 
comprehensive 

is 
population 
implementing 
three-pillar 
strategy.  This  includes  fostering  skilled  labour 
immigration  from  third  countries,  in  addition  to 
relying on the potential of domestic and European 
skilled  workers  (Fachkräftestrategie)  Immigration 
of  skilled  workers  from  third  countries  demands 
transparent  administrative 
more  efficient  and 
procedures,  as  well  as  improved  recognition  of 
educational and vocational qualifications.  

this 

Making  better  use  of  women’s  labour  market 
potential  could  help  alleviate  skills  shortages, 
counter  the  implications  of  ageing  and  raise 
potential growth. While Germany has one of the 
highest  employment  rates  for  women  in  the  EU 
(75.8%  in  2018,  against  an  EU-28  average  of 
67.4%),  almost  half  of 
is  part-time 
employment (46.7%, against an EU-28 average of 
30.8%).  Consequently,  the  female  employment 
rate  in  full-time  equivalents  is  only  59.4%,  and  is 
accompanied  by  a  wider  unadjusted  gender  pay 
gap  at  21%  (versus  an  EU  average  of  16%)  in 
2017 ; than the adjusted gender pay gap at 6%. The 
gender employment gap in full-time equivalents is 
the  fourth  highest  in  the  EU  (20.8 pps  vs  EU 
average  of  18 pps),  flagged  as  'on  average'  in  the 
Social  Scoreboard.  The  wide  unadjusted  gender 
pay  gap  reflects  the  lower  number  of  hours 
worked,  and  the  sectors  in  which  women  tend  to 
work  more  commonly  (30).  Germany  has  the 
highest  proportion  of  women  working  for  low-
to  neighbouring 
compared 
wages 
countries  like  France  (13.2%),  Denmark  (10.5%) 
or  the  United  Kingdom  (25.8%)  (Eichhorst  et  al., 
2019).  Although 
in  Wage 
Structures  Act 
(Entgelttransparenzgesetz)  has 
increased awareness of the principle of equal pay, 
few employers  have changed their pay policy due 
to the complicated procedures (BMFSFJ, 2019). 

the  Transparency 

(32.4%) 

to 

Full-time  childcare  and  all-day  school  facilities 
to  support  women’s 
remain  key  drivers 
attachment 
labour  market.  The 
the 
employment rate of women with children younger 
than  6  is  17.5 pps  lower  than  that  of  women 
without  children  —  one  of  the  widest  gaps  in  the 
EU (the average is 9 pps). In addition, 2018 30.2% 
of  the  15-64  year  old  women  in  Germany  who 

(30)  The  majority  of  women  are  occupied  in  the  public 
administration, education, health and social services, and in 
wholesale and other services. 

(31)  According  to  government  data,  the  provision  of  childcare 
facilities  for  children  under  3  more  than  doubled  between 
2007 (15.5%) and 2017 (33.1%). 

41 

                                                           
                                                           
4.3. Labour market, education and social policies* 

the 

to  evaluate  whether 

social security contributions. As noted in the 2019 
Country  Report,  these  measures  will  merit  close 
monitoring 
intended 
positive effects materialise. Additional measures to 
increase  the  disposable  income  of  lower  and 
middle-income  families,  such  as  abolishing  the 
solidarity surcharge (for some 90% of taxpayers as 
from  2021)  and  offsetting  the  effects  of  the  fiscal 
drag  for  2019-2020,  may  improve  incentives  to 
work longer hours.  

and 

background 

Temporary agency work is shrinking, driven by 
a combination of cyclical and structural factors. 
Temporary  agency  work  represents  2.5%  of  total 
employment in Germany (around 950 000 people, 
moving  annual  average  until  end  of  June  2019). 
17%  of  exits  from  unemployment  in  2019  were 
from temporary agency work, while 15% of newly 
unemployed  people  were  previously  employed 
under  such  a  contract  (Bundesagentur  für  Arbeit, 
2019a). The low-skilled, males, young people with 
a  migrant 
are 
overrepresented groups in temporary agency work. 
The 2017 legal change aimed at ensuring equal pay 
after  9  months  of  working  in  the  same  user 
undertaking  and  the  introduction  of  a  maximum 
assignment period of 18 months was followed by a 
decline in the number of agency workers (Hutter et 
al. 2019). This was more than compensated for by 
the  expansion  of  regular  employment  (permanent 
contracts  subject  to  social  security  contributions, 
with at least 21 hours  worked per week). In 2019, 
these  increased  to  70.3%  of  all  employment,  for 
the  first 
the 
weakening economic situation has also contributed 
to fewer job openings in agency work.  

time  since  2002.  Since  2018, 

refugees 

The  potential  of  people  with  a  migrant 
background  remains  underused.  The  gap  in 
employment rates between native-born people and 
those  born  outside  the  EU  remains  one  of  the 
highest in the EU (16.3 pps vs EU average of 9.4 
pps),  even  after  a  slight  narrowing  (by  0.8  pps) 
(European  Commission,  2019b).  By  eliminating 
this gap, almost 1 million more people could be in 
particularly 
employment.  The 
challenging  for  women  born  outside  the  EU,  for 
whom the employment gap is twice as wide as for 
non-EU-born  men.  The  gender  activity  rate  gap 
between  those  born  in  the  EU  and  those  born 
outside  it  is  also  wide,  at  20.2  pps  in  2018  (EU 
average  9.5  pps).  Facilitating  the  recognition  of 
vocational and professional qualifications issued in 

situation 

is 

labour 

third  countries  by  implementing  the  new  law  on 
skilled 
migration 
(Fachkräfteeinwanderungsgesetz)  is  expected  to 
improve  the  labour  market  integration  of  those 
born  outside  the  EU.  So  is  the  new  increased 
access  to  integration  and  occupation  courses  and 
vocational  training  provided  by  the  new  law  to 
foreigners 
employment 
promote 
(Ausländerbeschäftigungsförderungsgesetz). 

the 

of 

the 

the 

improving, 

Although 
labour  market 
participation  of  refugees  remains  a  challenge. 
Thanks to ambitious ongoing measures supporting 
language  learning  and  work-based  training  for 
refugees, 
labour  market  participation  of 
recently  arrived  migrants  (i.e.  those  born  outside 
the  EU  and  established  for  less  than  5  years)  is 
increasing:  their  employment  rate  reached  42.9% 
in 2018, up from 37.3% in 2016. The employment 
rate  of  nationals  of  major  refugee  countries 
increased  to  34.7%  in  September  2019.  However, 
it  remains  significantly  lower  than  that  of  foreign 
nationals  in  general  and  of  German  nationals. 
Refugees  are  also  increasingly  participating  in 
vocational  training  (32).  The  number  of  refugees 
among training place applicants registered with the 
Bundesagentur  für  Arbeit  continued  to  increase 
(2016:  10,300;  2017:  26,400;  2018:  38,300).  Of 
in  2018,  only  14,000 
the  38,300  applicants 
(36.5%) found a training place (BIBB, 2019) even 
though the number of training places exceeded the 
number  of  applicants,  and  there  remained  a  high 
number  of  unfilled  training  places  (53,000  at  the 
end of September 2019). Insufficient knowledge of 
the  German  language,  a  lack  of  professional 
qualifications  acquired  in  their  home  country  and 
the  difficulties 
their  qualifications 
recognised  remain  the  main  obstacles  for  the 
labour market integration of this group. As part of 
the  Migration  Package  adopted  in  June  2019,  a 
new 
und 
Beschäftigung)  enlarged  possibilities  for  people 
who  only  had  temporary  permits  to  stay  to 
complete vocational training. 

bei  Ausbildung 

in  getting 

(Duldung 

law 

(32)  Employment  rates  are  estimated  on  the  basis  of  German 
social  security  data  from  December  2018  (Bundesagentur 
für Arbeit, 2018). 

42 

                                                           
4.3. Labour market, education and social policies* 

4.3.2.  SOCIAL POLICY 

which  aims  at  establishing  a  more  inclusive  child 
and youth welfare system.  

is 

the 

labour  market 

is  performing 
While 
improving 
strongly,  the  social  situation 
moderately.  In  2018,  18.7%  of  the  population 
were  at  risk  of  poverty  or  social  exclusion  (EU 
average  22.5%),  a  small  improvement  from  2017 
(19%).  This  was  mainly  driven  by  a  decline  in 
severe  material  deprivation  (2017:  3.4%,  2018: 
3.1%)  and in the number of households  with very 
low  work  intensity  (2017:  8.7%,  2018:  8.1%). 
Material  and  social  deprivation  is  also  falling 
(2017:  8.1%,  2018:  7.5%)  (33),  while  monetary 
poverty declined only by 0.1 pp. The rate of people 
in  work  who are at risk of poverty stood at 9.1%, 
only  slightly  below  the  EU  average  (9.5%), 
reflecting  challenges  in  labour  market  outcomes 
for certain groups (see Section 4.3.1). 

Challenges  remain  as  regards  equality  of 
opportunities at an early age. Children in single 
parent  households,  in  families  with  three  or  more 
children,  or  whose  parents  have  low  educational 
attainment  or  a  migrant  background  are  the  most 
vulnerable  to  poverty.  Investing  in  children  and 
their families creates positive long-term effects for 
society  as  a  whole  (European  Commission, 
2019d).  The  federal  government  has  adopted  a 
(Starke-Familien-Gesetz), 
Strong  Family  Law 
which  entered  into  force  on  1 July  2019.  This 
should  improve  social  protection  of  children  by 
easing  access 
the 
supplementary  child  benefit  (Kinderzuschlag)  and 
participation 
benefits 
(Leistungen 
Teilhabe). 
Bildung 
Furthermore,  several  of  those  benefits  have  been 
expanded. It remains to be seen whether the reform 
of  these  benefits  will  reach  a  higher  number  of 
eligible 
children.  Meanwhile, 
discussions  continue  on  the  possible  introduction 
of  a  child  guarantee  (Kindergrundsicherung). 
Also, positively noted is the ongoing reform of the 
social  security  code  VIII  (Sozialgesetzbuch  VIII), 

to  child-related  benefits, 

education 

families 

und 

and 

and 

für 

for 

(33)  The  Material  and  Social  Deprivation  indicator  (MSD)  is 
the result of a revision of the material deprivation indicator 
(MD).  It  takes  into  consideration  a  broader  concept  of 
deprivation  as  it  also  includes  items  related  to  social 
activities,  whereas 
the  MD  measured  only  material 
deprivation.  It  is  based  on  13  items  (some  of  which  are 
common to MD). The MSD rate is the proportion of people 
in  the  total  population  lacking  (because  of  an  enforced 
lack) at least 5 items out of the 13 MSD items (as opposed 
to 3 or more out of 9 items for MD). 

to 

improve 

the 
Comprehensive  measures 
pension  system  are  still  pending.  In  2018,  the 
rate  of  people  aged 65  and over  who  were  at  risk 
of  poverty  or  social  exclusion  stood  at  19%, 
1.3 pps  above  the  2017  figure  and  0.5 pps  above 
the  EU  average  (34).  On  the  other  hand,  in  the 
future  public  finances  will  be  under  pressure  (see 
Section  4.1).  Thus,  providing  cost-effective 
measures  against  old-age  poverty  will  prove 
range  of  potential 
essential,  along  with  a 
improvements  of  the  pension  system  (European 
Commission, 2019b). The introduction of the basic 
pension (Grundrente) and the intended inclusion of 
self-employed  in  the  statutory  pension  pillar  are 
expected to improve pension coverage for targeted 
groups  (35).  However,  the  decision  on  the  future 
architecture  of  the  pension  system  has  been 
the  ‘Pension 
postponed  with 
Commission 
Intergenerational 
Contract’.  Major  reforms  are  not  expected  until 
after 
its 
the  Pension  Commission  presents 
recommendations in spring 2020.  

the  set-up  of 

for  Reliable 

The  lack  of  affordable  housing  has  become  a 
major  challenge.  Although  the  housing  cost 
overburden rate has been falling, Germany has still 
one of the worst rates in the EU. In 2018, 14.2% of 
the population lived in a household that spent 40% 
or  more  of  its  income  on  housing  costs.  The 
situation  is  more  severe  for  the  elderly  (19.3%) 
and people at risk of poverty (49.5%), particularly 
in  core  cities  of 
regions 
(European  Commission,  2019b)  (36).  Demand 
seems  to  outweigh  the  supply  of  units  in  the 
middle and lower price segments (see Section 4.4).  

the  metropolitan 

(34)  The  persistent  at-risk-of-poverty  rate  for  the  elderly  has 

increased by over 2 pps (2017: 12%, 2018:14.1%). 

(35)  The basic pension is unlikely to address the risk of old-age 
poverty among low earners with longer career interruptions 
(see  also  assessment  in  OECD,  2019a).  The  legislative 
implementation of the government coalition’s commitment 
to  improve  coverage  of  the  self-employed  under  the 
statutory  pension  pillar  will  start  in  2020.  Until  then,  the 
exact sub-groups to be included, along with further details 
of the design of measures, remain to be defined. 

(36)  Official  statistics  on  how  the  lack  of  affordable  housing 
affects  the number  of  homeless  persons  (see  for  estimates 
Hanesch,  2019)  will  be  available  from  2022  once  the  bill 
Homelessness’ 
on 
(Wohnungslosenberichterstattungsgesetz), 
in 
September 2019, is implemented. 

‘Reporting 

adopted 

on 

43 

                                                           
                                                           
4.3. Labour market, education and social policies* 

to 

linked 

that  are 

However,  differences 
the 
insurance  status,  triggered  by  incentives  to  give 
preferential treatment to patients on PHI, continue 
to exist (European Commission, 2019b). Two acts 
of 2015 and 2019 aim especially to reduce waiting 
times for SHI patients, increase the availability of 
doctors,  including  in  rural  areas,  and  improve 
efficiency  in  care  delivery.  The  impact  of  this 
reform will need to be assessed (see Section 4.1). 

Recent  major  reforms  of  the  long-term  care 
system  (LTC)  in  Germany  have  significantly 
increased  both  the  number  of  LTC  recipients 
and public expenditure on LTC. The number of 
dependents  receiving  LTC  services  in  the  social 
LTC  insurance (38)  increased  by  43%  from  2014, 
before  the  reforms,  to  2018,  while  in  the  same 
period public expenditure grew by 62%. This was 
mainly  due  to  the  redefinition  of  care  levels  and 
care  needs  assessment  methods,  which  now  also 
cover  for  people  suffering  from  dementia  —  an 
issue of rising importance given Germany’s ageing 
population.  Precautionary  measures 
to  ensure 
sustainable financing in view of population ageing 
were taken and a LTC provident fund financed by 
increased LTC premiums was established. 

Staff  shortages  in  the  nursing  professions  are 
expected to impact on health and the long-term 
availability  and  quality  of  care  in  the  future. 
Germany  has  more  practicing  nurses  per  1,000 
people  (1.8,  2017  data)  than  many  other  EU 
Member  States.  However,  already  today  there  are 
five  times  more  vacancies  than  available  skilled 
workers  in  elderly  care  (39).  The  government  has 
released  funds  for  hiring  13,000  additional  nurses 
as  from  2019  and  is  promoting  recruitment  from 
non-EU  countries.  In  addition,  to  improve  the  job 
attractiveness  and  career  prospects  of  nurses,  a 
reform  and  streamlining  of  their  education  and 
training 
2020 
(OECD/European  Observatory  on  Health  Systems 
and  Policies,  2019).  Still,  such  measures  are 
expected to alleviate the issue only mildly. 

taking 

effect 

from 

is 

(38)  The social LTC insurance in Germany is established under 
the  umbrella  of  the  social  health  insurance  and  covers  ca. 
90%  of  the  population.  The  remaining  10%  of  the 
population  are  covered  by  a  compulsory  private  LTC 
insurance.  

(39)  In  2018,  there  were  2,900  unemployed  skilled  workers, 
compared  with  15,100  registered  job  offers  for  qualified 
nursing staff (Bundesagentur für Arbeit, 2019b). 

Although access to healthcare is generally good 
and health coverage broad, inequalities persist. 
Unmet needs for medical care in 2018 were among 
the  lowest  in  the  EU  (0.2%),  and  considerably 
below the EU average (1.8%). However, the gap in 
self-reported  health  by  income  groups  indicates 
problems with inequality. Only half of Germans in 
the  lowest  income  group  have  self-reported  good 
health, compared with 80% of those in the highest 
income  group (37).  Social  inequalities  in  mortality 
and  life  expectancy  have  increased  over  time 
(Lampert  et  al,  2018)  and  are  considerable  (see 
Graph  4.3.3).  This  suggests,  as  confirmed  by  the 
prevention  law  of  2015,  that  there  is  potential  for 
strengthening  a  ‘health  in  all  policies’  approach, 
including  disease  prevention  and  promoting 
healthy  lifestyles  for  all  ages,  and  for  reducing 
health inequalities. 

Graph 4.3.3:  Years of difference in life expectancy between 

people with highest and lowest education (at 
age 40) 

Source: Commission staff services; for DE: Luy et al, 2015 

The  divide  between  social  health  insurance 
(SHI)  and  private  health  insurance  (PHI)  also 
continues  to  raise  concerns.  The  dual  health 
insurance  system  weakens  the  solidarity-based 
principle  in  healthcare  as  it  allows  civil  servants, 
the self-employed and people with high incomes to 
opt  out  of  SHI.  The  situation  concerning  waiting 
times  is  good  by  European  standards  (in  2018, 
0.9%  of  Germans  reported  unmet  medical  needs 
due to waiting times, against 1.8% across the EU). 

(37)  Low income is defined here as being in the fifth of society 
with  the  lowest  disposable  income,  and  high  income  is 
understood as being in the fifth of society with the highest 
disposable income. 

44 

02468101214SKHUPLEECZDESIDKFIROBGMTSEELPTHRIT  
                                                           
                                                           
4.3. Labour market, education and social policies* 

Germans  prefer  free  ECEC  provision  (Wößmann 
et  al.,  2019).  But  municipalities  and  researchers 
(Spiess,  2019)  do  not  necessarily  recommend 
using  additional  funds  of  the  ECEC  quality 
improvement  law  indiscriminately  to  subsidise  or 
abolish  tuition  fees,  irrespective  of  deficiencies  in 
quantity  and  quality  (DStGB,  2019).  In  addition, 
ensuring high quality in ECEC is also an essential 
condition  for  reducing  the  influence  of  socio-
economic  and  migrant  background  on  educational 
performance. 

The  basic  skill  proficiency  of  young  students 
remains  broadly  unchanged,  while 
socio-
economic  background  continues  to  have  a 
strong impact on education outcomes. The 2018 
International  Student 
for 
OECD  Programme 
Assessment  (PISA)  puts  the  reading,  mathematics 
and  science  performance  of  15  year-olds  in 
Germany  at  around  the  EU  average.  In  2018, 
underachievement  increased  compared  to  2015  in 
all  disciplines,  most  importantly  in  reading.  The 
heavy  impact  of  socio-economic  background  on 
reading  remained  stable  (Reiss  et  al.,  2019; 
European  Commission,  2019e;  OECD,  2019b; 
OECD,  2019c;  OECD,  2020).  The  percentage  of 
15  year-old  students  with  a  low  socio-economic 
background  who  underperform  in  reading  is  27.5 
pps greater than for those of a high socio-economic 
background — a gap 2 pps above the EU average. 
There  is  a  particular  performance  gap  (more  than 
one  PISA  competence  level)  between  academic 
and vocational lower secondary schools. Germany 
is  one  of  the  country  with  the  widest  gap  in 
underachievement  rates  in  reading  between  pupils 
born abroad and pupils who do not have a migrant 
background,  and  this  has  worsened  significantly 
since  2009.  However,  native-born  pupils  with 
parents  born  abroad  are  increasingly  catching  up 
with pupils that do not have a migrant background. 
The PISA study shows that students cluster in low- 
and  high-performing  schools,  and  the  heads  of 
disadvantaged  schools  report  material  and  staff 
shortages  more 
in 
frequently 
advantaged  schools.  In  addition,  disadvantaged 
schools  report  a  significantly  higher  share  of  not 
fully certified teachers. Ensuring good basic skills 
for all is increasingly important to face digital and 
technological  change  and  sustain  competitiveness 
while contributing to SDG 4 – quality education.  

those 

than 

Serious  teacher  shortages  are  putting  a  strain 
on  the  education  system.  According  to  the 

4.3.3.  EDUCATION AND SKILLS 

in 

reached 

between 

agreement 

Planned  investment  in  education  is  responding 
the 
to  pressing  needs,  yet  challenges 
education sector persist. Overall, public spending 
on  education  rose  by  5.6%  in  real  terms  between 
2010 and 2017, increasing by 21% in pre-primary 
and primary education and decreasing by 2.4% in 
tertiary education.  Still,  Germany is spending less 
of its resources on education now than it did in the 
past.  While  in  2011  it  spent  4.3%  of  its  GDP  on 
education,  in  2016  and  2017  this  was  4.1%,  well 
below the EU average of 4.6%. Private and public 
expenditure  also  decreased  between  2010  and 
2017,  dropping  0.4  pp.  to  6.4%.  The  government 
spends 9.3% of its total expenditure on education, 
also  below  the  EU  average  (10.2%).  Under  the 
financial 
the 
government and federal states on higher education 
funding  in  May  2019,  each  side  will  invest 
€1.88 billion  per  year  from  2021.  However,  a 
major investment gap remains due to a significant 
need 
(Gornig, 
2019).  The  government  also  plans  to  increase  the 
students  and  apprentices 
loans 
(BAFöG)  by  more  than  €1.3 billion  in  the  period 
2018  to  2021,  compared  to  2.7  billion  in  2018. 
While  the  municipal  investment  deficit  for  school 
infrastructure  decreased  by  €4.9 billion  in  2018 
compared 
to 
it 
€42.8 billion,  higher  than  in  any  other  sector 
(KfW,  2019a).  Under  the  digital  pact  for  schools, 
the  federal  government  will  invest  €5 billion  and 
the  Länder  €0.5billion  by  2024,  but  this  is 
estimated to cover only one third of financial needs 
(Breiter et al., 2017). Additional investment needs 
also arise from the expansion of all-day schooling 
promised  by  the  government  in  2018  under  the 
coalition agreement.  

infrastructure 

replacement 

to  2017, 

amounted 

system 

still 

for 

for 

The expansion of early childhood education and 
care  (ECEC)  places  is  progressing,  but  serious 
supply  gaps  remain.  The  participation  of  4-6 
year-olds  in  early  childhood  education  and  care 
was  stable  at  96.4%  in  2018  and  above  the  EU 
average  (95.4%).  However,  the  growing  demand 
for  places  for  under  3  year-olds  is  leading  to 
substantial  supply  gaps,  in  particular  in  urban 
areas.  A  survey  among  more  than  2,600  ECEC 
managers  reveals  serious  shortages  of  qualified 
personnel  due 
lack  of 
attractiveness,  difficult  working  conditions  and 
low  salaries  (DKLK,  2019).  A  majority  of 

the  profession’s 

to 

45 

4.3. Labour market, education and social policies* 

in 

enrolling 

Despite  excellent  employment  prospects,  fewer 
students  are 
formal  VET 
programmes.  Young  people  increasingly  favour 
academic  education  over  VET:  in  2017,  2.7% 
fewer  new  students  than  in  2016  started  formal 
VET  programmes.  Unfilled  training  opportunities 
increased to 57,700 in 2018 from 49,000 in 2017. 
Regional  imbalances  in  qualifications  and  jobs 
appear  to  be  more  pronounced  (BIBB,  2019).  At 
the  same  time,  92.4%  of  recent  VET  graduates 
found  employment  in  2018,  up  from  91.3%  in 
2017 and far above the EU average of 79.5%. For 
Germany,  60%  of  openings  by  2030  are  expected 
to be for medium-qualification jobs, compared to a 
46%  EU  average  (Cedefop,  2018).  In  response  to 
changing  professional  profiles,  the  government 
aims  to  raise  the  attractiveness  of  VET.  In  2019, 
three  continuing  education  and  training  (C-VET) 
levels  with  harmonised 
terms  of  C-VET 
occupations  were  introduced  and  a  new  federal 
initiative was launched to support the development 
and testing of innovative approaches. 

Skills  shortages 
in  STEM  and  ICT  are 
increasing, despite above-average attainment in 
those areas. Science, technology, engineering and 
mathematics  (STEM)  studies  are  attractive  in 
Germany: 35.6% (2017) of tertiary-educated adults 
hold a degree in these fields, making Germany the 
best  performer  in  the  EU  (average  25.8%).  While 
the  attractiveness  of  engineering,  manufacturing 
and construction has slightly decreased, graduation 
in  other  STEM  fields,  such  as  natural  sciences, 
mathematics  and  statistics,  and  information  and 
communication technologies  (ICT), has increased. 
The  high  share  of  STEM  graduates  is,  however, 
still  insufficient  to  fill  the  large  demand-supply 
gap in this field, which amounted to over 300,000 
open  positions  in  April  2019.  For  IT  professions 
skills shortages have more than tripled since 2014 
(IW, 2019). 

Germany  is  particularly  exposed  to  the  impact 
of  automation,  and  this  poses  challenges  to 
skills strategies. Existing skills imbalances require 
further  efforts,  particularly  to  better  align  skills 
supply  with 
labour  market  demand  (OECD, 
2019e).  Reducing  skills  shortages  and  mitigating 
the impact of socio-economic factors on education 
and  labour  market  outcomes  for  disadvantaged 
groups remains essential (OECD, 2019e). To meet 
current and future labour force demands related to 
structural  changes  in  the  labour  market,  Germany 

lower 

German  Teachers’  Association, 
in  2019/2020 
around  15,000  posts  will  remain  vacant,  while 
40,000 posts will be filled by people who were not 
teachers.  The  biggest 
trained  originally  as 
shortages occur for primary schools, non-academic 
secondary  schools  ,  vocational  and  special  needs 
schools.  Salaries  for  teachers  at  such  schools  are 
than  for  higher  educational 
generally 
sectors.  While  official  needs  forecasting  expected 
a  shortage  of  15,300 
teachers  until  2025 
(Sekretariat  der  KMK,  2018),  research  based  on 
recent  estimates  of  growth  in  numbers  of  primary 
students  identifies  a  shortage  of  26,300  teachers 
(Klemm  and  Zorn,  2019).  Teacher  shortages 
threaten  the  comprehensive  provision  of  quality 
education  due  to  cancelled  classes,  and  there  is  a 
challenge from relying on people who did not train 
as 
Negative 
repercussions for the intended expansion of all-day 
schooling are also likely, as well as for integrating 
recently arrived migrants (DUK, 2019). 

(Quereinsteiger). 

teachers 

in 

than 

higher 

Inequalities  in  educational  attainment  persist, 
with  socio-economic  and  migrant  backgrounds 
still having a strong influence. The rate of 18-24 
year-olds  leaving education and training early  has 
remained stable just around 10.3% since 2015, but 
so  has  the  fact  that  the  rate  has  been  more  than 
three  times  higher  for  foreign-born  people  since 
2010.  Young  people  from  a  disadvantaged  socio-
economic background are three times less likely to 
(Autorengruppe 
be 
education 
In  addition, 
Bildungsberichtersattung,  2018). 
attainment  rates  in  both  higher  and  vocational 
education  are  lower  for  people  from  a  migrant 
background 
people 
for 
(Autorengruppe  Bildungsberichtersattung,  2018). 
to 
Germany  has  undertaken  serious  efforts 
integrate  recently  arrived  ‘people  with  a  migrant 
background’ in particular into vocational education 
(OECD,  2019d).  However,  as  the  national  data 
report on vocational education and training (VET) 
education 
a  migrant 
shows,  people  with 
background  are  still  less  likely  to  start  VET  than 
people  without  such  a  background  (34.2%  vs 
55.7%  in  2017).  Stronger  efforts  are  needed  to 
better  address  persisting  educational  inequalities 
and low performance levels among children with a 
migrant  background  (OECD,  2019d).  Among 
persons  with  disabilities,  the  tertiary  attainment 
rate  is  lower  in  Germany  (23.9%)  than  the  EU 
(32.4%).  

native-born 

46 

4.3. Labour market, education and social policies* 

Opportunities 

is  implementing  ambitious  measures  like  the 
‘Qualifications 
Act’ 
(Qualifizierungschancengesetz) (40) and the Act on 
Strengthening Continuing Vocational Training and 
Insurance  Protection.  Such  measures 
improve 
access to further education for the low-skilled and 
long-term  unemployed  and  may  extend 
their 
working lives.  

(40)  At  present,  support  is  limited  to  employees  without  a 
vocational qualification, employees in danger of becoming 
unemployed,  and  small  and  medium-sized  enterprises.  In 
the  future,  all  employees  should  be  able  to  access  further 
education  regardless  of  their  qualifications, age  or  type  of 
employer. 

47 

                                                           
4.4. COMPETITIVENESS REFORMS AND INVESTMENT* 

4.4.1.  INVESTMENT AND PRODUCTIVITY  

Labour productivity  

trade 

in  particular 

Labour productivity growth in Germany shows 
a long-term declining trend and turned negative 
in  2018,  due  to  cyclical  factors  but  also 
structural  weaknesses.  The  recent  decline  in 
labour productivity was more marked than in most 
euro  area  countries.  It  was  driven  mainly  by  the 
manufacturing  sector,  and 
the 
automotive  industry.  An  interplay  of  external 
factors  (decline  in  global  demand,  uncertainty 
stemming  from 
tensions)  and  domestic 
factors  (including  changes  in  emission  testing 
standards 
car 
manufacturers to  meet emission standards) lead to 
consumer  uncertainty  and  a  decline  in  output  and 
labour  productivity  as  manufacturers  hoarded 
some labour (See Chapter 1). Services productivity 
slowed but remained positive (0.5%). Most of the 
slowdown in labour productivity was due to lower 
total  factor  productivity  (TFP)  growth,  i.e.  the 
efficiency  with  which  labour  and  capital  are  used 
together,  which  dropped  from  1.2%  in  2017  to 
0.1% in 2018.  

failure  of 

some 

and 

the 

in 

factors 

While  the  long-term  slowdown  in  productivity 
growth  is  a  global  phenomenon,  a  number  of 
are 
structural 
country-specific 
hampering efficient allocation of the economy’s 
resources.  The  long-term  decline  in  TFP  and 
labour productivity growth in Germany (see Graph 
4.4.1)  is  often  attributed  to  a  combination  of 
factors.  These  are:  weak  growth-enhancing 
investment,  in  Knowledge  Based  Capital  and 
among SMEs in particular; lack of modern digital 
rural  and  semi-rural  areas; 
infrastructure 
demographic  developments  and  shortages  of 
skilled  labour;  a  decline  in  business  dynamism; 
slow 
in 
transforming  knowledge  into  economic  success; 
weaknesses  in  e-government,  excess  regulation 
and low competition in business services (Bauer et 
al.,2020;  Cléaud  et  al.,  2019).  According  to  the 
Council  of  Economic  Experts,  which  has  been 
appointed  as  the  German  National  Productivity 
Board,  the  main  drivers  of  productivity  growth  in 
the  future  are  investment  in  education,  research 
and  innovation  and  an  environment  that  sets  the 
right  incentives  for  private  investment  (German 
Council of Economic Experts, 2019b). The Federal 
for  Economic  Affairs  and  Energy 
Ministry 

technology  diffusion 

and  delays 

published  a  new  ‘SME  Strategy’  and  a  ‘national 
industry  strategy 
for  2030’,  which  contain 
measures  to  foster  innovation  and  improve  the 
framework  conditions  for  businesses,  including 
corporate taxation and competition. 

Graph 4.4.1:  Contribution to labour productivity growth, 

percentage points 

Source: OECD 

Resource productivity 

Improving resource productivity can be a main 
driver  of  future  competitiveness  and  growth, 
while  minimising  negative 
impacts  on  the 
environment. Materials are the main cost factor in 
the  manufacturing  sector  in  Germany,  accounting 
for  44%  of  costs  compared  to  18%  for  labour. 
Improving  resource  productivity  is  therefore  a 
main  driver  of  future  growth  while  minimising 
impacts  on  the  environment.  Using  resource-
efficient  production  processes  can  also  reduce 
dependency  on  volatile  raw  material  markets. 
Germany  set  itself  the  goal  of  doubling  raw 
material  productivity  between  1994  and  2020  as 
its  national  sustainable  development 
part  of 
strategy. It has developed a number of initiatives to 
help  and  incentivise  industry  to  become  more 
resource-efficient  and  advance  towards  SDG  8 
‘Decent work and economic growth’ and SDG 12 
production’. 
‘Responsible 
However,  despite  resource  efficiency  gains  and  a 
relative  decoupling  of  raw  material  use  and 
economic  growth,  natural  resource  use  remains  at 
level. 
an 
Germany’s total  material consumption amounts to 
between  33  and  40  tons  per  person/year  whereas 

environmentally 

unsustainable 

consumption 

and 

48 

-4-3-2-101234858891949700030609121518Non-ICT capital deepeningICT capital deepeningMultifactor productivityLinear (Labour productivity (trend line))Linear (TFP (trend line)) 
  
4.4. Competitiveness reforms and investment* 

to 

further  in  2018.  German  start-ups  still  face 
difficulties  in  attracting  funding  (KfW,  2019b). 
The  government  launched  several  initiatives  to 
address  these  key  challenges  (see  Section  4.2). 
Programmes  such  as  EXIST-Potential  and  Young 
Entrepreneurs in Science support entrepreneurship 
among  students,  while  a  new  Transfer  Initiative 
improve  science-industry  knowledge 
aims 
transfer. There are plans to expand existing cluster 
initiatives  in  2019  with  a  new  Future  Cluster 
Initiative.  An  agency  for 
the  promotion  of 
disruptive  innovation  has  been  set  up  and  is 
scheduled to start operations in 2020. The German 
Parliament  adopted  a  new  law  introducing  a  tax 
incentive  for  R&D  from  1 January  2020. The  law 
allows businesses to claim a tax credit worth 25% 
of  the  eligible  expenses  (personnel  costs  of 
research 
for 
subcontracting).  All  companies  regardless  of  size 
are  entitled  to  the  incentive  for  qualifying  R&D 
projects.  However,  the  base  is  capped  at  € 2 
million,  translating  into  a  maximum  tax  credit  of 
€ 500,000  per  company  per  year,  which  should 
benefit  mainly  SMEs.  The  tax  credit  can  be  paid 
out even where there is no tax liability.  

staff  or  60%  of 

fees 

the 

Ensuring  a  sufficient  supply  of  highly  skilled 
workers  is  vital  for  business  investment  in 
innovation  and  digitalisation  and  for  high-
growth  enterprises.  The 
lack  of  qualified 
personnel  is  the  most  important  factor  hampering 
investment  in  innovation  and  digitalisation,  in 
particular  for  SMEs  and  high-growth  enterprises 
(European  Commission/European  Central  Bank, 
2019;  ZEW,  2019;  Pellens  et  al.,  2020).  This  is 
despite some positive trends over the last 5  years. 
Regarding  25-34  year-olds,  these  trends  include 
increases  in  the  proportion  who  have  successfully 
completed  tertiary  education,  in  the  numbers  of 
new  graduates  in  science  and  engineering,  and  in 
computing  graduates 
(European  Commission, 
2019f). In terms of ICT graduates, despite a small 
increase from 4.5% (in 2016) to 4.7% (in 2017) of 
total  graduates,  there  is  still  a  lack  of  ICT 
specialists  in  the  country.  The  number  of  IT 
specialist vacancies increased by 51% from 82,000 
in 2018 to 124,000 in 2019. IT specialist positions 
are  unoccupied  for  sixth  months  on  average 
(Bitkom,  2019).  The  proportion  of  female  ICT 
specialists  in  Germany  is  slightly  below  the  EU 
average  (1.3%  vs  1.4%  of 
total  graduates) 
(European Commission, 2019g). 

to 

its 

target  of  doubling 

scientists  consider  eight  tons  to  be  sustainable 
(Wuppertalinstitut,  2019).  According 
the 
Federal  Environmental  Agency,  Germany  will 
raw  material 
miss 
productivity  by  2020  (BMU,  2018).  Germany’s 
secondary  raw  material  use  rate  in  2016  was 
11.4%, slightly below the EU-average. Moving to 
a  circular  economy,  e.g.  by  promoting  reuse, 
recyclability and secondary raw materials markets, 
would boost Germany’s resource productivity and 
efficiency of its  use of  natural resources, generate 
cost  savings,  and  create  jobs.  A  recent  study 
suggests  that  public  support  for  innovations  with 
environmental  benefits  (eco-innovations)  is  an 
effective  policy  measure  to  significantly  increase 
firms’  material  productivity  (Flachenecker  and 
Kornejew, 2019). The study further shows that this 
improvement  has  led  to  substantial  increases  in 
firms’  competitiveness,  while 
their 
carbon footprints (SDGs 8, 12 and 13). 

reducing 

Research and innovation  

invests  considerable  resources 
in  R&D 
investment 

in 
Germany 
is 
R&D  but  private 
increasingly  concentrated  in  large  firms,  while 
SMEs  and  start-ups  face  challenges.  R&D 
intensity has increased during in recent years, from 
2.5%  of  GDP  in  2007  to  3.1%  in  2018  (third 
highest in the EU). A new national R&D intensity 
target of 3.5% by 2025 was included in Germany’s 
high-tech strategy (BMBF, 2018). With two thirds 
of R&D performed in the business sector, German 
business  R&D  intensity  (2.2%  in  2018)  is  the 
third-highest  in  the  EU.  However,  business  R&D 
is  predominantly  performed  by  large  firms  in 
R&D-intensive  industries,  whereas  SMEs’  R&D 
expenditure  has  stagnated  over  the  past  decade 
(ZEW,  2019).  Germany  ranks  eighth 
the 
European  Innovation  Scoreboard  (EIS)  and  its 
performance  has  stagnated  since  2011.  Recent 
years have seen a decrease in particular in SMEs’ 
level  of  innovation  activities.  This  is  reflected  in 
the  numbers  of  SMEs  introducing  product  or 
process  innovations,  introducing  marketing  or 
organisational innovations, or innovating in-house. 
The  2019  EIS  ranked  Germany  eighth,  sixth  and 
eighth,  respectively,  for  these  indicators,  while  in 
2011  Germany  was  first  in  all  three  (European 
Commission, 2019f; Pellens et al., 2020).  

in 

Following  a  decreasing  trend  over  the  last  15 
years,  the  start-up  rate  in  Germany  declined 

49 

4.4. Competitiveness reforms and investment* 

Box 4.4.6: 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 started to cool down in 2019, 
responding to the economic weakness. 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 if population ageing intensifies as expected and immigration slows down. 

Assessment of barriers to investment and ongoing reforms 

Barriers to investment in Germany discussed in this report are:  
 

predictability  and  planning  and  management  capacities  for  local  communities  (see  Section  4.1  and 
below) 
planning constraints and capacity constraints in the construction sector (see Section 4.1 and below);  
a complex tax system with high compliance costs (see Section 4.1);  
financing difficulties for young innovative companies (see Sections 4.2 and 4.4.1);  
shortages of skilled labour (see Sections 4.3.1, 4.3.3 and 4.4.1);  
insufficient  availability  of  certain  network  infrastructures,  including  electricity  networks  and 
broadband, as well as a lack of digital public services (see Section 4.4.3); and  
a  number  of  sectoral  regulations,  including  those  that  restrict  competition  in  business  services  and 
regulated professions (see Section 4.4.3).  

 
 
 
 
 

 

Investment bottlenecks such as capacity constraints hinder public infrastructure investment projects 
at  municipal  level,  while  lengthy  planning  and  legal  proceedings  act  as  an  additional  major 
impediment  to  investment  projects  in  transport,  energy  and  digital  infrastructure.  While  public 
investment  has  increased  noticeably,  in  particular  at  federal  level,  investment  at  municipal  level  has  been 
much less dynamic and continued to fall short of depreciation. A lack of planning capacities and skilled staff 
(e.g. engineers) remains a major bottleneck at municipal level. As a consequence, the available budget for 
infrastructure  investment  is  often  not  fully  used.  Measures  to  mitigate  these  obstacles,  such  as  consulting 
provided by ‘Partnerschaft Deutschland’, have yet to show results. Hiring engineers at municipal level, also 
by  providing  competitive  salaries  and  rebuilding  in-house  planning  capacities,  could  help  to  overcome 
existing  constraints.  To  provide  municipalities  with  the  incentives  and  planning  certainty  necessary  to 
undertake such a step, a long-term public investment plan would be needed that creates continuous demand 
for  public  construction  projects.  Furthermore,  planning  procedures  in  Germany  usually  involve  extensive 
consultation of the public and stakeholders, and opposition by individuals or interest groups often results in 
lengthy court cases. The number of court cases initiated by environmental protection associations increased 
by about 23% between 2013 and 2016 (Sachverständigenrat für Umweltfragen, 2018). A general increase in 

50 

Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionCSRWages & wage settingDigital Economy / TelecomCSREducation, skills, lifelong learning CSREnergyCSRTransportCSRLegend:No barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressNot assessed yetPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
4.4. Competitiveness reforms and investment* 

the complexity of planning procedures may also be deduced from Germany’s deteriorating performance in 
the World Bank’s Doing Business Report with respect to dealing with construction permits (1). Based on the 
example of a private sector construction project measured by the World Bank, Germany’s performance has 
declined  from  8th  place  in  the  rankings  in  2015  to  30th  place  (World  Bank,  2019).  In  addition,  German 
municipalities  on  average  have  fewer  inhabitants  than  those  in  other  OECD  countries,  which  may  have 
implications for their capacity to manage investment (OECD, 2019f).  

Digitalisation of the planning and construction process and faster court proceedings could help speed 
up  the  implementation  of  public  infrastructure  projects.  The  use  and  uptake  of  the  software  solution 
Building  Information  Management  (BIM)  for  the  whole  supply  chain  of  planning,  construction  and 
operations could help speed up the implementation of public infrastructure projects. Besides sponsoring pilot 
projects, a national plan presented in 2015 provides that BIM should be systematically introduced by 2020 
as the new standard for federal transport infrastructure projects. This would be a welcome step, even though 
not binding for infrastructure projects at regional and municipal level. Similar plans are also scheduled for 
other  public  works.  The  German  National  Regulatory  Control  Council  has  also  issued  a  number  of 
recommendations to speed up court proceedings in Germany, such as the introduction of a compulsory start 
date for a first hearing and measures to allow for faster legal certainty.  

(1)  This includes the procedures, time and cost to complete all formalities to build a warehouse and the quality control and 

safety mechanisms in the construction permitting system. 

Research and Innovation (contd.) 

is 

by 

ecosystem 

supporting 

high-growth 

The  generally  strong  performance  of  the 
innovation 
the 
development  of  high-growth  businesses,  while 
shortages  of  skilled  staff  are  hampering  it. 
Limited  access  to  early-stage  and  growth  finance 
(see Section 4.2), and the scarcity of staff with the 
right  skills  are  considered  major  obstacles  to 
investment 
businesses 
(Flachenecker et al., 2020). This problem is partly 
rooted  in  demographic  changes,  as  the  cohort  of 
people with the most entrepreneurial activity (aged 
30-50)  has  been  shrinking  over  recent  decades. 
Furthermore, Germany faces a general shortage of 
qualified labour for particular professions (Pellens 
et  al,  2020).  A  number  of  policy  initiatives  are 
under way to address skills shortages. In December 
2018,  the  federal  government  adopted  the  new 
skilled  labour  strategy.  A  new  immigration  law, 
entering into force in March 2020, aims to increase 
immigration of skilled labour from third countries. 
To  create  a  stronger  culture  of  life-long  learning, 
the  government  adopted  in  July  2019  a  National 
Continued  Education  Strategy.  The  MINT  action 
plan,  adopted  in  February  2019,  aims  to  increase 
the  attractiveness  of  science  and 
technology 
education. 

Research and innovation have a key role to play 
in  ensuring  an  effective  and  credible  climate 
policy.  In  its  2030  climate  action  programme, 
adopted  in  2019,  the  government  recognised  that 

to  R&D, 

climate protection requires the mobilization of the 
entire  innovation  system,  a  strong  entrepreneurial 
commitment 
further  governmental 
research  and  innovation  impetus,  and  research 
funding.  Specific  R&D  support  is  envisaged  to 
help  expand  the  use  of  climate-friendly,  low-  or 
zero-emission,  technologies.  Within  the  overall 
concept  of  ‘Research  Factory  for  Batteries’, 
technology 
support  will  be  provided 
development  and  innovation  along  the  entire 
battery value chain including sustainable recycling. 
There  is  also  a  focus  on  options  for  storing  and 
using  CO2  and  a  hydrogen  strategy  will  be 
developed. 

for 

Housing investment 

is  still 

investment 

lagging  behind 
Housing 
housing needs in metropolitan areas. Fuelled by 
strong demand, investments in dwellings increased 
considerably  (by  30.4%  in  real  terms)  between 
2010  and  2019,  but  access  to  affordable  housing 
remains a challenge. Net migration is an important 
driver  of  the  strong  demand  for  housing.  In 
parallel, supply has not kept up with demand for a 
prolonged period (European Commission, 2019h). 
Despite 
ratio  of  housing 
investments  to  GDP  is  currently  just  above  the 
long-term  average,  although  it  has  improved 
significantly  since  the  mid  2000s.  Low  interest 
rates coupled with rising incomes have contributed 
to  increased  property  prices,  in  particular  in  big 
cities  that  are  also  foreign  investment  targets. 

rising  needs, 

the 

51 

 
4.4. Competitiveness reforms and investment* 

The housing shortage has put upward pressure 
on  housing  rents.  In  recent  years,  Germany  has 
experienced  strong  increases  in  housing  rental 
costs  as  recorded  by  the  HICP. In  2017-2018,  the 
inflation differential for this item of the consumer 
basket  vis-à-vis the rest of the euro area averaged 
0.8 pps. In the second half of 2019, rental inflation 
was  also  above  overall  inflation,  as  it  also  was  in 
the rest of the euro area. 

The  construction  sector  is  operating  at  high 
capacity,  which  is  driving  price  inflation  in 
construction services higher and boosting profit 
margins  but  in  many  cases  also  affecting  the 
quality of works. Price  and cost developments in 
the  construction  sector  and  with  regard  to  the 
acquisition  of  real  estate  can  be  traced  through 
various  indicators,  none  of  which  is  directly 
reflected  in  the  Harmonised  Index  of  Consumer 
Prices.  Price  inflation  in  construction  investment 
(measured by the respective deflator in the national 
accounts)  eased  somewhat  in  the  third  quarter  of 
2019  to  4%  against  a  year  earlier,  but  remains 
high.  The  deflator  of  the  value  added  of  the 
construction  sector  has  tended  to  be  significantly 
stronger  (8%),  suggesting  that 
the  prices  of 
construction  output  rise  faster  than  input  prices. 
Meanwhile,  real  unit  labour  costs  (i.e.  the  labour 
share)  have  continued  to  fall,  implying  that 
building  firms  are  maintaining  some  degree  of 
wage moderation and boosting profitability. At the 
same  time,  the  cases  of  structural  damage  in  new 
construction were found to have increased by 90% 
compared  to  2009  (Institut  für  Bauforschung, 
2018). 

The  German  housing  market  is  characterised 
by a low rate of home ownership. In 2018, 51.5% 
of  the  population  were  living  in  a  building  stock 
they  owned,  while  48.6%  lived  as  tenants.  The 
likelihood  of  being  a  homeowner  or 
tenant 
depends to a considerable extent on income. Only 
25.2% of people earning below 60% of the median 
equivalised  income  (i.e  made  equivalent  for  the 
differences in a household’s size and composition) 
own  their  home,  while  this  figure  reaches  56.5% 
for  people  earning  above  60%  of  the  median 
equivalised  income.  Low  home-ownership  rates 
are reflected in the higher share of income spent on 
housing  rentals  (5.5%  in  2018)  compared  to  the 
rest  of  the  euro  area  (3.4%)  and  peers  (3.9%  in 
France).  To  alleviate  some  of  the  pressure  in  the 
housing market, the government has introduced the 

House  price  inflation  accelerated  from  2-3%  after 
the  financial  crisis  to  10%  per  year  in  2019, 
making  it  difficult  for  low  and  middle-income 
households  to  afford  adequate  housing.  Estimates 
by authorities and NGO’s still point to a significant 
shortage  of  housing  in  metropolitan  areas  despite 
booming construction activity (ibid.). The Prognos 
Institute, for example, estimates that in 2017 alone 
supply was lower than demand by 90,000 units (or 
around  25%)  (41).  The  largest  discrepancy  was  in 
social  housing,  where  only  one-third  of 
the 
demand  could  be  accommodated  (Koch  et  al., 
2019).  The  annual  housing  target  of  building 
375,000 new  flats between 2017 and 2021, which 
the  federal  government  stipulated  in  the  coalition 
agreement,  has  thus  not  been  met  and  strong 
increases in purchase and rental prices are creating 
further challenges for affordability.  

attention 

(see  Section 

Recent  policy  measures  are  not  keeping  pace 
with the demand for affordable housing, and in 
some cases may even increase housing shortages 
in  the  future.  Lack  of  affordable  housing  has 
become  a  major  challenge,  particularly  in  core 
cities  of  the  metropolitan  regions,  necessitating 
policy 
4.3.2).  A 
constitutional  amendment,  which  came  into  force 
in April 2019, allows the federal level to continue 
providing financial assistance for social housing to 
the  Länder.  However,  insufficient  funding  for 
social  housing  is  only  one  obstacle.  Ineffective 
regional  supply  strategies  and  poor  framework 
conditions at the local level (lack of building land, 
lengthy  planning  procedures,  lack  of  qualified 
staff,  etc.)  hamper  the  expansion  of  housing 
construction. In addition, some part of construction 
activities  takes  place  in  less  demanded  areas, 
risking  future  oversupply  in  several  shrinking 
regions  (Henger  and  Voigtländer,  2019).  Local 
policies  might  rather 
the  allocation 
problem  and  create  disincentives  for  further 
investment, thus exacerbating the housing shortage 
(Sagner  and  Voigtländer,  2019;  Bültmann-Hinz, 
2019). One example is the currently discussed rent 
price ceiling (Mietpreisdeckel) in Berlin. Similarly, 
the  fine-tuning of  the national rent price  break,  to 
which the federal government agreed on 9 October 
2019,  is  likely  to  aggravate  the  current  lack  of 
supply  of  rental  housing  (Kholodilin  and  Kohl, 
2019). 

increase 

(41)  The  supply  is  further  reduced  when  owner-occupied 

apartments are deducted from the figure. 

52 

                                                           
4.4. Competitiveness reforms and investment* 

4.4.2.  REGIONAL DISPARITIES 

in  Germany  exist 

Regional  disparities 
in 
competitiveness,  investment,  employment  and 
demographic  developments.  Competitiveness 
across  Germany,  as  measured  by  the  Regional 
Competitiveness  Index  (RCI),  varies  widely, 
closely  matching  economic  output  and  GDP  per 
capita levels (see Chapter 1). The investment ratio 
also  varies  significantly  between  regions,  but 
systematic east-west or north-south patterns cannot 
be detected. This is different for R&D expenditure, 
which  is  highest  in  southern  German  regions  and 
much lower in eastern Germany, but also in some 
less  prosperous  regions  in  the  west.  The  highest 
unemployment rates are in the east of the country. 
There  is  a  digital  divide  between  rural  and  urban 
areas  in  next-generation  access  coverage.  Certain 
regions  are  experiencing  significant  demographic 
decline,  a  development  most  pronounced  in  a 
number of eastern regions, whereas big cities have 
seen significant increases in their populations. This 
shows  a 
rural-urban  shift  occurring  across 
Germany.  The  planned  phase-out  of  coal  for 
electricity  generation  will  change  the  economic 
and  social  development  path  of  certain  German 
regions where lignite mining plays a major role in 
the  regional  economy  (see  Section  4.5).  This 
proportionate 
requires 
investments  and  other  regulatory  responses  to 
create new opportunities in the affected areas. 

well-targeted 

and 

4.4.3.  SINGLE MARKET FOR GOODS AND 

SERVICES  

the 

third  biggest  port 

Germany has scope for further improvement in 
enforcing  internal  market  rules.  Germany  plays 
an important role in further developing the Single 
Market.  However,  the  Single  Market  Scoreboard 
suggests  scope  for  further  improvement.  As  the 
largest  importer  of  goods  in  the  EU,  and  with 
Hamburg 
in  Europe, 
Germany has a major responsibility to ensure that 
non-compliant  products  do  not  enter  the  EU. 
Unlike most Member States, Germany so far does 
not provide data on customs controls in the field of 
compliance.  Moreover, 
product 
improved 
could 
guarantee a higher number of notifications of draft 
technical  regulations  under  the  Single  Market 
Transparency  Directive  and  would  thus  allow 
stakeholders  and  the  European  Commission  to 

administrative 

coordination 

safety 

and 

so-called  Housing  Construction  Campaign,  which 
comprises a number of measures to tackle housing 
shortages and rising house prices. 

Digitalisation  

there  are 

technologies  but 

German  businesses  are  increasingly  adopting 
still 
digital 
weaknesses  compared  to  other  industrialised 
countries.  They  are  taking  advantage  of  the 
opportunities  offered  by  big  data:  15%  of 
businesses  performed  big  data  analysis  in  2018 
(EU  average  12%)  up  from  6%  in  2016.  11%  of 
SMEs  sell  cross-border  (EU  average  8%).  More 
than a third of businesses (38%) share information 
electronically  (EU  average  34%).  However,  only 
12%  of  German  businesses  use  cloud  services 
(below  the  EU  average  of  18%).  The  number  of 
SMEs selling online fell from 26% in 2016 to 19% 
in 2018 (still above the EU average of 17%). There 
are several national and EU-coordinated initiatives 
for digitalising the economy, many of which target 
SMEs.  These 
the  Mittelstand  4.0 
competence centres, which aim to improve SMEs’ 
the  Go-Digital  programme, 
digitalisation,  and 
which  promotes  consulting  and  implementation 
services for SMEs in digitised business processes, 
digital market development and IT security. There 
is  also  an  initiative  on  IT  security,  designed  to 
increase cybersecurity awareness among SMEs.  

include 

Digitalisation has the  potential to facilitate and 
‘green’  and  carbon-neutral 
the 
accelerate 
transition,  but  digital 
among 
readiness 
environmental technology sectors varies widely. 
Digital  technologies  and  applications  can  save  7-
10  times  more  emissions  than  they  produce  and 
make  possible  a  15-20%  reduction  in  global  CO2 
emissions  by  2030. ICT-enabled  solutions  can 
reduce  energy  use  by  up  to  17%,  cut  emissions 
from  transport  by  up  to  27%  and  optimise 
agricultural  activities,  which  account  for  roughly 
24%  of  all  CO2  emissions.  Among  the  leading 
German green tech markets, energy efficiency and 
environment-friendly 
and 
storage  have  a  strong  digital  starting  position, 
while  waste  management,  recycling,  material 
efficiency and water in turn use digital technology 
much less (BMU, 2018). However, the carbon and 
energy footprint of digital technologies should also 
be  considered,  requiring  in  particular  continued 
efforts to increase energy efficiency in networks as 
well as more energy efficient devices 

generation 

power 

53 

4.4. Competitiveness reforms and investment* 

Digital single market  

fast  broadband 

Germany is not among the digital leaders in the 
EU  due  to  its  weak  performance  in  ultrafast 
broadband  and  4G  mobile  coverage.  Germany 
ranks 12th among EU Member States on the Digital 
Economy and Society Index (DESI) 2019 (42). The 
take-up  of 
(≥30Mbps)  has 
improved from 36% of households (2017) to 44% 
(2018).  However,  Germany  still  scores  below  the 
EU  average  on  the  take-up  of  ultrafast  broadband 
(≥100Mbps), at 15% of households in 2018. ‘Fibre 
to the premises’ (FTTP) coverage in Germany was 
8.5% in 2018, significantly below the EU average 
of  29.6%.  Rural  FTTP  coverage  is  3.6%,  also 
below  the  EU  average  of  14.2%.  To  date,  around 
€ 5 billion of federal funds have been committed to 
broadband  infrastructure.  While  the  government 
has made considerable efforts on the financial side 
for  the  roll-out  of  digital  networks,  significant 
improvements  in  terms  of  FTTP  coverage  is  not 
expected  in  the  short  term,  given  the  lack  of 
building  capacities  and  know-how.  Germany  is 
only  24th  in  the  EU  for  4G  coverage  and  23rd  for 
mobile  broadband  take-up.  In  2019,  a  5G  auction 
took  place  and  all  bidders  successfully  acquired 
spectrum.  A  subsidy programme and a strategy to 
streamline  permit  procedures  and  facilitate  access 
to 
the  extension  and 
densification  of  mobile  networks  aim  to  improve 
mobile  infrastructure  supply  in  poorly  served  or 
unsupplied areas. 

the  public  estate  for 

Artificial intelligence and cybersecurity are key 
priorities  for  the  German  government.  The 
artificial intelligence (AI) Strategy adopted in 2018 
sets out the framework for a holistic policy on the 
future  development  and  application  of  AI  in 
Germany. The further development of the existing 
Excellence  Centres  for  AI  was  initiated  and 
substantially  funded.  Several  funding  initiatives 
were launched, e.g. in the fields of IT security and 
autonomous  driving.  The  National  Pact 
for 
Cybersecurity  is  bringing  together  all  relevant 
stakeholders to implement the measures envisaged 
under  the  national  cybersecurity  strategy,  such  as 
the  Creation  of  an  Agency  for  Innovation  in 
Cybersecurity  and  the  introduction  of  an  IT-
Security  Label  to  inform  consumers  about  IT 
security  features  in  products.  In  2019,  Germany 

(42)  The five dimensions of the DESI are: connectivity, human 
capital,  use  of  internet  services,  integration  of  digital 
technology, and digital public services 

react  and  prevent  barriers  to  trade  in  the  internal 
market. 

to 

Changes  in  the  regulation  of  business  services 
could  boost  economic  activity  and  investment. 
The level of regulatory restrictiveness in Germany 
remains high and above the EU average  for many 
sectors  including  architecture,  engineering,  legal, 
tax  advice  and  accounting  services  (European 
Commission,  2017b).  It  is  also  above  the  OECD 
average for lawyers, notaries, accountants and civil 
engineers  (OECD,  2019g).  Recent  economic 
analysis  (e.g.  IMF,  2018)  concludes  that  some 
professional  services  are  over-regulated,  with 
measures  in  place  that  stifle  competition  and 
increase prices, e.g. exclusivities on the exercise of 
the  OECD, 
certain  activities.  According 
reducing  entry  barriers  to  professional  services  to 
the level of a benchmark economy would lead to a 
GDP  per  capita  increase  of  2%  after  10  years 
findings  and 
(OECD,  2018).  Despite 
concrete 
the  European 
Commission,  there  is  a  lack  of  policy  progress  so 
to  court 
far, 
the 
of 
judgments. 
‘Meisterpflicht’ 
professions, 
12 
announced  in  2019,  will  in  general  permit  only 
professionals with these ‘Meister’ qualifications to 
set  up  a  self-employed  business.  The  reform  goes 
against  the  views  of  the  German  Monopolies 
Commission (Monopolkommission), which expects 
a  decline  in  newly  established  companies  but  no 
increase  in  quality.  An  envisaged  reform  of  the 
rules concerning the legal profession and law firms 
aims to reduce regulatory barriers. 

these 
reform  proposals  by 

in  most  cases  only  reactions 

re-introduction 

craft 

The 

for 

to 

the 

According 

The retail sector saw steady growth in 2018 and 
is expected to grow further, but restrictions still 
have an impact on both establishment and daily 
operations. 
Retail 
Restrictiveness  Indicator  (Dominguez-Torreiro  et 
al.,  2018),  Germany  scores  highly  on  retail 
establishment  and  operations.  The  planning  rules 
are very detailed and vary according to the Länder, 
assigning  the  sale  of  a  large  variety  of  goods  to 
certain specific areas. As regards daily operations, 
a recent ruling of the Federal Court of Justice now 
allows  bakeries,  which  operate  a  café  to  sell  their 
goods also outside of the prescribed opening hours. 
Since July 2019, centres of excellence aim to help 
small 
cope  with 
digitalisation. 

retailers  modernise 

and 

54 

                                                           
4.4. Competitiveness reforms and investment* 

implemented  a  method  of  federal  information 
management  (FIM),  both  on  the  federal  and 
Länder  level,  providing  standardised  information 
to be implemented for all digital public services. 

implement 

A  lack  of  commitment  by  the  federal  states  to 
standardise their service provision is leading to 
high  transaction  costs,  delays  and  uncertainty. 
This is limiting the ability of other stakeholders to 
plan  and 
the  necessary  changes. 
Although the IT Planning Council decided to keep 
the  five  existing  state  service  accounts  for 
organisations, it currently evaluates the possibility 
to provide one consistent service account based on 
the  digital  certificate  for  authentication  which  is 
already  well-established  with  the  German  digital 
tax  declaration  system  ELSTER.  In  2019,  the 
federal cabinet decided to reorganise the project of 
modernising  the  IT  infrastructure  of  the  federal 
public  authorities  since  the  project  is  facing 
considerable delays and cost increases. 

the 

implementing 

the  electronic  archiving  of 

A  third  Bureaucracy  Relief  Act  was  adopted 
but  more  can  be  done  to  reduce  red  tape  and 
legal compliance costs. The act passed in October 
2019 aims to reduce the administrative burden for 
businesses  by  about  €1.1  billion  per  year,  i.a.  by 
tax 
simplifying 
electronic 
documents, 
transmission  of  certificates  of  incapacity  to  work, 
and introducing the option of a digital registration 
form  in  the  accommodation  industry.  In  addition, 
further  simplifications  are  particularly 
some 
addressed 
to  start-ups.  For  example,  young 
businesses will have to submit their advance VAT 
returns  only  quarterly  rather  than  monthly.  The 
National  Regulatory  Control  Council  provides  in 
its  digitalisation 
its  2019  annual  report  and 
monitoring report a number of recommendations to 
further  reduce  unnecessary  bureaucracy  and  legal 
compliance  costs.  In  particular,  small  businesses 
and  start-ups  would  benefit  from  a  further 
reduction 
taxation  and 
modernisation  of  the  tax  administration.  They 
would  also  benefit  from  simplification  of  the 
system, 
complex 
including  through  further  improvement  of  digital 
public services (European Commission, 2019i). 

and  permitting 

inefficiencies 

licensing 

in 

in 

The  uptake  of  e-health  is  low  but  recent 
measures  accelerated  the  deployment  of  e-
health  infrastructure.  The  uptake  of  e-health 
applications in Germany is still low. In 2018 only 

took part in the newly established European High-
Performance Computing Joint Undertaking.  

Transport  

The  insufficient  coordination  and  long-term 
planning at the different levels of government is 
hindering  the  development  of  key  cross-border 
TEN-T  infrastructure  projects.  This  is  the  case 
with  the  Karlsruhe-Basel  rail  line  and  the  railway 
access  routes  to  the  Brenner  Base  tunnel,  the 
Fehmarn  belt  fixed  link  and  the  Dresden-Prague 
high-speed  rail  line.  The  same  problem  affects 
navigability conditions and transport efficiency for 
the Rhine, Danube and Elbe Rivers. Consequently, 
an  efficient  modal  shift  from  road  to  rail  and 
inland  waterways  cannot  be  ensured.  The  road 
sector  has  the  biggest  share  of  freight  transport, 
predominating  over  rail  and  inland  waterways.  In 
addition, not advancing at national level with such 
infrastructure  projects  jeopardises  commitments 
undertaken  under 
the  TEN-T  Regulation  for 
completing the core network by 2030. 

4.4.4.  GOVERNANCE AND INSTITUTIONAL 

QUALITY 

Digital public services  

Germany  is  lagging  behind  in  digital  public 
services, including e-health. Germany ranks 24th 
in  the  EU  for  digital  public  services,  well  below 
the  EU  average  (European  Commission,  2019g). 
Despite  a  small 
improvement,  only  43%  of 
German  online  users  actively  used  e-government 
services  in  2018  (EU  average:  64%).  Moreover, 
the uptake of e-health applications is also still low. 
In  2018  only  7%  of  Germans  used  online  health 
and  care  services  (EU  average: 18%),  19%  of 
general  practitioners  used  e-prescriptions  (EU 
average:  50%)  and  26%  of  them  exchanged 
medical data (EU average: 40%). Under the Online 
Access  Act  adopted 
in  2017,  administrative 
services  will  have  to  be  offered  electronically  in 
the  future.  It  is  therefore  planned  to  integrate  the 
different  administrative  portals  of  the  federal 
government,  Länder  and  municipalities  into  a 
portal  network.  However, 
is 
proceeding  slowly  and  it  and  meeting  the  goal  of 
digitalisation of all 575 services by the end of 2022 will 
be  challenging.  In  order  to  cope  with  its  complex 
national  and  regional  legal  system,  Germany  has 

implementation 

55 

4.4. Competitiveness reforms and investment* 

7% of Germans have used health and care services 
provided  online  (EU  average:  18%),  19%  of 
general  practitioners  used  e-prescriptions  (EU 
average:  50%)  and  26%  of  them  exchanged 
medical data (EU average: 40%). Efforts to roll out 
the necessary infrastructure started in late 2017. In 
2018,  the  Federal  Ministry  of  Health  made  major 
adjustments  to  the  Appointment  Service  and  Care 
law,  enabling  health 
to 
provide electronic patient records on a nationwide 
and  interoperable  basis  by  2021.  The  Electronic 
Emergency Data Set and the Electronic Medication 
Plan will be launched in 2019. 

insurance  companies 

Public procurement  

Public  procurement  in  Germany  is  largely 
decentralised  and  subject  to  a  complex  legal 
system.  Germany’s  public  procurement 
is 
characterised  by  decentralisation,  a  complex 
national  and  regional  legal  system  and  a  lack  of 
data  and  transparency.  Though  the  value  of 
contracts published EU-wide has slightly improved 
to 1.6% of GDP and is no longer the lowest in the 
EU,  it  is  still  well  below  the  average  of  4.1%. 
Greater transparency could improve the quality of 
services  and  allow  for  further  efficiency  gains.  It 
could  also  improve  accountability  and  trust  in 
public investment. 

could 

strengthen 

Better  use  of  e-procurement  and  sustainable 
procurement 
public 
procurement’s  role  as  a  strategic  tool.  Since 
October  2018,  it  has  been  mandatory  to  use  e-
procurement for all public procurement procedures 
above the  EU threshold. The Federal Government 
has  established  various  tools  to  assist  contracting 
authorities  to  advance  sustainable  and  innovative 
procurement,  in particular the Competence  Centre 
for  Sustainable  Procurement  and  the  Competence 
Centre  for  Innovative  Procurement,  as  well  as 
for 
initiatives 
sustainable  public  procurement  and  a  lifecycle 
the  German 
costing  calculation 
tool 
Environment 
public 
procurement  in  Germany  would  benefit  from  a 
more coordinated and strategic approach.  

like  a  dedicated  web  portal 

from 
However, 

Agency. 

56 

4.5. ENVIRONMENTAL SUSTAINABILITY* 

 Germany has the capacity to be at the forefront 
of  climate  and  environmental  protection,  but 
despite  recent 
initiatives,  meeting  climate 
targets  requires  additional  efforts.  In  2019, 
Germany  increased  the  ambition  of  its  climate 
change 
commitment.  The  Climate  Action 
Programme 2030 recently adopted by the German 
government (see Box 4.1.3) and the proposed new 
Climate  Act  will  enshrine  in  law 
the  2030 
greenhouse  gas  reduction  target  of  55%  (below 
1990  levels).  It  will  also  refer  to  achieving 
greenhouse  gas  neutrality  by  2050,  up  from  a  80-
95% reduction referred to in the climate package in 
2016. However, Germany also declared that it will 
not  reach  its  climate  target  for  2020  and  that,  in 
order  to  comply  with  the  EU  Effort  Sharing 
Decision  and  Regulation,  it  will  have  to  use  the 
respective  flexibility  provisions.  The  transition  to 
climate  and  environmental  sustainability  could  be 
a major opportunity for Germany to become a lead 
lead  supplier  of  climate-friendly 
market  and 
technologies.  In  2016,  German  companies  had 
14%  of  the  global  market  for  environmental 
technology  and  resource  efficiency  (BMU,  2018). 
environmental 
The 
sustainability  both  at  EU  (43)  and  international 
level,  coupled  with  the  existing  strengths  of 
German  industry,  provide  favourable  conditions 
for  the  German  economy  to  benefit  from  this 
transition.  However, 
require  a 
sufficiently  ambitious,  systematic  and  coordinated 
approach,  including  economic  policy  levers  such 
as  a  long-term  investment  vision,  taxation  and 
other  incentives  to  attract  private  investment  for 
the transition towards sustainable growth (see also 
Section 4.1). Green criteria in public procurement 
and green budgeting have the potential to facilitate 
and 
the 
environmental sustainability. 

towards  decarbonisation 

this  would 

transition 

increased 

attention 

to 

Transport 

The  transformation  of  the  transport  sector 
towards  clean  mobility  represents  a  major 
challenge  for  the  German  economy  and  plays 
an  important  role  in  meeting  climate  and 
environmental  targets.  Under 
the  combined 
pressure  of  regulators  and  consumers  the  German 

(43)  Several  EU  funding  programmes  contribute  to  sustainable 
development  in  Germany.  For  instance,  the  European 
Regional Development Fund spent €4.6 billion on 10 of the 
17 Sustainable Development Goals up to December 2018. 

jobs  will  be  required 

car  industry,  which  is  a  significant  contributor  to 
German GDP and employment, will have to switch 
to  environmentally  well-performing  mobility 
solutions.  This  also  reflects  the  fact  that  the 
transport  sector  has  done  particularly  badly  at 
cutting  emissions  of  both  greenhouse  gases  and 
local air pollutants. This switch is expected to lead 
to  considerable  shifts  in  market  shares,  value 
chains,  employment,  trade  patterns  and  R&D 
investment.  Fewer 
to 
manufacture and maintain electric battery vehicles, 
which 
traditional 
complex 
combustion  engine  vehicles;  at  the  same  time, 
in  electronic 
other 
engineering, 
etc. 
(Fraunhofer IAO, 2018). So far, most German car 
producers were trailing behind world leaders when 
it came to promoting innovative mobility solutions 
such  as  alternative  power  trains  or  connected  and 
autonomous  driving.  Many  consumers  are  still 
deferring  their  purchase  until  environmentally 
well-performing  cars  are  available  at  affordable 
prices (see Chapter 1 and Box 4.5.7).  

jobs  may  be  created 
software 

development, 

than 

less 

are 

air 

pollution 

including 

Despite  the  very  high  external  costs  of  road 
transport, 
and 
greenhouse  gas  emissions,  a  modal  shift  in 
particular  towards  rail  transport  is  not  taking 
place. Road transport generates the overwhelming 
majority  (96%)  of  the  external  costs  created  by 
transport, including accidents, environmental costs 
(through  air  pollution,  greenhouse  gas  emissions, 
noise,  habitat  damage)  and  congestion.  In  2017, 
car trips represented more than 84% of passenger-
kilometres  travelled  in  Germany,  above  the  EU 
average  of  82%.  However,  the  level  of  taxes  and 
charges  paid  by  land  transport  users  (around  €64 
billion) is only a fraction of the total (external and 
infrastructure (44)) 
land 
transport.  At  the  same  time,  rail  transport  has 
failed  to  improve  its  services (45),  hampered  by 
low  competition  within  the  passenger  sector.  The 
market share of new entrants on long-distance rail 
services  remains  low  (below  1%  in  2016).  Rail 
services’  lack  of  punctuality  and  the  increasing 
offer  of  long-distance  bus  services  suggest  that 
there  is  a  market  need  for  alternatives  to  the 
incumbent rail operator. 

generated 

cost 

by 

(44)  Investment  in  transport  infrastructure  over  recent  years 

stayed constant below 0.6% of GDP. 

(45)  Only  around  75%  of  high-speed  (ICE,  Inter-  or  Eurocity) 

trains arrived on time in 2018. 

57 

 
                                                           
                                                           
4.5. Environmental sustainability* 

Box 4.5.7: Transformation of the transport sector 

Germany needs more modern, cleaner and better performing mobility solutions to meet environmental 
and  climate  targets  and  improve  productivity  and  the  quality  of  life.  Currently,  there  are  more  than  57 
million vehicles with internal combustion engines registered in Germany, a significant proportion of which do 
not in reality meet EU emission standards. This is despite several major programmes to replace vehicles that 
perform poorly in environmental terms by those that perform better. In consequence, air pollution, associated 
with premature death and morbidity, including cardiovascular and respiratory diseases, continues to exceed EU 
limit values in many German cities, thus negatively affecting labour productivity and increasing pressure on the 
health care system (European Environment Agency, 2019). At the same time, the upsizing of the car fleet and 
the ever-rising share of sport utility vehicles (SUVs) continues to counteract efforts to reduce CO2 emissions 
from the transport sector. Moreover, congestion both in cities and on motorways continues to increase and the 
death toll from road accidents remains at unacceptably high levels. So far, most German car manufacturers, but 
also German regulators, have been trailing behind world leaders when it came to promoting innovative mobility 
solutions such as alternative power trains or connected and autonomous driving, and (environmentally)  well-
performing public transport, including taxis. However, the sheer dimension of the self-inflicted ‘diesel scandal’ 
and  the  subsequent  ineffectual  crisis  management  seem  to  have  served  as  a  powerful  wake-up  call  for  both 
private and public actors. Nonetheless, the tax privilege for diesel remained untouched, which still triggers net 
revenue shortfalls in the amount of €1.5 billion annually (see Section 4.1). 

As  a  strong  innovator,  with  a  strong  transport-vehicle  manufacturing  basis  and  well-developed 
infrastructure,  Germany  has  the  capacity  to  be  at  the  forefront  in  offering  clean,  safe  and  modern 
transport and mobility solutions. As it is still unclear what the future alternative powertrain for road transport 
will look like (or if there might even be a revival of clean combustion engines), policy should preferably foster 
innovation  and  competition  between  various  technologies.  In  order  to  do  so  and  to  meet  national  carbon 
emission targets, Germany has decided to introduce a fixed carbon price for the transport and building sector, as 
of January 2021, and an emissions trading scheme as of 2026. The emission trading system is one of the central 
policy  instruments  to  lower  carbon  emissions,  as  it  will  gradually  put  an  ever-tighter  limit  on  transport 
emissions, eventually cutting absolute transport-related CO2 emissions by about 40% by 2030 Along with this, 
Germany undertakes big efforts into a countrywide rollout of rechargeable e-mobility. The present generation 
of  e-vehicles  faces  a  number  of  challenges  related  to  their  performance  and  price,  the  production,  use  and 
recycling of batteries, charging infrastructure, charging time and range. With its strong innovation ecosystem, 
transport-vehicle manufacturing basis and well-developed infrastructure, Germany has the capacity to be at the 
forefront  in  developing  new  technologies  which  can  enable  the  transport  sector  to  shift  towards  greater 
sustainability and environmental and climate protection. The expected growth in the market for electric vehicles 
will lead to a significant increase in demand for batteries. Batteries’ sustainability, environmental and energy 
performance will become increasingly important as the market grows. Through the European Battery Alliance, 
Germany is actively promoting the development of a competitive and sustainable battery value chain. 

‘Island solutions’ in big cities could be a first step in the transition to alternative power trains (such as e-
mobility and fuel cells) and new mobility concepts. Strengthening private and public investment in clean and 
sustainable  mobility  solutions,  notably  e-mobility,  is  high  on  the  political  agenda.  Such  investment  should 
usefully first focus on urban mobility, where the problem of air pollution, noise emissions, congestion and road 
safety  is  particularly  urgent,  and  where  autonomy-constraints  are  less  of  a  concern.  Special  temporary 
arrangements  (‘regulatory  sandboxes’)  and  targeted  public  procurement  could  reduce  the  time  and  cost  of 
getting  new  products  to  market  and  make  it  easier  for  young  companies  to  secure  financing  and  support 
regulatory  learning,  by  providing  a  safe  space  to  test  innovative  products  and  business  models.  Investing  in 
‘public’  transport  in  big  cities  (i.e.  electric  buses,  postal  lorries  and  taxis)  would  further  encourage 
technological competition (e.g. ultrafast charging vs provision of replacement batteries) and spur innovation. It 
could also solve some of the problems currently faced by electric vehicles, as the charging infrastructure would 
be  local  and  the  distances  limited.  Best  practices  across  other  countries  show  that  modernising  the  public 
vehicle  fleet has  significantly improved air quality  and reduced public health risks. Regions  and cities  could 
declare  a  clear  commitment  to  clean  public  transport  and  could  for  example  set  a  target  for  electric  buses 
instead of private electric cars. In addition, and not least given population ageing, promoting autonomous and 
connected driving should remain a core priority for industry and policymakers. This should include providing 
sufficiently well-performing telecommunications and roads infrastructure.  

58 

4.5. Environmental sustainability* 

The  German  federal  government  has  introduced  a  package  of  stimulus  measures  for  private  electric 
vehicles, including subsidies for the purchase of electric cars. Electric cars (of whatever kind) represented 
only  0.2%  of  cars  in  use  and  only  1%  of  new  car  registrations  in  2018.  Electrically  chargeable  cars  (which 
include both fully battery-operated and plug-in hybrids) represent only less than 0.5% of cars in use, and only 
2.9% of new car registrations in 2019. Following a number of high-level meetings with representatives from 
politics,  the  automotive  industry  and  trade  unions  (Konzertierte  Aktion  Mobilität)  it  was  decided  on 
5 November 2019 to increase the purchase incentive for electric vehicles and extend the measure until 2025. 
For pure electric cars below a list price of €40,000, the subsidy is expected to increase from €4,000 to €6,000, 
while for cars with a list price above €40,000 the subsidy would be €5,000. This could reduce the price gap, but 
not the performance gap with respect to charging time and fuel autonomy. At the same time policy measure do 
not  sufficiently  target  the  modernisation  and  possible  electrification  of  light  commercial  vehicles,  which 
account for about 5% of the car fleet and are typically powered by environmentally problematic diesel engines. 
Over the next 2 years the number of publicly accessible charging stations should increase from around 21,100 
now to 50,000 (1 per 23 vehicles assuming the German alternative fuels infrastructure policy framework target 
of 1 million electric vehicles is reached). However, it is not clear yet whether access possibilities and payment 
systems will be standardised, or whether this initiative includes a  strategy for the roll out of private charging 
stations and adapting the energy supply infrastructure to the new power consumption patterns.  

Germany  has  recently  issued  a  plan  for  more  efficient  organisation  of  the  mobility  system  in  order  to 
meet  air  quality  and  climate  targets,  reduce  congestion  and  improve  the  quality  of  life.  The  Climate 
Action Programme 2030 was adopted in autumn 2019 to cut among other things the transport-related emissions 
by 40-42% by 2030. A package of measures to encourage electric mobility, promote the railways and introduce 
CO2 pricing aims to achieve this. Already before this, the German authorities have taken measures in promoting 
the electrification of local bus  fleets  and the  exchange of information and best-practices of local  and  federal 
authorities  on  sustainable  mobility.  The  ‘Sofortprogramm  Saubere  Luft  (2017-2020)’  aims  to  incentivise  a 
modal  shift  (road  to  rail,  individual  to  public  transport)  as  well  as  smart  and  shared  transport  solutions,  to 
reduce  travel  times,  distances  and  emissions,  using  fast  data  processing,  automation  and  digitalisation.  The 
€1.5 billion  programme  that  is  earmarked  to  be  spent  over  3  years  to  support  various  initiatives  (including 
charging  systems,  the  digitalisation  of  local  traffic  systems  and  retrofitting  buses).  In  addition,  the  Federal 
Government  supports  the  retrofitting  of  heavy  and  light  municipal  and  commercial  vehicles  by  further  €432 
million. More could also be done by taking into account the binding targets  for public procurement of clean 
vehicles  established  in  the  Clean  Vehicles  Directive.  The  federal  government  plans  to  adapt  the  legal  and 
technical framework conditions for automated driving and is preparing a comprehensive hydrogen strategy, as 
an important element for future mobility, but details are not yet known. Germany has also enacted an increase 
in the aviation tax, as of April 2020. To promote a more climate friendly alternative mobility rail travel will 
become  cheaper  and  more  attractive:  the  value-added  tax  for  long-distance  rail  tickets  will  be  reduced  from 
19%  to  7%.  In  addition,  there  will  be  massive  investments  in  the  rail  network  such  as  for  replacement 
investment, digitalisation and electrification, which is expected to strengthen the attractiveness of the railway. 
In addition, the German government plans to raise federal funding for local public transport to €1 billion a year 
as of 2021. The additional funding is to be used to expand track-based local public transport infrastructure. As 
of 2025 the funding is to rise to €2 billion a year. The federal funding for local public transport is planned to be 
increased  by  an  additional  €5.2  billion  over  the  years  2020  to  2031.  Furthermore,  the  federal  government 
provides additional €900 million in the years 2020 to 2023 for measures to expand the cycling infrastructure 
(cycle path network, bicycle parking systems, storage facilities or cycle superhighways), and provides financial 
assistance to pilot projects.  

While  Germany’s  national  energy  and  climate  plan  lists  a  number  of  policies,  the  lack  of  detail  and 
integration  creates  uncertainty  about  the  overall  government  strategy  for  decarbonising  the  transport 
sector,  including  the  transport  of  goods.  As  the  main  hub  and  transit  country  for  trans-European  haulage, 
with its strong industrial base and economy, Germany could play a central role in developing solutions. Zero-
emission transport of goods based on battery-electric, hydrogen or catenary-electric lorries could be considered 
(e.g. between two factory sites or within companies’ or local authorities’ vehicle parks). By 2025, the current 
80  hydrogen  refilling  stations  should  extend  to  400  and  become  the  backbone  of  a  robust  hydrogen-based 
heavy  goods  transport  network.  The  existing  two  test  tracks  for  catenary-electric  haulage  are  already 
commercially used.  

59 

such 

as  premature  mortality 

Germany’s  air  pollution  continues  to  be  a 
serious  concern,  adversely  affecting  the  labour 
productivity of people living in urban areas and 
local  air 
healthcare  expenditures.  Among 
pollutants, fine particulate matter, nitrogen dioxide 
(NO2)  and  ground-level  ozone  (O3)  cause  the 
greatest  harm.  Air  pollution  has  adverse  health 
and 
effects, 
morbidity (46),  mainly  related  to  respiratory  and 
cardiovascular  diseases.  It  also  causes  economic 
losses,  for  example  through  higher  healthcare 
costs,  reduced  yields  from  agriculture  and  lower 
labour  productivity  (OECD,  2016).  For  2018, 
exceedances  of  the  EU  limit  value  for  nitrogen 
dioxide  (NO2)  were  reported  in  32  of  the  89  air 
quality  zones.  Several  cities  in  Germany  exceed 
the  World Health Organization guidelines for fine 
particulate matter concentrations, but comply with 
the  relatively  less  stringent  EU  limits  (Thunis  et 
al.,  2017).  Additional  and  effective  measures  are 
required to ensure compliance with EU air quality 
standards  and  EU  vehicle  type  approval  rules. 
Traffic  accounts  for  about  60%  of  harmful  NOx 
emissions  in  urban  areas,  and  of  this  72.5%  is 
caused by diesel vehicles. The federal government 
is  making €1.5 billion available for  municipalities 
to  electrify  and  retrofit  public  transport,  taxis  and 
commercial  vehicles  until  2020.  However,  the 
large  majority  of  the  15  million  registered  diesel 
cars  (with  Euro  3  to  Euro  6c  engines)  still  have 
significantly  high  NOx  emissions  in  real-world 
driving  conditions.  Following  software  updates 
they  still  exceed  limit  values  by  up  to  around 
300%  (UBA,  2019).  Hardware  updates  have  not 
taken  place  yet  as  regulations  enabling  system 
authorisations were only adopted in 2019, and the 
issue of financing is still contested. 

Energy  

Investment in energy infrastructure and energy 
efficiency is crucial to  meet climate and energy 
targets. Various initiatives reflected in Germany’s 
draft National Energy and Climate  Plan (NECP)47 
are  likely  to  further  underpin  efforts  towards 

(46)  In Germany an estimated 720 years of life lost per 100,000 
inhabitants  (or  59,600  premature  deaths  per  year)  are 
attributable  to  fine  particulate  matter  concentrations  and 
144  years  of  life  lost  (or  11,900  premature  deaths)  are 
attributable  to  nitrogen  dioxide  (NO2)  concentrations 
(EEA, 2019). 

47 The Commission will assess, in the course of 2020, the final 
National  Energy  and  Climate  Plan.  Germany  has  not  yet 
submitted its final Plan.  

to 

the 

to  upgrade 

to  avoid  financial 

sustainability  and  contribute  towards  advancing 
towards SDG 7 ‘Affordable and clean energy’ and 
SDG  13  ‘Climate  action’,  but  their  success  will 
depend  significantly  on  the  investments  these 
initiatives  can  spur.  Further  development  of 
electricity transmission infrastructure is required in 
order 
losses  and  market 
distortions due to congestion and limited flexibility 
of 
the  electric  system.  Recent  estimates  for 
investment needs in energy transmission networks 
increased significantly, while the investment in the 
power generation sector has stagnated since 2014. 
latest  national  network 
According 
development  plan  which  has  been  confirmed  by 
the  German  Regulator  in  December  2019,  the 
country’s  electricity  transmission  network  needs 
approximately  €76  billion  in  investment.  €55 
billion  are  needed 
the  existing 
electricity  transmission  system  and  to  build  new 
transmission  infrastructure  onshore  by  2030.  A 
further €21 billion need to be invested in electricity 
transmission  infrastructure  offshore  to  allow  for 
the  installation  of  17-20  GW  of  offshore  wind  by 
2030.  The  effect  of  the  further  expansion  of 
offshore  wind  on  the  need  to  develop  additional 
internal transmission grid remains  to be evaluated 
in  detail.  However,  it  can  be  expected  that  the 
pattern  of  electricity  production  being  located  in 
the  north  of  Germany,  but  clusters  of  electricity-
consuming industries located  in the south,  will be 
reinforced.  Investment  needs  in  the  gas  grid  are 
forecast to reach €7-9 billion by 2028, largely  for 
bottleneck  removal,  for  the  L-H-Gas  switch  and 
for  measures  related  to  the  energy  transition  and 
achievement  of  2050  climate  targets.  Next  to 
speeding  up  progress 
the  expansion  of 
transmission  and  distribution  grids,  investment  in 
energy  efficiency  needs  to  increase  significantly. 
This would be required to meet the EU’s target of 
improving energy efficiency by 32.5% by 2030. It 
is therefore important to create the right conditions 
and  put  in  place  mechanisms  to  attract  private 
financing 
investments. 
Embedding  the  principle  of  ‘energy  efficiency 
first’ in the strategy would allow energy savings to 
be  harnessed  in  other  areas  and  policies,  in 
particular  with  respect  to  private  and  public 
investment. In December 2019 the German Federal 
Government  launched  the  “Energy  Efficiency 
Strategy 2050”. It sets a target for 2030 (reduction 
of  national  primary  energy  consumption  by  30  % 
as  compared  to  2008)  and  includes  numerous 

for  energy  efficiency 

in 

60 

 
                                                           
4.5. Environmental sustainability* 

measures  to  foster  energy  efficiency  investment 
across sectors. 

per  year  in  Rheinisches  Revier)  (Dehio  and 
Schmidt, 2018). 

resulting 

Stronger  progress  with  expanding  renewable 
electricity  is  needed  in  light  of  Germany’s 
climate ambition. The federal government has set 
a  2030  target  for  renewable  electricity  to  provide 
65%  of  gross  electricity  consumption.  However, 
there  is  a  risk  that  Germany  might  not  meet  its 
renewable energy target for 2020, also because  of 
the  undersubscriptions  in  recent  wind  energy 
auctions 
lack  of  projects 
from  a 
approvals.  While  there  are  efforts  to  address 
planning-related 
renewables 
limitations 
deployment,  the  decision  to  introduce  a  minimum 
distance between wind installations and residential 
areas of 1,000 metres (with possible regional opt-
outs)  may  affect  planning  and  processes  for 
deploying  onshore  renewables  at  local  level  in 
certain  regions.  At  the  same  time,  the  target  for 
expanding  offshore  wind  power  will  be  increased 
from 15 to 20 GW by 2030 and the support cap for 
solar  photovoltaics,  currently  at  52  GW  total 
capacity, will be removed completely. 

on 

‘Just transition’ 

The  phase-out  of  coal  and  lignite  mining  poses 
economic and social challenges in some regions. 
Germany is still heavily reliant on fossil fuels, and 
coal in particular. Within the EU, Germany has the 
largest number of coal-fired power plants (53) and 
produces most coal. To reduce CO2 emissions and 
achieve climate neutrality, the German government 
has announced the phase-out of Germany’s lignite 
mining for the generation of electricity by the end 
of 2038. This decision entails significant structural 
change  and  economic  and  social  challenges,  with 
over 19,650 direct and 35,734 indirect jobs in coal 
mining  affected  (Dehio  and  Schmidt,  2018; 
European  Commission,  2019j).  The  transition  to 
clean  energy  will  especially  affect  three  coal 
mining areas: The Lausitzer Revier (covering parts 
of  Brandenburg  and  Saxony),  the  Rheinische 
Revier  (parts  of  North-Rhine  Westphalia)  and  the 
Mitteldeutsche  Revier  (parts  of  Saxony  and 
Saxony-Anhalt).  Demographic  developments  in 
the eastern regions are less favourable to achieving 
a  smooth  structural  change  as 
the  working 
population is projected to decline more drastically 
until 2035 (by 2% per year in  Lausitzer and 1.4% 
in  Mitteldeutsches  Revier)  than  in  the  west  (0.6% 

for 

that 

into 

strategy 

political 

A  ‘just  transition’  to  sustainable  growth  will 
require the identification of investment needs, a 
coherent  investment  strategy  and  additional 
measures  to  create  new  opportunities  for  the 
losers  from  structural  change.  The  205  Climate 
Action  Plan  (BMU,  2016)  emphasises  that  a 
successful  transition  away  from  coal  can  be 
achieved  only  through  a  regional  and  industry-
oriented 
integrates 
subnational  authorities,  the  private  sector  and 
workers 
the  decision-making  process. 
Furthermore,  a  commission  on  growth,  structural 
change  and  employment  (referred  to  as  the  ‘Coal 
Commission’)  was  set  up  in  June  2018  to  build  a 
consensus 
transition.  The 
the  needed 
Commission  proposed  a  mix  of  instruments  and 
made  recommendations  for  future  investments  in 
the affected regions (BMWi, 2019). Based on this 
report,  the  federal  government  has  pledged  to 
support the affected Länder with up to €14 billion 
in  financial 
transfers  for  significant  regional 
investments  until  2038  at  the  latest.  The  federal 
government  will  fund  additional  measures  in  its 
own  remit  (e.g.  rail  and  road  infrastructure, 
research institutions). These projects amount to up 
to €26 billion, adding up to a total budget of up to 
€40  billion  until  2038.  Given  the  weight  of  coal-
related  economic  activity  and  the  more  peripheral 
nature  of  the  Lausitz  region,  the  transition  to  an 
especially 
economy 
innovation-based 
daunting  there.  The  European  Commission  has 
proposed a Just Transition Fund to support people 
in the regions most affected (see Annex D). 

looks 

Circular economy 

Making  full  use  of  the  circular  economy’s 
potential  can  help  Germany  reach  its  climate 
targets, and an overarching strategy would help 
to bring about the necessary systemic change. A 
recent  study  suggested  that  EU  emissions  in 
material-intensive industries and value chains may 
be  reduced  by  up  to  56%  through  consistent 
application  of  circular  economy  principles. 
(Material  Economics,  2018).  The  extraction  and 
processing  of  natural  resources  accounted  for 
about  40%  of  Germany’s  total  climate  change 
impacts,  predominantly  related  to  the  production 
of iron and steel, cement manufacturing, petroleum 
refining,  chemical  and  plastics  production,  cattle 

61 

4.5. Environmental sustainability* 

the  year  2019  was  characterised  by  the  heavy 
drought,  other  climate-change  induced  extreme 
weather  phenomena  such  as  heavy  rainfalls  and 
storms are expected to occur  in Germany as  well, 
prompting corresponding investment needs, e.g. in 
urban areas and along river basins. 

Nature-based  solutions  hold  strong  climate 
mitigation  potential  and  are  a  vital  and  cost-
effective  complement  to  decarbonisation  in  the 
energy,  transport  and  industrial  sectors  in 
Germany.  They  combine  climate  and  nature 
protection  and  focus  on  reducing  emissions  from 
the  land  sector  and  protecting  and  enhancing 
natural  carbon  sinks.  Stepping  up  restoration  of 
peatlands  is  a  cost-efficient  carbon  sink  measure 
and  would  promote  SDG 13  ‘Climate  action’  and 
SDG 15 ‘Life on land’). 

in 

factors 

Significant 

Conserving  and  restoring  degraded  ecosystems 
will  help  to  halt  continuing  biodiversity  loss, 
while  a  reform  of  fertiliser  rules  would  reduce 
excess  nitrate  levels  and  reduce  costs.  34%  of 
protected  species  and  41%  of  habitats  (according 
to  the  Habitat  Directive)  show  a  negative  trend, 
while  for  only  14%  of  protected  species  and  10% 
of habitats are development trends  positive  (BFN, 
2019).  These  negative  trends  in  biodiversity  and 
towards 
ecosystems  will  undermine  progress 
SDG 15  ‘Life  on  land’  and  SDG 14  ‘Life  below 
water’. 
continued 
biodiversity  loss  and  soil,  air  and  water  pollution 
are  intensive  agriculture,  high  nitrogen  inputs  and 
landscape  fragmentation.  While  declining,  the 
daily  land-take  rate  (62  hectares  per  day  in  2015) 
is  still  far  above  the  2030  target  of  less  than  30 
hectares  per  day  as  set  out  in  the  national 
sustainability  strategy.  The  agricultural  area  used 
for organic farming, an important building block of 
more  sustainable  food  systems,  has  increased 
(from  5.8%  in  2012  to  6.8%  in  2017)  but  is  still 
below  the  EU  average  (7.03%).  With  current 
growth rates, the 20% target Germany has set itself 
for  2030  is  not  within  reach.  Germany  has  the 
second-highest number of monitoring stations with 
average nitrate levels exceeding 50 mg/l. Costs for 
purifying excess nitrates from drinking water have 
continued  to  rise  and  are  mainly  supported  by 
households  and  public  authorities.  Eutrophication 
by phosphorus has not been addressed sufficiently 
yet,  which  is  compromising  the  achievement  of 
SDG 6 ‘Clean water and sanitation’. 

farming and extraction of coal, natural gas, and oil 
(International  Resource  Panel,  2019).  While  these 
impacts have slightly decreased in recent years, the 
absolute  level  of  material-related  climate  change 
impacts 
resource 
remained  high.  Applying 
efficiency  and  circular  economy  strategies  along 
the  entire  supply  chain  could  help  decrease  these 
impacts.  The  new  2030  Climate  Action 
Programme  does  not  take  much  account  of  the 
potential of the circular economy. This is a missed 
opportunity. A number of strategies and initiatives 
address  elements  of  the  circular  economy,  but 
Germany does not have an overarching strategy to 
help  bring  about  the  necessary  systemic  change. 
The  resource  efficiency  programme  PROGRESS 
II, 
sustainable 
consumption  and  the  German  high-tech  strategy 
deal  with  different  circularity  aspects.  Unlike  a 
growing  number  of  EU  Member  States,  Germany 
does not have a comprehensive  strategy to further 
develop  the  regulatory  framework,  make  full  use 
of synergies with digitisation and mobilise finance. 
In  recognition  of  this,  and  with  support  from  the 
Federal  Ministry  of  Education  and  Research,  the 
new  Circular  Economy  in  Germany  initiative 
(CEID, Circular Economy Initiative Deutschland), 
has  been  tasked  with  drawing  up  a  circular 
economy Roadmap for Germany by 2021.  

the  national  programme  on 

Climate  change  adaptation/nature-based 
solutions 

Climate change is having a significant  bearing 
on 
the  economy  and  requires  additional 
investment  in  climate  change  adaptation.  As  in 
the  previous  year,  climate  change  had  significant 
impacts  in  2019.  By  the  end  of  October  2019, 
more  than  60  local  authorities  in  Germany  had 
declared  the  state  of  ‘climate  emergency’.  On  25 
September  the  federal  government  organised  a 
national forest summit and pledged €547 million in 
emergency aid in response to forest damage caused 
by  a  combination  of  exceptional  heatwaves, 
droughts,  bark  beetle  outbreaks  and  forest  fires. 
Climate 
forest 
management  practices  (monocultures)  have  led  to 
high  economic 
to 
emergency  wood-cutting.  The  agricultural  sector 
has been affected by particularly low soil moisture 
the  country.  Speed 
in 
levels 
restrictions  were 
issued  for  several  concrete 
highways prone to heat-induced ‘blow-ups’. While 

large  parts  of 

foresters  due 

unsustainable 

change 

losses 

and 

for 

62 

ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (48) 

2019 country-specific recommendations (CSRs) 

Germany has  made  Limited  Progress in addressing 
CSR 1  

CSR  1:  While 
the  medium-term 
respecting 
budgetary objective, use fiscal and structural policies 
to  achieve  a  sustained  upward  trend  in  private  and 
public  investment,  in  particular  at  regional  and 
municipal  level.  Focus  investment-related  economic 
policy  on  education;  research  and 
innovation; 
digitalisation  and  very-high  capacity  broadband; 
sustainable transport as well as energy networks and 
affordable  housing,  taking  into  account  regional 
disparities.  Shift  taxes  away  from  labour  to  sources 
less detrimental to  inclusive  and sustainable  growth. 
Strengthen  competition  in  business  services  and 
regulated professions. 

respecting 

While 
the  medium-term  budgetary 
objective, use fiscal and structural policies to achieve 
a  sustained  upward  trend  in  private  and  public 
investment,  in  particular  at  regional  and  municipal 
level. 

Some  Progress  Private  investment  remains  solid 
despite  the  economic  slowdown,  but  is  still  lagging 
behind  infrastructure  and  housing  needs.  In  2018, 
private investment increased by 3% in real terms and 
across  most  asset  types,  excluding  non-residential 
construction investment which remained subdued. In 
2019, real investment continued increasing at similar 
investment 
rates,  however  with  non-residential 
picking  up  speed,  while  equipment 
investment 
growth weakened. Altogether, the private investment 
share  of  GDP  increased  from  18%  in  2011-2017  to 
19%  in  2018-2019.  The  most  dynamic  components 
in  recent  years  have  been  housing  and  other 
investment  (comprising  mainly  R&D  and  other 

(48)  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. 

63 

 
                                                           
A. Overview table 

Commitments  

Summary assessment (48) 

(e.g. 

intellectual  property).  However,  investment  is  still 
lagging  behind  infrastructure  and  housing  needs. 
This is reflected in short-term pressures, observed for 
example through increases in house prices and rents. 
Furthermore, 
the  manufacturing  sector  faces  a 
slowdown  in  foreign  demand  dynamics,  in  tandem 
with  a  need  to  adapt  to  climate  and  environmental 
low-emission  cars).  Public 
requirements 
investment  has  continued 
increasing  against  a 
backdrop of a  significant investment backlog. Gross 
public  investment  increased  by  around  6%  annually 
in 2015-2017 and by close to 9% in 2018 and close 
to  7%  in  2019  in  nominal  terms.  In  real  terms  the 
increase  averaged  about  4%  in  2015-2019  as  price 
inflation for construction works was high (more than 
4.5%  on  average)  in  2017-2019.  This  raised  the 
public investment rate from 2.1% of GDP in 2015 to 
2.5% of GDP in 2019. Since 2017, total government 
net  investment  has  turned  positive.  In  2018-2019, 
municipal  investment  picked  up  speed,  but  net 
investment 
investment 
remains  negative.  The 
backlog  at  municipal  level  remains  high  at  EUR 
138.4 billion, 4% of GDP. 

investment-related  economic  policy  on 

Focus 
education; 

Limited  Progress  While  education  expenses  have 
somewhat been increased in 2019, including through 
the  Digitalpakt  Schule,  a  longer  term  horizon  for 
education expenses remains missing. 

research and innovation;.  

digitalisation and very-high capacity broadband; 

Some  Progress  Germany 
invests  considerable 
resources in R&D, still private investment in R&D is 
increasingly concentrated in large firms while SMEs 
and  start-ups  face  challenges.  R&D  intensity  has 
increased during the last years, from 2.46% of GDP 
in 2007 to 3.13% in 2018 (3rd highest in the EU). A 
new national R&D intensity target of 3.5% by 2025 
was  included  in  Germany’s  High  Tech  Strategy 
(BMBF,  2018).  With  two  thirds  of  the  R&D 
performed  in  the  business  sector,  German  business 
R&D intensity (2.16% in 2018) is the third highest in 
the  EU.  However,  business  R&D  is  predominantly 
in  R&D-intensive 
firms 
performed  by 
industries,  whereas 
and  medium-sized 
small 
enterprises' R&D expenditure has stagnated over the 
past decade. 

large 

Progress  Regarding 

Limited 
digitalisation, 
especially digital public services, the implementation 
of the Online Access Act is proceeding rather slowly, 
and  it  is  unlikely  that  the  Act’s  nominal  goal  of 

64 

A. Overview table 

Commitments  

Summary assessment (48) 

digitalizing all 575 services by the end of 2022  will 
be  met.  In  November  2019  the  Federal  Cabinet 
decided  the  reorganization  of  this  costly  digital 
project  of  modernizing  the  IT  infrastructure  of  the 
public  authorities.  Regarding  broadband,  aalthough 
take-up  of  fast  broadband  (≥30Mbps)  has 
the 
improved, Germany remains  below the  EU average, 
and considerably  so in  fiber to the premises (FTTP) 
coverage,  4G  coverage  and  mobile  broadband  take-
up. While the Government made considerable efforts 
on  the  financial  side  for  the  roll-out  of  digital 
networks,  significant  improvements  in  terms  of 
FTTP  coverage  and  take-up  are  not  expected  in  the 
short term, given the lack of building capacities and 
know-how.  

sustainable transport 

as well as energy networks 

time 

the  same 

Limited  Progress  The  transport  sector  has  done 
particularly  badly  at  cutting  emissions  of  both 
greenhouse gases and local air pollutants, which has 
lead  to  a  gap  in  meeting  Germany’s  Effort  Sharing 
Decision  target.  Despite  very  high  external  cost  of 
road  transport,  Germany  records  a  high  use  of 
the 
passenger  cars  while  at 
competition  within the rail passenger sector remains 
low. The Climate Package of Autumn 2019 included 
a  number  of  promising  measures,  including  support 
infrastructure  of  electric 
for  creating  charging 
vehicles,  increased subsidies for electric, hybrid and 
fuel  cell  vehicles,  public 
investment, 
creation  of  new  cycling  routes,  modernisation  of 
ports and inland waterways, support to rail transport. 
However, the impact and the implementation of these 
needed  and  overall  well-conceived  measures  still 
remain to be seen. 

transport 

Limited  Progress  Some  measures  have  been  taken, 
including  an  agreement  on  forward-looking  internal 
planning  and  auditing  of  grid  expansion,  and 
improving  construction  and  access  of  the  liquefied 
natural  gas  network  to  the  existing  gas  transmission 
system. Still, further investments in energy networks 
are  required;  beyond  transmission  networks  also  in 
distribution and heat networks. It is likely  that there 
in 
will  be 
transmission  infrastructure  by  2030  than  expected 
just  a  year  ago.  However,  there  is  currently  no 
systematic 
of 
investments  in  different  types  of  energy  networks 
relevant  for  the  energy  transition  (Energiewende)  in 
Germany  at  federal  level  and  across  different  levels 

comprehensive 

significantly 

investment 

tracking 

higher 

and 

65 

A. Overview table 

Commitments  

Summary assessment (48) 

of government. 

and affordable housing, taking into account regional 
disparities. 

Limited  Progress  Several  housing  measures  have 
been  adopted,  however  the  impact  on  housing 
investment  may  not  necessarily  be  positive.  A 
mechanism to control the increase in rents is planned 
to  be  extended  until  2025,  while  some  Länder  are 
considering further accelerating rent controls. A new 
regulation  regarding  commission  fees  of  real  estate 
agents  is  intended  to  lead  to  a  fairer  distribution  of 
the costs between the selling and buying parties.  An 
act  to  strengthen  housing  benefits  will  enter  into 
force in 2020 and will increase the reach and level of 
housing  benefits  including  regular  updates,  with  the 
next update  scheduled in 2022. Taken together, it is 
not  clear  that  these  measures  will  improve  housing 
investment.  While  they  may  have  a  temporary 
mitigating  effect  on  rental  price  dynamics,  in  the 
longer run, prices and investment are also shaped by 
supply-side  policies,  and  longer  term  outcomes  are 
intimately linked to incentives to invest in housing. 

Shift  taxes  away  from 
detrimental to inclusive and sustainable growth. 

labour 

to  sources  less 

Limited Progress While the reform of the solidarity 
surcharge  will  bring  some  relief,  the  tax  system 
continues  to  rely  heavily  on  taxes  on  labour,  and 
there was limited progress in shifting the tax burden 
inclusive  and 
to  sources 
sustainable growth. 

less  detrimental 

to 

Strengthen  competition  in  business  services  and 
regulated professions. 

No  Progress  No  measures  have  been  taken  to 
in  business  services  and 
stimulate  competition 
regulated  professions  in  2019.  The  only  announced 
measures  include  legal  amendments  in  order  to 
comply  with  the  ruling  of  the  European  Court  of 
Justice  on  tariffs  for  architects  and  engineering 
services  and  in  order  to  comply  with  a  European 
regulation.  Contrary  to  this,  the  federal  government 
presented  a  draft 
that  will  further  stifle 
competition,  as  it  conditions  practicing  12  craft 
professions on having obtained a Master Craftsman's 
Certificate  (Meisterpflicht). The  new  measure partly 
reverses the 2004 deregulation. 

law 

CSR  2:  Reduce  disincentives  to  work  more  hours, 
including  the  high  tax  wedge,  in  particular  for  low-
wage  and  second  earners.  Take  measures 
to 
safeguard the long-term sustainability of the pension 
system,  while  preserving  adequacy.  Strengthen  the 
conditions  that  support  higher  wage  growth,  while 
respecting  the  role  of  the  social  partners.  Improve 

Germany  has  made  Some  Progress  in  addressing 
CSR 2  

66 

A. Overview table 

Commitments  

Summary assessment (48) 

educational 
disadvantaged groups. 

outcomes 

and 

skills 

levels 

of 

Reduce disincentives to work more hours,  

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

and second earners.  

Some Progress Some measures were taken to reduce 
disincentives  to  work  more  hours,  in  partcular 
regarding  taxes  on  labour.  However,  overall  major 
disincentives remain in place. 

Some Progress A number of measures taken on the 
social security contributions and tax brackets impact 
the tax wedge, however the overall reduction in 2019 
and  2020  is  limited.  While  the  large-scale  abolition 
of  the  solidarity  surcharge  from  2021  will  have  a 
noticeable  impact,  the  tax  wedge  will  still  remain 
among the highest in the EU, and the tax and benefit 
system  results  in  high  marginal  tax  rates  for  certain 
groups of low wage earners. 

Limited  Progress  Second  earners  also  benefit  from 
the  slight  reduction  of  the  tax  wedge  and  from  the 
continuing expansion of childcare and all-day school 
facilities, the overall landscape is unchanged, with a 
tax system that results in high marginal tax rates for 
second  earners  and  with  persisting  gaps 
in 
availability of quality and affordable early childhood 
education and care. 

Take  measures 
long-term 
sustainability of the pension system, while preserving 
adequacy. 

safeguard 

the 

to 

Limited  Progress  The  Pension  Commission 
(Kommission  Verlässlicher  Generationenvertrag) 
continued  its  deliberations,  with  proposals  expected 
in  March  2020  on  the  future  of  the  pension  system 
after  2025.  Considering 
challenges  of 
sustainability, adequacy and fairness, indeed appears 
to  be  need  for  action.  The  coalition  government 
agreed  on  the  introduction  of  a  contribution-based 
minimum  pension  (Grundrente)  in  November  2019, 
that  is  expected  to  improve  adequacy  for  certain 
groups,  however,  the  related  legislative  act  has  not 
been adopted yet. 

the 

Strengthen  the  conditions  that  support  higher  wage 
growth,  while  respecting  the  role  of  the  social 
partners. 

Some Progress Overall wage growth has been so far 
resilient  to  the  slowdown,  yet  it  is  expected  to 
decelerate  and  converge  closer  to  the  euro  area 
average.  The  minimum  wage  increase  from  9.19 
euros per hour in 2019 to 9.35 euros per hour in 2020 
represents  a  nominal 
increase  of  about  1.7%, 
remaining below overall wage growth, and collective 
bargaining  coverage  stagnated  in  2018,  at  relatively 
low level compared to the past. 

67 

A. Overview table 

Commitments  

Summary assessment (48) 

Improve  educational  outcomes  and  skills  levels  of 
disadvantaged groups.  

to 

reforms 

the  challenge 
strong 

Limited  Progress  Germany  started  in  2019  some 
improve  upskilling  and 
promising 
reskilling,  yet  there  is  further  potential,  and  the 
degree  of 
the 
is  underlined  by 
continuing 
impact  of  socio  economic 
background  on  education  outcomes,  reflected  in  the 
International  Student 
OECD  Programme 
for 
Assessment 
where 
underachievement increased compared to 2015 in all 
disciplines,  most  importantly  in  reading.  Germany 
increased in 2019 the investment in relevant research 
to  improve  educational  justice.  Whose  impact  on 
better  education  outcomes  is  still  to  materialise. 
Educational  outcomes 
levels  of 
disadvantaged groups remained broadly unchanged. 

(PISA) 

results 

skills 

2018 

and 

Europe 2020 (national targets and progress)  

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

79.9%  in  2018  and  80.5%  in  the  second  quarter  of 
2019. 

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

71.4%  in  2018  and  72.3%  in  the  second  quarter  of 
2019. 

Employment rate of women: 73% 

75.8%  in  2018  and  76.2%  in  the  second  quarter  of 
2019. 

R&D  target:  3.0%  of  GDP  by  2020  and  3.5%  by 
2025, of which one-third public and two-third private  

3.13%  in  2018  (preliminary  data),  of  which  about 
one-third public and two-third private. 

Greenhouse  gas  (GHG)  emissions  target:  -40%  in 
2020  compared  with  1990,  and  by  80  to  95%  by 
2050  (in  sectors  not  included  in  the  EU  emissions 
trading scheme) 

In  2018,  GHG  emissions  were  30.8%  lower  than  in 
1990.  

Renewable  energy  target  in  gross  final  energy 
consumption 18% by 2020 and 60% by 2050 

16.4% in 2018 (preliminary data)  

Energy  efficiency,  indicative  national:  reduction  of 
primary  energy  consumption  by  20%  by  2020,  30% 
by 2030, and by 50% by 2050, compared to 2008 

Germany  decreased  its  primary  energy  consumption 
between  2008  and  2018  by  9.9%  (government 
estimation)  

Early school leaving target: <10%. 

At 10.3% in 2018, Germany is close to the European 
target and to the national target. Still, it has actually 
moved  away  from  the  target  as  in  2017  the  early 

68 

 
 
A. Overview table 

Commitments  

Summary assessment (48) 

school leaving rate was at 10.1%. 

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

is 

to 

increase 

continuing 

Germany 
tertiary 
attainment,  which  stood  at  34.9%  in  2018  but 
remained below the EU average of 39.9% and the EU 
target  of  40.7%.  The  national  target  of  42%  also 
includes  ISCED  level  4  (unlike  the  EU  target),  and 
has thus been met (49.8% in 2018). 

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 
long-term 
reduction  by  320,000 
2008 
unemployed). 

(i.e. 

The  number  of  long-term  unemployed  people  (LFS 
definition)  fell  from  1.63  million  to  0.6  million 
between 2008 and 2018 (by about 63%). 

69 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

70 

General government debt projections under baseline, alternative scenarios and sensitivity tests2018201920202021202220232024202520262027202820292030Gross debt ratio61.959.256.855.052.950.848.646.745.043.542.140.939.8Changes in the ratio (-1+2+3)-3.4-2.7-2.4-1.7-2.1-2.1-2.2-1.9-1.7-1.5-1.4-1.3-1.1of which(1) Primary balance (1.1+1.2+1.3)2.82.11.40.90.90.90.90.80.60.50.40.30.1(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)2.42.01.51.21.11.00.90.80.60.50.40.30.1(1.1.1) Structural primary balance (bef. CoA)2.42.01.51.21.21.21.21.21.21.21.21.21.2(1.1.2) Cost of ageing0.20.40.50.71.01.21.41.61.7(1.1.3) Others (taxes and property incomes)0.10.10.20.30.40.50.50.60.6(1.2) Cyclical component0.60.1-0.1-0.3-0.2-0.10.00.00.00.00.00.00.0(1.3) One-off and other temporary measures-0.20.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-1.0-0.6-1.0-0.8-1.2-1.2-1.3-1.1-1.1-1.0-1.0-1.0-1.0(2.1) Interest expenditure0.90.90.80.70.60.50.40.30.30.20.20.20.2(2.2) Growth effect-1.0-0.3-0.6-0.6-0.8-0.7-0.7-0.5-0.4-0.4-0.3-0.3-0.3(2.3) Inflation effect-1.0-1.2-1.2-1.0-1.0-1.0-1.0-1.0-0.9-0.9-0.9-0.8-0.8(3) Stock-flow adjustments0.40.00.00.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Debt Sustainability Monitor (DSM) 2019. 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). 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.[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 and the DSM 2019.[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. 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 after that) to bring the debt-to-GDP ratio to 60 % by 2034. The critical values used are 0 and 2.5 pps of GDP. The DSA classification is based on the results of five 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. 303540455055606570758020172018201920202021202220232024202520262027202820292030Debt as % of GDP -DEBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario30405060708020172018201920202021202220232024(% of GDP)Stochastic debt projections 2020-2024 -DEp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline303540455055606570758020172018201920202021202220232024202520262027202820292030Debt as % of GDP -DEBaselineHistorical SPB scenarioSGP scenario303540455055606570758020172018201920202021202220232024202520262027202820292030Debt 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 (2030)39.836.242.242.443.0Debt peak year20192019201920192019Percentile rank35.0%30.0%Probability debt higher4.6%Dif. between percentiles15.2MEDIUMLong termMEDIUM(S2 = 2.2)S1S2Short termLOW(S0 = 0.1)DSALOWDebt sustainability analysis (detail)Medium termLOWLOW(S1 = -2.4) 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2019. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2019. 
(3) Quarterly values are annualized. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

71 

201420152016201720182019Total assets of the banking sector (% of GDP)(1)266.5253.0248.6237.6232.5249.5Share of assets of the five largest banks (% of total assets)32.130.631.429.729.1-Foreign ownership of banking system (% of total assets)(2)4.44.47.16.911.012.3Financial soundness indicators:(2)              - non-performing loans (% of total loans)3.93.02.61.81.41.3              - capital adequacy ratio (%)17.317.918.118.818.418.0              - return on equity (%)(3)2.51.72.22.92.43.8Bank loans to the private sector (year-on-year % change)(1)1.32.33.73.95.35.7Lending for house purchase (year-on-year % change)(1)2.43.53.74.04.65.0Loan-to-deposit ratio(2)97.594.692.689.490.287.6Central bank liquidity as % of liabilities(1)1.11.01.11.61.41.4Private debt (% of GDP)98.497.898.2100.0102.1-Gross external debt (% of GDP)(2) - public48.943.940.134.431.432.5    - private41.444.944.644.646.447.8Long-term interest rate spread versus Bund (basis points)*0.00.00.00.00.00.0Credit default swap spreads for sovereign securities (5-year)*12.77.711.58.15.75.9 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
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) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
(4) 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). 
(5) Average of first three quarters of 2019 for the employment rate, unemployment rate and gender employment gap. 
Source: Eurostat 

72 

201420152016201720182019 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)9.510.110.310.110.3:Gender employment gap (pps)9.18.78.27.98.18.1Income inequality, measured as quintile share ratio (S80/S20)5.14.84.64.55.1:At-risk-of-poverty or social exclusion rate(1) (AROPE)20.620.019.719.018.7:Young people neither in employment nor in education and training (% of population aged 15-24)6.46.26.76.35.9:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)77.778.078.679.279.980.6Unemployment rate(2) (15-74 years)5.04.64.13.83.43.1Long-term unemployment rate (as % of active population)2.22.01.71.61.41.3Gross disposable income of households in real terms per capita(3) (Index 2008=100) 104.5105.9107.7109.1111.1:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)259352652827040:::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)0.451.091.68:::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(4)33.233.534.833.233.3:Children aged less than 3 years in formal childcare27.525.932.630.329.8:Self-reported unmet need for medical care1.60.50.30.30.2: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) Long-term unemployed are people who have been unemployed for at least 12 months. 
(2) 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. 
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. The value for 2018 refers to reading. 
(5) Average of first three quarters of 2019. Data for youth unemployment rate is seasonally adjusted. 
Source: Eurostat, OECD 

73 

Labour market indicators201420152016201720182019 5Activity rate (15-64)77.777.677.978.278.679.1Employment in current job by durationFrom 0 to 11 months12.012.212.412.512.7:From 12 to 23 months8.88.99.09.49.5:From 24 to 59 months16.215.915.315.616.1:60 months or over60.760.659.959.659.2:Employment growth* (% change from previous year)0.90.91.21.41.41.0Employment rate of women(% of female population aged 20-64)73.173.674.575.275.876.5Employment rate of men (% of male population aged 20-64)82.282.382.783.183.984.6Employment rate of older workers* (% of population aged 55-64)65.666.268.670.171.472.3Part-time employment* (% of total employment, aged 15-64)26.526.826.726.926.827.2Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)13.113.213.212.912.612.0Transition rate from temporary to permanent employment(3-year average)32.929.130.331.331.0:Youth unemployment rate (% active population aged 15-24)7.77.27.16.86.25.8Gender gap in part-time employment37.838.037.937.537.437.7Gender pay gap(2) (in undadjusted form)22.322.021.521.0::Education and training indicators201420152016201720182019Adult participation in learning(% of people aged 25-64 participating in education and  training)8.08.18.58.48.2:Underachievement in education(3):17.2::21.1:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)31.432.333.234.034.9:Variation in performance explained by students' socio-economic status(4)::::17.2: 
 
 
 
 
 
 
 
 
  
 
C. Standard tables 

Table C.4: 

Social inclusion and health indicators 

(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  

74 

201320142015201620172018Expenditure on social protection benefits* (% of GDP)Sickness/healthcare9.79.79.89.910.0:Disability2.22.22.32.32.4:Old age and survivors11.010.911.011.011.0:Family/children3.23.13.23.23.3:Unemployment1.11.11.01.01.0:Housing0.60.60.60.60.6:Social exclusion n.e.c.0.20.20.30.40.3:Total28.027.928.128.428.5:of which: means-tested benefits3.33.43.53.73.6:General government expenditure by function (% of GDP)Social protection18.918.719.019.319.4:Health7.07.17.17.17.1:Education4.34.24.24.14.1:Out-of-pocket expenditure on healthcare13.112.712.812.712.5:Children at risk of poverty or social exclusion (% of people aged 0-17)*19.419.618.519.318.017.3At-risk-of-poverty  rate(1) (% of total population)16.116.716.716.516.116.0In-work at-risk-of-poverty rate (% of persons employed)8.69.99.79.59.19.1Severe material deprivation rate(2)  (% of total population)5.45.04.43.73.43.1Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan0.50.30.70.20.30.9Tenant, rent at market price3.03.63.23.83.54.1Proportion of people living in low work intensity households(4) (% of people aged 0-59)9.910.09.89.68.78.1Poverty thresholds, expressed in national currency at constant prices*105381044710865111061139711612Healthy life yearsFemales7.06.712.312.412.4:Males7.06.811.411.511.4:Aggregate replacement ratio for pensions(5)0.50.50.50.50.50.5Connectivity dimension of the Digital Economy and Society Index (DESI)(6):62.166.969.171.5:GINI coefficient before taxes and transfers*51.751.651.550.850.0:GINI coefficient after taxes and transfers*29.730.730.129.529.0: 
 
 
 
 
 
 
  
 
C. Standard tables 

Table C.5: 

Product market performance and policy indicators 

*While the indicator values from 2003 to 2013 are comparable, the methodology has considerably changed in 2018. As a 
result, past vintages cannot be compared with the 2018 PMR 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 here: 
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 codified as follows: zero if received everything, one if 
received 75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the 
application is still pending or don't know. 
(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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm 

(8) Simple average of the indicators of regulation for lawyers, accountants, architects and engineers. 
(9) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
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). 

75 

Performance indicators201320142015201620172018Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-0.813.921.033.992.29-0.42Labour productivity growth in construction-3.043.48-0.260.93-1.691.91Labour productivity growth in market services1.090.470.48-0.500.890.45Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry4.24-1.221.82-1.68-0.302.78ULC growth in construction2.78-0.503.451.464.802.01ULC growth in market services0.383.213.203.432.703.23Business environment201320142015201620172018Time needed to enforce contracts3 (days)394459479499499499Time needed to start a business3 (days)14.514.510.58.08.08.0Outcome of applications by SMEs for bank loans40.170.580.350.380.180.34Research and innovation201320142015201620172018R&D intensity2.842.882.932.943.073.13General government expenditure on education as % of GDP4.304.204.204.104.10:Employed people with tertiary education and/or people employed in S&T as % of total employment434344454545Population having completed tertiary education5252324242525Young people with upper secondary education6777777787877Trade balance of high technology products as % of GDP1.060.900.971.041.051.06Product and service markets and competition2003200820132018*OECD product market regulation (PMR)7, overall1.801.411.291.08OECD PMR7, retail3.382.882.710.48OECD PMR7, professional services83.032.822.652.41OECD PMR7, network industries91.871.331.271.08 
 
 
 
 
 
 
  
 
 
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 (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 % of total value added for the economy. 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (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 00MWh and 10 000 -100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste. 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP. 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions. 
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity including international aviation (kgoe) divided by 
gross value added in transportation and storage sector (in 2010 EUR). 
Transport carbon intensity: GHG emissions in transportation and storage sector divided by gross value added in transportation 
and storage sector (in 2010 EUR). 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels. 
Aggregated supplier concentration index: Herfindahl index covering oil, gas and coal. Smaller values indicate larger 
diversification and hence lower risk. 
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels. Smaller values indicate larger diversification. 
* European Commission and European Environment Agency - 2018 provisional data. 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators). 

76 

Green growth performance201320142015201620172018MacroeconomicEnergy intensity kgoe / €0.120.110.110.110.11-Carbon intensity kg / €0.350.330.320.320.31-Resource intensity (reciprocal of resource productivity)kg / €0.490.500.460.450.450.44Waste intensity kg / €-0.14-0.14--Energy balance of trade % GDP-3.4-2.8-2.0-1.5-1.7-2.0Weighting of energy in HICP%12.4011.9411.7810.3610.4710.37Difference between energy price change and inflation p.p.3.2-1.6-6.1-5.0-0.21.3Real unit of energy cost% of value added21.021.522.423.5--Ratio of environmental taxes to labour taxesratio0.100.090.090.090.08-Environmental taxes% GDP2.12.01.91.91.81.8Sectoral Industry energy intensity kgoe / € 0.080.070.070.070.07-Real unit energy cost for manufacturing industry excl. refining% of value added17.618.319.420.5--Share of energy-intensive industries in the economy% GDP9.439.409.439.599.66-Electricity prices for medium-sized industrial users€ / kWh0.140.160.150.150.150.15Gas prices for medium-sized industrial users€ / kWh0.050.040.040.030.030.03Public R&D for energy % GDP0.050.050.040.040.040.05Public R&D for environmental protection% GDP0.030.030.030.020.030.03Municipal waste recycling rate%63.865.666.767.167.267.3Share of GHG emissions covered by ETS*%51.151.450.649.948.448.9Transport energy intensitykgoe / €0.570.590.580.600.61-Transport carbon intensitykg / €0.790.790.810.830.850.82Security of energy supplyEnergy import dependency%63.061.962.263.763.9-Aggregated supplier concentration indexHHI15.015.218.125.125.7-Diversification of energy mixHHI24.724.624.624.724.9- 
 
  
 
ANNEX D: INVESTMENT GUIDANCE ON JUST TRANSITION FUND 

2021-2027 FOR GERMANY 

Building  on  the  Commission  proposal,  this  Annex  (49)  presents  the  preliminary  Commission  services’ 
views on priority investment areas and framework conditions for effective delivery for the 2021-2027 Just 
Transition  Fund  investments  in  Germany.  These  priority  investment  areas  are  derived  from  a  broader 
analysis of the territories  facing serious socio-economic challenges deriving  from  the  transition process 
towards a climate-neutral economy of the Union by 2050 in Germany, assessed in the report. This Annex 
provides the basis for a dialogue between Germany and the Commission services as well as the relevant 
guidance  for  the  Member  States  in  preparing  their  territorial  just  transition  plans,  which  will  form  the 
basis for programming the Just Transition Fund. The Just Transition Fund investments complement those 
under  Cohesion  Policy  funding  for  which  guidance  in  the  form  of  Annex  D  was  given  in  the  2019 
Country Report for Germany (50). 

The area that will be most severely affected by the phasing-out of coal mining for electricity generation 
and the  structural transition to a climate  neutral and circular economy is the  Lausitzer  Revier,  which is 
located  in  Eastern  Germany.  It  is  comprised  of  seven  regions  (Elbe-Elster,  Oberspreewald-Lausitz, 
Dahme-Spreewald, Spree-Neiße, and Cottbus situated in the Land Brandenburg, as well as Bautzen and 
Görlitz  situated  in  the  Land  Saxony).  In  these  regions,  around  8,300  people  are  directly  employed  in 
lignite  mining.  1.24%  of  the  region’s  employed  population  (4,900  people  in  2016)  could  be  indirectly 
affected by the structural change. 

A second affected area will be the Mitteldeutsches Revier, which is comprised of eight regions (Leipzig, 
the City of Leipzig, and Nordsachsen situated in the Land Saxony, and Burgenlandkreis, Saalekreis, the 
City  of  Halle,  Mansfeld-Südharz,  and  Anhalt-Bitterfeld  situated  in  the  Land  Saxony-Anhalt).  Even 
though the share of directly employed (0.32% or 2,400 workers in 2016) and indirectly employed (0.2% 
or 1,400 workers) in the lignite sector is smaller, the Mitteldeutsches Revier will face challenges due to 
very low innovation and research potential and a rapidly aging population.  

Finally, another affected area will be the Rheinisches Revier in the Land North-Rhine-Westphalia. There, 
8,960  people  are  directly  employed  in  lignite  mining  (1.13%  of  the  working  population  in  2016)  and 
5,380 people could be at risk indirectly. The three most impacted regions in the Revier are Düren, Rhein-
Erft-Kreis, and Rhein-Kreis Neuss. 

Based on this preliminary assessment, it appears warranted that the Just Transition Fund concentrates its 
intervention  on  these  areas,  areas,  while  taking  into  account  that  the  Rheinisches  Revier  has  a  stronger 
intrinsic capacity to adjust to the transition challenges. 

The  phasing-out  of  coal  will  lead  to  increased  unemployment  challenges  in  the  geographical  areas 
concerned. In order to tackle these transition challenges, investment needs have been identified to use the 
growth potential of companies existing in the areas in order to provide a significant number of alternative 
industrial  jobs.  Nevertheless,  the  economic  structure  of  the  three  areas  would  need  to  be  transformed 
considerably. 

In  order  to  tackle  these  challenges,  priority  investment  needs  have  been  identified  for  diversifying  and 
making  the  regional  economy  more  knowledge  and  service-based.  Furthermore,  investment  needs  for 
alleviating  the  socio-economic  costs  of  the  transition  have  been  identified.  The  smart  specialisation 
strategy51  of  the  Länder  provides  an  important  framework  to  set  priorities  for  innovation  in  support  of 

(49)  This  Annex  is  to  be  considered  in  conjunction  with  the  European  Commission’s  proposal  for  a  Regulation  of  the  European 
Parliament and of the Council on the Just Transition Fund 2021-2027 (COM(2020)22) and its proposal for a Regulation of the 
European Parliament and of the Council laying down common provisions on the European Regional Development Fund, the 
European Social Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and 
for  the  Asylum  and  Migration  Fund,  the  Internal  Security  Fund  and  the  Border  Management  and  Visa  Instrument 
(COM(2020)23). 
(50)  SWD(2019) 1004 final 

77 

 
                                                           
 
D. Investment Guidance on Just Transition Fund 2021-2027 for Germany 

economic transformation in the three Reviere. The Just Transition Fund could complement these efforts 
by targeting its actions in particular on: 

  Productive  investments  in  SMEs,  including  start-ups,  leading  to  economic  diversification  and 

reconversion; 

 

 

 

 

 

Investments in the creation of new firms, including through business incubators and consulting 
services; 

Investments  in  research  and  innovation  activities  and  fostering  the  transfer  of  advanced 
technologies; 

Investments in the deployment of technology and infrastructures for affordable clean energy, in 
greenhouse gas emission reduction, energy efficiency and renewable energy; 

Investments in digitalisation and digital connectivity; 

Investments in enhancing the circular economy, including through waste prevention,  reduction, 
resource efficiency, reuse, repair and recycling; 

  Upskilling and reskilling of workers; 

  Active inclusion of jobseekers; 

 

Investment  in  regeneration  and  decontamination  of  sites,  land  restoration  and  repurposing 
projects and; 

  Technical assistance. 

78 

ANNEX E: PROGRESS TOWARDS THE SUSTAINABLE 

DEVELOPMENT GOALS (SDGS) 

Assessment of Germany’s short-term progress towards the SDGs (52) 

Table E.1 shows the data for Germany and the EU-28 for the indicators included in the EU SDG indicator 
set used by Eurostat for  monitoring progress towards the SDGs in an EU context (53). As the short-term 
trend at EU-level is assessed over a 5-year period, both the value at the beginning of the period and the 
latest available value is presented. The indicators are regularly updated on the  SDI dedicated section of 
the Eurostat website. 

Table E.1: 

Indicators measuring Germany’s progress towards the SDGs 

(52)  Data  extracted  on  9  February  2020 

from 

the  Eurostat  database 

(official  EU  SDG 

indicator 

set; 

see 

https://ec.europa.eu/eurostat/web/sdi/main-tables).  

(53)  The EU SDG indicator set is aligned as far as appropriate with the UN list of global indicators, noting that the UN indicators are 
selected for global level reporting and are therefore not always relevant in an EU context. The EU SDG indicators have strong 
links with EU policy initiatives. 

(Continued on the next page) 

79 

 
 
  
 
 
                                                           
References 

Table (continued) 

(Continued on the next page) 

80 

 
 
 
 
  
 
References 

Table (continued) 

(Continued on the next page) 

81 

 
 
 
 
  
 
References 

Table (continued) 

(Continued on the next page) 

82 

 
 
 
 
  
 
References 

Table (continued) 

Source: Eurostat 

83 

 
 
 
  
 
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