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# 52015SC0025

**COMMISSION STAFF WORKING DOCUMENT Country Report Germany 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /\* SWD/2015/0025 final \*/**

  

Executive summary  1

1.     Scene setter: economic
situation and outlook  3

2.     Imbalances, Risks and
Adjustment 11

2.1.   Current Account 13

2.2.   Private Consumption  21

2.3.   Investment 29

2.4.   Euro area spillovers 49

3.     Other structural issues 55

3.1.   Taxation, long-term
sustainability and fiscal framework  57

3.2.   Financial sector 61

3.3.   Labour market, education and
social policies 63

3.4.   Energy, transport, services
and public procurement 67

3.5.   Policies for long-term growth  71

A.     Overview table  73

B.     Standard tables 80

LIST OF BOXES

1.1.    Economic
surveillance process 8

2.1.1. The
importance of the income balance to the current account surplus 18

2.2.1. Labour
productivity and labour costs developments in Germany  27

2.3.1.  A closer look
at energy investment 34

2.3.2. Main
features of the 2001 and 2008 tax reforms in Germany  41

2.3.3. Price
developments and financing conditions in the German housing market 45

LIST OF Tables

1.1.   
Key economic, financial and social indicators - Germany  9

1.2.   
Macroeconomic Imbalance Procedure indicators 10

2.1.1. Change
in current account and contribution of savings and investment by sector (pps of
GDP) 14

2.3.1. Germany's
budgetary projections compared to European and national deficit ceilings (% of
GDP) 31

LIST OF Graphs

1.1.    GDP in constant prices (index, 2010 = 100) 3

1.2.    Contribution to GDP growth by final demand
components (%, pps) 3

1.3.    Private consumption in constant prices (index,
2010 = 100) 4

1.4.    Gross fixed capital formation and components
compared to (autumn and winter) forecasts (annual growth, 2013-15) 4

1.5.    Investment gap in relation to the euro area
without Germany, Ireland and Spain - contribution by type of goods (% of GDP) 5

1.6.    Investment gap in relation to the euro area
without Germany, Ireland and Spain - contribution by sector (% of GDP) 5

1.7.    Unemployment gap (%) 5

1.8.    Contributions to headline inflation (%,y-o-y) 6

1.9.    Current account balance by geographical
counterpart (% of GDP) 6

1.10.  Credit flows by institutional sector
(consolidated, % of GDP) 7

1.11.  Potential output growth and contributions by
production factors (% pps. per year) 7

1.12.  Population projections (in million persons) 8

2.1.1. Current account balance, national savings and
investment (% of GDP) 13

2.1.2. Sectoral excess savings and current account
balance (% of GDP) 13

2.1.3. Households and non-profit institutions serving
households (% of GDP) 14

2.1.4. General government (% of GDP) 14

2.1.5. Breakdown of current account
balance in relation to all countries (% of GDP) 15

2.1.6. Breakdown of current account
balance in relation to the euro area (% of GDP) 15

2.1.7. Current account balance in relation to EU-27, euro
area, emerging markets and developing countries (% of GDP) 16

2.1.8.  Breakdown
of current account balance in relation to China (% of GDP) 16

2.1.9.  Exports and 
imports (annual growth rate, %, y-o-y) 16

2.1.10. Imports by
broad economic categories (annual growth rate, %, y-o-y) 16

2.1.11. Changes in
trade in goods with vulnerable countries from 2004-2007 to 2011-2014 (EUR billions) 17

2.2.1. Revenue from taxes on income and wealth paid by
households and NPISH\* and social security contributions (% of GDP) 21

2.2.2. Implicit tax rate on labour (%) 21

2.2.3. Tax wedge at 50% of average earnings in 2001 and
2013 (% of total labour costs) 22

2.2.4. Tax wedge at 67% of average earnings in 2001 and
2013 (% of total labour costs) 23

2.2.5. Implicit rate on consumption (%) 23

2.2.6. Revenue from value added tax and other indirect
taxes (% of GDP) 23

2.2.7. HICP\* in Germany (annual average index, 2000 =
100) 24

2.2.8. HICP\* for electricity (annual average index, 2000
= 100) 24

2.2.9. Kaitz index  for gross wages and for labour costs
for full-time earners (2013) 25

2.3.1. Gross fixed capital formation by layer of
government (% of GDP) 29

2.3.2. Net fixed capital formation by layer of government
(% of GDP) 29

2.3.3. Investment by the energy sector 32

2.3.4. Manufacturing as a proportion of total exports
(%, 2010-13 average) 37

2.3.5. Manufacturing as a proportion of nominal
machinery and equipment investment (%, 2010-13 average) 37

2.3.6. Share of total nominal goods exports and in total
nominal machinery and equipment investment (%, 2008-12 average) by
manufacturing sub-sector 38

2.3.7. Share of total nominal goods exports and in total
nominal machinery and equipment investment (%, 2008-12 average) by
manufacturing sub-sector excl. motor vehicles sub-sector 38

2.3.8. Non-financial corporates' acquisition of shares
and other equity (% of GDP) 39

2.3.9. Proportion of shares and securities in firms' total
assets (in %) 39

2.3.10. Proportion of
stakes and securities in firms' total assets (in %) – large firms vs. SMEs 40

2.3.11. Proportion of
stakes and securities in firms' total assets (in %) – Incorporated vs.
unincorporated   40

2.3.12. Marginal cost
of additional domestic investment in different types of assets (in %, corporate
level) 42

2.3.13. Marginal tax
advantage of debt – individual level (in %) 43

2.4.1. Exports to Germany in value added as a percentage
of exporters' GDP (in %, 2011; top 15 EU countries) 49

2.4.2. German exports in value added as a percentage of
German GDP (in %, 2011) 50

2.4.3. Gross foreign assets of Germany as a percentage
of counterpart GDP (in %, top 15 EU countries, excluding Luxembourg) 51

2.4.4. Gross foreign assets as a percentage of German
GDP (in %) 51

2.4.5. Foreign claims of German banks as a percentage of
German GDP (in %, by sector) 51

2.4.6. Gross foreign liabilities as a percentage of
German GDP (in %) 52

2.4.7. Positive shock to German government investment 54

Economic activity in Germany has been
uneven but is expected to gradually strengthen.
Domestic demand has eventually taken over as a main driver of growth and
household consumption has developed well, but business investment has
disappointed and remains subdued. Going forward, economic activity is expected
to gradually strengthen. The positive outlook for employment, low interest
rates and real wage growth should support private consumption. Business
investment should recover, but the housing investment is set to slow to a more
moderate pace. Import growth should strengthen, while exports should benefit
from increasing demand in Germany’s trading partners. Falling oil prices will
exert further downward pressure on consumer prices, but rising labour costs
should uphold core inflation.

This Country Report assesses Germany’s
economy against the background of the Commission’s Annual Growth Survey, which
recommends three main pillars for the EU’s economic and social policy in 2015:
investment, structural reforms and fiscal responsibility. In line with the
Investment Plan for Europe, it also explores ways to maximise the impact of
public resources and unlock private investment. Finally, it assesses Germany in
the light of the findings of the 2015 Alert Mechanism Report, in which the
Commission found it useful to further examine the persistence of imbalances or
their unwinding.

The main findings of the in-depth review
contained in this Country Report are:

·
The current account consistently shows a very
high surplus, which is projected to increase to 8 % of gross domestic
product (GDP) in 2015. This is owed to a trade
surplus resulting from strong competitiveness, notably in the export-oriented
manufacturing sector, and high revenues from private sector investment abroad,
which have not been offset by increased domestic demand, in particular due to
weak investment. The impact of low energy prices is also contributing to the
surplus. Germany’s current account surplus in relation to its euro‑area
partners has fallen to less than a quarter of the total surplus, indicating an
on-going rebalancing process in the euro area.

·
Private consumption has strengthened, but
several factors may hamper future growth. Some
features of the tax system may hamper future private consumption. These include
the high tax burden on labour and the impact of fiscal drag on disposable
incomes. Moreover, the surging costs of renewable energies have affected
households’ disposable incomes.

·
Consistently weak business investment and
insufficient public investment remain a drag on growth. Private sector investment has disappointed owing to continued
weakness in machinery and equipment investment, and a loss of momentum in growth
of residential investment. While investments made by German companies abroad
are buoyant, the domestic investment slump is noteworthy given the supportive
conditions for capital formation. Public investment has fallen short of the required,
and current federal fiscal relations have not ensured adequate public
investment at the level of municipalities.

·
Germany is closely integrated with the euro
area and economic spillovers imply that Germany's economic developments can
benefit but also adversely affect other Member States. The German market is an important
export destination for other euro area Member States, in particular for
countries integrated into German firms’ production chain. While euro area
partners benefit from Germany’s success in trading, the weak domestic investment,
falling potential growth and dependence on external conditions pose risks to
both Germany and the euro area.

The Country Report also analyses other
macroeconomic and structural issues and the main findings are:

·
Public
finances:
Balanced headline budgets and structural surpluses in the years to come create
scope for investment in the economy’s future growth potential. The tax burden
on labour remains high, in particular for low-wage earners, while the scope for
shifting taxes to more growth-friendly revenue sources appears underused. Last
year’s pension reform put an additional strain on the sustainability of the
pension system and the share of public spending on healthcare (in GDP) is one
of the highest in the EU. The implementation of the constitutional
balanced-budget rule (‘debt brake’) at federal state level is not yet complete.

·
Financial
sector: The
banking sector has become more resilient, but impediments to consolidation in
the public banking sector remain and venture capital is underdeveloped. Low
profitability and low interest rates may pose a challenge for institutional
investors.

·
Labour
market, education and social policies: Employment
continues to rise and unemployment is at a record low. Despite the current
overall favourable situation, skills shortages are emerging, unemployment in
some regions remains relatively high and the workforce is projected to decline
in the medium to long term due to demographic change. In this context, insufficient
incentives to work and the employability of workers remain an issue, also with
a view to improving their income. Long-term unemployment is an increasing
concern and it is still at a high level.

·
Energy,
transport, services and public procurement: More renewable
electricity, combined with insufficient transmission capacity, poses a
challenge for network management. Barriers to competition persist in the professional
services and railway sectors, while the rate of publication of public contracts
under EU procurement legislation remains very low.

Overall, Germany has made limited
progress in addressing the 2014 country-specific recommendations. As regards policies relevant to the Macroeconomic Imbalance
Procedure, some steps were taken to increase public investment, but they appear
insufficient to address the investment backlog in infrastructure, education and
research. No measures were taken to improve the efficiency of the tax system or
reduce high taxes and social contributions. The potential of the general
minimum wage to foster private consumption may be limited. As regards
recommendations to address other policy challenges, Germany has taken some
action to enhance the cost-effectiveness of public spending, but has not acted
to ensure the sustainability of the pension system. Germany is making progress
in addressing shortages in childcare and all-day schooling, but fiscal
disincentives to work have not been tackled. No significant efforts have been
made to stimulate competition in the railway and service sectors.

This Country Report reveals the policy
challenges stemming from the analysis of macroeconomic imbalances. In
particular, while Germany’s international competitiveness is an asset, the
country would benefit from greater tapping of domestic sources of growth. In
particular:

·
A boost to investment could unlock the country’s future growth potential. Taking advantage of its fiscal space would enable Germany to
address the backlog in public investment. Improvements in the business environment
and corporate taxation would support private sector investment. Substantial
investment is needed in both energy infrastructure and energy efficiency if
Germany is to reach its targets. Initiatives to reap efficiency gains from sectoral reform, e.g. in the
services sector, would also support investment.

·
Further tap into the labour and skills
potential to strengthen growth and incomes. Reducing
disincentives to take up a job or to increase working time and facilitating
better education outcomes would also help Germany to increase its growth
potential. Addressing the impact of fiscal drag and dealing with the (potential)
employment effects of the minimum wage are key medium-term policy challenges in
order to ensure appropriate conditions for domestic demand

Other challenges are:

·
Structural policies favouring sustainable long-term growth. In the energy sector, it seems important to continue monitoring
the impact of renewable energy reform on consumer costs and to coordinate
energy policies with neighbouring countries. Moreover, there appears to be
scope for sectoral reform to improve competition, particularly in the
professional services and railway sectors.

Economic
Situation

Economic output in Germany was uneven in
the course of 2014 though started to rise at the end of the year. The acceleration of growth in 2013 carried over into the beginning
of 2014. The cyclical slowdown that occured over the summer subsided as
economic activity started to regain momentum at the end of 2014 (Graph 1.1).
This weak development reflected a poor recovery in other euro area Member
States, depressed business confidence due to geopolitical tensions as well as
sluggish demand from some large German export markets. Quarterly growth rates
have been volatile, partly owing to considerable weather effects as well as the
fall in oil prices. Real GDP rose by 1.6 % in 2014, mostly driven by
domestic demand, after increasing by 0.1 % in 2013.

Graph 1.1:     GDP in constant prices (index, 2010 = 100)

Source:  European Commission

Economic activity, including corporate
investment, is expected to strengthen further in 2015. The Commission winter 2015 forecast expects economic activity to
strengthen further over the course of 2015 on the back of a robust labour
market, favourable financing conditions and an improving external environment,
including a significant boost from falling oil prices. The recovery in
corporate investment that was interrupted in mid-2014 is expected to resume cautiously.
Private consumption is forecast to grow noticeably thanks to low interest
rates, high net migration and continued real wage growth. Very low inflation due
to declining oil prices widens the scope for increased consumption expenditure.
Overall, the Commission winter 2015 forecast expects GDP to increase by 1.5 %
in 2015, helped along by more working days, and to accelerate to a rate of 2 %
in 2016.

Graph 1.2:     Contribution to GDP growth by final demand components (%, pps.)

Source: European Commission Calculations

Domestic demand has taken over as the
main contributor to GDP growth. While external
demand played an important role from 2010 to 2012, GDP growth has since been
driven mostly by domestic demand (Graph 1.2 and 1.3). In 2014, the largest driver
of growth in domestic demand was consumption. Net exports contributed with 0.4
pp. to growth, with moderate export growth exceeding import growth. In the
coming years, domestic demand is expected to remain the primary growth driver.

Graph 1.3:     Private consumption in constant prices (index, 2010 = 100)

Source:  European Commission Calculations

While investment has recovered somewhat,
it developed less dynamically than expected. Gross
fixed capital formation increased in 2014 across all sectors and asset types,
but amid the interruption of the recovery process it increased less dynamically
than previously projected by both the federal government and independent
forecasters (Graph 1.4). However, as uncertainty decreases in 2015 and underutilisation
of domestic production capacity declines, corporate investment is expected to
recover in 2015, reflecting in particular pent-up replacement investment and
investment in new product lines.

Graph 1.4:     Gross fixed capital formation and components compared to (autumn and winter) forecasts (annual growth, 2013–15)

Source:  European Commission Calculations

While the investment differential in
relation to the euro area has closed for the economy as a whole, public
investment remains low. In the past, Germany's
generally low investment rate resulted mainly from weakness in residential and
non-residential construction investment (Graph 1.5 and Graph 1.6). While the
overall investment gap in relation to the euro area seems to have closed,
public investment remains comparably low. Even though public investment
expanded in 2014 and is expected to pick up further in 2015–16, the public sector
investment differential in respect of the euro area is expected to remain
largely unchanged (see Section 2.3).

Graph 1.5:        Investment gap in relation to the euro area without Germany, Ireland and Spain — contribution by type of goods (% of GDP)

||

Source: European Commission Calculations

Graph 1.6:        Investment gap in relation to the euro area without Germany, Ireland and Spain — contribution by sector (% of GDP)

||

Source: European Commission Calculations

Though the German economy was showing
some weakness in 2014, this has not affected the country's robust labour
market. In 2014, employment rose by 0.9 pp. and the
unemployment rate fell to a record-low of around 5 % (Eurostat
definition). Employment growth is expected to slow to 0.5 % in 2015, while
the unemployment rate is projected to fall slightly. Going forward, the new
general minimum wage may have some negative employment effects. Youth
unemployment continues to reach record lows. Contrary to the euro area, the unemployment
gap – the difference between actual and structural unemployment – is close to
zero in Germany, which suggests that the remaining unemployment in Germany is
of a broadly structural nature (Graph 1.7).

Graph 1.7:     Unemployment gap (%)

||

Source: European Commission  Note: NAWRU stands for Non-Accelerating Wage Rate of Unemployment

Both core and headline inflation in
Germany remained low in 2014. Harmonised inflation
averaged just 0.8 % in 2014, driven mainly by the marked decline in the
price of oil and falling prices of unprocessed food (Graph 1.8). Harmonised
inflation, excluding food and energy (‘core inflation’), was somewhat higher
but still moderate at 1.4 %, suggesting subdued domestic inflation pressures.
Amid marked employment growth, remuneration per employee grew by 2.6 % in
2014, yet without feeding much into inflation. In recent years, real wage
growth has exceeded that of productivity, which has helped to support domestic
demand and maintain core inflation.

Graph 1.8:        Contributions to headline inflation (%, y-o-y)

||

Source: European Commission

External and sectoral developments

Going forward,
the current account surplus is expected to remain at high levels. From 7.7 % in 2014 ([1]), the current account is projected to
increase to 8 % of GDP in 2015, while a slight decrease is forecast
for 2016 (7.7 %) (Graph 1.9).  The main reason for the rise in the
persistently high surplus is the projected subdued increase in imports which is
owed, on the one hand, to low energy prices and, on the other hand, to weak
investment and the associated high import content.

Graph 1.9:        Current account balance by geographical counterpart (% of GDP)

||

Source: European Commission, Bundesbank

Favourable financing conditions have not
led to higher credit growth. Despite favourable
financing conditions and although Germany’s banking sector has proven to have
healthy balance sheets in the European Central Bank's asset quality review,
borrowing by households and the corporate sector has been very low since 2009,
in most cases due to a lack of credit demand (see also Section 3.2). For
example, in the case of small and medium-sized enterprises bank loans have been
amply available with only a 10 % rejection rate. However, firms have not
applied as they have adequate internal funds. Likewise, housing investment
seems to have been financed largely by own resources. This has coincided with a
significant deleveraging of the financial sector via negative credit flows,
which has not yet abated.

Graph 1.10:      Credit flows by institutional sector (consolidated, % of GDP)

||

Source: European Commission

Germany’s public finances are in a sound
position, which creates scope for greater investment in the economy’s future
growth potential. Germany recorded a general
government budget surplus of 0.4 % in 2014. Continued small budget surpluses are projected and the debt-to-GDP ratio is set to fall gradually in
the years ahead. Germany is also expected to continue recording structural
surpluses and hence over-achieving significantly its medium-term budgetary
objective of a structural deficit deficit of no more than 0.5 % of GDP.

Germany’s potential output is highly
dependent on strengthening domestic sources of future growth. Total factor productivity growth in Germany has been low and
declining in recent years, pointing to the scope and need for efficiency gains
in the economy (Graph 1.11). Potential growth has been significantly
benefitting from strong immigration since 2010 owing to the related rise in
labour supply. In the medium term, however, adverse demographic developments
are likely to have an increasing dampening impact, possibly leading to a
decline of potential growth to about 1 % per year.  It is thus forecast to
be one of the lowest average potential growth rates over the next decades.

Graph 1.11:      Potential output growth and contributions by production factors (pps. per year)

||

Source: European Commission Calculations

Demographic change will remain a key
challenge for Germany’s economy due to the imminent impact of an ageing society. Germany’s population is ageing rapidly and in the coming years the
impact on the German labour market and public finances will accelerate. This
decline in the workforce due to demographic change is expected to increasingly
affect potential growth, unless policy measures are taken. The population is
projected to fall from around 81 million in 2013 to around 71 million in 2060
and the working-age population to decrease by around 28 % (Graph 1.12) ([2]). Assuming no policy change, this could both lower government
revenue and steadily increase age-related expenditure.

Graph 1.12:    Population projections (in million persons)

||

Source: The 2015 Ageing Report, European Commission

Table 1.1: Key economic, financial and social indicators - Germany

1 Domestic banking groups and stand-alone banks.

2 Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches.

3 Real effective exchange rate

(\*) Indicates BPM5 and/or ESA95

Source: European Commission, 2015 winter forecast; ECB

Source: European Commission, 2015 winter forecast; ECB

Table 1.2:  Macroeconomic Imbalance Procedure indicators

Flags: p: provisional.

Note: Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC,  the first threshold concerns Euro Area Member States. (1) Figures in italic are according to the old standards (ESA95/BPM5). (2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). (3) Unemployment rate i=Eurostat backcalculation to include Population Census 2011 results.

Source: European Commission

Developments in saving and investment
balances by sector

The German current account remains at
high levels in the coming years. Contrary to the
euro area as a whole, the high and persistent German current account surpluses reflect
a combination of steadily increasing savings accompanied by low levels of
investment for more than a decade. In recent years, the current account surplus
has consistently remained at historically high levels (Graph 2.1.1). Going
forward it is expected to remain at around 7–8 % of GDP from 2014 to 2016.

Graph 2.1.1:   Current account balance, national savings and investment (% of GDP)

Source: European Commission Calculations

In contrast to previous years, a breakdown
of excess savings shows that all sectors are now contributing to the current
account surplus. While the largest contribution to
the current account surplus remains the structurally large excess savings
position of the household sector, in recent years the change in the current
account balance has been driven mainly by the non‑financial corporate and
government sectors. This reflects a continuation of the long-term shift in the
non-financial corporate sector towards a structural net saving position. This
is coupled with ongoing fiscal consolidation efforts that have produced an
excess savings position in the government sector (Graph 2.1.2). The
contribution of the non-financial corporate sector to the current account
surplus in the years following the crisis has been driven by a marked decrease
in investment relative to the pre-crisis period (Table 2.1.1).

Graph 2.1.2:   Sectoral excess savings and current account balance (% of GDP)

Source: European Commission Calculations

A further breakdown shows that changes
in both savings and investment behaviour at the sectoral level are driving
aggregate developments. The position of households
and non-profit institutions serving households shows a slight reduction in
excess savings as robust household consumption reduced the saving rate
moderately (Graph 2.1.3). Finally, the excess savings of the general government
were mainly driven by significantly higher savings after the crisis, in a
context of reduced government expenditure (Graph 2.1.4), while public
investment remained at low levels. While in the immediate aftermath of the
crisis the excess savings position of non-financial corporate sector rose
sharply as savings increased and investment fell, it appeared to be closing
somewhat thereafter as both positions moved downwards. However, in 2013 a
further divergence was visible as savings and investment moved in opposite
directions (see Section 2.3). After a period of relative stability, the excess
savings position of the financial corporate sector declined markedly in 2013,
driven by a swing in savings.

Table 2.1.1:     Change in current account and contribution of savings and investment by sector (pps. of GDP)

Source: European Commission Calculations

.Graph 2.1.3:  Households and non-profit institutions serving households (% of GDP)

Source: European Commission

Graph 2.1.4:   General government (% of GDP)

Source: European Commission

Current account developments

The German current account surplus
increased in 2014, but remained broadly stable in relation to the euro area. The current account surplus increased from
6.7 % of GDP in 2013 to 7.4 % in 2014, well above the Macroeconomic
Imbalance Procedure indicative three-year threshold of 6 % of GDP (Graph 2.1.5).
The increase in the current account balance in 2014 was mainly explained by a
further increase in the trade surplus in goods and a decrease in the deficit in
services. According to provisional data, the current account balance in
relation to the euro area flattened in 2014 (from 1.7 % to 1.8 % of
GDP) and represented less than a quarter of the total current account surplus,
compared with more than 60 % at the end of the 2000s (Graph 2.1.6) ([3]). The current account surplus against the EU-28 also increased in
2014 according to provisional data, after some years of registering decreases
(Graph 2.1.7). The external position in relation to Germany’s main
European partners improved slightly or remained stable.

Graph 2.1.5:   Breakdown of current account balance in relation to all countries (% of GDP)

Source: Bundesbank, European Commission Calculation

Graph 2.1.6:   Breakdown of current account balance in relation to the euro area (% of GDP)

Source: Bundesbank, European Commission Calculation

The current account surplus with the
rest of the world continued to grow, particularly in relation to emerging
markets and developing countries. Germany’s surplus
against this group of countries has grown steadily in recent years (Graph 2.1.7)
and represents almost one third of the total current account surplus.
Furthermore, the external position against China has continuously improved
since 2008, turning into a surplus in 2012 (Graph 2.1.8). This rise has been
driven by a growing balance in goods. The increase in the German current
account surplus is also supported by improving positions in relation to the
United States and Japan. The increase in the trade surplus in goods in 2014 can
be partly attributed to the decline in oil prices and a corresponding reduction
of import values. The rising nominal effective exchange rate is not likely to
have supported German exports to non-euro area trading partners in 2014 on
average. However, the exchange rate declined considerably in the second half of
the year, which implies an improvement in price competitiveness. This, together
with the projected strong reduction of oil prices in 2015 compared to the
previous year, supports the expectation of a further increase in the German
current account surplus in 2015.

Germany’s exports reached a record high
in 2014 while imports grew less dynamically, contributing to the increase in
the current account. Export and import
growth accelerated after the crisis, but exports have increased more than
imports since 2012, contributing to the increase in the merchandise trade
surplus (Graph 2.1.9). The pace of import growth was lower in nominal
terms than in volume in 2014,

Graph 2.1.7:   Current account balance in relation to EU‑28, euro area, emerging markets and developing countries (% of GDP)

Source: Bundesbank, European Commission Calculation

Graph 2.1.8:   Breakdown of current account balance in relation to China (% of GDP)

Source: Bundesbank, European Commission Calculation

reflecting the decline in oil prices, while
imports from the other main goods categories rose (Graph 2.1.10).

Graph 2.1.9: Exports and imports (annual growth rate, %, y-o-y)

Source: Bundesbank, European Commission Calculation

Graph 2.1.10: Imports by broad economic categories (annual growth rate, %, y-o-y)

Source: Bundesbank, European Commission Calculation

Rebalancing in relation to the
vulnerable EU countries is occurring as a result of import and export developments.
A comparison of Germany’s exports, imports and
trade balances in relation to vulnerable countries before the crisis and in
recent years (2004–2007 and 2011–2014, respectively) suggests that rebalancing
within the euro area is taking place, and is a result of lower German exports
to these countries and higher German imports (Graph 2.1.11). There are,
however, differences between countries. Decreasing trade balances in relation
to Spain, Greece and Ireland seem to be mainly related to decreasing exports to
those countries, while higher imports explain most of the decreasing German
trade surpluses in respect of Italy and Portugal.

Graph 2.1.11: Changes in trade in goods with vulnerable countries from 2004–2007 to 2011–2014 (EUR billions)

Source: Bundesbank, European Commission Calculation

(Continued on the next page)

Box (continued)

Impact of taxation on income and private consumption

Revenue from income taxes paid by
households and from social contributions was on a downward trend before the
crisis, but has risen in recent years. Total
revenue from taxes on income and wealth paid by households and from social
contributions, including paid by employers, fell steadily in relation to GDP
before the crisis (Graph 2.2.1). This was caused by a sharp reduction in
personal income tax rates across the progressive tax scale. Tax rates at the
entry and top levels of the progressive tax scale were gradually reduced from
26 % and 53 % respectively in 1999 to 14 % and 42 % in
2009. The bulk of these cuts took place before 2005. Weak employment growth combined
with wage moderation also reduced the revenue collected from payroll-related
taxes. After the crisis and a temporary spike following the crisis-related GDP slump
in 2009, the tax burden resumed its upward trend. Social contributions as a
proportion of GDP were on a downward trend for most the 2000s, but have been
rising steadily since the end of the decade in the wake of an increasingly
favourable labour market, which has weathered the economic crisis remarkably
well. Taxes on income and wealth paid by households as a proportion of GDP were
on a downward trend for the first half of the 2000s, but have since been rising.
The implicit tax rate on labour was also on a downward trend, though it
increased briefly before the crisis and again in recent years, suggesting that
the sum of all direct and indirect taxes and social contributions levied on
labour has grown more quickly than total employee remuneration. The implicit
tax rate on labour in Germany has fallen below the euro-area average in recent
years, but remains significantly above the EU average (Graph 2.2.2).

Graph 2.2.1:   Revenue from taxes on income and wealth paid by households and NPISH\* and social contributions (% of GDP)

Source: Destatis, European Commission

Graph 2.2.2:   Implicit tax rate on labour (%)

Source: European Commission (Taxation trends in the EU)

While the impact of fiscal drag has in
the past been mitigated by discretionary tax cuts and is now strongly limited
by low inflation, it remains a potential source of future non-discretionary tax
increases. The downward trend in income taxes paid
by households until the mid-2000s also reflects the impact of discretionary tax
reforms that more than offset the effect of fiscal drag ([4]), i.e. the process where, in a progressive tax system, rising
incomes (whether due to inflation or increasing real incomes) result in a
higher average tax burden. However, since 2005 there have been no further major
discretionary income tax reductions. In 2013, Germany adopted a law aimed at
reducing fiscal drag, which slightly increased the basic income-tax allowance.
However, the law falls short of the initial proposal to also adjust the tax
scale and to introduce a regular review every two years to limit unintended
across-the-board tax increases owing to inflation, as already happens in many
other Member States. Therefore, while the impact of fiscal drag is currently
mitigated by low inflation, with dynamic wage growth and somewhat higher
inflation rates in the coming years, fiscal drag could lead to significant
non-discretionary tax increases, which could in turn affect disposable incomes.
A model-based counterfactual analysis ([5]) which assumes that all tax brackets except the top rate are
adjusted in line with inflation indicates that the non-adjustment of tax
brackets will lead — at an inflation rate of 0.1 % as projected by the
European Commission winter 2015 forecast — to a fall in the disposable income
of households of just EUR 143 million in 2015. But in a scenario where
there is 2 % inflation, this figure would increase to about
EUR 3 billion (0.1 % of GDP). In its recent and first report on
the impact of fiscal drag, based on an income tax micro-simulation model, the
federal government estimates that in 2015 there will be additional revenue of
EUR 0.7 billion (at 1 % inflation), EUR 1.8 billion (at 1.5 %
inflation) and EUR 2.9 billion (at 2 % inflation).

The tax burden on labour remains
relatively high, especially for low-wage earners, with potentially negative
effects on labour market participation and disposable income. The tax wedge for workers earning 50 % and 67 % of the
average wage has remained largely unchanged since 2001 and remains among the
highest in the EU (based on 2013 data for a single person with no children,
Graphs 2.2.3 and 2.2.4). In particular, social contributions paid by employees
are among the highest in the EU, despite a reduction in contribution rates
since the mid-2000s. The recent reforms to social insurance systems are likely
to involve a further rise in contribution rates and again increase the tax
wedge (see Section 3.1). Inactivity traps — which measure the part of the
additional gross wage that is taxed away where an inactive person (not entitled
to unemployment benefits but eligible for income-tested social assistance)
takes up a job — are relatively high for low-wage earners, with a high
contribution from personal income taxes and employee social contributions. For
workers earning 50 % of the average wage, the inactivity trap in 2013 was
in Germany 73.1 % (euro area average: 58.3 %), of which 30.9 %
resulted from labour taxes.

Graph 2.2.3:   Tax wedge at 50% of average earnings in 2001 and 2013 (% of total labour costs)

Source: European Commission, OECD (Tax and benefits indicators database)

Graph 2.2.4:   Tax wedge at 67% of average earnings in 2001 and 2013 (% of total labour costs)

Source: European Commission, OECD (Tax and benefits indicators database)

While the tax burden on consumption has
increased over the last decade, it still does not appear to be particularly
high. The implicit tax rate on consumption — the
ratio between the revenue from all consumption taxes and the final consumption
expenditure of households — increased by 0.6 pp. between 2000 and 2012, mainly
due to a major hike in the standard rate of value added tax from 16 % to
19 % in 2007 (Graph 2.2.5). While revenues from value added tax as a
proportion of GDP increased slightly over the last decade, those from other
indirect taxes including excise duties decreased (Graph 2.2.6). Part of
the additional revenue resulting from the increase in value added tax was used
to reduce the unemployment insurance contribution rate. Despite the jump in the
implicit tax rate on consumption caused by the increase in value added tax,
Germany has one of lowest value added tax standard rates in the EU and its
consumption taxes represent a below-average proportion of total tax revenue.
Consumption-related taxation has been kept stable and does not appear to have
constrained private consumption dynamics.

Graph 2.2.5:   Implicit rate on consumption (%)

Source:  European Commission (Taxation trends in the EU)

Graph 2.2.6:   Revenue from value added tax and other indirect taxes (% of GDP)

Source: European Commission

Surging costs for the use of renewable
energy has affected households’ disposable income.
The surcharge paid by electricity consumers to fund the difference between
guaranteed feed-in tariffs for renewable energy producers and market prices has
increased steadily in recent years. The surcharge increased by 47 % in
2013 and by a further 18 % in 2014. For 2015, it has been reduced
slightly, by 1 %. The total volume of the surcharge has increased significantly
in recent years and is projected to reach EUR 21.8 billion or 0.7 %
of GDP in 2015. The roll-out of renewable energy with close-to-zero marginal
generation costs has helped reduce wholesale prices. However, the hike in the
surcharge has caused a significantly stronger increase in consumer electricity prices
in Germany in comparison with consumer prices in general (Graph 2.2.7) and
consumer electricity prices in other Member States (Graph 2.2.8). The cost of
the surcharge has a direct impact on household net disposable income, with a
larger impact for lower income households that tend to spend a higher
proportion of their incomes on accommodation and energy. For example, based on
an average annual electricity consumption of 3 456 kWh per household with
on average 2.02 household members in Germany in 2013, the current renewable
energy surcharge of 6.17 ct/kWh would amount to EUR 213 per household, per year.

Graph 2.2.7:   HICP\* in Germany (annual average index, 2000 = 100)

Source:  European Commission

Graph 2.2.8:   HICP\* for electricity (annual average index, 2000 = 100)

Source:  European Commission

Overall, tax policies do not stand out
as a major reason for subdued private consumption in the pre-crisis period, but
— if they are not adjusted — may hamper
private consumption in the future. The tax burden has resumed an upward
trend in recent years and fiscal drag could lead to non-discretionary tax
increases in the coming years and could dampen the effect of continued dynamic
wage growth by increasing the average rate of taxation. The tax wedge on
labour, in particular for low-wage earners, remains comparatively high, and
there are risks of a further rise in social contribution rates. The
policy-induced surge in electricity prices has affected disposable incomes and
consumption, especially those of low-income households.

The potential impact of the general minimum
wage on consumption

Germany has introduced a general minimum
wage of EUR 8.50 an hour in 2015 with some exceptions and transitional arrangements. The new legislation is a response to the expansion of low-wage
jobs, the increase in wage and income inequality, and the decline in the
proportion of workers covered by collective bargaining agreements. Some groups
are excluded. Negotiated sector-specific minimum wages remain valid, but cannot
be lower than EUR 8.50 an hour from 2017. A new minimum wage commission (Mindestlohnkommission)
will make recommendations on future adjustments to the level of the minimum
wage every two years, which can be adopted by the government. The law
introducing the general minimum wage also provides for an easing of the
conditions for applying collective bargaining agreements to all companies in a
sector (Allgemeinverbindlicherklärung), and for an extension of the Posting
of Workers Act to all sectors (Arbeitnehmer-Entsendegesetz). The minimum
wage law is to be reviewed in 2020.

Overall, the potential of the minimum
wage to strengthen domestic demand is likely to be limited due to employment and price effects and the interaction with the tax
and benefits systems. The general minimum wage is intended to increase the
income of low-wage earners, thus contributing to reducing inequality, preventing
an increase in-work poverty and increasing consumption and domestic demand.
However, the impact of the minimum wage on net disposable incomes and therefore
on domestic demand could be mitigated by potential employment and price effects
as well as by higher taxes and social contributions and lower benefits,
including in some cases the withdrawal or reduction of income top-ups (Aufstockung).
Household net equalised income is estimated to increase on average by less than
EUR 5 per month due to the minimum wage, even assuming no employment
effect ([6]). These results
suggest that the impact of the minimum wage on consumption may be rather
limited.

The employment impact of the minimum
wage is expected to be significant in the eastern federal states and among
those sectors with a high share of ‘mini-jobbers’. The
share of employees earning less than EUR 8.50 an hour is particularly high
in the eastern federal states (23 %) and among ‘mini-jobbers’ (58 %),
in specific services (up to 23 %), in companies with fewer than 10
employees (more than 30 %), in jobs requiring no or limited qualifications
(35 %), and among women (20 %) and young workers (37 %) ([7]). Measured by estimates of the Kaitz index for full-time workers
(quotient of the minimum and the median wages), the effective level of the
minimum wage for Germany as a whole and in the western federal states is
expected to be in the mid‑range in EU terms, while for the eastern
federal states, it would be at the upper end, for both gross wages and labour costs
(Graph 2.2.9) ([8]).

Graph 2.2.9:   Kaitz index for gross wages and for labour costs, for full-time earners (2013)

Source: OECD, European Commission Calculation based on OECD and European Commission – OECD Tax–Benefit model for labour cost. Note: Definitions of gross wages and labour cost reflect the categorisation of the OECD-EC Tax-Benefit database. Gross wages are equal to employees’ pre-tax compensation. The German minimum wage of EUR 8.50 an hour is set at a gross wage level. The labour cost paid by employers is the sum of the gross wage and employer’s social security contributions.

The overall employment effect is
difficult to estimate. Estimates of employment
effects range from positive to very significant job losses, in many cases
part-time jobs. The strong variation is partly due to different assumptions as
regards the wage elasticity of labour demand, the number of workers affected
and the impact of the minimum wage on wages in general. Moreover, the
employment effect could be stronger if companies substitute labour for capital,
or weaker if companies reduce non-wage benefits or if the statutory minimum
wage is circumvented. On the other hand, the impact of higher wages on
employment will be mitigated if companies pass on wage increases to consumers in
the form of higher prices, or absorb part of the cost increases by reducing
their profits. The minimum wage may also incentivise labour force participation
and higher productivity. The magnitude of these effects is difficult to
estimate, however. Price increases could be strong in some service sectors
where many workers are affected by the new minimum wage.

 (Continued on the next page)

Box (continued)

Public investment in infrastructure and
education

While the level of public investment has
picked up recently, it still differs significantly from the  euro-area average
and there has been no lasting trend of positive net investment. After an increase in the second half of the 2000s resulting partly
from crisis-related stimulus packages, the share of public sector gross fixed
capital formation as a proportion of GDP has been stable in recent years, reflecting
moderate nominal growth rates and even a slight fall in real terms in 2012 and
2013 (Graph 2.3.1). As a consequence, the differential in public
investment as regards the euro-area average (excluding Germany, Spain and
Ireland) remains significant, even though it decreased from 1.5 % of GDP
in 2009 to 1.0 % in 2013 (see Graph 1.6). In 2014, gross public
investment increased by 3.8 % in nominal terms and 3.1 % in real
terms and is projected by the European Commission winter 2015 forecast to
continue doing so in 2015/16, given the overall sound position of public
finances and the policy measures adopted by the federal government. Moreover,
after a short period of positive net public investment, gross investment fell
again below depreciation in 2013 and just offset depreciation in 2014 (Graph 2.3.2).

Graph 2.3.1:   Gross fixed capital formation by layer of government (% of GDP)

Source: Destatis, European Commission

Graph 2.3.2:   Net fixed capital formation by layer of government (% of GDP)

Source: Destatis, European Commission

A public investment backlog has emerged
in particular at the level of municipalities and with respect to Germany’s
transport infrastructure. Public investment by
municipalities decreased from 1.1 % of GDP in 2000 to 0.8 % in 2014,
whereas it increased slightly at federal and federal state level (Graph 2.3.1).
Hence, the share of municipalities in total public sector gross fixed capital
formation fell from 46 % in 2000 to 36 % in 2014. The downward trend
in public investment can partly be explained by strong infrastructure
investment in East Germany over the 1990s, which has been levelling off since,
and by the privatisation of public enterprises and services, such as network
industries or waste management. However, especially negative net investment by
municipalities since the beginning of the 2000s suggests significant
underinvestment (Graph 2.3.2). Investment has also been insufficient to
maintain the quality of Germany’s transport infrastructure, with real
investment decreasing notably for federal state, county and municipal roads and
local public transport. Therefore, bottom-up studies and surveys suggest that
additional annual investment of ½ to 1 % of GDP (EUR 15–30 billion) in the
coming years is needed to modernise Germany’s transport infrastructure and
remove specific bottlenecks as well as overcome the municipal investment
backlog ([9]).

Some progress has been made towards
increasing public investment in infrastructure and enhancing the fiscal space
of municipalities. The federal government has made
available an additional EUR 5 billion for investment in public transport
infrastructure and EUR 600 million for urban development over the period 2014–17.
There are also plans to partly compensate municipalities for social expenditure
by an additional EUR 5 billion annually, which should increase their fiscal
space for investment. To this end, in December 2014 a law was adopted to relieve
the federal states and municipalities by EUR 1 billion annually and
to top up the special fund for the expansion of childcare facilities by EUR 550
million. Further financial relief for municipalities is to be provided in the
form of funding for the integration of people with disabilities. There are also
plans to make more flexible use of funds for infrastructure investment and to
further develop infrastructure funding through public-private partnerships. An
expert group has been set up to develop proposals on how to raise private and
public investment, e.g. by tapping more into private funds for public
infrastructure projects. More recently, a further EUR 10 billion for infrastructure
investment over the period 2016–18 has been announced, though not yet
specified, and proceeds from auctioning broadcast spectrum are planned to be
invested in broadband expansion.

However, the planned measures fall short
of the requirements to tackle the investment backlog in public infrastructure. If fully implemented, these measures would amount to about EUR 10
billion or 0.3 % of GDP per year and are thus significantly below the
identified additional annual investment requirement of ½ to 1 % of GDP.
Given the evidence of underinvestment, especially at local level, the fiscal
position of municipalities and their resulting capacity to invest is particularly
relevant in this context. This is also affected by the allocation of revenue
and expenditure competences between the federal government, the federal states
and the municipalities (see Section 3.1).

Germany has made limited progress in
raising education spending, which remains rather low by international standards,
especially as regards primary and lower secondary education. In 2011, Germany’s total public and private expenditure on educational
institutions of 5.1 % of GDP was well below the OECD average of
6.1 %, although educational institutions’ expenditure per student of
27 % of per capita GDP was in line with the OECD average. This may also
reflect the lower proportion of the under-30s in the German population.
Expenditure per student relative to GDP per capita is below the OECD average in
primary and lower secondary education, above average in upper secondary education
and in line with the average in tertiary education. Public spending on
education amounted to 4.4 % of GDP in 2011, compared to an average of
5.1 % in the euro area and 5.3 % in both the EU and the OECD. In
2012, public expenditure on education in Germany fell to 4.3 % of GDP.

Table 2.3.1:     Germany’s budgetary projections compared to European and national deficit ceilings (% of GDP)

Source: 1) German draft budgetary plan 2015; 2) Federal Ministry of Finance, Eckwertebeschluss der Bundesregierung zum Regierungsentwurf des Bundeshaushalts 2015 und zum Finanzplan 2014 bis 2018 sowie zum Sondervermögen ‘Energie- und Klimafonds’, March 2014.

In contrast, Germany has made some
progress in increasing research spending and has almost reached its Europe 2020
target. Expenditure on research and development is
mainly provided by the private sector and increased from 2.4 % of GDP in
2000 to an estimated 2.94 % in 2013, well above the estimated EU-28 average
of 2.02 %. While Germany is close to achieving its Europe 2020
expenditure target of 3 % of GDP, other advanced economies such as
Finland, Sweden and South Korea are investing even more. Moreover, significant
disparities exist in innovation performance and expenditure at regional level,
especially as regards private investment in research and development.

The federal government has taken
measures to increase spending on education and research, but additional efforts
appear needed to reach the national target. The
2014 stability programme already included plans to provide an additional EUR
6 billion to support the federal states in financing childcare facilities,
schools and higher education institutions and additional EUR 3 billion for
research. Moreover, it is planned to enhance cooperation between the federal
government and the federal states in the area of science and research. However,
the latest available data suggest that total public and private expenditure on
education and research may fall short of the national target of 10 % of
GDP by 2015 as agreed by the federal government and the federal state
governments. While total expenditure increased from 8.6 % of GDP in 1995
to 9.1 % in 2011, it decreased to 9.0 % in 2012. Therefore, further
efforts appear necessary at all levels of government to meet the 10 %
expenditure target, and even would be needed to catch up with the most
innovative economies. Besides an increased  expenditure level, also the outcomes
in the education system (see Section 3.3) and start-up companies’ access to
venture capital (see Sections 3.2 and 3.5) remain important challenges.

Germany’s currently favourable fiscal
position provides significant scope for additional infrastructure investment
and education expenditure in full respect of European and national budget rules. Current projections indicate scope of up to 1 % of GDP under
Germany’s medium-term budgetary objective and of up to ½ % of GDP under
its national ‘debt brakeֹ’. According to the European Commission winter 2015 forecast,
Germany is projected to comply with its medium-term budgetary objective with a
margin of around 1.2 % of GDP in 2015 and 1.0 % of GDP in 2016.
According to the draft budgetary plan for 2015, Germany plans to continue
overachieving its medium-term objective during 2017–18 with a margin of about
1 % of GDP (Table 2.3.1). The federal government also plans to comply
with a margin of about ½ % of GDP with the deficit ceiling for the
federal budget set by the national ‘debt brake’ in the period 2015–18 ([10]). Therefore, the national deficit ceiling is more constraining and
sets the maximum fiscal buffer.

Investment in the energy sector

From an investment perspective, energy
generation, efficiency and networks play a significant role. Corporate investment in the energy sector alone represented 9 %
of total gross capital formation in 2013, not including most energy efficiency
and photovoltaic investment, which are accounted for in the buildings sector
(Graph 2.3.3). Total investment amounted to EUR 16.1 billion in renewable
energy generation in 2013, up to EUR 10 billion in energy efficiency in
residential buildings in 2011 ([11]) and EUR 5.5 billion in energy networks in 2013 (Table 1 in Box 2.3.1).

Graph 2.3.3:   Investment by the energy sector

Source: Destatis

Private investors dominate energy
investment. With public investment as a proportion
of total investment in renewable energy generation at 2.5 % and in energy
efficiency at 8.6 % in 2010, the role of the public sector as a direct
investor is limited. Banks and private intermediaries provide the bulk of
energy financing in Germany with households accounting for 37 % of total
renewable energy investment in 2012. In 2010, concessionary loans by KfW, Rentenbank,
and state banks were equivalent to EUR 16.5 billion or 45 % of energy
efficiency and renewable energy investment in Germany. Private intermediaries
provided EUR 12.4 billion in the same year ([12]).

The current policy framework and Germany’s
geographical location underline the relevance of investment in the energy
sector. In the broader context of EU climate and
energy policy, the Energiewende (transformation of Germany’s energy
system) and various policy instruments, such as the feed-in tariff for
renewable energy, play a central role in this regard. The Energiewende
sets renewable energy and energy efficiency objectives for 2020 and 2050, and
requires the phasing out of nuclear energy by 2022, along with ambitious
greenhouse gas reduction targets. These objectives require significant
investment in renewable energy for power and heating, in energy efficiency of
the existing building stock and in the expansion and upgrading of power and gas
networks. As a central ‘switch table’ in the EU’s internal energy market,
Germany’s energy investment choices also have important spillover effects on
the EU. Germany’s geographical location requires significant domestic and
cross-border network expansion in line with the requirements for electricity
generation, transmission and distribution (see Section 3.4). Investment in gas declined between 1994 and 2004. Despite the slow
recovery after 2005, investment should increase by a total of EUR 1.9 billion
between 2014 and 2019 in order to meet the targets of 260 megawatts additional
compressor capacity and 423 km grid expansion until 2019, according to the
Network Development Plan Gas 2014.

 (Continued on the next page)

Box (continued)

(Continued on the next page)

Box (continued)

Investment in machinery and equipment

The German manufacturing sector accounts
for a significant proportion of German investment in machinery and equipment,
exports and gross value added. Its importance for
the overall economy is reflected in its proportion of total economy gross value
added, which has averaged 22 % since the mid-1990s without seeing a
significant decline. The sector has also continued to dominate Germany’s goods
exports , accounting for around 80 % on average of the annual value of
total German exports since the early 2000s. Finally, the manufacturing sector
is an important driver of investment in Germany, accounting for an average of
around 30 % nominal investment in machinery and equipment on average since
the mid-1990s. Notably, while a trend decrease in its proportion of machinery
and equipment investment took place between the mid-1990s and the mid-2000s,
stabilisation or possibly even a trend reversal has since be observed.

A cross-country comparison shows that
the German manufacturing sector drives the country’s total exports to a larger
extent than is the case for the entire euro area.
The German manufacturing sector makes up nearly 80 % of the country’s
total exports compared to around 70 % in the euro area (2010–13 average).
This reflects the relatively large importance of the manufacturing sector for
the German economy (Graph 2.3.4 and 2.3.5). Having seen a less pronounced
decline compared to other Member States since the mid-1990s, the German
manufacturing sector as a proportion of total gross value added exceeds the euro
area average by more than 6 pps. The sector’s role for investment in machinery
and equipment is above average also from a European perspective, although this
difference is less pronounced owing to a larger role of leasing financing in
Germany than elsewhere, since in such cases investments are recorded in the
(financial) services sector.

Graph 2.3.4:   Manufacturing as a proportion of total exports (%, 2010–13 average)

Source: European Commission Calculations

Graph 2.3.5:   Manufacturing as a proportion of nominal machinery and equipment investment (%, 2010–13 average)

Source: European Commission Calculations

Data for German manufacturing sub-sectors
show that the most export-oriented branches are the same ones that drive
manufacturing investment in machinery and equipment. In 2011 the sub-sector chemicals, pharmaceuticals, petroleum,
minerals and rubber accounted for almost 20 % of gross value added of the
total manufacturing sector, followed by cars and transport at 18 %. A
pronounced positive correlation emerges when contrasting each manufacturing sub-sector’s
share of total German nominal investment in machinery and equipment with its
share of total nominal goods exports. Unsurprisingly, the manufacturers of
motor vehicles, chemicals electrical equipment, basic metals and other
machinery and equipment are among those driving both aggregates.

In a cross-country perspective, the
difference between Germany and other Member States is driven mainly by the
German automotive sector. While the positive
association between machinery and equipment investment and exports is more
pronounced in Germany than in Italy, Spain, the United Kingdom or than in
comparison with the euro-area average, the difference narrows when excluding the
manufacturing of motor vehicles from the data (Graph 2.3.6 and 2.3.7). This
reflects the strong position of the German automotive sector and in particular
the non-price competitiveness advantage that it enjoys relative to other Member
States, including a specialisation in end products that is sustained by high
levels of research & development investment. Moreover, the sub-sector ‘motor
vehicles and land vehicles’ has benefited from growth in emerging market
economies (Brazil, Russia, India and China) and the US.

Graph 2.3.6:   Share of total nominal goods exports and total nominal machinery and equipment investment (%, 2008–12 average) by manufacturing sub-sector

Source: European Commission Calculations

Graph 2.3.7:   Share of total nominal goods exports and total nominal machinery and equipment investment (%, 2008–12 average) by manufacturing sub-sector, excl. motor vehicles sub-sector

Source: European Commission Calculations

The central role of export-oriented
manufacturing companies in driving machinery and equipment investment could reduce
the scope for an investment-induced current account rebalancing. First, manufacturing plays a central role in quantitative terms in
total machinery and equipment investment in Germany and the sector’s investment
behaviour is a main driver behind the overall cyclical machinery and equipment
investment pattern. Second, machinery and equipment investment seems to be
closely correlated with goods exports. Hence, given the current growth pattern
of the German economy with a significant focus on exports, and with limited
scope in the medium term for replacing exports with domestic demand in view of
the shrinking German market, the current analysis supports the view that it is
unlikely that a significant expansion in machinery and equipment investment
would be observed without an associated increase in exports. This would offset
part of the current account rebalancing that the high import content of
machinery and equipment investment causes.

Understanding the nature of German
corporates' financial acquisitions

The German non-financial corporates have
maintained their excess savings position in the post-crisis period. Since the early 2000s the excess savings of Germany’s non-financial
corporate sector have been mainly used to acquire equity and investment fund
shares ([13]). These
financial investments have been very substantial, also in comparison with other
EU Member States of similar size. A breakdown of equity and investment fund
shares ([14]) shows that
German non-financial corporates have primarily invested into listed and unlisted
shares. During the crisis, however, other equity grew in importance,
potentially reflecting the injection of capital into smaller supplier companies
and/or the acquisition of privately-owned firms (Graph 2.3.8).

Graph 2.3.8:   Non-financial corporates' acquisition of shares and other equity (% of GDP)

Source: European Commission Calculations

Firm-level balance sheet data for the
period 1997-2012 provides evidence that strategy-related equity holdings in
other firms are of increasing importance. This
finding is based on extrapolated results based on firm-level annual balance
sheet data from a large number of sectors ([15]). From a cross-sector perspective the importance of shares in other
firms held with a view to supporting the holding firm's business activity by
establishing a lasting relation with the other firms (shares or stakes, Beteiligungen)
has increased from below 10 % in the mid-1990s to close to 16 % in
2012 (Graph 2.3.9). By contrast, the proportion of securities acquired without
the motivation of a direct return on the investment made (securities, Wertpapiere)
in total assets has been fluctuating around 2-3 % of total assets over the
same period. Coinciding with the increase in German non-financial corporates' savings
and acquisition of equity and investment fund shares, these developments give
an indication that firms' increasing equity investments have been related to
their corporate strategy, i.e. to support their business activity.

Graph 2.3.9:   Proportion of shares and securities in firms’ total assets (in %)

Source: Bundesbank

The size of strategic equity acquisition
has increased over time, and is especially pronounced for manufacturing sub-sectors
with a strong export orientation. Notably, the
largest proportion of strategy-related shares is found in some of the
export-oriented manufacturing sectors, such as chemicals and transport
equipment, suggesting a likely link to their internationalisation strategy.
Disaggregated stock data show heterogeneity across firms. The largest average
proportion of stakes in total assets is found for the sectors ‘manufacture of
chemical and pharmaceutical products’ and ‘transport equipment’ (around 29 %,
2006–11 average), and ‘data processing, electrical and optical equipment’ (25 %,
2006–11 average). For 2011 additional non-extrapolated data broken down by sector
and size as well as legal form show that also in the sectors where shares are
quantitatively most important (e.g. manufacturing of chemicals) developments
are driven by large firms and, even among the latter group, developments are
driven by incorporated firms ([16]). Holdings
of securities only play a minor role in these sectors. These manufacturing sub-sectors
are characterised by a strong export orientation; together, they accounted for
close to one third of German exports. At the same time, their
internationalisation strategy goes beyond pure reliance on exports. In particular,
transport equipment includes the car manufacturing sector, which has been
widely documented to be well-integrated in global value chains, making inter
alia intensive use of foreign direct investment. The sector's high proportion
of stakes is therefore presumably related to its internationalisation strategy.
By contrast, very low average shares of stakes were found in typically
domestically oriented service sectors such as construction and retail.

Equity holdings in other firms are
especially high in large incorporated firms, which own quantitatively important
holdings of shares for strategic reasons. Large
firms drive the result of a large and increasing proportion of stakes in total
assets (Graph 2.3.10). In a similar vein, strategy-related shares are more
important for incorporated than unincorporated firms (Graph 2.3.11). On average
incorporated firms’ holdings of shares outstripped those of their
unincorporated peers, but the data does not allow for a clear conclusion on
whether this predominantly reflects a size effect. The importance of strategic
investments for incorporated firms reflects the behaviour of stockholding
companies (Aktiengesellschaften, AG). For AGs, typically
the form of the largest, often internationally active enterprises, shares account
for around 33 % of assets, whereas for smaller limited liability companies
(Gesellschaft mit beschränkter Haftung, GmbH) it is only approximately 9 %.

Graph 2.3.10: Proportion of stakes and securities in firms’ total assets (in %) — large firms vs SMEs

Source: Bundesbank

Graph 2.3.11: Proportion of stakes and securities in firms’ total assets (in %) — incorporated vs unincorporated

Source: Bundesbank

Complementary data showing important
transactions and financial crossholdings among firms in German corporate groups
of affiliated companies further supports the hypothesis of financial assets being
held especially for business strategy reasons.  The
aggregate results show that financial assets as a proportion of total assets are
indeed substantially lower based on large corporations’ consolidated balance
sheets (almost 13 %, end-2013) ([17]) than on average for the individual balance sheets of the same firms’
(around 27 %). In addition to the data on shares in individual firms’
balance sheets discussed above, this further supports the interpretation that
financial assets are held by German non-financial corporates especially for
strategic reasons. The aim could be to establish strategic ties with other
firms that are linked to the international value chain of the company.

Graph 2.3.12: Marginal cost of additional domestic investment in different types of assets (in %, corporate level)

Source: ZEW (2014), ‘Effective tax levels using the Devereux/Griffith methodology’.

The impact of tax reforms on the incentives
for corporate investment and the financing structure

Corporate taxation in Germany was
substantially reshaped by two major tax reforms of 2001 and 2008. At the corporate level, the corporate income tax rate was gradually
reduced and in 2001 the split-rate on retained and distributed profits was
eliminated. At the same time, the tax base was enlarged by tightened
depreciation rules and an interest barrier limiting the tax deductibility of
interest expenses. At the level of the shareholder, the full imputation system
of corporate and personal income tax was ultimately converted into a final flat
withholding tax on capital income (dividends, interest and capital gains) (Box
2.3.2).

As regards domestic investment, the two
tax reforms have increased the relative attractiveness of retained earnings as
a source of funding, but not eliminated the positive debt bias, which is high
in international comparison. Graph 2.3.12
shows that prior to the 2001 reform the marginal cost of debt-financed
investment ([18]) at the
corporate level was much lower than of equity-financed investment, across all
asset types considered (industrial buildings, machinery and patents as a proxy
of intangible assets). The ‘tax value’ of interest expenditure was large due to
the high corporate income tax rate against which the deduction can be claimed
and the ‘tax penalty’ for equity particularly high for retained earnings. By
lowering the statutory corporate income tax rate and limiting the deductibility
of interest expenses, the two reforms in the 2000s have narrowed the gap
between equity and debt financing, although it remains positive. This has
created a more neutral tax incentive structure, which has made retained
earnings as a source of funds for investments relatively more attractive, but
still less attractive than debt finance. Econometric work with firm level data
(ORBIS database) for German corporations over the period 1998-2013 has been
carried out by the European Commission’s Joint Research Center, focusing on the
impact of the two tax reforms. First indications show that the effect of the
tax reforms on excess savings of domestic operations is statistically
significant, but of moderate magnitude, suggesting that tax changes are only
one factor behind the observed trend in corporate savings ([19]).

Graph 2.3.13: Marginal tax advantage of debt — individual level (in %)

Source: ZEW (2014), ‘Effective tax levels using the Devereux/Griffith methodology’.

The tax reforms have also changed the
incentives for financing real investment abroad.
One of the hypotheses for the dynamics observed  in German corporate investment
and net savings is that corporations might have had incentives, including from
the tax system, to redirect investment from the domestic economy to foreign
locations. A forward-looking indicator of the marginal cost of investment,
adjusted to account for relevant tax provisions, allows assessing the
tax-adjusted cost of an outbound investment compared to an investment undertaken
domestically for various financing modes. The analysis shows that using
retained earnings in a foreign subsidiary to fund domestic investment is more
expensive than undertaking the same (marginal) investment abroad. This is in
particular the case when the parent company raises debt domestically to
co-finance the investment abroad. The same is the case for an investment
financed by new equity issued by the subsidiary. At the same time, the gap
between the marginal costs of alternative investment scenarios has generally
been shrinking over time, thanks also to changes introduced by the 2001 and
2008 tax reforms.

Average tax rates point to a general
trend after 2001 towards a lower tax burden on newly setup foreign operations,
e.g. investment via a new subsidiary. The effective
average tax rate captures the incentives for locating abroad a discrete rather
than marginal investment. The investment project is supposed to have a
20 % pre-tax return. Among the main destinations for German foreign
direct investment, falling effective average tax rates are found in Belgium,
the Netherlands, the Czech Republic and the US, while tax incentives for
investing in Luxembourg have remained constant for many years ([20]). This can be attributed to the tax reforms in Germany as well as
concomitant changes to the tax systems in potential source countries, notably
their lowering of headline corporate income tax rates.

At the level of the individual investor,
debt has been tax-favoured relative to equity since 2009. Measured by the marginal tax advantage of debt, which factors in
both corporate taxes and taxes on interest, dividends and capital gains at the
individual level ([21]), debt was
relative disadvantaged with respect to equity between 2001 and 2009
(Graph 2.3.13). This was driven by the fact that due to the half-income
system personal taxes on interest income were much higher than those on
dividends and capital gains. By ending the half-income system, debt has again
been tax-favoured since 2009, since all types of capital income became subject
to a final flat withholding tax. This implied a strong reduction of the
personal tax rate on interest income, which tax-favoured debt compared to
equity. At the same time, retained earnings compared to dividends were
tax-disadvantaged before 2001 since capital gains were fully subject to
personal taxes while not benefiting from the full imputation credit granted to
dividends. In addition, under the split system, undistributed profits at the
corporate level were taxed at a higher corporate income tax rate than
distributed profits. After the 2001 reform, taxes on dividends and capital
gains were de facto aligned, resulting in a broadly neutral tax treatment
between them (Box 2.3.2).

Changes in tax incentives have impacted
on firms’ capital structure and pay-out policies, giving some weight to the
hypothesis that the tax arrangements have supported corporate deleveraging and
made retained earnings more attractive as a source of funding. A statistically significant relationship between the tax advantage
of debt and the debt ratio has been found for a panel of German companies,
indicating that an increase in the tax advantage of debt is associated with a
higher debt ratio ([22]). The
overall reduction in the positive debt bias at corporate level could therefore
in principle be one reason behind German corporate deleveraging. There is also
empirical evidence that the interest barrier, which has not been captured by
the indicators used in the analysis above, has led firms to lower their debt-to-assets
ratios and their net interest expenditure. Supposedly opposing its originally
intended effects, national firms also adjusted their capital structure, and
external rather than internal debt (i.e. intra-group lending) was reduced ([23]). At the same time, the tax favouring of debt at an individual level
following the 2009 tax reform does not appear to have had a major impact on the
corporate debt-to-asset ratio. Changes to the tax system have also created an
incentive for accumulating reserves out of earnings as a source of funds.
Asymmetric tax treatment of dividends and capital gains is one factor
determining the way shareholders are remunerated. In the German case, the
abolishment of the tax advantage of dividends and the lowering of the corporate
income tax rate — which has correspondingly reduced the tax value of deductible
interest — has increased the relative attractiveness of retained earnings as a
source of funding for possible real investment by corporations. Before the 2001
reform, dividend payments were regularly preferred to repurchases of shares,
whereas the reform appears to have reduced both the propensity to pay dividends
as well as their size ([24]).
Furthermore, the switch from the full imputation to the half-income system by
the 2001 tax reform may have contributed to a reduction in share ownership
diffusion ([25]).

(Continued on the next page)

Box (continued)

(Continued on the next page)

Box (continued)

Trade and financial linkages between Germany
and other EU countries

The German domestic market represents an
important export destination for several other EU Member States, and in
particular for smaller neighbouring countries.
German-bound exports are of major significance to Hungary and the neighbouring
countries of Czech Republic, the Netherlands, Austria and Luxembourg,
accounting for between 15–25 % of their respective GDPs. For Belgium and
Poland, Germany also represents an important market with exports amounting to
over 10 % of national GDP, while in Bulgaria, Croatia and Denmark the
figure is somewhat lower but still significant at 6–8 %. The larger EU
Member States — France, Italy, the United Kingdom and Spain — all show export
linkages in the range of 3–4 % of GDP.

In terms of inward trade spillovers,
German exports still depend on the EU market though the rest of the world has
become progressively more important. In 2013, total
exports of goods and services represented approximately 46 % of German
GDP. German exporters depend on a set of large markets
across the world, most importantly France (4.4 % of German GDP) and the United States (4.3 %), followed by the United Kingdom, the Netherlands, China,
Switzerland, Austria and Italy, with figures ranging between 2–3.5 % of GDP. Other
important markets include neighbouring Belgium, Poland and the Czech Republic,
as well as Spain (all above 1 % of German GDP).

When measured in exported value added ([26]),
exports to Germany remain significant for many geographically-close EU
countries, reflecting integration into global value chains. In value-added terms, exports to Germany are most important for the
Czech Republic and Hungary, while for seven other EU Member States ([27]) exports — in terms of value added — account for over 4 % of domestic GDP. In many cases, this
reflects the upstream position of these countries in global value chains
involving German firms (Graph 2.4.1).

In exported value added, German exports
are most significant to distant large economies. The
main destinations of German exports in value added terms are the United States,
China and France, confirming the picture of increasing diversification in
Germany’s external trade dependence (Graph 2.4.2).

Graph 2.4.1:   Exports to Germany in value added as a percentage of exporters' GDP (in %, 2011; top 15 EU countries)

Source: World Input-Output database (2011). International Monetary Fund, World Economic Outlook database. European Commission. based on the methodology of Koopman, Wang and Wei (2014), 'Tracing Value-Added and Double Counting in Gross Exports', American Economic Review 104:2, pp. 459-494.

Graph 2.4.2:    German exports in value added as a percentage of German GDP (in %, 2011)

Source: World Input-Output database (2011). International Monetary Fund, World Economic Outlook database. European Commission based on the methodology of Koopman, Wang and Wei (2014), 'Tracing Value-Added and Double Counting in Gross Exports', American Economic Review 104:2, pp. 459-494. ROW denotes the residual trading partner from a dataset comprising 39 trading partners.

Financial integration between Germany and
other EU countries

Other EU Member States have large
financial and banking exposures to Germany creating the possibility for
significant outward spillovers. In 2012, financial
interlinkages were strongest with Ireland and the Netherlands, where gross
financial exposures to Germany via equity and debt instruments accounted for 95 %
and 76  % of domestic GDP, respectively. Nine additional Member
States, including the United Kingdom and France ([28]),
registered exposures ranging from 15–35 % of national GDP. As regards the
exposures of the banking sectors of EU Member States to Germany, the
Netherlands, followed by Sweden, Italy and Austria recorded the largest
exposures to Germany.

Germany is also a major funding partner
and investor in several EU Member States. According
to 2012 data, Germany is a major funding partner and investor, which holds domestic
large gross financial stakes in Malta, Ireland, the Netherlands and Austria. For
seven other Member States, including the United Kingdom, France and Spain ([29]), German
financial assets corresponded to approximately 20–35 % of domestic GDP
(Graph 2.4.3) ([30]).
Funding from the German banking sector remains important for Malta and Cyprus
as well as for the economies of Ireland, Austria and the United Kingdom ([31]). A large
set of other Member States also benefit significantly from German bank funding
([32]).

Graph 2.4.3:   Gross foreign assets of Germany as a percentage of counterpart GDP (in %, top 15 EU countries, excluding Luxembourg)

Source: European Commission based on Hobza and Zeugner (2014), 'Current account and financial flows in the euro area', Journal of International Money and Finance 48, pp. 291-313.

In terms of inward spillovers, Germany
has the highest financial exposure towards the main financial centres of the EU
and the United States. Luxembourg, the United
Kingdom, France and the Netherlands are the countries where Germany’s financial
exposure is largest. Exposures to Italy, Spain, Austria and Ireland are also
sizeable (Graph 2.4.4). Foreign claims of the German banking sector are mostly
exposed to the United States and the United Kingdom, a large proportion of
which is invested in the non-bank private sector. France, Italy, Spain, the
Netherlands and Luxembourg follow (Graph 2.4.5). The funding dependence of the
German economy is largely concentrated in the same set of countries (Graph 2.4.6).

Graph 2.4.4:   Gross foreign assets as a percentage of German GDP (in %)

Source: European Commission based on Hobza and Zeugner (2014), 'Current account and financial flows in the euro area', Journal of International Money and Finance 48, pp. 291-313.

Graph 2.4.5:   Foreign claims of German banks as a percentage of German GDP (in %, by sector)

Source: European Commission based on Bank of International Settlements (2014), consolidated banking statistics (ultimate risk basis, Q2-2014). International Monetary Fund, World Economic Outlook database.

Graph 2.4.6:   Gross foreign liabilities as a percentage of German GDP (in %)

Source: European Commission based on Bank of International Settlements (2014), consolidated banking statistics (ultimate risk basis, Q2-2014). International Monetary Fund, World Economic Outlook database.

Economic spillovers and euro area
macroeconomic policy

Reinvigorating Germany’s aggregate
demand would raise growth domestically and have the additional benefit of
supporting the euro area recovery. Coordinating the
policy stance at euro area level is of major importance to avert the risk of
halting the economic upswing and the rebalancing process. It is in this context
that economic conditions in Germany and their impact on other economies of the
euro area are of particular importance. The persistently high current account
surplus in Germany partly reflects remaining weaknesses in domestic demand.
This implies that there is scope to strengthen Germany’s performance and at the
same time contribute to foster growth dynamics and tackle downwards price
pressures in the euro area as a whole. This appears particularly pertinent in
light of the interplay between unprecedented monetary policy action, an
appropriate fiscal policy stance and an ambitious structural reform agenda. Moreover,
with Germany representing a large part of the euro area’s growing current
account surplus between 2008-14, it holds a central position in ensuring that
the euro area contributes to the G20 objective of strong and sustainable global
growth over the medium term, including the pledge to take policy action to
achieve a lasting reduction in global imbalances.

Germany and the euro area would mutually
benefit from a more symmetric adjustment. With a
goods export share of around 40 % to the euro area and about 60 % to
the EU, economic conditions in other Member States play a key role for Germany.
Since external demand markedly determines German firm’s investment and
employment decisions, bringing an end to the demand contraction in other EU
Member States would help strengthening their import demand and thereby boost
German companies' confidence and longer-term sales expectations. It is
therefore in the interest of the good functioning of both the German and the
euro area economies to ensure that the adjustment becomes more symmetric than
what has been observed in the past, further supporting the ongoing rebalancing
of trade flows within the euro area (see Section 2.1). Given Germany’s strong
production chain linkages with its euro area partners, German import demand
considerably impacts other Member States' economic situation. Hence, providing
the conditions for continued robust private consumption growth and addressing
the remaining weaknesses in private and public investment would be beneficial
to Germany in its own right and would in addition strengthen import dynamics,
also due to the relatively high import content of investment goods.

Euro area
partners directly benefit from Germany’s success in trade and share the risks
of its reliance on external demand to drive
growth. Euro area partners that are integrated in German firms' production
chain benefit from their strong international price and non-price
competitiveness. Almost half of German exports consist of imported intermediate
goods of which around half of them are provided by other euro area Member
States. Preserving Germany’s international competitiveness is therefore to the
benefit of the EU's economy as a whole. At the same time, the strong dependence
of the German economy on external conditions combined with the rather weak
trend growth adversely affect economic prospects in the euro area. Just as euro
area partners benefit from the trade prowess of Germany, they likewise suffer
from the risks associated with the heavy reliance on external demand to drive
growth. As shown by Germany’s low trend growth, securing Germany’s future
economic potential depends on broadening its growth model, tapping more into
domestic sources of growth. The current export-led growth model exposes Germany
and its euro area partners to volatility in economic activity, which makes it
more difficult for euro area partners to adjust production capacities and
employment plans to meet fluctuating German import demand. Increasing the
resilience of the German economy to external shocks by attaining over time a
more balanced growth pattern is therefore in the common interest.

Policy
settings as regards structural reform and fiscal policy are of direct
importance for both Germany and its partners. Investment
decisions in the private and public sector in Germany have a pronounced euro
area dimension. While it is in the interest of the German economy itself to
raise potential growth, this would also benefit the euro are as a whole since Germany’s
weak potential growth implies that also euro area partners are likely to move
along a flatter long-term growth path. Private and public investment that
raises productivity and seizes the economic efficiency gains embedded in new
capital would shift the German economy to a more dynamic growth path. This
would have both a lasting positive effect on potential growth in the euro area
and in the shorter term benefit euro area partners via the provision of
investment goods to Germany. These positive spillovers would support the
recovery of the euro area economy, which in turn would be to the benefit of the
German economy itself given the sizeable share of the EU and euro area in
German exports. Furthermore, improving the euro area economic prospects would
help to re-channel a larger part of Germany’s excess savings towards investment
in the internal market. Combined with investing more in Germany itself, these
mutually reinforcing investments would increase the resilience of the German
economy to external shocks. It would also reduce the risk of again experiencing
large valuation losses of assets invested abroad, which could cause adverse
wealth effects for German households and firms.

Higher
public investment would strengthen growth in Germany and provide a considerable
positive spillover on the euro area. Public sector
investment can play an important role in addressing Germany’s overarching
challenge of strengthening domestic demand and the economy's growth potential.
It is a tool available to policy makers, which has the potential to impact
productivity growth in the economy directly but also indirectly by improving
conditions for private investment. As analysed in Section 2.3, Germany’s
currently favourable fiscal position provides scope for additional public
sector investment, in full respect of European and national budget rules.
Current projections indicate scope annually of up to 1 % of GDP under Germany’s
medium-term budgetary objective and of up to ½ % of GDP under its national
‘debt brakeֹ’. Therefore, even under the more constraining national 'debt
brake', fiscal space exists for a timebound boost of public investment. As
previously analysed by the European Commission ([33]), a
positive boost to German public investment has a sizable effect on German GDP
that grows over time. Private consumption increases, and German net exports
fall during the first 4 years after the policy action. Initially, private
investment falls, but in the medium terms private investment rises, as the rise
in government capital raises the productivity of private production capital.
GDP in the rest of the euro area falls in the very short term, but rises
subsequently (see Graph 2.4.7). In the model simulation, the response of
economic activity to a public investment boost is muted by a rise in the
monetary policy rate. When monetary policy – as under the current circumstances
- is constrained by the zero lower bound, the impact on economic activity is
larger for Germany and growth in the rest of the euro area benefits already on
impact. This assessment is supported by an economic analysis by the
International Monetary Fund ([34]),
which suggests that a four-year increase in public investment by ½ % of
GDP would yield a persistent increase in Germany’s real GDP of ¾ %. In the
case of accommodative monetary policy, it would also raise growth in the euro
area by 1/3 %, with substantial positive
effects on peripheral countries. In addition to the positive economic impact on
Germany and the euro area as a whole, decisive policy action to increase public
investment in Germany would strengthen confidence in the policy stance at the euro
area level, thereby also facilitating the implementation of much-needed
structural reforms.

Graph 2.4.7:   Positive shock to German government investment

(1)Dynamic responses to a positive 1% of GDP innovation to German government investment. Trade balance responses are shown as differences from unshocked path normalized by steady state domestic GDP; responses of other variables shown as relative % deviations from unshocked paths. Source: European Commission Calculations

Tax system

There has been no progress in shifting
the tax burden towards more growth-friendly revenue sources. Revenues continue to rely strongly on labour taxation (22.1 %
of GDP in 2012 vs 20 % in the EU-28) ([35]), which also implies a shrinking revenue base in view of
demographic trends. The share of consumption taxes as a proportion of total tax
revenues is below the EU average (27.5 % of total revenue vs 28.5 %
in the EU-28). Moreover, the share of potential value added tax revenue lost
due to the application of the reduced rate and exemptions is increasing ([36]). The federal government commissioned a study on the fiscal impact
of the reduced value added tax rate (currently 7 %) ([37]), but this has not resulted in specific measures. The revenues from
recurrent property taxes remain comparatively low (0.5 % of GDP in
2012 vs 1.5 % in the EU-28) and the valuation of property is outdated, dating
back to market values of 1963/64 in the western federal states and 1935 in the
eastern federal states. Although a reform of the municipal real‑estate
tax (Grundsteuer) is part of the coalition agreement and announced in
the 2014 National Reform Programme, no concrete action has been taken so far.
Instead of relying more on less distortive recurrent property taxes, the trend
of increasing real estate transfer taxes has continued. After Berlin,
Lower Saxony, Schleswig-Holstein and Bremen in January 2014, also Hessen, from
August 2014, and Saarland, from January 2015, have increased the real estate
transfer tax. The level of environmental taxes compared to total taxes is
relatively low in Germany (5.6 % in Germany in 2012 vs 6.1 % in the
EU-28), although this does not include the surcharge paid by electricity
consumers to finance the expansion of renewable energy (see Section 2.2),
which is not considered a tax. No measures have been taken to broaden the tax
base by reducing environmentally harmful tax expenditure, such as energy tax reductions
and exemptions or the favourable taxation of company cars.

There have been limited efforts to
reduce the burden of high labour taxes and, in particular, of social
contributions. The tax wedge for low-wage earners
remains among the highest in the EU (see Section 2.2). Recently, the
federal government slightly increased the minimum income tax allowance to align
it with the subsistence level as is legally required every two years. It
has also announced plans to reduce the impact of fiscal drag in the current
legislative period. In 2015, the overall contributions rate hardly
changed. The reduction in the pension contribution rate by 0.2 pp. was
more than offset by an increase of 0.3 pp. in the contribution rate for
long-term care. Moreover, as described above, the Act to enhance financial
structures and quality in the statutory health insurance on the one hand
reduced the contribution rate for employees from 8.2 % to 7.3 %. On
the other hand, it allows individual health insurers to raise extra, income-based
premiums from employees. This was expected to stimulate competition and result
in lower contributions. Yet, it appears that for many insured people the total
contribution rate has remained unchanged. Future cost increases in healthcare
could again put pressure on the tax wedge as the new premiums will continue to
be income-based. Furthermore, the 2014 pension reform is projected to lead to
stronger increases in the contribution rate in the long-term.

No significant measures have been taken
to address the significant disincentives to labour participation for second
earners. Apart from still insufficient availability
of full-time childcare facilities and all-day schools (see Section 3.3), fiscal
disincentives due to the joint taxation of income for married couples (Ehegattensplitting)
and free health insurance coverage for non-working spouses are likely to be an
important factor discouraging second earners from taking up a job or increasing
the number of hours worked. This contributes to a low proportion of women
working full-time and one of the lowest numbers of hours worked on average by
women in the EU, despite a high female employment rate. In 2013, a second
earner increasing his/her income from 33 % to 67 % of the average
wage lost 45.6 % of the extra earnings by taxation, compared to
35.8 % on average in the EU ([38]). The exemption of mini-jobs from personal income tax and in many
cases from all employee social contributions also discourages workers from
moving into jobs with earnings above the mini-job threshold of EUR 450 per
month. This disincentive is in many cases even stronger for spouses subject to
joint income taxation.

The local trade tax (Gewerbesteuer)
has not been reviewed. The local trade tax adds to
the corporate income tax and the solidarity surcharge and contributes to a
relatively high overall tax burden on German corporations of 30.2 % in
2014 vs 22.9 % on average in the EU‑28. Moreover, inefficiencies
arise from the local trade tax due to the inclusion of non-profit elements in
the tax base.

There has been no progress in improving
the tax administration. The administrative burden
of taxation for companies and the cost of tax collection remain comparatively
high in Germany, while electronic filing in personal and corporate income tax
is less used than on average in the EU ([39]). Disincentives for tax collection may arise from the current
allocation of tax revenues and the design of the horizontal fiscal equalisation
system (Länderfinanzausgleich), given that significant parts of
additional tax revenues resulting from tax inspections are redistributed to
other federal states. An enhanced cooperation between the federal states and in
some areas possibly by centralisation, including by strengthening the role of
the Federal Central Tax Office (Bundeszentralamt für Steuern), as
envisaged by the coalition agreement of the current federal government, would
be benefitial for the tax administration. The federal government and the federal
state governments adopted a joint discussion paper in November 2014 on the
modernisation of tax administration, which aims to give fresh impetus to a
uniform tax administration software.

Long-term sustainability

Overall, Germany has made some progress
in enhancing the cost-effectiveness of public spending on healthcare and
long-term care. At 8.4 % of GDP in 2012, the
rate of public spending on healthcare in Germany is one of the highest in the
EU, although it has been on a downward trend since 2009. Public expenditure on
long-term care is close to the EU-28 average and its growth rate has been
relatively low in recent years. Despite high spending and above-average costs
in several areas, the health status of the German population is in most
respects comparable to the rest of the EU ([40]). At the beginning of 2015, most provisions of the Act to enhance
financial structures and quality in the statutory health insurance (Gesetz
zur Weiterentwicklung der Finanzstruktur und der Qualität in der gesetzlichen
Krankenversicherung) entered into force. It reduced the general
contribution rate for employees, while allowing individual insurers to fill the
funding gap as necessary by supplementary premiums from employees, also with a
view to increasing competition between insurers. The Act also establishes an
independent Institute for Quality Control and Transparency in Healthcare.
Moreover, a working group of the federal government and the federal state
governments endorsed the main features of a hospital care reform, which is
planned to be converted into legislation in 2015 and aims to reduce bed
capacity and operational costs, to introduce quality as an additional criterion
for hospital planning and funding, and to make the reporting on quality more
transparent. A draft Act to strengthen the provision of healthcare (Versorgungsstärkungsgesetz)
aims in particular to ensure nationwide high-quality health services, including
in rural areas. The Act to reinforce long-term care (Pflegestärkungsgesetz),
which also entered into force at the beginning of 2015, increased the long-term
care contribution rate by 0.3 pp. with a view to financing extended care
services and a reserve fund which is intended to limit the expected
contribution increases. By also promoting the use of out-patient benefits and
services, it may enhance the cost-effectiveness of long-term care. Later in
this legislative period, the federal government plans to introduce a new
definition of care dependency (Pflegebedürftigkeitsbegriff) and to
increase the contribution rate by another 0.2 pp.

No measures have been taken to better
ensure the sustainability of the pension system following the 2014 pension
reform. The reform puts an additional strain on the
sustainability of the pension system and affects intergenerational income
distribution. It has improved pension benefits and early retirement conditions
for certain groups, in particular a pension supplement for those having raised
children born before 1992 (Mütterrente) and the possibility of
retirement without pension reductions two years ahead of the statutory
retirement age if contributions have been paid for 45 years (Rente mit 63).
These benefits are financed through a higher pension contribution rate for the
active labour force, including low-wage earners, and a lower average
replacement rate. No measures have been specified to increase incentives for
later retirement, which appear indispensable in view of the projected strong
decline in Germany’s working-age population and a possible shortage of skilled
workers in the medium term. Moreover, measures to ensure a higher take-up of
occupational and private pension insurance by low-wage earners are still
outstanding (see Section 3.3).

Fiscal framework

Some further federal states have made progress
in implementing the constitutional balanced-budget rule (‘debt brake’). The federal constitution stipulates structurally balanced budgets
for the federal states as of 2020. Unlike for the national budget, it does not
lay down more specific implementing provisions, which are the sole
responsibility of the federal states themselves. Recently, Bremen amended its constitution,
so that to date eight federal states have enshrined balanced-budget rules in
their constitutions and four in their budget laws ([41]). Saxony amended its budget law to further specify the implementing
rules of its constitutional ‘debt brake’ regarding the cyclical adjustment of
the deficit ceiling and the exemption clause for natural disasters and other
emergencies. Such implementing rules and other provisions, including for
decreasing annual borrowing ceilings for the transition period to 2020, financial
transactions and recording deviations in budget execution from the authorised
level of borrowing in a control account, also exist in Baden-Württemberg,
Hessen, Rhineland-Palatinate and Schleswig-Holstein ([42]). On the other hand, Berlin, Brandenburg, North Rhine-Westphalia
and Saarland have not enshrined balanced-budget rules in their legislation and
the majority of federal states have not laid down detailed implementing rules.

First steps have been taken in improving
the design of fiscal relations between the federal government, the federal
states and the municipalities. Discussions between
the federal government and the federal state governments have started on a
comprehensive review of vertical and horizontal fiscal relations and the
respective positions have been outlined on a broad range of issues. These
include the enforcement of the European Fiscal Compact and the national ‘debt
brake’ at federal state level, the allocation of revenue and expenditure competences
between the different layers of government, the fiscal equalisation system
among the federal states (Länderfinanzausgleich), tax autonomy and tax
administration. Tangible results appear indispensable for further strengthening
the framework for sustainable fiscal policies in Germany, including mechanisms
that can ensure adequate public investment at all levels of government,
including especially municipalities.

Germany has not put in place an
independent body in charge of producing or endorsing macroeconomic forecasts. The federal budget and fiscal projections at general government
level are based on the federal government’s own macroeconomic forecasts. While
for the government’s spring and autumn projections the independent joint
economic forecast issued twice a year by leading research institutes is used as
a benchmark, there is no legal requirement to follow it. Nor is there an
endorsement procedure of forecasts involving an independent body within the
meaning of Regulation (EU) No 473/2013. The Commission Opinion on Germany’s
draft budgetary plan for 2015 calls upon the national authorities to ensure
that the EU provisions are followed. Moreover, Germany may need to adjust the
timing of the established national procedures to the European cycle of
budgetary monitoring so that the draft budgetary plan submitted to the European
Commission is based on up-to-date projections. Currently, the autumn
macroeconomic and tax revenue projections are published shortly after the
submission deadline for the draft budgetary plan.

The German banking sector has become
more resilient following the crisis, ensuring sufficient loss absorption
capacity, but low interest rates may pose a challenge. Between the end of 2008 and June 2014, German banks’ ʻtier 1
capitalʼ increased from 9.6 % to 15 % of risk-weighted assets
and is clearly above the euro-area average (13.6 %) ([43]), while a low ratio of non-performing loans (2.7 %) indicates
solid bank assets. In November 2014, the loan-to-deposit ratio (79.4 %)
was below the euro-area average (95.2 %). The level of private‑sector
indebtedness (103.4 % of GDP) is below the euro-area average and appears
moderate. Very low interest rates may pose a challenge for institutional
investors, notably insurance companies, and could also entail a risk for
housing markets. However, apart from limited over-valuation of house prices in
urban areas, there are no signs of overheating in the housing market.

Despite improved resilience, the German
banking sector may prove vulnerable due to its low profitability. All but one German institution passed the comprehensive assessment,
with the only bank at risk of failure having already closed the capital
shortfall before the end of the exercise. However, some banks only just cleared
the capital hurdle in the adverse scenario and five institutions would not have
passed on full implementation of Basel III rules, which will apply as from
2019. German banks also perform relatively poorly on the leverage ratio. The
low profitability of German banks is linked to their strong reliance on net
interest income. A sudden increase in the interest rate level could be a
problem for the sector, making strong capitalisation important for financial
stability. Thus, a review of banks’ business models appears needed to diversify
earnings more.

Germany has made no progress in pursuing
consolidation efforts in the Landesbanken (regionally owned banks) sector,
including by improving the governance framework. No
measures have been taken to continue restructuring Landesbanken and improving
corporate governance, which in recent years had been driven mainly by
Commission state‑aid decisions. Facilitating a market-driven
consolidation appears to depend on further steps to amend these banks’
corporate structure and reduce political influence.. A review of the legal
framework of the public banking sector could contribute to removing possible
impediments to consolidation and to a clearer separation of public interest
objectives and operational bank business.

Lending conditions remain favourable in
Germany, though venture capital still appears to be underdeveloped. Lending conditions remain favourable for households, and credit
standards for consumer credits have hardly changed recently. Even though the
financing conditions for housing loans have become tighter (see Box 2.3.3),
mortgage interest rates are in line with other euro-area countries, while loans
to the corporate sector yield significantly lower interest than the euro-area
average. Businesses (including small and medium‑sized enterprises, SMEs)
still have good access to finance and there are no indications of a significant
tightening of lending conditions. However, capital-intensive young companies
(e.g. in high-tech sectors and developing areas such as eco-innovation) are
often lacking financing options in their growth phase, including because the
venture capital market in Germany is poorly developed in international
comparison. Private equity investment in Germany in 2013 (0.18 % of GDP)
was below the EU average (0.25 %) and well below non-euro area countries
like Denmark (0.7 %), the UK (0.5 %) or Norway (0.43 %),
while venture capital investment in Germany in 2013 (0.03 % of GDP) was
slightly above the EU-average (0.02 %) ([44]).

Labour market

Despite the overall good performance of
the labour market, Germany faces important medium and long-term challenges, in
particular population ageing and skills shortages.
Germany’s working-age population (between 20 and 64 years of age) is projected
to decline by 11.4 % until 2030 — an annual average of -0.8 %. This
results in a twofold challenge, namely the need to increase both labour supply
and productivity. There is scope to increase the labour market participation of
women and older workers, and to activate and integrate long-term unemployed and
people with a migrant background. In addition, Germany is also trying to
attract and better integrate skilled workers from abroad as part of its skilled
labour concept (Fachkräftekonzept). The government has already improved
the recognition of foreign occupational qualifications and has reduced barriers
to immigration from third countries. Recent net migration is expected to
increase labour force potential and thus compensate partly for demographic
effects in the short-term — however, relying on foreign labour increases the
need for more integration efforts. On the other hand, the 2014 pension reform
allowing people to retire at the age of 63 under certain conditions (Rente mit
63, see Section 3.1) sends the wrong signals when it comes to safeguarding
the human capital potential of skilled workers.

While the unemployment rate is overall
low (5.0 % in 2014), it exceeds 10 %
in several federal states and long-term unemployment is an increasing
concern. The employment rate increased to 77.6 % in the
first three quarters of 2014 and Germany reached its Europe 2020 national
employment target in 2013. In particular, the employment rate for older workers
(aged 55–64) reached 65.4 % in the first three quarters of 2014. The
increase in employment was coupled with wage increases in the last year (see
also Box 2.2.1).

There are gender gaps in terms of full-time
labour market participation, pay and pension entitlements and the labour market
potential of women is not used to the full. In
2013, the employment rate for women was 72.3 % (55.8 % in full-time
equivalents) and thus considerably lower than for men (81.9 %). In
addition, the gap in the share of part-time work between women (46.1 % in
2013) and men (11 % in 2013) is one of the highest in the EU and the
part-time work rate of mothers (close to 70 %) is much higher in the western
federal states. Germany also has the third highest gender pension gap in the
EU. Limited availability of childcare, all-day schools and long-term care
services as well as fiscal disincentives for second earners discourage women in
particular from taking-up full-time jobs.

Despite low youth unemployment and rates
of young people not in education, employment or training, geographical and
socio-economic disparities remain and disproportionally affect East German
residents and young migrants across Germany (see
also Education and skills, below). Furthermore, more than half of the young
people not in education, employment or training are inactive and Germany has
not yet presented a comprehensive strategy for reaching out to and delivering
the Youth Guarantee to those who are not registered with an employment service.

The labour market potential of people
with a migrant background is underutilised. There
are also gaps between employment rates of nationals and non-EU nationals. The
employment rate of non-EU-28 nationals (15–64 years) was 54.9 % in 2013,
which is 18.6 pps. below that of German nationals. Women are particularly
affected, with an employment rate gap of 26.9 pps. Lower employment is
accompanied with higher unemployment rates, and especially with higher
inactivity rates.

Germany has made some progress in
monitoring the minimum wage as the minimum wage law stipulates a permanent assessment
of its impact and a global assessment of the law in 2020. The law provides that the new minimum wage commission (Mindestlohnkommission),
which is supposed to make recommendations on future adjustments to the level of
the minimum wage, will evaluate continuously the impact of the minimum wage on
workers’ protection, competition and employment in specific sectors and regions
and in relation to productivity. It shall make a ‘global assessment’ to
determine the level of the minimum wage that ensures workers’ protection,
allows competition and preserves employment, and will take developments in
agreed wages as a benchmark. Such an assessment requires appropriate data
availability on wages, on the structure of earnings and on exempted groups.

Long-term unemployment is an increasing
concern and it is still at a high level. The number
of registered long-term unemployed is still high, despite the favourable situation
on the labour market. Both the proportion of total unemployment
accounted for by long-term unemployment (44.7 % in 2013) and the share of
long-term unemployed among the labour force remain higher than in other Member
States with low unemployment rates, such as Sweden, Finland, Austria or
Denmark. The per capita integration budget for the long-term unemployed
recipients of unemployment benefit II (Eingliederungsleistungen) was
reduced by around 48 % between 2010 and 2013 ([45]). The Federal Ministry of Labour and Social Affairs announced in
2014 the initiative ‘Creating opportunities – ensuring social integration.
Concept on reducing long-term unemployment’, which highlights the need for
action. Although the initiative goes in the right direction, the measures might
not be sufficient to improve the individualised personal support on a larger
scale including continued assistance following placement.

Germany has not taken any measures to
facilitate the transition from non-standard employment such as mini-jobs to
more sustainable forms of employment. Mini-jobs are
wide-spread in Germany with around 7.5 million people working under this form
of contract, due to the beneficial treatment they offer (see Section 3.1). For
almost 5 million people, mini-jobs are their only employment (however, about 40 %
of these are students or pensioners) ([46]). Women represent 2/3 of ‘mini-jobbers’
([47]). Their
transition rate into employment subject to full mandatory social security
contributions are low (42 %). Companies often opt for mini-job contracts
because of their flexibility. Workers in mini-jobs tend not to benefit from
in-work training opportunities ([48]). Announced plans in the coalition agreement to facilitate the
transition from mini-jobs to regular employment have since then not been further
specified or followed-up. The introduction of the statutory minimum wage is
supposed to affect the number of ‘mini-jobbers’, most probably by increasing
the number of part-time workers subject to social security contributions – yet,
the effects are not yet quantifiable.

Education and skills

Germany has made substantial progress in
increasing the overall availability of childcare facilities, but regional
bottlenecks and quality concerns remain. With
32.3 % of children under three in formal childcare facilities in 2014,
Germany is close to reaching the Barcelona target (33 %) but has not yet
reached its national target (39 %). There are still important regional
differences regarding the availability of childcare facilities (52 % in
the eastern federal states compared with 27.4 % in the western federal
states). While additional funds are being dedicated to the expansion of
childcare and the overall quantity of childcare facilities has grown rapidly in
recent years, concerns about quality, insufficiently qualified staff, and limited
flexibility in opening hours remain. The federal government, federal state
governments and municipalities have recently agreed on a roadmap for setting
common quality standards for childcare facilities. This includes regular
conferences and a working group consisting of representatives of the federal
government and the federal state governments and municipalities, which should
submit a report by 2016. The childcare allowance (Betreuungsgeld)
introduced in 2013 appears to have a negative impact on participation in early
childhood education and care ([49]).

Germany has made some progress in
increasing the availability of all-day schools, but there is scope for
improving the contribution of all-day schools to high-quality education. 32.3 % of the primary and lower secondary pupils attended
all-day schools in 2012/13. Annual expansion has slowed from 2 % per year
in 2002–2009 to 1.3 % in 2009–2012 and there are important regional
differences. All-day schools differ widely as regards their organisation and
the type of activity offered, in many cases providing care rather than innovative schooling
in the afternoon. Some federal states have launched measures aimed at improving
the quality of all-day schools. Lower Saxony, for instance, has determined
compulsory models for all-day schools, provided for local flexibility to
develop innovative concepts and increased the availability of staff.

Germany has made limited progress in
improving the educational achievement of disadvantaged people. The German Education Report 2014 and the PISA (Programme for
International Student Assessment) 2012 Results confirm that, despite progress,
Germany remains one of the countries where educational attainment continues to
be largely determined by socioeconomic background. The early school leaving
rate in Germany reached the Europe 2020 national target in 2013. Young people
with a migrant background are twice as likely to leave school early. There
are open vacancies for apprentices while at the same time a quarter million of
school graduates interested in taking up an apprenticeship are deemed unfit for
it and are enrolled in catch-up courses in the so-called transitional system (Übergangssystem).
This is due to general shortcomings in the school system but also to regional
and sectoral mismatches. A federal level programme of EUR 500 million was
launched in 2014 to support the quality of teacher training (Qualitätsinitiative
Lehrerbildung) by supporting innovative concepts. Early testing of German
language competence is being encouraged at pre-primary level in order to help
low achievers, for instance in Saxony and Berlin. Furthermore, recent efforts
to promote inclusion of disabled students in mainstream education may enable
more young people with special educational needs to obtain a qualification and
improve their employment prospects.

Social policy and social protection

Decreasing benefit levels in the
statutory pension insurance, the relatively low work volume of women leading to
a high gender pension gap, and a rise in non-standard forms of employment increase
old-age-poverty risks. Old-age poverty has already increased
in recent years and is expected to rise further ([50]). The 2014 pension reform will further reinforce the downward trend
in the average replacement rate and will not address the risk of old-age
poverty in the future. The standard pension within the statutory pension scheme
has increased at a rate below inflation from 1990 to 2014, contributing to a decrease
in the real value of pensions.

Germany has made no progress in increasing
the coverage in second and third pillar pension schemes. Adequate retirement incomes of future retirees will increasingly
depend on the accumulation of complementary private pension entitlements. It
was the intention of the earlier pension reforms to compensate the reduction in
the level of public pensions with the occupational and private state-subsidised
Riester pension schemes. However, the low interest rates currently
available on the capital markets jeopardise the effectiveness of private pension
schemes ([51]). Moreover,
the take-up and coverage of the two supplementary systems is too low to
compensate for the loss in public pensions in a comprehensive way. Today, only
about half of the eligible workforce has taken up a so-called Riester
private pension plan and coverage is particularly low among those people who potentially
benefit most, i.e. low-wage earners, individuals with basic education and
migrants. Moreover, many people are not fully aware of the pension entitlements
they have acquired and what they can expect upon retirement from all three
pillars.

Energy

Germany has been successful in promoting
the development of renewable energy sources, but this has been achieved at a
high cost. The increasing share of renewable
electricity produced in Germany under the previous renewable energy support
scheme has, in the absence of sufficient transmission capacity within Germany,
created additional challenges for network management, including an increasing
number of short interruptions in the distribution network ([52]). The successful implementation of the Energiewende (transformation
of Germany’s energy system) also depends on a further expansion of cross-border
grids and coordination with neighbouring countries. Concerning energy
efficiency, Germany is neither on track in meeting its target notified to the
Commission in 2013, nor on track to reach the more ambitious target it set
itself in 2010.

The reform of renewable energy has resulted
in a stabilisation of cost development. The revised
Renewable Energy Act (EEG) entered into force on 1 August 2014. The reform is
intended to control costs, especially by introducing binding corridors for
renewables expansion. The reform prioritises support for the least expensive renewable
energy technologies (onshore wind and photovoltaics) and obliges larger
renewable producers to sell their electricity directly on the market. The
reform has resulted in a slight decrease of the renewable energy surcharge in
2015 compared to 2014, but in particular the comparably high feed-in tariff for
offshore wind requires future cost development to be monitored carefully. It
remains a challenge to better integrate renewables into the market and create
market-based incentives for the allocation of new generation capacities, moving
from a feed-in tariff into a tendering process. While the total financial
exemption of energy-intensive industries from the renewable surcharge slightly
decreased owing to the reform, the number of exempted sectors and companies
remained almost unchanged. Exemptions for large sections of the industry add to
the electricity bill of other industrial consumers and households and tend to
distort price signals. In the future, using auctions as the standard procedure
for allocating support could bring down costs even further.

Infrastructure development is being
pursued, but faces significant delays (see Section
2.3). Approximately 23 % of projects for the development of the
highest voltage grid identified in 2009 in the Energy Network Expansion Act (Energieleitungsausbaugesetz)
have been implemented. The initial target of 50 % by 2016 was lowered to 40 %,
but it is uncertain whether this target will be met. For major infrastructure
expansion, authorisation and planning procedures are now centralised at the
Federal Network Agency. The national grid development plans include projects
necessary to eliminate existing bottlenecks. However, most of the projects are
still in the development or permitting stage. Despite an increased effort at
federal level to encourage local and regional governments to accept necessary
network expansions, public opposition and hesitation by regional governments
delay the implementation significantly. Further cross-border interconnections,
especially the implementation of the ‘Projects of Common Interest’ with Poland,
Austria, Belgium and Netherlands as well as with Norway would improve links to the
electricity network of neighbouring countries. There is scope to further increase
the transport capacity of the gas network, in particular from North to South,
and the distribution systems in southern Germany, and to improve its
interconnectivity with neighbouring countries, including reverse flows.

Efforts to coordinate with neighbouring
countries have been stepped up. In July 2014, the
Federal Ministry of Economic Affairs and Energy set up a regular round-table
discussion with neighbouring Member States and the Commission on regional
cooperation for promoting security of electricity supply and renewable energy.
Furthermore, the reformed Renewable Energy Sources Act includes an opening
clause supporting renewable electricity produced outside Germany. In October
2014, the Federal Ministry of Economic Affairs and Energy published a Green
Paper on electricity market design, which calls for regional cooperation in the
area of capacity markets.

Planned energy efficiency measures appear
insufficient for addressing Germany’s policy targets. The federal government presented in December 2014 a comprehensive
National Energy Efficiency Action Plan, including energy tax breaks linked to
energy efficiency increases and low-interest loans, to address its target
shortfalls. Despite the energy demand-side measures under this plan, including
efficiency measures in the building sector, measures on the energy-supply-side
as well as in the transport sector are insufficient to overcome the substantial
target shortfall. A first step in this direction was taken by the Action Plan
on Climate Action (Aktionsprogramm Klimaschutz 2020) adopted in December
2014, which includes measures aimed to reach Germany’s greenhouse gas emissions
reduction target of 40 % by 2020 compared to 1990 levels.

Transport

The competitive situation in the German
railway markets has not significantly improved since last year. In particular, in the long distance rail passenger segment, the
difficult competitive environment is discouraging for new entrants. Track
access charges for long distance passenger transport are among the highest in
the EU. The market share of new entrants in the long distance rail passenger
market remains below 1 % and is falling. One of the few non-incumbent
operators stopped operations during 2014. Since the rejection of the draft law
aimed at streamlining the principles of network access, easing market access
for railway undertakings and granting greater powers to the regulator (Eisenbahnregulierungsgesetz)
by the federal council (Bundesrat) in 2013, no new initiatives have been
adopted to increase competition in the railway markets. Germany is now
preparing a new proposal to transpose Directive 2012/34/EU (Recast of the First
Railway Package) in 2015. Moreover, the Commission considers that Germany does
not comply with EU rules on financial transparency in the rail sector, and a case
on that issue is pending at the European Court of Justice. Germany is the only
Member State with a system of agreements on the transfer of profits from the
infrastructure subsidiaries to the holding. It cannot be excluded that under
the current arrangements, public funds may be used to cross-subsidise passenger
and freight train services open to competition, even in other Member States. In
early 2015, the federal government and Deutsche Bahn AG have signed a new
infrastructure financing agreement, still to be submitted to the European
Commission.

Professional services

Policy action has been limited as
regards restrictions to enter the services markets and exercising professions. There are still barriers preventing companies and individual
professionals from entering the services markets and exercising professional
services; these include restrictions on legal form and shareholding, and
professional qualification requirements. Germany has started reviewing existing
rules concerning access and exercise of regulated professions, in order to
assess whether they are justified by general interest and proportionate. To
date, Germany has not taken any measures as a result of this review and the
ongoing mutual evaluation process to address the cumulative effect of rules
governing access and exercise of professional activities. Nor has it addressed
the diversity of rules applying across federal states. Legal form and
shareholding requirements have a negative impact on establishment as they
restrict the choice of the business model and limit investment opportunities.
For instance, when a very stringent legal form requirement applies (e.g. that only
the professionals as natural persons may perform a certain activity), such a
rule makes the primary establishment of a German legal person or the secondary
establishment of a professional company from another Member State impossible in
practice. It also limits the possibilities of service providers to choose
company structures that would make it easier for them to raise capital for
investments needed to grow. Fixed tariffs for a few but important professions
also represent serious restrictions to service providers by depriving them of
the possibility to compete on the basis of price or quality. These barriers may
harm competitiveness and contribute to low productivity growth in the
professional services sector (see Box 2.2.1) and affect other sectors consuming
these services.

Retail

While the German retail sector is
performing well overall, planning regulations in certain federal states may
create market entry barriers. Measures to achieve
spatial planning objectives of public interest, such as retaining supply areas
in the city centres, need to be proportionate to avoid potential competition
distortions. Economic criteria are sometimes applied in the authorisation
procedures to assess the impact of large outlets on city and town centres. This
may hamper market entries and favour certain types of retailers.

Public procurement

The value of contracts published by the
German authorities under EU procurement legislation remains low despite ongoing
efforts. Germany has the lowest values of contracts
published under EU procurement legislation (2013 data: 1.1 % of GDP — including utilities — or 6.4 % of public
expenditure on works, goods and services — excluding utilities —, as compared with 3.2 % or
19.1 % on average in the EU-28 respectively). At the end of 2014 the
Federal Ministry for Economic Affairs and Energy presented an interim report of
a statistical study aimed to develop an IT concept to collect, analyse and
report on procurement data in Germany. This IT concept is due in December 2015
and the first statistics in 2018. Moreover, in the context of two infringement
cases, the Ministry sent circulars to other Ministries, subordinate agencies, federal
states and municipalities on the conditions for the use of exceptions to the
publication requirement, in particular for urgency, and recommending an internal
control system (the ‘four-eyes’ principle). These are steps in the right
direction, but results in terms of more public procurement open to EU‑wide
bidding or fewer complaints to the Commission for non-publication are not
visible so far and the reasons behind the low value of contracts published
under EU procurement legislation are not clearly identified.

Research and innovation

Germany is one of the EU’s innovation
leaders, but regional disparities are large and securing its competitive
position in the future is challenging. The country
is the best performer in the EU according to the European Innovation Output
Indicator. Germany is close to achieving its research and development (R&D)
expenditure target of 3 % of GDP (see Section 3.1), but other leading
innovative economies are investing even more. Remaining at the technological
frontier and securing its competitive position in the future would require
continued investment in education, R&D, and innovation. Significant
disparities exist in innovation performance and expenditure at regional level,
especially as regards private investment in R&D, with the eastern federal
states in general lagging behind. Regional clusters and smart specialisation to
address disparities lead in the right direction.

Lack of finance and skills shortages are
hindering the growth of start-up companies, including in high-tech sectors. The federal government supports fast-growing, innovative start-up
companies through financing instruments such as investment grants and micro
mezzanine funds. A review of the regulatory framework for venture capital, as
foreseen in the coalition agreement, would be a welcome step and could
contribute to stimulating private investment and entrepreneurship (see Section 3.2).
Moreover, demographic trends and emerging skill shortages mean that the
potential number of entrepreneurs who either start a new business or continue
an established business is expected to continue to decline, which could hamper
Germany’s future growth and innovation performance. An adequate supply of
skilled labour will be crucial for avoiding shortages of qualified staff in
high-tech industries. Germany is already taking initiatives e.g. to attract and
retain students and academics from abroad, but further efforts appear
necessary, e.g. regarding the possibilities for qualified people to stay longer
on the labour market.

Germany adopted a new high-tech strategy
in September 2014. The strategy aims to strengthen
economic growth by means of a coherent innovation policy, supporting knowledge
transfer and innovation in future markets. The high-tech strategy focuses on six
key strands: the digital economy and society, sustainable economy and energy,
the innovative workplace, health living, intelligent mobility, and civil
security. The update in 2014 was a useful step towards making the strategy more
integrated and coherent and to improve acceptance by strengthening
communication and the involvement of society.

Information and communication technologies

Germany’s performance could be improved
as regards the roll-out of fixed ultra-fast broadband lines. While Germany performs well on basic and fast broadband access,
Germany performs weakly with regard to ultra-fast broadband connections in international
comparison. The whole German territory has access to basic broadband (both
fixed and mobile technologies) and 75 % of the territory has access to
fast broadband (connections of 30 Megabits per second). However, Germany ranks
19th out of 28 Member States as regards the share of population
subscribed to an ultra-fast broadband connection of above 100 Megabits per
second (0.9 % of the population, equivalent to 2.6 % of all
subscriptions). The share of fibre connections in relation to total broadband
penetration is also low in international comparison (0.94 % compared to
16.65 % OECD average and more than 60 % in South Korea and Japan,
according to OECD broadband statistics). This may be partly explained by
factors such as the topographical size of the country and its decentralised
settlement structure. In this context, it is important to ensure a competitive
and investment-friendly environment.

The new Digital Agenda 2014-2017 is a
step in the right direction. In August 2014, the federal
government passed its first ‘Digital Agenda 2014–2017’ bill, aimed at helping
Germany become a worldwide leader in expanding high-speed data lines, internet
security and fostering cyber-related entrepreneurship. It aims to provide fast
broadband (50 Megabits per second) internet to rural and urban areas alike by
2018, through a variety of technologies on the market. This is well above the
EU target of all European households having access to internet connections of
30 Megabits per second by 2020, but it does not tackle the EU target of 50 %
of households subscribing to internet connections above 100 Megabits per second
by 2020. In December 2014, an early allocation of the 700 MHz band for new
broadband wireless applications was agreed. This can ensure that certain
peripheral areas gain access to high-speed networks soon. The revenues
resulting from the auctioning of the spectrum are planned to be used for
broadband deployment.

Public administration and business
environment

There continues to be scope to reduce
the administrative burden and improve the business environment. The introduction of the statutory minimum wage and corresponding
documentation requirements may have resulted in additional administrative
burden for businesses. On the positive side, the federal government adopted in
2014 a better regulation work programme and approved new measures to reduce the
administrative burden for businesses and citizens. These included for example a
‘one-in, one-out’ system for new legislation, requiring the revision or
scrapping of existing rules for any new regulations that impose costs on
businesses. The federal government also adopted exemptions from reporting
obligations for start-ups as well as measures to support the uptake of
electronic invoicing and archiving. These are welcome steps, but the business
environment for SMEs in particular still faces challenges, including a simplification
of the tax system, reforms of tax administration (see Section 3.1) and better
coordination across federal states.

The availability of online public
services remains below the EU average. Germany is still
one of the EU countries with the lowest online interaction between public
authorities and citizens (23rd out of 28 Member States). In 2014,
18 % of German citizens interacted with the government via the internet (the
EU average is 33 %). An e‑government strategy was adopted in August
2014 in the context of the ‘Digital Agenda 2014–2017’ bill, to foster the
digital transformation of the public administration. The main challenge now is
to implement the strategy accordingly.

Commitments || Summary assessment ([53])

2014 Country-specific recommendations (CSRs)

CSR 1: Pursue growth‐friendly fiscal policy and preserve a sound fiscal position, ensuring that the medium‐term budgetary objective continues to be adhered to throughout the period covered by the Stability Programme and that the general government debt ratio remains on a sustained downward path. In particular, use the available scope for increased and more efficient public investment in infrastructure, education and research. Improve the efficiency of the tax system, in particular by broadening the tax base, in particular on consumption, by reassessing the municipal real estate tax base, by improving the tax administration and by reviewing the local trade tax, also with a view to foster private investment. Make additional efforts to increase the cost‐effectiveness of public spending on healthcare and long‐term care. Ensure the sustainability of the public pension system by (i) changing the financing of new non‐insurance/extraneous benefits (‘Mütterrente’) to funding from tax revenues, also in order to avoid a further increase of social security contributions, (ii) increasing incentives for later retirement, and (iii) increasing the coverage in second and third pillar pension schemes. Complete the implementation of the debt brake consistently across all Länder, ensuring that monitoring procedures and correction mechanisms are timely and relevant. Improve the design of fiscal relations between the federation, Länder and municipalities also with a view to ensuring adequate public investment at all levels of government. || Germany has made limited progress in addressing CSR 1 (this overall assessment of CSR 1 does not include an assessment of compliance with the Stability and Growth Pact): · Some progress in increasing public investment in infrastructure, including an additional EUR 10 billion for infrastructure investment recently announced for the period 2016–18. · Limited progress in raising education spending and some progress in increasing research spending. The federal government has increased expenditure on education and research, but the share of public spending on education as a proportion of GDP is still below EU average and total expenditure on education and research may fall short of the national target of 10 % of GDP by 2015. · No progress in improving the efficiency of the tax system. · Some progress in increasing the cost‐effectiveness of public spending on healthcare and long‐term care. An independent Institute for Quality Control and Transparency in Healthcare has been set up and the main features of a hospital care reform outlined. The use of out-patient benefits and services in long-term care have been promoted. · No measures have been taken to better safeguard the sustainability of the pension system following the 2014 pension reform. · Some progress in completing the implementation of the ‘debt brake’. One more Land has amended its constitution and another one further specified implementing rules. · Limited progress in improving the design of fiscal relations between the federal government, the federal states and the municipalities. Preparatory steps towards a comprehensive reform have been taken.

CSR 2: Improve conditions that further support domestic demand, inter alia by reducing high taxes and social security contributions, especially for low‐wage earners. When implementing the general minimum wage, monitor its impact on employment. Improve the employability of workers by further raising the educational achievement of disadvantaged people and by implementing more ambitious activation and integration measures in the labour market, especially for the long‐term unemployed. Take measures to reduce fiscal disincentives to work, in particular for second earners, and facilitate the transition from mini‐jobs to forms of employment subject to full mandatory social security contributions. Address regional shortages in the availability of fulltime childcare facilities and all‐day schools while improving their overall educational quality. || Germany has made limited progress in addressing CSR 2: · Limited progress in reducing the high tax wedge, especially for low-wage earners. The reduction in the pension contribution rate by 0.2 pp. was more than offset by an increase of 0.3 pp. in the contribution rate for long-term care. Moreover, the Act to enhance financial structures and quality in statutory health insurance reduced the contribution rate for employees from 8.2 % to 7.3 %, but also allows individual health insurers to raise extra, income-based premiums from employees, and it appears that for many insured people the total contribution rate has remained unchanged. The federal government announced plans to reduce the impact of fiscal drag in the current legislative period. On the other hand, the recent increase in the minimum income tax allowance results from existing law and is not considered a new policy measure. · Some progress towards monitoring the minimum wage. The minimum wage law requires continuous assessment of its impact and a global assessment of the law in 2020. · Limited progress in improving the educational achievement of disadvantaged people. The federal government launched a programme in 2014 to support the quality of teacher training (Qualitätsinitiative Lehrerbildung). Early testing of German language competence is being encouraged at pre-primary level in some federal states. Germany is making efforts to promote the inclusion of disabled students in mainstream education. · Limited progress in implementing more ambitious activation and integration measures. The Federal Ministry of Labour and Social Affairs announced in 2014 an initiative aimed to reducing long-term unemployment (‘Chancen eröffnen – soziale Teilhabe sichern. Konzept zum Abbau der Langzeitarbeitslosigkeit’). This is a step in the right direction, but might not be sufficient to improve individualised support. Germany has not assessed the effectiveness of the 2011 reform of active labour instruments. · No progress in addressing fiscal disincentives to work for second earners. · No progress in taking measures to facilitate the transition from non-standard employment such as mini-jobs to more sustainable forms of employment subject to full mandatory social security contributions. · Substantial progress in increasing the availability of childcare facilities. The quantity of childcare facilities has grown rapidly, but regional bottlenecks and quality concerns remain. Additional funds for investment in childcare are planned. The federal government, federal state governments and municipalities have recently agreed on an overall approach to address quality issues. · Some progress in increasing the availability of all-day schools. Annual expansion slowed in 2009–2012 compared with the previous years and there are important regional differences. Some federal states have launched measures aimed at improving the quality of all-day schools. However a comprehensive national and federal approach is missing.

CSR 3: Keep the overall costs of transforming the energy system to a minimum. In particular, monitor the impact of the Renewable Energy Act reform on the cost-effectiveness of the support system for renewable energies. Reinforce efforts to accelerate the expansion of the national and cross‐border electricity and gas networks. Step up close energy policy coordination with neighbouring countries. || Germany has made some progress in addressing CSR 3: · Some progress in keeping the overall costs of transforming the energy system to a minimum. · Substantial progress as regards the support system for renewables. The reform of the Renewable Energy Act (EEG) curbs the cost increases associated with the renewable support system, controls the expansion of renewables, initialises market integration and stabilises the cost contribution of industrial consumers. The increased use of competitive bidding for supporting renewable energy sources may result in further progress. · Limited progress in electricity network development. The planning of projects to eliminate internal bottlenecks for electricity transmission has begun, but these are still at the development or permitting stage and face regional public opposition. · Some progress in policy coordination with neighbouring countries. Regular round-table discussions on regional cooperation to promote the security of the electricity supply and renewable energies have been set up. A Green Paper on electricity market design aimed at facilitating the decision on whether to introduce a national capacity remuneration mechanism has been published.

CSR 4: Take more ambitious measures to further stimulate competition in the services sector, including certain professional services, also by reviewing existing regulatory approaches and converging towards best practices across Länder. Identify the reasons behind the low value of public contracts open to procurement under EU legislation. Increase efforts to remove unjustified planning regulations which restrict new entries in the retail sector. Take action to remove the remaining barriers to competition in the railway markets. Pursue consolidation efforts in the Landesbanken sector, including by improving the governance framework. || Germany has made limited progress in addressing CSR 4: · Limited progress as regards stimulating competition in the services sector. Germany is participating in the mutual evaluation exercise provided for in the Directive amending the Professional Qualifications Directive. However, no major changes can be expected before the end of that exercise or before the deadline for submission of the national action plan, which is expected to be in the second quarter of 2015. On legal form and shareholding restrictions, limited changes are underway in some federal states, but there is still no broad review of such restrictions. · Limited progress in identifying the reasons behind the low value of public contracts open to procurement under EU legislation. The Federal Ministry for Economic Affairs and Energy presented an interim report of a statistical study aimed to build a statistical database and sent circulars on the use of the urgency procedure. · No progress as regards restrictions in retail. · Limited progress in improving competition in the railway markets. Germany has announced the preparation of a new proposal to transpose Directive 2012/34/EU in 2015 (Recast of the First Railway Package). The federal government and Deutsche Bahn AG have signed a new infrastructure financing agreement. · No progress in pursuing consolidation efforts in the Landesbanken sector.

Europe 2020 (national targets and progress)

Employment rate target: 77 % of the population aged 20-64 || Employment rate for population aged 20–64: 76.9 % in 2012 and 77.3 % in 2013. The national employment target has been reached.

R&D target: 3.0 % of GDP || Gross domestic expenditure on R&D was 2.88 % of GDP in 2012 and 2.94 % in 2013. Germany made clear progress in achieving the 3 % R&D target and in 2013 had almost reached it. In 2013, in line with the national target, private R&D spending represented two thirds of the total figure (about 1.9 % of GDP and nearly 2 % if spending from abroad is included), while public spending represented one third (about 1 % of GDP). Both public and private spending have increased in recent years.

Greenhouse gas emissions: 14 % in 2020 compared to 2005 (in non-ETS sectors) || According to the latest national projections submitted to the Commission, and taking into account existing measures, emissions in 2020 will be 13 % lower than 2005 levels (i.e. the target is expected to be missed by 1 pp.). Non-emissions trading scheme (ETS) greenhouse gas emissions fell by 3.8 % between 2005 and 2013, while the gap between non-ETS projected emissions and the 2013 ESD-target amounts to a 0.7 % shortfall.

2020 Renewable energy target: 18 % Share of renewable energy in all modes of transport: 10 % || In 2013, the share of energy from renewable sources in gross final energy consumption reached 12.2% according to EurObserv'ER data. This is above the renewable share set out in the indicative trajectory under the EU Renewables Directive 2009/28/EC.

Indicative national energy efficiency target: Annual improvement of energy intensity (energy productivity) by 2.1 % p.a. on average until 2020. The absolute level of energy consumption in 2020 was determined to be at 276.6 Mtoe (primary energy consumption) or 194.3 Mtoe (final energy consumption). Germany set itself a more ambitious target in 2010 (Energy Concept: reduction of energy consumption from 2008 to 2020 by 20 %) || For two years, Germany has not been on track to meet the target it communicated to the Commission in 2013, or the more ambitious target it set itself in 2010. In December 2014 a comprehensive National Energy Efficiency Action Plan (including better financing) was presented to address these gaps.

Early school leaving target: <10 % || Early leavers of education and training (percentage of the population aged 18–24 with at most lower secondary education and not in further education or training): 10.5 % in 2012 and 9.9 % in 2013. Germany achieved the target in 2013.

Tertiary education target: 40 % (EU 2020) or 42 % (national target). || Tertiary educational attainment: 31.9 % in 2012 and 33.1 % in 2013, compared with an EU-average of 36.9 %. Germany has not achieved the EU target of 40 %. However, the national target of 42%, which includes International Standard Classification of Education (ISCED) 4, has already been met.

Target on the reduction of population at risk of poverty or social exclusion in number of persons: Risk-of-poverty or social exclusion target: 20 % reduction in the number of long-term unemployed by 2020 as compared with 2008 (i.e. reduction by 320 000 long-term unemployed). || The number of long-term unemployed decreased by 485 000 in 2011, 623 000 in 2012 and 658 000 in 2013 as compared with 2008. The number of long-term unemployed decreased by around 40 % between 2008 and 2013. Germany has already fulfilled the national Europe 2020 poverty target.

Table B.1:       Macroeconomic indicators

Source: European Commission 2015 winter forecast; Commission calculations

Table B.2:       Financial market indicators

Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators).

Table B.3:       Taxation indicators

Source: European Commission

Table B.4:       Labour market and social indicators

(Continued on the next page)

Table (continued)

Source: European Commission (EU Labour Force Survey and European National Accounts) For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

Table B.5:       Product market performance and policy indicators

  Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators)

Table B.6:       Green Growth

Source: European Commission unless indicated otherwise; European Commission elaborations indicated below

([1])  According to provisional national
accounts data for the year 2014.

([2])  European Commission (2014), 'The 2015
Ageing Report: Underlying assumptions and projection methodologies', European
Economy No 8/2014

([3])  The 2014 figures in Graphs 2.1.6 to
2.1.11 (except 2.1.9) are estimated based on available quarterly data until
Q1–Q3 2014. The growth rate of the period compared with the same period in 2013
is extrapolated to estimate the 2014 figure.

([4])  Broer (2011) found that, for different
individual income levels between 1996 and 2010, discretionary reduction of tax
rates led to stronger tax relief than could have been achieved by tariff
indexation to inflation (Broer, M., 2011, ‘Kalte Progression in der
Einkommensbesteuerung. Ist ein Tarif auf Rädern der
diskretionären Anpassungspolitik in Deutschland überlegen?’, Wirtschaftsdienst,
No 10, pp. 694–698).

([5])  European Commission, Joint Research
Centre, based on the EUROMOD model.

([6])  Bruckmeier, K. and J. Wiemers (2014), ‘Die meisten Aufstocker
bleiben trotz Mindestlohn bedürftig’, IAB-Kurzbericht No 7/2014.

([7])  Data for 2012 from Brenke, K. (2014), ‘Mindestlohn: Zahl der
anspruchsberechtigten Arbeitnehmer wird weit unter fünf Millionen liegen’, DIW
Wochenbericht No 5/2014. The impact is expected to be
smaller due to wage increases since 2012.

([8])  According to European Commission
estimates based on uprated SOEP 2012 data and the European Commission – OECD
Tax – Benefit model, the Kaitz index in 2015 is expected to be about 48 %
(for both gross wages and labour costs) of the median wage for Germany as a
whole, slightly lower for the western federal states (46 % and 45 %
for gross wages and labour costs, respectively), and significantly higher for the
eastern federal states (62 % and 61 % for both gross wage and
labour costs, respectively).

([9])  European Commission (2014), ‘Macroeconomic
imbalances — Germany 2014’, European Economy, Occasional Papers, No 174;
European Commission (2014), ‘Infrastructure in the EU: Developments and Impact
on Growth’, European Economy, Occasional Papers, No 203.

([10]) The constitutional ‘debt brake’
stipulates that as of 2016 the structural balance of the federal budget must
not exceed a deficit of 0.35 % of GDP, with a gradually decreasing
ceiling along an agreed transition path in the preceding years. The federal
states must have structurally balanced budgets as of 2020. However, no
meaningful assessment of possible fiscal space appears possible in the latter
case, since the situation differs significantly across federal states and no
consistent structural balances are available at the level of the federal
states.

([11]) Blazejczak, J.,
J. Diekmann, D. Edler, C. Kemfert, K. Neuhoff and W-P. Schill (2013) ‘Energy
Transition Calls for High Investment’, DIW Economic Bulletin, No 9/2013. The
government reports energy efficiency investments in residential buildings of
EUR 39.5 billion and EUR 15.3 billion for non-residential buildings in 2013, (Bundesministerium
für Wirtschaft und Energie (2014), ‘Ein gutes Stück Arbeit. Die Energie der
Zukunft. Erster Fortschrittsbericht zur Energiewende’). However, these figures
represent full capital expenditure for the refurbishment of the existing
building stock (including investments in photovoltaic and non-investment related
expenditure) while actual incremental investment in energy-efficiency-specific
measures is significantly lower. Regarding industrial energy efficiency
investments, the Federal Statistical Office reports EUR 0.93 billion in 2012.

([12]) Juergens, I., H. Amecke, R. Boyd, B. Buchner, A. Novikova, A.
Rosenberg, K. Stelmakh and A. Vasa (2012), ‘The Landscape of Climate Finance in
Germany’, CPI Report.

([13]) With ESA2010 the naming changed from
unquoted/quoted to unlisted/listed shares, from shares and other equity to
equity and investment fund shares (unit), from mutual fund shares to investment
fund shares (unit).

([14]) Along the dimension (I) equity (listed
shares, unlisted shares, other equity) and (II) investment fund shares or units
(money market fund shares or units, non-money market fund shares/units),
ESA2010.

([15]) The Bundesbank data comprise firms from
the following sectors: for 1997-2009, manufacturing, mining and quarrying,
construction, wholesale and retail trade, transport excluding railway and
business activities according to Destatis’ 2003 ‘Klassifikation der
Wirtschaftszweige’ (WZ 2003, NACE Rev. 1.1); for 2006-2012, in addition to
the above-mentioned sectors, gas, and water supply, sewerage, accommodation and
food service activities, information and communication according to Destatis’
2008 ‘Klassifikation der Wirtschaftszweige’ (WZ 2008, NACE Rev. 2).
Deutsche Bundesbank (2013), ‘Extrapolated results from financial statements of
German enterprises from 2006 to 2012’, Special Statistical Publication 5.

([16]) Deutsche Bundesbank (2014), ‘Verhältniszahlen aus Jahresabschlüssen
deutscher Unternehmen von 2010 bis 2011’, Statistische Sonderveröffentlichung.

([17]) Deutsche Bundesbank (2014), ‘Consolidated
financial statement statistics as a contribution to the extended corporate
analysis: approach and initial results’, Monthly Report 07/2014.

([18]) Incentives for corporate investment
under alternative sources of finance (retained earnings, new equity and debt)
are analysed based on the tax-adjusted user cost of capital, which is an
indicator of the marginal cost of investment calculated according to the
Devereux and Griffith methodology. An investment project at a constant
inflation rate of 2 % and a real interest rate of 5 % is assumed.
The analysis accounts only for taxation at the corporate level, also given that
in integrated capital markets and with diffused stock holdings it would be
virtually impossible for the firm to account for taxation at the level of the
individual investors. Differences in companies’ financial structure or
tax-minimising financial arrangements by multinational corporations are not
taken into account (see Devereux, M. P. and R. Griffith, 2003, ‘Evaluating
tax policy for location decisions’, International Tax and Public Finance,
Vol. 10, pp. 107–126; the calculated indicators are available in ZEW,
2014, ‘Effective tax levels using the Devereux/Griffith methodology’, Report
for DG TAXUD).

([19]) Barrios, S., D. Pontikakis and S.
Riscado, (2015), ‘The great swing in EU corporate savings: does tax policy
matter?’, European Commission, Joint Research Centre, forthcoming.

([20]) ZEW (2014), ‘Effective tax levels using
the Devereux/Griffith methodology’, Report for DG TAXUD.

([21]) The ‘marginal tax advantage of debt’ is
the difference between the after-tax value returned to the investor as interest
and as equity income (dividends or realised capital gains). A positive
indicator value signals that debt interest is the tax favoured way to return
capital to investors, once taxation at both corporate and individual level has
been factored in. The indicator also depends on the relative importance of
external vs internal equity. Thus, the relevant dividend-pay-out ratio is
assumed to take the extreme values of 0 (capital returned via share repurchase
giving rise to a capital gain) and 1 (full distribution). Moreover, given that
the top statutory personal income tax rates are used, the calculated value can
be interpreted as a lower bound.

([22]) Accordingly, a 10 % increase in
the tax advantage of debt is associated with a 1.5 % increase in the debt
ratio (Hartmann-Wendels, T., I. Stein and A. Stöter, 2012, ‘Tax incentives and
capital structure choice: evidence from Germany’, Deutsche Bundesbank
Discussion Paper, No 18/2012).

([23]) Dreßler, D. and U. Scheuering (2012),
‘Empirical evaluation of interest barrier effects’, ZEW Discussion papers, No
12-046. .

([24]) Kaserer, C., M. S. Rapp and O.
Trinchera (2012), ‘Payout policy and corporate insiders: evidence from the
German Tax Reduction Act 2001’, Zeitschrift für Betriebswirtschaft, Vol. 82,
ZfB-Special Issue 5/2012, pp. 85-114.

([25]) Rünger, S. (2010), ‘The Effect of
Germany’s Tax Reform Act 2001 on ownership diffusion of German corporations’,
CESIfo Conference on Corporate Taxes and Corporate Governance.

([26]) Exports in value added exclude the
value of imports embedded in gross exports. Exports in value added refer to the
value of exports that is added by the respective country.

([27]) Slovakia, Austria, the Netherlands,
Poland, Slovenia, Luxembourg, Belgium, United Kingdom.

([28]) As well as Austria, Denmark, Cyprus, Finland, Belgium, Malta,
Sweden.

([29]) Along with
Cyprus, Belgium, Hungary and Finland.

([30]) Debt excluding (official) represents other
investment (e.g., loans) and portfolio investment in debt securities, minus
official amounts linked to TARGET2, the European Central Bank's Securities
Markets Programme and the euro area financial assistance programmes.

([31]) Data on bank claims cover in particular the banking sector, data
on gross financial exposures cover the claims of the entire economy .The two
data sources may not be entirely consistent as i) gross financial exposures are
based on 2012 data while bank claims are based on Q2-2014 data, ii) countries
in the sample differ across datasets and iii) data on bank claims is based on
the country of ultimate risk (the country where the guarantor of a claim
resides) and includes claims of banks' own foreign affiliates, while gross
financial exposures are based on a locational notion of counterpart that is
consistent with balance of payments statistics.

([32]) France, Italy, The Netherlands, Poland,
Portugal, Spain, Finland, Hungary, Belgium and Denmark.

([33]) Kollmann, R., M. Ratto, W. Roeger, J.
in’t Veld and L. Vogel (2014), ‘What drives the German current account? And how
does it affect other EU Member States?’, European Economy, Economic Papers 516.

([34]) Elekdag, S. and D. Muir (2014), ‘Das
Public Kapital: How Much Would Higher German Public Investment Help Germany and
the Euro Area?’, IMF Working Paper, No 14/227.

([35]) European Commission (2014), ‘Taxation
trends in the European Unionֹ — Data for the EU Member States, Iceland
and Norway, Luxembourg’.

([36]) This so-called value added tax policy
gap is estimated to have increased from 37 % in 2000-2011 to 41 %
in 2009‑2012 (CASE, 2014, ‘2012 Update Report to the Study to quantify
and analyse the value added tax Gap in the EU-27 Member States’).

([37]) RWI (2013), ‘Analyse der fiskalischen Auswirkungen des ermäßigten
Umsatzsteuersatzes in Deutschland unter Verwendung eines Simulationsmodells
sowie der Wachstumseffekte von Straffungskonzepten’, Endbericht, Oktober 2013.

([38]) European Commission, OECD (2015), ‘Tax
and benefits indicators database’.

([39]) PwC and WorldBank (2014), ‘Paying Taxes
2015:  The global picture’; OECD (2013), ‘Tax administration 2013, Comparative
information on OECD and other advanced and emerging economies’, OECD
publishing..

([40]) Germany has the highest number of
(acute care) hospital beds per inhabitant among EU countries (5.3 per
1 000 in 2012 against 3.7 on average in the EU) and the second highest
expenditure on pharmaceuticals per inhabitant after Belgium (in EUR purchasing
power parity) (OECD, 2014, ‘Health at a Glance: Europe 2014’, OECD Publishing).

([41]) Bavaria, Bremen, Hamburg, Hessen,
Mecklenburg-Western Pomerania, Rhineland-Palatinate, Saxony and Schleswig-Holstein
have enshrined debt brakes in their respective constitutions and Baden
Württemberg, Lower Saxony, Saxony-Anhalt and Thuringia in their budget laws.

([42]) Annual ceilings for the structural
deficit to 2020 and provisions for the calculation of structural balances have
been laid down in administrative agreements with the federal states receiving
consolidation assistance (Berlin, Bremen, Schleswig-Holstein, Saarland and
Saxony-Anhalt).

([43]) European Central Bank (2014), ‘Statistics
on Consolidated Banking Data’.

([44]) European Private Equity and Venture
Capital Association (2014), ‘2014 Yearbook — European Private Equity Activity
Data 2007-2013’.

([45]) European Commission calculation based on ‘Statistik der Bundesagentur
für Arbeit’. From 2010 to 2013, the integration budget
for long-term unemployed recipients of unemployment benefit II (Eingliederungsleistungen)
was reduced from EUR 5.7 billion to EUR 2.8 billion, the integration budget as
a proportion of total expenditure for active and passive labour market services
under social code book II decreased from 12.2 % to 6.9 %.

([46]) Körner, T., H. Meinken, and K. Puch, ‘Wer sind die ausschließlich
geringfügig Beschäftigten? Eine Analyse nach sozialer Lebenslage’, Wirtschaft
und Statistik, Heft 1, Statistisches Bundesamt, Wirtschaft und Statistik,
Januar 2013.

([47]) Hans-Böckler-Stiftung (2010), ‘Atypische Beschäftigung. Minijobs:
Ländlich, westlich, weiblich’, Böckler Impuls, 19/2010, Hans-Böckler-Stiftung, Düsseldorf.

([48]) Voss, D. and C. Weinkopf, ‘Niedriglohnfalle Minijob’, WSI
Mitteilungen, No 1/2012.

([49]) The allowance has played a role in the
decision of 13 % of the parents with children under three who do not wish
their children to participate in childcare. The allowance is particularly
attractive for families with low labour market participation, low educational
attaintment, a low income or a migrat background (Fuchs-Rechlin, K., G.
Kaufhold, M. Thuilot and T. Webs, 2014, ‘Der U3 Ausbau im Endspurt. Analysen zu kommunalen Betreuungsbedarfen und Betreuungswünschen von
Eltern’, Forschungsverbund TU Dortmund und DJI, Dortmund.

([50]) Severe material deprivation among the elderly increased from about
2 % in 2010 to 3 % in 2013. The number of beneficiaries receiving a
means-tested minimum income for retirees (Grundsicherung
im Alter) nearly doubled between its introduction in
2003 and 2013 (the increase is 93.7 % according to the European
Commission’s calculation based on Destatis data). In 2013, around 500.000
people were receiving Grundsicherung im Alter. The at-risk of poverty
rate in old age in Germany is higher than the EU-average (DE: 14.9 %, EU:
13.9 %).

([51]) In its annual pension report the
federal government’s long-term projection of the pension level until 2028
suggests that the total standard pension level as a percentage of average
insured income (Gesamtversorungsniveau vor Steuern) may be kept at
today’s level, provided that people have contributed fully to a supplementary Riester-pension.
However, the level of Riester-pension depends strongly on the projected
interest rate. The report assumes an interest rate of 4 % per year which
is very generous given today’s low-interest environment.

([52]) Germany performs well in terms of long
disruptions (fifteen minutes per customer and year, 2009–2013 average)
according to the System Average Interruption Duration Index (SAIDI), (http://www.bundesnetzagentur.de).
However, 72 % of total disruptions in Germany take less than three
minutes and are not captured by SAIDI.

([53])The
following categories are used to assess progress in implementing the 2014 CSRs:

No progress: The Member State (MS) has
neither announced nor adopted measures to address the CSR. This category also
applies if the MS has commissioned a study group to evaluate possible measures.

Limited progress: The MS has announced
some measures to address the CSR, but these appear insufficient and/or their
adoption/implementation is at risk.

Some progress: The MS has announced or
adopted measures to address the CSR. These are promising, but not all of them
have been implemented and it is not certain that all will be.

Substantial progress: The MS has adopted
measures, most of which have been implemented. They go a long way towards
addressing the CSR.

Fully implemented: The MS has adopted
and implemented measures that address the CSR appropriately.

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