COMMISSION STAFF WORKING DOCUMENT In-depth review for Germany Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Germany, competitiveness, economic policy, energy policy, housing policy, investment, macroeconomics, property market

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 629 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Germany Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Germany 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Germany  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Germany  continues  to  experience  imbalances.  The  persistent  large  current 
account surplus, reflecting also subdued investment relative to savings, which has 
cross-border  relevance,  has  been  gradually  reduced,  most  recently  amid  the 
energy  crisis,  but  is  expected  to  increase  markedly.  The  current  account  surplus 
receded slowly until 2019 with a gently increasing domestic investment ratio and 
a  falling  trade  balance  and  has  since  been  marked  by  unusual  economic 
circumstances. It decreased markedly in 2022 on the back of higher import energy 
prices, along with a narrowing of the non-energy trade surplus and a recovery in 
tourism imports. In 2022, the surplus remained above the levels suggested by the 
country's  fundamentals  and  it  is  expected  to  rebound  markedly  in  2023  and 
remain almost unchanged in 2024, it is projected to stay below the MIP threshold. 
Wages  are  forecast  to  grow  strongly,  supporting  domestic  demand,  while  unit 
labour  costs  may  grow  faster  than  in  the  rest  of  the  euro  area.  Nonetheless, 
consumption  and  investment  are  temporarily  dampened  by  high  inflation.  In 
recent years, house prices have shown sharp increases, even if easing somewhat 
since  mid-2022.  Housing  supply  cannot  catch  up  with  demand  amid  weak 
residential  investment,  which  may  add  to  continuing  risks  of  overvaluation.  A 
further  reduction  of  vulnerabilities  would  benefit  from  the  timely  and  effective 
implementation of the public investment initiatives and removing of obstacles to 
investment. 

 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 

Selected economic and financial indicators (Part 1), Germany 
Selected economic and financial indicator (Part 2), Germany 

LIST OF GRAPHS 

Graph 2.1:  Decompositions of the external surplus/ net lending/ borrowing 

Graph 2.2:  Evolution of the balance of goods and services in current and constant prices 

Graph 2.3:  Energy price developments 

Graph 2.4:  Productivity by sector and development of manufacturing orders 

Graph 2.5: 

Investment by type of investment and net public investment broken down by federal levels 

Graph 2.6:  House price dynamics 

Graph 2.7:  Selected graphs, Germany 

Graph 2.8:  Components of gross fixed capital formation deflator growth and consumer price inflation 

Graph 2.9: 

Impact of German value added inflation on EU partners’ consumer price inflation 

4 

6 

20 
21 

7 

7 

8 

9 

10 

12 

17 

18 

19 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances  Procedure  (MIP),  the Commission  identified  “macroeconomic  imbalances”  in 
Germany. (1) These imbalances were related to a persistent large current account surplus, which 
reflects  subdued  investment  relative  to  savings,  and  has  cross-border  relevance.  The  2023  Alert 
Mechanism Report published in November 2022 concluded that an in-depth review (IDR) should be 
undertaken  also  this  year  for  Germany  with  a  view  to  assess  the  persistence  or  unwinding  of 
imbalances. (2)  The  AMR  found  that  Germany’s  large  current  account  surplus  had  recently 
decreased  substantially,  as  a  result  of  the  deterioration  of  terms  of  trade  driven  by  an  adverse 
external  shock. Until  early 2022, nominal  house price growth had been among the highest in the 
EU,  and  house  prices  were  estimated  to  be  overvalued.  Core  inflation  and  wage  increases  in 
Germany may facilitate euro area rebalancing. 

The fundamentals of the German economy have been proven solid, although the COVID-
19  crisis,  the  disruption  of  energy  deliveries  from  Russia  and  high  energy  prices  have 
been testing its resilience. Germany’s real GDP grew by 1.8% in 2022, as the recovery from the 
COVID-19 pandemic was taking place against the backdrop  of industry streamlining capacity, the 
energy crisis, and the urgency of investing in the green transition. Although cost and price inflation 
and  higher  interest  rates  dented  purchasing  power,  private  consumption  still  expanded,  whereas 
investment remained broadly unchanged. Demand conditions reached a trough at the end of 2022 
and early 2023, resulting in relatively low GDP growth at 0.2% expected in 2023, which is forecast 
to accelerate to 1.4% in 2024. (3) After having peaked in October 2022 at 11.6% (8.7% for 2022 
as  a  whole),  inflation  (HICP)  has  been  easing  somewhat  since,  reflecting  a  reversal  of  price 
increases in imported energy. Unemployment is expected to stay low and exert upward pressure on 
wages and core inflation. Going forward, inflation is easing and is expected to come down to 6.8% 
in 2023 and 2.7% in 2024 reflecting lower energy prices, while wages move the other direction as 
growth of gross wages per head is expected to accelerate from 4.7% in 2022 to 5.5% in 2023 and 
5.3%  in  2024,  supporting  consumption.  Corporate  profits  remain  high,  leaving  room  to  cushion 
further wage increases and to finance investments needed for the transition to a more sustainable 
growth  model.  Since  the  second  half  of  2022,  house  prices  increases  receded,  reflecting  the 
increasing interest rate environment and the reduced purchasing power of buyers. As the price of 
energy imports ease, the current account surplus is partially rebounding from 4.2% of GDP in 2022 
towards 6% of GDP in 2023 and 2024. At the same time, the surplus is expected to remain below 
pre-pandemic levels on account of energy prices still exceeding past levels, the continuation of the 
trend  in  increasing  investments  and  accelerating  labour  cost  dynamics.  The  main  risk  factors  for 
the economy include an aggravated fragmentation of global trade, a flaming up of energy prices 
and/or  energy  shortages  amid  increasing  geopolitical  tensions,  persistent  supply-side bottlenecks, 
and entrenched inflation necessitating monetary tightening. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities for Germany. Vulnerabilities related to housing and external balances in Germany 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

4 

 
                                                 
 
are also discussed in horizontal thematic notes that were recently published. (4)The MIP assessment 
matrix is published in the 2023 Country Report for Germany. (5) 

1. 

Introduction 

(4)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 
Economy: Institutional Papers, 197. European Commission (2023), External Sustainability Analysis: Thematic Note to 
Support In-Depth Reviews, European Economy: Institutional Papers, 196. 

(5)  European Commission (2023), Country Report Germany 2023, SWD(2023) 605 final. 

5 

                                                 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution, and prospects  

On  5  April  2023,  the  Commission  published  a  horizontal  thematic  note  on  external 
balances,  also  explaining  that  the  German  current  account  surplus  having  declined 
gradually  since  its  peak  in  2015,  decreased  to  4.2%  in  2022.   (6)  The  current  account 
surplus of Germany has been persistently high, averaging 7.6% of GDP between 2011 and 2021 
(Graph 2.1). After having peaked at 8.6% of GDP in 2015, the surplus declined, yet still amounting 
to  8.2%  of  GDP  in  2019.  In  this  period, the  trade  balance  of  goods  and  services  fell  perceptibly, 
from 7.6% of GDP in 2015 to 5.9% in 2019. However, this decline was somewhat counterbalanced 
by the swelling primary income balance, reflecting investment returns, that increased from 2.3% of 
GDP to 3.7% of GDP. During the pandemic, the current account balance eased somewhat, then it 
dropped markedly from 7.7% of GDP in 2021 to 4.2% of GDP in 2022. This drop was mostly driven 
by the declining balance in goods and services, which fell from 5.5% in 2021 to 2.1% of GDP in 
2022, (Graph 2.1). The balance of trade in goods declined from 5.4% in 2021 to 2.9% of GDP. The 
balance of services moved from a roughly balanced position to a deficit of -0.8% of GDP, reflecting 
a  normalisation  of  outbound  tourism  resuming  after  COVID-19  related  restrictions  were  largely 
lifted. The primary income surplus was stable at around 3.9% of GDP, reflecting a high net foreign 
asset position. The secondary income balance (current transfers) widened slightly to -1.8% of GDP, 
from -1.6% of GDP in 2021. Overall, the current account balance has declined, while in 2022 it was 
still  above  the  levels  suggested  by  fundamentals (7):  economic  fundamentals  of  the  German 
economy,  such  as  high  income  per  capita  and  high  manufacturing  intensity  suggest  a  current 
account surplus of about 1.3% of GDP in 2022. 

(6)  For a detailed overview of developments relating to external balances in Europe, including Germany’s, see European 

Commission (2023), External Sustainability Analysis: Thematic Note to Support In-Depth Reviews, Institutional Paper 196. 
April 2023. 

(8)  Gas price inflation was already strong in 2021 as demand for low-emission energy (gas) increased worldwide (European 

Economic Forecast. Autumn 2021 (europa.eu)). 

6 

 
                                                 
 
Graph 2.1: Decompositions of the external surplus/ net lending/ borrowing 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat, European Commission services 

The  balance  of  goods  and  services  has  been  on  a  declining  trend  driven  by  a  declining 
goods  balance  while  cost  competitiveness  has  been  faltering  somewhat.  The  balance  of 
goods and services continuously declined from its peak of 7.6% of GDP in 2015 to 5.9% in 2019 
and 5.5% in 2021, driven by declining net exports of goods that came from 8.2% of GDP in 2015 
to 6.3% in 2019 and to 5.4% in 2021. In the 2010s global trade growth has slowed considerably. 
Protectionism  increased,  resulting  in  a  challenge  for  the  export-centred  German  economic  model 
integrated in international value chains. Manufacturing productivity has largely stalled since 2017 
(Graph 2.4) and manufacturing intensity has been declining since 2016. The energy (notably gas) 
price  hikes  of  2021  and  2022,  of  which  only  the  latter  has  dissipated,  are  set  to  put  additional 
burden on cost competitiveness, which has declined relative to the rest of the euro area with unit 
labour costs growing faster in Germany between 2012 and the outbreak of the pandemic (Graph 
2.7d). These trends have tended to favour a deeper penetration of imports. 

Graph 2.2: Evolution of the balance of goods and services in current and constant prices 

Source: Destatis, Bundesbank, European Commission services 

In 2022, sharp price increases for imported energy, loss of export market shares in non-
energy  goods,  higher  import  of  equipment  and  intermediate  goods  as  well  as  higher 
tourism imports drove the decline in the current account surplus. Surging imported energy 
prices caused the energy balance to deteriorate massively and accounted for 2 percentage points 
(pps)  of  GDP  of  the  decline  in  the  current  account  surplus.  This  development  added  to  the 
deterioration in the energy terms of trade of 2021 when gas prices already increased considerably 
as  supply  became  scarcer  (Graph  2.7c).  The  decline  in  the  surplus  in  2022  was  also  driven  by 
volume  effects  in  non-energy  goods  and  services,  accounting  for  a  significant  share  (1.3  pps). 
Beyond  the  normalisation  of  tourism  spending,  there  was  also  an  increase  in  the  imports  of 

7 

-4-3-2-101216171819202122pps of GDPa) Change in the balance of goods and servicesNon-energy volumeServices volumeEnergy volumeEnergy T.O.T.Non-energy T.O.T.Services T.O.T.Total G+S balance-7-6-5-4-3-2-1013456789101115161718192021222324% of GDPb) Balance of goods and services at constant pricesG+SNon-energy goodsEnergy (rhs)Services (rhs)-8-7-6-5-4-3-2-10123456789101115161718192021222324% of GDPc) Balance of goods and services at current pricesG+SNon-energy goodsEnergy (rhs)Services (rhs)   
  
2. 

Assessment of macroeconomic vulnerabilities 

intermediate goods and non-transport equipment which reflected stockpiling of key raw materials 
and robust equipment investment.  

The  current  account  surplus  is  expected  to  increase  towards  6%  of  GDP  in  2023  and 
2024. In 2023, lower energy prices are expected to improve the current account, partly reversing 
the deterioration recorded in 2022 as energy prices decrease even if expected to remain markedly 
high  with  gas  prices  at  around  triple  of  their  pre-2021  levels (8).  Conversely,  moderate  external 
demand,  also  associated  to  the  Russian  military  aggression  against  Ukraine,  is  expected  to  limit 
exports, in particular from the manufacturing sector. At the same time, the current account balance 
is  expected  to  reflect  a  structural  adjustment  to  domestic  investments  motivated  by  the  green 
transition  and  onshoring, linked  to  order  books being  at  historical  highs,  averaging  six  months  of 
future  orders  (Graph  2.4).  The  corporate  sector  is  being  increasingly  challenged  by  emerging 
competitors in China and beyond and affected by a permanent deterioration in terms of trade on 
energy  relative  to  pre-pandemic  levels.  Sustained  wage  growth  is  expected  to  be  supportive  of 
consumption. Fiscal support measures are expected to keep the government budget in a deficit.  

Graph 2.3: Energy price developments 

Source: European Commission services 

(8)  Gas price inflation was already strong in 2021 as demand for low-emission energy (gas) increased worldwide (European 

Economic Forecast. Autumn 2021 (europa.eu)). 

8 

405060708090100110120Jan 21Apr 21Jul 21Oct 21Jan 22Apr 22Jul 22Oct 22Jan 23Apr 23Jul 23Oct 23Jan 24Apr 24Jul 24Oct 24EUR/bbla) Crude oil, price assumptions 4/25/2023AF220255075100125150175200225Jan 21Apr 21Jul 21Oct 21Jan 22Apr 22Jul 22Oct 22Jan 23Apr 23Jul 23Oct 23Jan 24Apr 24Jul 24Oct 24EUR/MWhb) Natural gas, price assumptions 4/25/2023AF220100200300400500600700Jan 21Apr 21Jul 21Oct 21Jan 22Apr 22Jul 22Oct 22Jan 23Apr 23Jul 23Oct 23Jan 24Apr 24Jul 24Oct 24EUR/MWhc) Electricity, EU avg, price assumptions 4/25/2023AF22  
 
                                                 
Graph 2.4: Productivity by sector and development of manufacturing orders 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat, Destatis, European Commission services 

The  German  economy’s  large  current  account  surplus  also  reflects  a  domestic  demand 
gap relative to output. Prior to the pandemic, the ratio of surplus savings (net lending) to GDP 
was declining slowly in line with an increase in the investment ratio. In the wake of the COVID-19 
pandemic,  while  government  transfers  to  households  and  corporates  shored  up  private  balance 
sheets, consumption and investment possibilities were restricted by public health measures, supply 
bottlenecks  and  uncertainty.  As  a  result,  Germany  still  had  a  domestic  demand  shortfall in  2021 
and the decline of the current account to 4.2% in 2022 was only partly explained by a rebound in 
domestic  demand.  The investment  ratio  continued to  increase, largely  reflecting  higher  costs  and 
prices  for  investment  goods  since  investment  was  stagnant  in  constant  prices.  Increased 
investment was in part the  result of rising inventories against the background of impaired supply 
chains and the gearing up for the execution of investment projects. Consumption expanded more 
visibly but still remained below pre-pandemic levels.  

Wage  growth  is  forecast  to  accelerate,  supporting  domestic  demand.  While  real  wages 
declined  by  4%  in  2022,  as  of  2023  an  increasing  number  of  negotiated  wage  agreements  are 
being updated to reflect high inflation both in the tradable and non-tradable sector. (9) Negotiated 
hourly wages in February 2023 were 6.5% higher than a year before. The growth of gross wages 
per head is expected to accelerate from 4.7% in 2022 to 5.5%] in 2023 and 5.3% in 2024, leading 
to  a  real  wage  decline  of  0.4%  in  2023  and  a  real  wage  increase  of  3%  in  2024.  After  the 
minimum wage increase to EUR 12 per hour in October 2022 was decided by the government, the 
Minimum  Wage  Commission  (Mindestlohnkommission)  will  decide  until  end  June  2023  for  an 
additional  minimum  wage  increase  effective  from  2024.  Wage  developments  are  expected  to 
increasingly support disposable incomes, while  also contributing to intra-EU  rebalancing. In 2023, 
unit labour costs are expected to increase in Germany by 5.9% and in the euro area as a whole by 
5%, while in 2024 it is forecast to increase by 4.1% in Germany and by 3.2% in the euro area as a 
whole. 

Household savings have largely normalised to levels just above pre-pandemic levels, and 
consumption  is  expected  to  recover  further.  The  household  saving  rate  surged  amid  the 
pandemic  thanks  to  income  support  and  restrictions  on  consumption.  In  2022,  the  surplus  of 
savings over investment eased as the saving rate declined, with households spending some of the 

(9)  Representing a major wage negotiation round this year affecting 2.6 million public employees at federal and municipal 

level, at end April 2023, Germany's ver.di union and the government agreed to pay increases amounting to around 11% for 
a duration of two years, running until end 2024. Öffentlicher-Dienst.Info - TVöD - Tarifrunde 2023 (oeffentlicher-
dienst.info) 

9 

6080100120140030507091113151719212003=100a) Productivity by sectorMarket services (G_N)Manufacturing (C)Construction (F)Tradable (A_E, G_J)Non tradable (F, K_U)80100120140160607080901001101201302015201620172018201920202021202220232015=100b) Production and orders in manufacturingstock of orders (rhs)industrial productionorders receivedorders received (excl. large orders)     
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

excess savings from their peak during the COVID-19 pandemic. Private consumption expanded  by 
4.3%  in  2022,  reflecting  a  particularly  strong  expansion  in  services  by  8.3%.  In  the  future,  two 
effects that still weighed on consumption in 2022 are expected to ease: in the first half of 2022 
some COVID-19 related restrictions still pulled down consumption and in 2022, the share of people 
saving for unexpected need temporarily jumped.  

Corporate  savings  increased  during  the  pandemic,  while  investment  is  set  to  recover 
somewhat  after  stagnating  in  2022  and  2023.  Aggregate  corporate  profitability  benefitted 
from government support (short-term work scheme Kurzarbeit and energy cost support), exercised 
pricing  power  and  wage  costs  evolving  more  slowly  than  sales  prices.  In  2020-2022,  corporate 
savings were on average 1.5 pp of GDP higher than pre-pandemic. Investment was constrained by 
supply bottlenecks, the pandemic and uncertainty and has not yet recovered fully to pre-pandemic 
levels.  Inventories  expanded  to  high  levels  (see  Graph  2.5),  reflecting  stockpiling  amid  high 
uncertainty on the availability and price of supplies. Investment in construction however declined by 
1.7% in 2022, driven primarily by a 2.2% reduction in housing investment. Higher costs of financing 
and  increased  uncertainty  cooled  investment  dynamics  by  early  2023,  and  while  equipment 
investment  growth  is  expected  to  stay  positive,  it  is  not  expected  to  compensate  for  declining 
investment in construction, resulting in investment contracting by 0.7% in 2023. As cost pressures 
ease, investment is expected to strengthen, reflecting the high order books, addressing the digital 
transition  and  decarbonisation  needs  amid  continued  high  energy  prices.  Housing  construction  is 
expected to decline in 2023 caused by high building and borrowing costs and bottom out in 2024, 
while  continued  demand  for  housing,  energetic  refurbishment  and  resumption  in  real  income 
growth  remain  supportive.  Its  medium-term  development  will  also  depend  on  demographic 
developments, including net migration. 

Graph 2.5: Investment by type of investment and net public investment broken down by federal 
levels 

Source: Eurostat, European Commission services 

Germany’s government turned from a net lender to a net borrower on account of ample 
crisis policy support, and is expected to remain a net borrower, supporting investment in 
the  coming  years  partly  due  to  extra-budgetary  funds.  After  running  surpluses  in  2014-
2019, the government became a net borrower in 2020-2022 with the provision of ample pandemic 
measures and support programmes. The government deficit was around 4% of GDP in 2020 and 
2021,  and  at  2.6%  of  GDP  in  2022.  Government  spending  helped  to  shield  other  sectors: 
households  and  corporates  benefitted  from  the  short  time  work  arrangement,  households 
benefitted  from  extended  transfers  and  corporates  received  guarantees  and  grants,  and  thereby 
had a limited impact on the current account balance.  At the same time, these transfers were to a 

10 

       
2. 

Assessment of macroeconomic vulnerabilities 

great  extent  absorbed  by  household  and  corporate  savings  as  households  held  back  their 
consumption and corporates held back investments during times with COVID-19 restrictions. From 
2023,  the  persistence  of  some  net  borrowing  by  the  government  is  expected  to  more  directly 
translate into consumption and investment. Germany created or scaled up various extra-budgetary 
funds,  which  are  expected  to  lead  to  additional  spending  in  the  following  years.  As  a  reaction  to 
Russia’s  war  of  aggression  against  Ukraine,  Germany  decided  to  invest  an  additional  EUR  100 
billion (around 2.4% of GDP) in its defence capacities in a period of around five years from 2022 
onwards and created a special fund outside the national fiscal rules of the so-called debt brake. At 
the  same  time,  unused  pandemic-related  loans  for  around  1.5%  of  GDP  were  transferred  to  the 
Climate and Transformation Fund (Klima- und Transformationsfonds), aimed to finance additional 
measures  for  the  green  transition  for  a  period  of  around  four  years  from  2022  onwards.  For 
financing the relief measures in reaction to the heightened energy prices, Germany created a EUR 
200 billion fund (around 4.9% of GDP). This extra-budgetary fund is intended to finance mainly a 
gas and electricity price brake in 2023 and in the beginning of 2024. 

On 5 April 2023, the Commission published a horizontal thematic note on housing which 
also covers Germany. (10) It showed that house prices have been growing for a decade, leading to 
overvaluation.  Following a decade of steady growth, in 2022, house prices in nominal terms were 
on  average  80%  higher  than  in  2012,  having  expanded  with  a  peak  annual  growth  rate  of  12% 
during  the  pandemic.  Housing  affordability  declined  considerably;  the  price-to-income  ratio  has 
increased by 40% and the house price-to-rents ratio by 58% between 2012 and 2022, resulting in 
an  estimated  overvaluation  of  about  20%  (Graph  2.6). (11)  Bundesbank  analysis  suggests  that 
house prices in urban areas exceeded fundamentals by 25-40%. (12) 

(10)  For a detailed overview of developments on the European housing markets, including Germany’s, see European Commission 
(2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, Institutional Paper 197. April 2023.  

(11)  In order to assess house prices overvaluation, the Commission uses the average of two benchmarks relating prices to 

incomes and rents, and of the results of a valuation model based on fundamentals. These are described in Philiponnet and 
Turrini (2017). Compared to the historical relationship between house prices and incomes, house prices in Germany were 
overall 20% overvalued, while compared to the historical relationship with rents, house prices were overvalued by 41%, 
also reflecting that rents increased relatively moderately over time. Compared to a housing model using cointegration 
analysis including income variables, as well as cost variables and demographics, house prices were still 5% undervalued.  

(12)  https://www.bundesbank.de/resource/blob/904654/9f38009b7c747cd2013c6200280bc8e4/mL/2023-02-monatsbericht-

data.pdf 

11 

                                                 
Graph 2.6: House price dynamics 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat and European Commission services 

Since  the  second  half  of  2022,  house  prices  receded,  reflecting  the  increasing  interest 
rate environment and the reduced purchasing power of buyers. House prices peaked in the 
second  quarter  of  2022,  declining  by  1%  in  the  third  quarter  and  5%  in  the  fourth  quarter, 
compared to the quarter before. In the fourth quarter, house prices remained 3.6% below their level 
a year before; combined with the high inflation, real house prices declined a lot more (Graph 2.6). 
Mortgage loan issuance dropped as interest rates for mortgages with a fixed interest have risen by 
around 1.7 pp in the year from September 2021 to 2.8% for mortgages with 5-10 years maturity 
and  3.1%  for  mortgages  with  over  10  years  of  maturity, (13).  Yet,  in  Germany  mortgage  loans 
typically  have  the  interest  rate  fixed  for  over  5  years,  therefore  increasing  interest  rates  will 
primarily impact demand for new mortgages while not have an immediate impact on many existing 
mortgage holders.  

Although  increased  since  2010,  housing  supply  cannot  catch  up  with  housing  demand, 
housing completions have declined since 2020. The construction sector has expanded  in the 
2010s, increasing its share in the value added of the whole economy from 4.3% in 2010 to 5.5% in 
2021, matching the EU average. (14) The number of housing completions increased from 160 000 
in 2009 to 293 000 in 2019 and around 306 000 in 2020, while decreasing to 293 000 in 2021 
and further down to 278 000 in 2022. The Central Association of the German Construction Industry 
assumes  that  only  245  000  units  will  be  completed  in  2023.  These  levels  remain  clearly  below 
government  estimates  that  around  400  000  new  dwelling  are  needed  a  year,  which  was  also 
included  in  the  coalition  agreement  of  2021.  With  building  costs  increasing  rapidly  over  recent 
years and demand undermined by higher price of mortgages, many housing construction projects 
have come to a halt or are not being started, as construction costs would exceed  current market 
prices (15) 

Policy  settings  marked  by  administrative  burden,  divergent  construction  rules  across 
Länder,  while  supply  of  social  housing  remains  low,  seem  to  hold  back  construction 
activity. Despite government efforts, there remains considerable administrative burden, divergent 
construction  rules  across  Länder,  and  insufficient  digitalisation  of  administrative  procedures  and 

(13)  https://hypo.org/app/uploads/sites/3/2023/01/EMF-Q3-2022.pdf 

(14)  Construction sector activity includes both housing and commercial construction, both construction of new buildings and 

renovation of the existing stock. 

(15)  Supply shortages and rising material costs contributed to high increases in the cost of construction, with the price deflator 

increasing 8.3% in 2021 and 15.9% in 2022. 

12 

   
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

barriers to employment of skilled labour. Social housing is a Länder competence where however the 
federal government has been increasingly provided support. Still, the availability of social housing 
remains very limited. In 2021, only about 21 500 social housing units were built while the stock of 
social  housing  actually  declined  by  around  27  350  to  just  above  1.1  million.  The  government 
acknowledged that the targeted 400 000 completions of new housing will not be reached at least 
until  2024,  yet  it  is  not  clear  how  government  measures  would  make  a  tangible  contribution 
towards  reaching  this  objective  –  although  the  support  for  housing  renovation  is  expected  to 
contribute to improvements in the housing stock and to climate-friendly construction. 

The  overvaluation  in  the  housing  market  and  the  ongoing  price  correction  can  have 
implications  for  the  financial  sector,  meriting  close  monitoring,  even  if  no  major 
disruption  is  expected.  In  December  2021,  the  European  Systemic  Risk  Board  (ESRB)  issued  a 
recommendation  on  medium-term  vulnerabilities  in  the  residential  real  estate  sector  in 
Germany. (16) The ESRB considered house price overvaluation and high house price growth as well 
as possible loosening of lending standards and significant data gaps to be the main vulnerabilities 
in the German housing market. The policy mix is considered only partially appropriate and partially 
sufficient  to  address  the  increasing  vulnerabilities.  The  ESRB  has  concluded  that  borrower-based 
measures, in particular the loan-to-value (LTV) ratio measure, should be activated, and additional 
capital-based  measures  such  as  activating  the  countercyclical  capital  buffer  or  the  sectoral 
systemic  risk  buffer  would  increase  the  resilience  of  the  banking  sector.  Reflecting  the  evolving 
economic  situation  over  the  past  year,  high  energy  prices  and  inflation  now  reduce  real  incomes 
and raise default risks, while a reduction in house prices may reduce the value of collaterals. The 
high share of fixed interest rate mortgages has mixed effects on banks’ balance sheets: on the one 
hand,  it  can  result  in  a  financing  mismatch  for  banks  to  the  extent  these  used  shorter  duration 
liabilities  to  finance  low-yielding  fixed  interest  rate  mortgage  assets.  At  the  same  time,  it  also 
limits defaults of creditors. A number of factors contain risks for the financial sector: a gradual and 
orderly correction in house prices mitigates overvaluation and thus the risk of an abrupt correction, 
the  contraction  of  supply  is  supportive  of  house  prices,  private  indebtedness  remains  relatively 
limited, and the low share of non-performing loans provides a cushion for banks.  

Assessment of MIP relevant policies  

Government measures have cushioned the burden from high energy costs on household 
disposable  income  and  stabilised  domestic  demand.  In  reaction  to  the  heightened  energy 
prices,  the  German  government  implemented  a  wide  range  of  measures  supporting  domestic 
demand from households, including one-off payments to all employees, pensioners and students, a 
temporary reduction in the prices for mass transit and in taxes on motor fuels, temporary VAT tax 
reductions for hospitality and gas and district heating. The electricity and heating price brakes are 
addressing  the  energy  price  hikes  and  shielding  the  households  and  companies  from  that  price 
shock.  The  price  brakes  are  designed  that  the  financial  support  is  higher  with  increasing  energy 
prices thus having a sustained demand-stabilising effect. At the same time, the price signal of the 
energy market prices is kept in a way that incentives to reduce overall energy consumption are still 
intact,  independently  of  the  financial  support  received  through  the  price  brakes. (17)  Beyond 

(16)  OJ C 122, 17.3.2022, p. 1–8 

(17)  Overall, Germany's price brake measures have not been very targeted to support vulnerable households. The analysis of the 

distributional consequences of inflation and of the electricity and gas price brakes shows that the price caps provide 
relatively higher support for lower-income households, yet they do not fully compensate for the overall price increases. 
Resulting from higher energy prices and broader price increases, households in the lowest income decile suffered cost 
increases of around 14%, whereas for the top income decile saw cost increases of around 5%. The electricity and gas price 

13 

 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

temporary  support,  a  range  of  measures  is  expected  to  have  an  enduring  impact  favouring 
household  income.  Notable  examples  are  the  abolition  of  the  renewable  energy  surcharge 
(EEG-Umlage)  and  the  systematic  adjustment  of  the 
inflation 
(Inflationsausgleichsgesetz). Further efforts to target government transfers for those in need could 
contribute  to  better  use  of  fiscal  resources  and  also  enhance  the  supportiveness  of  transfers  to 
consumption against savings. 

income  tax  schedule  to 

Various  reforms  have  been  adopted  to  reduce  investment  barriers.  A  range  of  legislative 
reforms  were  adopted  to  improve  the  legal  framework  for  a  quicker  deployment  of  renewable 
energy generation capacities and the rollout of energy networks and LNG terminals. Among others, 
these  reforms  reduce  the  duration  of  planning  and  permitting  procedures,  make  the  use  of 
renewable  energy  an  overriding  public  interest  and  ease  spatial  planning  rules  to  open  further 
areas up for investment. (18) Announced in April 2023, further acceleration will promote constructing 
motorways and power generation capacities. Some of the facilitations, based on Council Regulation 
2022/2577  laying  down  a  framework  to  accelerate the  deployment  of  renewable  energy, (19)  are 
expected  to  expire  in  June  2024,  which  may  limit  their  impact.  There  is  potential  for  further 
improvements of planning and permitting procedures, such as setting a single contact point for all 
permitting  procedures,  being  transparent  on  deadlines,  roles  and  responsibilities  of  the  different 
authorities, and applying silence-is-consent rules, as well as raising the capacity of administrative 
and court staff, in accordance with the expected increase in tenders. 

Germany  envisages  to  invest  EUR  100  billion  (2.4%  of  GDP)  in  its  defence  capacities 
over the coming years. As a reaction to the Russian attack on Ukraine, the German government 
announced a historic policy shift and decided to modernise its military forces. For this objective a 
special purpose vehicle was created in such a way as to comply with the national fiscal rules of the 
so-called debt brake. From an investment perspective, spending by this defence fund will lead to 
additional  public  investment  in  the  year  when  the  actual  spending  takes  place.  No  consumption 
spending is planned  from this fund (like for example in form of salary payments). This increased 
military spending is also expected to help Germany reach the 2%-of-GDP NATO target for yearly 
defence spending. Currently, the lifetime of the fund is expected to be five years, while the exact 
annual spending profile has not yet been determined. 

Investments  are  expected  to  benefit  from  the  reinforced  Climate  and  Transformation 
Fund  to  finance  the  green  transition  in  the  next  years.  In  2021,  the  Climate  and 
Transformation Fund benefitted from the transfer of EUR 60 billion unused credits originally meant 
for  pandemic  measures,  and  the  government  plans  to  provide  it  with  funds  of  EUR  177  billion 
(4.5%  of  GDP)  in  2023-2026. (20)  Financed  from  the  revenues  of  the  domestic  emission  trading 
system, the fund can meaningfully contribute to finance the green transition in the coming years. 
This spending for environmental measures will primarily benefit private investment as the majority 
of the spending will happen as investment grants that are booked as capital transfers in national 
accounts. 

brakes helped to contain cost increases for the bottom decile at 12% whereas keeping cost increases for the highest decile 
at around 5%. For the other deciles, the effect lies in-between. (Source: JRC analysis based on EUROMOD, the tax-benefit 
microsimulation model for the EU countries, and its Indirect Tax Tool extension.) 

(18)  Strict minimum distance rules can be a major drag on investment, the introduction of particularly strict minimum distance 
rules in Bavarian decreased the number of construction permits for wind turbines by 90% (Stede and May, 2020). The new 
Onshore Wind Energy Act tackles this challenge by limiting the ability of Laender to set overly restrictive rules. 

(19)  OJ L 335, 29.12.2022, p. 36-44 

(20)  See Institut der deutschen Wirtschaft: "Wirtschaftspolitisches Monitoring des Bundeshaushalts", Studie für die bayerische 

Wirtschaft, November 2022 

14 

                                                                                                                                                        
2. 

Assessment of macroeconomic vulnerabilities 

Recent  initiatives  aim  to  accelerate  the  rollout  of  very  high-capacity  broadband 
investments.  Overall,  only  19.3%  of  households  have  access  to  a  fibre  broadband  connection, 
placing  Germany  among  the  Member  States  with  the  lowest  fibre.  This  holds  back  productivity 
growth, especially by small and medium-sized businesses. In July 2022, a gigabit strategy, which 
includes goals on 15 million new fibre-to-the-premises (FTTP) connections by the end of 2025 and 
on  making  FTTP  connections  available  for  all  German  households  by  2030  was  adopted,  the 
implementation of which would require considerable efforts. EUR 17 billion (0.5% of GDP) is to be 
used  to  subsidise  the  rollout  of  fibre  internet  connections,  at  a  subsidy  rate  of  50%.  A  revised 
funding programme will come into effect in 2023. The 2019 mobile frequencies auctions obliged 
the winners to also service all of the rail network (previously ICE (high-speed) lines only) as well as 
interregional roads (Land- und Bundesstraßen, previously only highways) which will trigger them to 
invest more and increase coverage.  

Investment  efforts  are  planned  to  be  stepped  up  to  support  public  transport  including 
rail. The federal government committed to increase subsidies to regional public transport by EUR 
17.3  billion  (0.5%  of  GDP)  spread  over  the  years  2022-2031,  and  after  the  high  take-up  of 
monthly EUR 9 tickets for local and regional transport across Germany over the summer of 2022, 
the  rollout  of  Deutschland  ticket,  with  the  same  coverage  of  the  EUR  9  ticket  and  at  a  cost  of 
monthly  EUR  49  started  in  May  2023,  incentivising  increased  use  of  public  transportation,  which 
will necessitate further investment into public transport infrastructure. In April 2023, it was decided 
to increase investments in rail by EUR 45 billion until 2027, adding to earlier commitments of EUR 
63 billion. 

Timely and full implementation of the German Recovery and Resilience Plan is expected 
to  help  enhance  overall  investment  levels.  The  Recovery  and  Resilience  Plan  includes 
important  measures  to  help  reducing  barriers  to  investment  and  promote  public  and  private 
investment.  Yet,  the  implementation  shows  significant  delays,  due  to  limited  internal  resources 
attached  to  the  plan  implementation  and  insufficient  prioritisation.  The  plan  is  expected  to  be 
revised  in  2023,  to  cover  among  others  additional  reforms  and  investments  in  the  REPowerEU 
chapter, with the overall aim to increase the value of the plan from EUR 26.4 billion to over EUR 
30.3 billion, making full use of the grants available.  

Government  measures  contributed  to  higher  wage  growth.  The  minimum  wage  was 
increased to EUR 12 per hour in October 2022, representing an increase of 25% compared to its 
nominal  value  a  year  before,  bringing  the  minimum  wage  up  from  48%  to  60%  of  the  median 
wage.  The  government  introduced  an  inflation  bonus  that  allows  employers  to  pay  a  one-time 
bonus of up to EUR 3.000 that is exempt from personal income tax and social contributions. 

Changes 
in  macroprudential  policy  partially  mitigate  the  risk  of  house  price 
overvaluation  while  there  is  room  for  further  measures  such  as  borrower-based  ones. 
Increases in the countercyclical capital buffer of 0.75% by Q1 of 2023 and sectoral systemic risk 
buffers reflected the recommendation of the European Systemic Risk Board of 2022, acting against 
the build-up of vulnerability in the residential real estate sector. There is need for further measures, 
namely activating borrower-based measures such as a loan-to-value (LTV) limit.  

Conclusion  

Germany has shown a gradual reduction in its vulnerabilities relating to a large current 
account surplus but going forward  the surplus is expected to bounce back towards 6% 
of GDP, staying lower than in pre-pandemic years. For a decade, Germany has recorded large 
current  account  surpluses,  reflecting  subdued  domestic  investment  relative  to  savings,  affecting 

15 

2. 

Assessment of macroeconomic vulnerabilities 

potential  economic  growth  over  time.  Since  its  peak  in  2015,  the  current  account  surplus  tilted 
downwards with a continued reduction in the balance of trade in goods and services, nonetheless 
largely  counterbalanced  by  the  increase  in  the  primary  income  balance.  At  the  same  time,  the 
domestic  investment  ratio  increased  and  unit  labour  costs  have  been  rising  faster  than  the  euro 
area  average.  In  2022,  mainly  as  a  result  of  temporary  events,  the  current  account  surplus  fell 
abruptly to 4.2% of GDP, reflecting a drop in the balance of trade driven by soaring energy prices, 
along  with  a  narrowing  of  the  non-energy  trade  surplus  and  a  growing  deficit  in  the  services 
balance. From 2023, the current account surplus is expected to bounce back towards 6% of GDP as 
the  prices  of  energy imports  continue  to ease  while  Germany’s  high  net  international  investment 
position, at some 71% of its GDP in 2022, is expected to be a lasting source of primary income. The 
current  account  balance  is  expected  to  remain  below  pre-pandemic  levels  as  energy  prices  are 
forecast  to  remain  above  earlier  levels.  In  addition,  wage  growth  is  accelerating  reflecting 
continued labour shortages and unit labour cost growth continues to exceed the euro area average. 
At  the  same  time,  it  is  expected  that  the  trend  towards  higher  investment  will  resume  and  the 
government  will  run  deficits.  While  in  recent  years  house  prices  have  become  increasingly 
overvalued,  since  the  second  half  of  2022  house  prices  started  to  ease,  reflecting  increasing 
interest rates and the reduced purchasing power of buyers. Yet overvaluation persists and housing 
supply is receding further from levels that were below demand. 

Timely and effective implementation of planned investment and related reforms would 
support both demand and the adjustment in the current account. To support investment in 
the  green  transition  and  defence,  dedicated  funds  have  been  set  up  or  capitalised  further,  and 
successive  reform  packages  accelerated  planning  and  permitting  rules.  Germany’s  Recovery  and 
Resilience Plan includes important measures to help reducing barriers to investment and promote 
public  and  private  investment.  Timely  and  effective  implementation  of  the  investment  initiatives 
and reforms, making full use of the allocated resources, can improve potential growth in Germany 
while also contributing to a more balanced external position. A range of government transfers have 
been mitigating the effects of high inflation on household disposable income, and in addition to a 
strong  minimum  wage  rise,  wage  increases  benefitted  from  favourable  tax  treatment.  Stricter 
macroprudential measures helped curb vulnerabilities related to housing prices, and now a cooling 
housing  market  is  undergoing  a  contained  price  correction.  Moderate  government  deficits  are 
projected  to  persist  in  the  coming  years  also  due  to  extra-budgetary  funds  supporting  public 
investment.  Further  efforts  to  target  government  transfers  for  those  in  need  could  contribute  to 
better  use  of  fiscal  resources  and  also  enhance  the  supportiveness  of  transfers  to  consumption 
against  savings.  Further  efforts  to  improve  the  availability  of  skilled  staff  would  tackle  a  key 
investment barrier. Policy action could help counter the decline in construction supply, including by 
streamlining  housing-related  regulations  across  Länder  and  digitalising  procedures,  as  well  as 
promoting social housing. 

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”   sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Germany, in line with Regulation 1176/2011. (21) 

(21)  European Commission (2023), European Semester Spring Package 2022, COM(2023) 600 final. 

16 

 
 
                                                 
Graph 2.7: Selected graphs, Germany 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat and European Commission services 

17 

   
 
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This  box sheds  light on  the sources  of  inflation  in  Germany  and  its  spill-overs with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Germany 
surged.  Wage  and  profit  growth  also  picked  up  across  the  EU.  With  input-output  data,  domestic 
inflation can be decomposed into the contribution from key cost factors. Taking into account some 
data limitations, the framework can be used to attribute consumer and investment price changes to 
i) extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (22) 

Data  suggests  that  much  of  inflation  in  Germany  reflected  surging  energy  prices  in 
2022, while the importance of domestic factors is projected to increase. In 2022, energy 
imports  were  key  drivers  of  consumption  inflation  (Graph  2.8).  Energy  and  extra-EU  non-energy 
imports contributed substantially to the acceleration in investment inflation. Spill-overs from other 
EU  countries  remained  contained,  however.  Namely,  import  cost  pass-through  from  EU  partners 
increased  domestic  consumption  and  investment  inflation  somewhat,  whereas  value  added 
inflation in other EU countries had only a negligible impact. The contribution from domestic factors, 
wages and profits, was only slightly larger compared to previous years. The importance of domestic 
wages and profits is expected to increase, particularly in 2023. By contrast, the impact of energy 
inflation is set to subside over the forecast horizon. Similarly, the impulse from non-energy import 
prices is expected to fade and spill-overs from inflation in other EU countries to remain marginal. 

Graph 2.8: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

Being  the  largest  EU  economy,  Germany  affects  inflation  in  other  Members  States, 
though  the  contribution  to  total  inflation  is  rather  small.  Although  Germany  has  a  non-

(22)  The graphs are based on national accounts data and the Commission’s Spring 2023 forecast, which are combined through 
a ‘Ghosh’ matrix based on Eurostat’s Figaro input-output available for 2015-2020. HICP is taken as the measure of the 
price of private consumption, including non-residents. Energy import prices from extra-EU reflect realised median prices 
until 2022, and energy price assumptions underlying the Spring forecast thereafter. Other goods prices reflect median 
Eureopan prices per industry until 2022, and forecast non-energy goods and service trade prices for 2023-2024. Value 
added deflators are assumed to affect all industries within a country to the same degree. For a similar analysis using an 
input-output-based methodology, see “Inflation Differentials in Europe and Implications for Competitiveness: Thematic 
Note to Support In-Depth Reviews” European Commission 2023, Institutional paper 198. 

18 

-4-2024681012161718192021222324% change (year-on-year)DE: contribution to domestic GFCF deflator growth-4-20246810161718192021222324% change (year-on-year)DE: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
   
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

negligible  impact  on  domestic  demand  in  other  Member  States,  spill-overs  from  value-added 
inflation  in  Germany  are  set  to  remain  contained,  as  the  growth  of  value  added  deflator  is 
projected to slow markedly in 2024 (see Graph 2.3). Overall, value added inflation in Germany has 
contributed  little  to  consumer  inflation  in  the  rest  of  the  EU  so  far.  Most  exposed  countries  are 
Austria, Czechia, Luxembourg and Hungary with value added inflation spill-overs at around 0.3 pps. 
p.a. over the forecast horizon.   

Graph 2.9: Impact of German value added inflation on EU partners’ consumer price inflation 

Source: European Commission services 

19 

00.10.20.30.40.50.60.719-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-24 .ATCZLUHUPLROSKSIHRBEDKFRSECYNLFIGRPTMTIEBGITLTEELVESRoEApp contribution to average annual change of CPIDE contribution to average annual change of CPI in other MSPassthrough of DE unit labour costPassthrough of DE unit profits (& ind. taxes)Passthrough from DE energy import costPassthrough from other DE G&S imports 
 
   
 
Table 2.1: Selected economic and financial indicators (Part 1), Germany 

2. 

Assessment of macroeconomic vulnerabilities 

(e) estimate based on ECB quarterly data        
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014.    
(2) Deviation of actual output from potential output as % of potential GDP.     
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.        
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default.          
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42.    
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

20 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 1.60.71.71.1-3.72.61.80.21.4Potential growth  (1)1.31.01.51.10.80.80.50.61.1Contribution to GDP growth:Domestic demand 0.81.01.61.8-2.61.32.5-0.21.7Inventories 0.0-0.40.2-0.1-0.20.50.4-0.1-0.3Net exports 0.70.1-0.1-0.6-0.80.8-1.10.50.0Contribution to potential GDP growth (1):Total Labour (hours) 0.20.20.50.10.00.0-0.2-0.10.2Capital accumulation 0.30.20.30.40.30.30.20.20.2Total factor productivity 0.80.60.70.70.60.50.50.50.6Output gap (2)-0.5-0.70.31.3-3.2-1.5-0.2-0.6-0.3Unemployment rate9.56.34.13.03.73.73.13.23.1Harmonised index of consumer prices (HICP)1.81.71.21.40.43.28.76.82.7GDP deflator 1.01.22.32.11.83.15.56.12.4External positionCurrent account balance (% of GDP), balance of payments4.66.17.88.27.17.74.25.95.7Trade balance (% of GDP), balance of payments5.35.56.85.95.85.52.1..Primary income balance (% of GDP)0.72.02.53.72.83.83.9..Secondary income balance (% of GDP)-1.4-1.4-1.4-1.5-1.6-1.6-1.8..Current account explained by fundamentals (CA norm, % of GDP) (3)0.00.61.31.61.61.51.31.21.0Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)0.30.71.82.73.23.33.02.82.8Capital account balance (% of GDP)0.00.00.0-0.1-0.30.0-0.5..Net international investment position (% of GDP)11.423.037.758.563.870.171.1..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)7.119.137.751.054.754.349.7..Net FDI flows (% of GDP)1.11.21.32.5-0.12.83.2..CompetitivenessUnit labour costs (ULC, whole economy)-0.42.32.93.33.40.63.75.94.1Nominal compensation per employee 0.92.22.63.40.43.14.25.55.3Labour productivity (real, hours worked)1.20.50.90.81.00.90.4-0.20.8Real effective exchange rate (ULC)-2.40.31.81.5-1.00.40.20.10.6Real effective exchange rate (HICP)1.2-1.20.9-1.50.81.0-1.6..Export performance vs. advanced countries (% change over 5 years)13.1-1.0-1.0-2.02.4-0.8...Private sector debtPrivate sector debt, consolidated (% of GDP)127.8119.0108.7112.7121.2120.4117.8..Household debt, consolidated (% of GDP)66.859.053.753.457.056.755.0..Household  debt, fundamental benchmark (% of GDP) (6)50.953.954.151.655.054.052.9..Household  debt, prudential threshold (% of GDP) (6)47.043.843.845.445.646.147.3..Non-financial corporate debt, consolidated (% of GDP)61.060.054.959.364.163.762.9..Corporate debt, fundamental benchmark (% of GDP) (6)52.561.870.071.576.876.074.7..Corporate debt, prudential threshold (% of GDP) (6)65.462.863.265.967.569.471.0..Private credit flow, consolidated (% of GDP) 0.31.23.56.46.45.76.6e..Corporations, net lending (+) or net borrowing (-) (% of GDP)1.22.41.60.42.03.20.61.60.4Households, net lending (+) or net borrowing (-) (% of GDP)5.85.45.25.69.07.85.45.95.9Net savings rate of households (% of net disposable income)10.610.310.210.816.415.111.4..forecast 
     
 
 
 
Table 2.2: Selected economic and financial indicator (Part 2), Germany 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

21 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal-0.52.05.25.87.811.55.3..House price index, deflated-1.80.74.14.47.18.2-1.5..Overvaluation gap (%) (7)-8.3-11.6-2.57.615.021.417.0..Price-to-income overvaluation gap  (%) (8)-6.7-13.3-5.35.712.221.920.0..Residential investment (% of GDP)5.25.46.06.47.07.27.6..Government debtGeneral government balance (% of GDP)-2.4-1.71.01.5-4.3-3.7-2.6-2.3-1.2General government gross debt (% of GDP)65.576.270.159.668.769.366.365.264.1Banking sectorReturn on equity (%).-1.62.11.71.93.9...Common Equity Tier 1 ratio.11.115.515.616.115.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).2.11.81.11.11.0...Gross non-performing loans (% of gross loans) (9)..2.51.21.21.11.0..Cost of borrowing for corporations (%)4.73.52.01.61.61.43.5..Cost of borrowing for households for house purchase (%)4.73.82.01.31.21.33.5..forecast