Economic Policies
#4Key Findings
With its strong past performance providing flexibility during the pandemic, Germany falls into the top ranks internationally (rank 4) with regard to economic policies. Its score on this measure has improved by 0.1 point relative to 2014.
The government reacted to the pandemic with one of the OECD’s largest support packages, featuring generous short-time work schemes and grants for firms. GDP declined by 4.6% in 2020. Prospects for a full recovery are good, given the relatively mild economic impact.
The unemployment rate had declined to about 5% in 2019, suggesting successful integration of the influx of refugees that arrived in 2015. After rising to 6.4% in 2020, the rate fell back to near pre-pandemic levels by late 2021. Labor shortages are now seen as a greater problem than unemployment.
Eight years of balanced budgets and surpluses gave the government considerable flexibility during the crisis. Debt rose to a moderate level of 71.4% of GDP in 2021, and is expected to decline. R&D funding has risen in recent years, with levels above the EU average, but critics point to a lack of disruptive innovation. A new carbon tax has been imposed in the building and transport sectors.
The government reacted to the pandemic with one of the OECD’s largest support packages, featuring generous short-time work schemes and grants for firms. GDP declined by 4.6% in 2020. Prospects for a full recovery are good, given the relatively mild economic impact.
The unemployment rate had declined to about 5% in 2019, suggesting successful integration of the influx of refugees that arrived in 2015. After rising to 6.4% in 2020, the rate fell back to near pre-pandemic levels by late 2021. Labor shortages are now seen as a greater problem than unemployment.
Eight years of balanced budgets and surpluses gave the government considerable flexibility during the crisis. Debt rose to a moderate level of 71.4% of GDP in 2021, and is expected to decline. R&D funding has risen in recent years, with levels above the EU average, but critics point to a lack of disruptive innovation. A new carbon tax has been imposed in the building and transport sectors.
How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
10
9
9
Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
8
7
6
7
6
Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
5
4
3
4
3
Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
2
1
1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Germany’s economic policies reflect the country’s broad consensus on the so-called social market economy model. Policies are supported by strong and stable institutions that guarantee sound property rights, an open economy, an effective competition policy, and effective social protection through a developed and constantly evolving welfare state. Over recent years, the leitmotif of the social market economy has been increasingly augmented by the growing emphasis on ecological sustainability. While this trend has been visible already in the past legislative terms, the new German coalition government that took office in December 2021 has now made this an explicit objective. The new three-party coalition formed by the SPD, the Green Party and the liberal FDP have agreed to transform the German economic model toward a “social-ecological market economy” (Koalitionsvertrag 2021, p. 25) where each of the three partners stands for an emphasis on one of the three model dimensions (SPD for social justice, Green party for ecological sustainability, and FDP for liberal market principles). Hence, this approach appears to be consistent and credible.
The German economy has performed relatively well over the medium term of the past decade and has also proved its resilience since the outbreak of the pandemic at the beginning of 2020.
Prior to the crisis, the country was on a path of stable economic growth and steady growth in employment. Compared to other OECD countries, Germany has reached very high employment levels with an unemployment rate increasingly in the region of a full-employment economy. From 2012 to 2019, government budgets were balanced or in a comfortable surplus situation (AMECO Database 2022).
Severely hit by the pandemic lockdowns since March 2020, the German government swiftly engineered one of the largest fiscal stabilization packages among OECD countries (International Monetary Fund 2021). The package included the activation of familiar and tested instruments such as generous short-time work schemes but also new rescue packages that effectively supported firms through grants and liquidity. Both this massive response and the underlying financial health of the German corporate sector explain a relatively mild impact of the largest global economic shock in postwar history. Real GDP declined by 4.6% in 2020, which marked a deep recession that was nonetheless milder than that seen in other euro area countries; on average, real GDP declined by 6.4% in the euro area (European Commission 2021). Germany’s recovery was hampered in 2021 by shortages of key industrial inputs and frictions in international supply chains. However, the prospect for a full recovery is good (Sachverständigenrat 2021) and further indicators such as the low number of firm insolvencies and the mild impact of the crisis on the level of unemployment confirm an optimistic assessment on how Germany will finally cope with the pandemic crisis.
Leading indicators classify Germany’s competitiveness as an investment location as good but not as excellent as, for example, the Scandinavian countries. A supportive economic policy mix is seen as a strength, but the country’s deteriorating infrastructure, the backlog in digitalization, high energy prices, and a high effective corporate tax burden are seen as weaknesses (Dutt, 2021; IMD World Competitiveness Ranking 2021).
Citations:
AMECO Database (2022): Annual macro-economic database of the European Commission’s DG for Economic and Financial Affairs, https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en (accessed: 3 January 2022).
Dutt, Verena, Fischer, Leonie, Heinemann, Friedrich, Kraus, Margit und Minkus, Fynn (2021), Länderindex der Stiftung Familienunternehmen, 8. Auflage, München: Stiftung Familienunternehmen.
European Commission (2021): European Economic Forecast, Autumn 2021, European Economy, Institutional Paper 160, November.
IMD World Competitiveness Ranking (2021): Results. https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/ (accessed: 3 January 2022)
International Monetary Fund (2021): Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, July 2021.
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
Sachverständigenrat (2021): Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Transformation gestalten: Bildung, Digitalisierung und Nachhaltigkeit, Jahresgutachten 2021/2022, Wiesbaden.
The German economy has performed relatively well over the medium term of the past decade and has also proved its resilience since the outbreak of the pandemic at the beginning of 2020.
Prior to the crisis, the country was on a path of stable economic growth and steady growth in employment. Compared to other OECD countries, Germany has reached very high employment levels with an unemployment rate increasingly in the region of a full-employment economy. From 2012 to 2019, government budgets were balanced or in a comfortable surplus situation (AMECO Database 2022).
Severely hit by the pandemic lockdowns since March 2020, the German government swiftly engineered one of the largest fiscal stabilization packages among OECD countries (International Monetary Fund 2021). The package included the activation of familiar and tested instruments such as generous short-time work schemes but also new rescue packages that effectively supported firms through grants and liquidity. Both this massive response and the underlying financial health of the German corporate sector explain a relatively mild impact of the largest global economic shock in postwar history. Real GDP declined by 4.6% in 2020, which marked a deep recession that was nonetheless milder than that seen in other euro area countries; on average, real GDP declined by 6.4% in the euro area (European Commission 2021). Germany’s recovery was hampered in 2021 by shortages of key industrial inputs and frictions in international supply chains. However, the prospect for a full recovery is good (Sachverständigenrat 2021) and further indicators such as the low number of firm insolvencies and the mild impact of the crisis on the level of unemployment confirm an optimistic assessment on how Germany will finally cope with the pandemic crisis.
Leading indicators classify Germany’s competitiveness as an investment location as good but not as excellent as, for example, the Scandinavian countries. A supportive economic policy mix is seen as a strength, but the country’s deteriorating infrastructure, the backlog in digitalization, high energy prices, and a high effective corporate tax burden are seen as weaknesses (Dutt, 2021; IMD World Competitiveness Ranking 2021).
Citations:
AMECO Database (2022): Annual macro-economic database of the European Commission’s DG for Economic and Financial Affairs, https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en (accessed: 3 January 2022).
Dutt, Verena, Fischer, Leonie, Heinemann, Friedrich, Kraus, Margit und Minkus, Fynn (2021), Länderindex der Stiftung Familienunternehmen, 8. Auflage, München: Stiftung Familienunternehmen.
European Commission (2021): European Economic Forecast, Autumn 2021, European Economy, Institutional Paper 160, November.
IMD World Competitiveness Ranking (2021): Results. https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/ (accessed: 3 January 2022)
International Monetary Fund (2021): Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, July 2021.
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
Sachverständigenrat (2021): Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Transformation gestalten: Bildung, Digitalisierung und Nachhaltigkeit, Jahresgutachten 2021/2022, Wiesbaden.
How effectively does labor market policy address unemployment?
10
9
9
Successful strategies ensure unemployment is not a serious threat.
8
7
6
7
6
Labor market policies have been more or less successful.
5
4
3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Germany’s success in reducing structural unemployment since the mid-2000s has been impressive. Germany’s employment increased from 41.0 million to 45.3 million between 2010 and 2019 (Destatis 2022) and features an employment rate that is far above the OECD average (OECD 2021). Before COVID-19 reached Germany, the unemployment rate decreased to 5% (2019 average, national definition, Bundesagentur für Arbeit 2021). This suggests that the labor market has successfully integrated the large influx of refugees that arrived in 2015. Employment growth has been accompanied by a decline in both temporary work and minor employment contracts (“Minijobs”) and confirms that the boom is not driven by a flight into atypical employment. However, a high part-time share of female workers in particular is another feature of the German employment boom, which could increase the risk of old-age poverty due to lower pension entitlements.
The negative impact of the pandemic on employment was surprisingly mild. Employment declined from 45.3 to 44.9 million from 2019 to 2020 but stabilized again in 2021 (Destatis 2022). After rising to 6.4% in the summer of 2020, the unemployment rate fell back to roughly its pre-pandemic level of 5.1% by November 2021 (Bundesagentur für Arbeit 2021), which points to the resilience of the labor market. Current predictions indicate that the German labor market of the future will no longer be characterized by a significant unemployment problem but, on the contrary, by a dramatic shortage of workers in many sectors.
There are several factors that help explain the German labor market’s structural and cyclical strengths. First, the Agenda 2020 reforms of the early 2020s have proved effective in increasing incentives to take on employment and reforming labor market administration. Second, researchers point to a high degree of wage flexibility that began already in the 1990s as a result of harmonic industrial relations and industrial accountability (Dustmann et al. 2014). Third, the government has a toolbox of tested labor market instruments to use in protecting jobs in a crisis situation. In 2020, the short-time work subsidies once again played a decisive role in helping firms affected by the lockdowns to keep their employees on payroll, despite plummeting sales. The government quickly increased replacement rates, made the scheme more accessible, expanded its duration and waved social security contributions. This helped firms effectively slash their wage costs during the most acute periods of the crisis. However, by international comparison, the German short-time work scheme is very generous in the support it provides and its unique increasing wage replacement rate could, over time, disincentivize structural change and the relocation of workers (Scarpetta et al, 2020).
In recent years, government regulation of the labor market has increased as new restrictions for temporary employment programs have been introduced. A national minimum wage has been in effect since January 2015, with exemptions for young employees and the long-term unemployed in particular. The minimum wage has increased from initially €8.50 to €9.82 from January 2022 onward. The new government plans to further lift the minimum wage to €12 (Koalitionsvertrag 2021). The German Council of Economic Experts has not reported any detrimental macroeconomic effects, though it is difficult to assess the long-term consequences of the national minimum wage, particularly during less dynamic periods.
While international organizations like the OECD have acknowledged Germany’s dynamic employment growth, they have regularly pointed to a key obstacle to achieving even higher labor use: the very high marginal tax rates on labor in general and for a family’s second earner in particular. Very high marginal tax rates are particularly harmful when it comes to integrating single parents into the labor market and create substantial work disincentives for a household’s second earner (OECD 2021).
Citations:
Bundesagentur für Arbeit (2021): Monatsbericht zum Arbeits- und Ausbildungsmarkt, November 2021.
Destatis (2022): Erwerbstätigkeit 2021 auf gleichem Niveau wie 2020, Pressemitteilung Nr. 001 vom 3. Januar 2022.
Dustmann, Christian, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener (2014), From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy, Journal of Economic Perspectives, 28(1): 167-88.
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
OECD (2021): Germany, Economic Policy Reforms 2021: Going for Growth, Country Note, April 2021.
Scarpetta, Stefano, Mark Pearson, Alexander Hijzen, and Andrea Salvatori (2020), Job Retention Schemes During the COVID-19-19 Lockdown and Beyond. OECD Tackling Coronavirus (COVID-19): Contributing to a Global Effort.
The negative impact of the pandemic on employment was surprisingly mild. Employment declined from 45.3 to 44.9 million from 2019 to 2020 but stabilized again in 2021 (Destatis 2022). After rising to 6.4% in the summer of 2020, the unemployment rate fell back to roughly its pre-pandemic level of 5.1% by November 2021 (Bundesagentur für Arbeit 2021), which points to the resilience of the labor market. Current predictions indicate that the German labor market of the future will no longer be characterized by a significant unemployment problem but, on the contrary, by a dramatic shortage of workers in many sectors.
There are several factors that help explain the German labor market’s structural and cyclical strengths. First, the Agenda 2020 reforms of the early 2020s have proved effective in increasing incentives to take on employment and reforming labor market administration. Second, researchers point to a high degree of wage flexibility that began already in the 1990s as a result of harmonic industrial relations and industrial accountability (Dustmann et al. 2014). Third, the government has a toolbox of tested labor market instruments to use in protecting jobs in a crisis situation. In 2020, the short-time work subsidies once again played a decisive role in helping firms affected by the lockdowns to keep their employees on payroll, despite plummeting sales. The government quickly increased replacement rates, made the scheme more accessible, expanded its duration and waved social security contributions. This helped firms effectively slash their wage costs during the most acute periods of the crisis. However, by international comparison, the German short-time work scheme is very generous in the support it provides and its unique increasing wage replacement rate could, over time, disincentivize structural change and the relocation of workers (Scarpetta et al, 2020).
In recent years, government regulation of the labor market has increased as new restrictions for temporary employment programs have been introduced. A national minimum wage has been in effect since January 2015, with exemptions for young employees and the long-term unemployed in particular. The minimum wage has increased from initially €8.50 to €9.82 from January 2022 onward. The new government plans to further lift the minimum wage to €12 (Koalitionsvertrag 2021). The German Council of Economic Experts has not reported any detrimental macroeconomic effects, though it is difficult to assess the long-term consequences of the national minimum wage, particularly during less dynamic periods.
While international organizations like the OECD have acknowledged Germany’s dynamic employment growth, they have regularly pointed to a key obstacle to achieving even higher labor use: the very high marginal tax rates on labor in general and for a family’s second earner in particular. Very high marginal tax rates are particularly harmful when it comes to integrating single parents into the labor market and create substantial work disincentives for a household’s second earner (OECD 2021).
Citations:
Bundesagentur für Arbeit (2021): Monatsbericht zum Arbeits- und Ausbildungsmarkt, November 2021.
Destatis (2022): Erwerbstätigkeit 2021 auf gleichem Niveau wie 2020, Pressemitteilung Nr. 001 vom 3. Januar 2022.
Dustmann, Christian, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener (2014), From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy, Journal of Economic Perspectives, 28(1): 167-88.
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
OECD (2021): Germany, Economic Policy Reforms 2021: Going for Growth, Country Note, April 2021.
Scarpetta, Stefano, Mark Pearson, Alexander Hijzen, and Andrea Salvatori (2020), Job Retention Schemes During the COVID-19-19 Lockdown and Beyond. OECD Tackling Coronavirus (COVID-19): Contributing to a Global Effort.
How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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9
9
Taxation policy fully achieves the objectives.
8
7
6
7
6
Taxation policy largely achieves the objectives.
5
4
3
4
3
Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
Up until the pandemic recession, Germany’s tax system had been able to support dynamic growth in government spending and balanced budgets across all federal layers. According to the Ministry of Finance, between 2010 and 2019, total tax revenues rose by 50%, from €531 billion to €799 billion (Bundesfinanzministerium 2020). This buoyant revenue growth is not just a function of economic growth alone; the ratio of tax revenues to GDP also increased significantly from 21.7% in 2010 to 24.1% in 2019 (Bundesfinanzministerium 2021). With the strong decline of economic activity in 2020 and temporary tax cuts to stabilize the economy during the pandemic crisis, tax revenues declined sharply in 2020, but they are projected to recover quickly and exceed their pre-crisis level in 2022 (Bundesfinanzministerium 2020).
Consideration of equity aspects: Germany is among the OECD countries in which the tax and transfer system is particularly effective in correcting unequal market incomes to achieve a more equal post-tax situation. Whereas the Gini coefficient is 0.49 for pre-tax market incomes, it is at 0.29 for disposable incomes by all the redistributive tax and transfer instruments (Sachverständigenrat 2019). Hence, the tax and transfer system performs quite well in terms of redistributive objectives with respect to the equalization of incomes. Germany taxes inheritances but applies generous provisions for corporate wealth. The country does not have a wealth tax, though the idea has been a subject of heated debate for many years. During the 2021 election campaign, parties on the left proposed introducing wealth taxes (as they had done often before), but the new three-party coalition proved unable to reach agreement on the issue.
Competitiveness: The German tax system lacks international competitiveness and entails substantial work disincentives. The top marginal personal-income-tax rate (47.5%) is comparable to the OECD average (OECD 2022), but the average marginal rate continues to be a key challenge for Germany’s competitiveness, as it is 15 percentage points higher than the OECD average. The OECD concludes that this is particularly harmful with regard to the integration of single parents into the labor market and it creates substantial work disincentives for households’ potential second earners (OECD 2021). Furthermore, the complexity of the German tax system imposes high compliance costs on households and firms. A major further weakness of the German tax system is the eroding competitiveness of corporate taxation. The position of Germany with regard to effective corporate-tax-rate comparisons has continuously declined over the past decade. Today, there are very few industrial countries left that impose a higher tax burden on their companies (Dutt et al., 2021). Germany has thus lost considerable tax appeal as a destination for foreign direct investment. The country is among the initiators of the emerging new OECD rules on international minimum corporate tax rates, but this project is unlikely to alleviate the lack of German tax competitiveness since the international minimum tax rate will be set far below the German level.
Ecological sustainability: Since the ecological tax reforms of the late 1990s, the German tax system has been equipped with “green” taxes designed to internalize the ecological damage produced by certain polluting activities. The German industry is subject to the European emissions-trading system with its market-based pricing of CO2 emissions. In 2021, Germany took another important step forward by introducing a carbon pricing system for the building and transport sectors. This CO2 emissions tax will increase from its initial fixed price of €25 per allowance (ton of CO2 equivalent) in 2021 to €55 in 2025 (Bundesregierung 2022). The new government aims to stick to this pre-announced price path but intends to set up a social compensation scheme (“Klimageld”) that will help low-income households cope with higher energy prices (Koalitionsvertrag 2021, p. 63).
Citations:
Bundesministerium der Finanzen (2020): Datensammlung zur Steuerpolitik 2020/2021, Dezember 2020.
Bundesministerium der Finanzen (2021): Die wichtigsten Steuern im internationalen Vergleich 2020, Ausgabe 2021, Rechtsstand: 31.12.2020.
Bundesregierung (2022): CO2 hat einen Preis Anreiz für weniger CO2-Emissionen, https://www.bundesregierung.de/breg-de/themen/klimaschutz/weniger-co2-emissionen-1790134 (accessed: 4 January 2022).
Dutt, Verena, Fischer, Leonie, Heinemann, Friedrich, Kraus, Margit und Minkus, Fynn (2021): Länderindex der Stiftung Familienunternehmen, 8. Auflage, München: Stiftung Familienunternehmen.
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
OECD (2021): Germany, Economic Policy Reforms 2021: Going for Growth, Country Note, April 2021.
OECD (2022): Top statutory personal income tax rate and top marginal tax rates for employees. Online: http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7 (accessed: 4 January 2022).
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2019): Den Strukturwandel meistern, Jahresgutachten 19/20, Sachverständigenrat: Wiesbaden.
Consideration of equity aspects: Germany is among the OECD countries in which the tax and transfer system is particularly effective in correcting unequal market incomes to achieve a more equal post-tax situation. Whereas the Gini coefficient is 0.49 for pre-tax market incomes, it is at 0.29 for disposable incomes by all the redistributive tax and transfer instruments (Sachverständigenrat 2019). Hence, the tax and transfer system performs quite well in terms of redistributive objectives with respect to the equalization of incomes. Germany taxes inheritances but applies generous provisions for corporate wealth. The country does not have a wealth tax, though the idea has been a subject of heated debate for many years. During the 2021 election campaign, parties on the left proposed introducing wealth taxes (as they had done often before), but the new three-party coalition proved unable to reach agreement on the issue.
Competitiveness: The German tax system lacks international competitiveness and entails substantial work disincentives. The top marginal personal-income-tax rate (47.5%) is comparable to the OECD average (OECD 2022), but the average marginal rate continues to be a key challenge for Germany’s competitiveness, as it is 15 percentage points higher than the OECD average. The OECD concludes that this is particularly harmful with regard to the integration of single parents into the labor market and it creates substantial work disincentives for households’ potential second earners (OECD 2021). Furthermore, the complexity of the German tax system imposes high compliance costs on households and firms. A major further weakness of the German tax system is the eroding competitiveness of corporate taxation. The position of Germany with regard to effective corporate-tax-rate comparisons has continuously declined over the past decade. Today, there are very few industrial countries left that impose a higher tax burden on their companies (Dutt et al., 2021). Germany has thus lost considerable tax appeal as a destination for foreign direct investment. The country is among the initiators of the emerging new OECD rules on international minimum corporate tax rates, but this project is unlikely to alleviate the lack of German tax competitiveness since the international minimum tax rate will be set far below the German level.
Ecological sustainability: Since the ecological tax reforms of the late 1990s, the German tax system has been equipped with “green” taxes designed to internalize the ecological damage produced by certain polluting activities. The German industry is subject to the European emissions-trading system with its market-based pricing of CO2 emissions. In 2021, Germany took another important step forward by introducing a carbon pricing system for the building and transport sectors. This CO2 emissions tax will increase from its initial fixed price of €25 per allowance (ton of CO2 equivalent) in 2021 to €55 in 2025 (Bundesregierung 2022). The new government aims to stick to this pre-announced price path but intends to set up a social compensation scheme (“Klimageld”) that will help low-income households cope with higher energy prices (Koalitionsvertrag 2021, p. 63).
Citations:
Bundesministerium der Finanzen (2020): Datensammlung zur Steuerpolitik 2020/2021, Dezember 2020.
Bundesministerium der Finanzen (2021): Die wichtigsten Steuern im internationalen Vergleich 2020, Ausgabe 2021, Rechtsstand: 31.12.2020.
Bundesregierung (2022): CO2 hat einen Preis Anreiz für weniger CO2-Emissionen, https://www.bundesregierung.de/breg-de/themen/klimaschutz/weniger-co2-emissionen-1790134 (accessed: 4 January 2022).
Dutt, Verena, Fischer, Leonie, Heinemann, Friedrich, Kraus, Margit und Minkus, Fynn (2021): Länderindex der Stiftung Familienunternehmen, 8. Auflage, München: Stiftung Familienunternehmen.
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
OECD (2021): Germany, Economic Policy Reforms 2021: Going for Growth, Country Note, April 2021.
OECD (2022): Top statutory personal income tax rate and top marginal tax rates for employees. Online: http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7 (accessed: 4 January 2022).
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2019): Den Strukturwandel meistern, Jahresgutachten 19/20, Sachverständigenrat: Wiesbaden.
To what extent does budgetary policy realize the goal of fiscal sustainability?
10
9
9
Budgetary policy is fiscally sustainable.
8
7
6
7
6
Budgetary policy achieves most standards of fiscal sustainability.
5
4
3
4
3
Budgetary policy achieves some standards of fiscal sustainability.
2
1
1
Budgetary policy is fiscally unsustainable.
Before government budgets in Germany were hit by the fiscal consequences of the pandemic, they looked back at an unprecedented eight-year period of balanced budgets and, since 2015, significant surpluses of 1% of GDP or more. The combination of stable economic growth with rising surpluses had led to a strong decline of the debt-to-GDP ratio from 82.4% in 2012 to 58.9% in 2019, which was below the Maastricht reference value of 60% (AMECO Database 2022). This success stands in sharp and favorable contrast to the other large euro area countries for which debt levels have been trending upwards and had reached magnitudes of 100% of GDP or even higher before the pandemic.
When the pandemic hit the country, the government was quick to set up a massive rescue package that, relative to GDP, was among the largest in the OECD (International Monetary Fund 2021). This reaction was in compliance with the constitutional debt brake, which foresees an escape clause in case of an emergency. The rescue package included additional resources for the health sector and containment of the pandemic, transfers to households, generous short-time work incentives, subsidies and liquidity support for companies, and temporary tax cuts (most prominently a temporary cut of VAT rates). This strong fiscal reaction was buoyed by a large economic policy consensus that a comprehensive fiscal answer was justified to mitigate the longer-run economic damage of the pandemic. Despite this massive fiscal engagement, the consequences for the government balance and public debt were much milder than in many other EU and OECD countries: The debt-to-GDP-ratio is projected to peak at a moderate level of 71.4% in 2021 and to fall subsequently. Thus, the fiscal performance in the pandemic so far rather reflects a responsible and rather successful stabilization policy that took advantage of the fiscal leeway created in the years before.
However, the medium- and long-run challenges resulting from demographic change are substantial and, so far, convincing answers of how to cope with it are missing. According to calculations based on the generational accounting methodology developed by Bernd Raffelhüschen and his coauthors (Stiftung Marktwirtschaft 2021), Germany’s “implicit debt” (i.e., the government’s spending promises not covered by future tax revenues) even exceeds the official debt and amounts to 105% of GDP in 2021. The new German government has developed no strategy for making the welfare state more sustainable and limiting the rising burden being placed on the federal budget with its increasing transfers to the pension system. Pension experts criticize both the previous and new governments of focusing one-sidedly on increasing benefits and lacking a sense of reality for the long-term constraints on financing (Börsch-Supan 2021).
Citations:
AMECO Database (2022): Annual macro-economic database of the European Commission’s DG for Economic and Financial Affairs, https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en (accessed: 3 January 2022).
Börsch-Supan, Axel (2021): Die Verdrängung des demographischen Wandels, Frankfurter Allgemeine Zeitung, 24 December 2021, p. 22.
International Monetary Fund (2021): Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, July 2021.
Stiftung Marktwirtschaft (2021): EU-Nachhaltigkeitsranking 2021: Corona geht – Demografie bleibt, Pressemitteilung, 13 December 2021.
When the pandemic hit the country, the government was quick to set up a massive rescue package that, relative to GDP, was among the largest in the OECD (International Monetary Fund 2021). This reaction was in compliance with the constitutional debt brake, which foresees an escape clause in case of an emergency. The rescue package included additional resources for the health sector and containment of the pandemic, transfers to households, generous short-time work incentives, subsidies and liquidity support for companies, and temporary tax cuts (most prominently a temporary cut of VAT rates). This strong fiscal reaction was buoyed by a large economic policy consensus that a comprehensive fiscal answer was justified to mitigate the longer-run economic damage of the pandemic. Despite this massive fiscal engagement, the consequences for the government balance and public debt were much milder than in many other EU and OECD countries: The debt-to-GDP-ratio is projected to peak at a moderate level of 71.4% in 2021 and to fall subsequently. Thus, the fiscal performance in the pandemic so far rather reflects a responsible and rather successful stabilization policy that took advantage of the fiscal leeway created in the years before.
However, the medium- and long-run challenges resulting from demographic change are substantial and, so far, convincing answers of how to cope with it are missing. According to calculations based on the generational accounting methodology developed by Bernd Raffelhüschen and his coauthors (Stiftung Marktwirtschaft 2021), Germany’s “implicit debt” (i.e., the government’s spending promises not covered by future tax revenues) even exceeds the official debt and amounts to 105% of GDP in 2021. The new German government has developed no strategy for making the welfare state more sustainable and limiting the rising burden being placed on the federal budget with its increasing transfers to the pension system. Pension experts criticize both the previous and new governments of focusing one-sidedly on increasing benefits and lacking a sense of reality for the long-term constraints on financing (Börsch-Supan 2021).
Citations:
AMECO Database (2022): Annual macro-economic database of the European Commission’s DG for Economic and Financial Affairs, https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en (accessed: 3 January 2022).
Börsch-Supan, Axel (2021): Die Verdrängung des demographischen Wandels, Frankfurter Allgemeine Zeitung, 24 December 2021, p. 22.
International Monetary Fund (2021): Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, July 2021.
Stiftung Marktwirtschaft (2021): EU-Nachhaltigkeitsranking 2021: Corona geht – Demografie bleibt, Pressemitteilung, 13 December 2021.
To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
10
9
9
Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
8
7
6
7
6
Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
5
4
3
4
3
Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
2
1
1
Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Germany’s performance in the area of research and development (R&D) remains good, but the country is losing ground in international rankings. According to the World Economic Forum (2019), Germany’s capacity for innovation was ranked best among the world’s top performers. In the Global Competitiveness Report 2019 (which is still the most recent regular report), Germany retained its top rank. Furthermore, Germany ranked fifth out of 141 countries with regard to patent applications per inhabitant. The quality of scientific research institutions was ranked at fourth place, a strong improvement relative to 2017, when Germany was ranked only 11th out of 140 countries (World Economic Forum 2019, p. 241). The leading role of German companies in the development of innovative vaccines against COVID-19 has demonstrated the country’s strength in biopharmaceutical research in a spectacular way.
However, in a more recent special report by the World Economic Forum with a focus on coronavirus-induced transformation challenges from 2020, Germany is ranked only 10th out of 37 countries with respect to its incentives for investments in research, innovation and invention “that can create the markets of tomorrow” (World Economic Forum 2020). In general, many have criticized in recent years that, in spite of Germany’s first-class research output, very few developments from research institutions have been successfully commercialized. In addition, many criticize the fact that while the German innovation system achieves incremental progress, no disruptive innovations result (Harhoff/Kagermann/Stratmann 2018; EFI 2018: p. 62). However, the Federal Agency for Disruptive Innovation, established in 2019 following the example of DARPA in the United States, does not seem to enjoy enough freedom to fulfill its mission (Bernau 2021).
Regarding funding, the German government has continuously increased R&D over recent years with spending levels above the European average. The total spending on R&D was at 3.17% of GDP in 2019 and slightly fell to 3.14% in 2020 due to the crisis-induced decline of spending in the private sector, whereas funding in the public sector was stable (Stifterverband 2022). The new coalition government has confirmed the past government’s commitment to increasing the ratio of R&D spending to GDP to 3.5% by 2025 (Koalitionsvertrag 2021, p. 19).
In 2020, Germany introduced an R&D tax incentive that involves providing entities a 25% tax credit for spending on R&D staff that will be paid out if the entity makes a loss. The tax subsidy is currently capped at €1 million per company per year.
In recent years, as Germany has increased its research and education budget and pursued its excellence initiative within the tertiary education sector, the quality of its scientific research institutions has improved slightly. In the World Economic Forum’s Global Competitiveness Report 2019, Germany performs well in the areas of higher education and training. However, the country was at only 21st place with regard to digital skills among the population (World Economic Forum 2019, p. 240).
Citations:
Bernau, Patrick, 2021: “Deutschland scheitert in kleinen Schritten.” https://zeitung.faz.net/fas/wirtschaft/2021-05-30/fe89e2d58aeac7fb63fbf74704468576/ (accessed: 6 February 2022)
EFI (Expertenkommission Forschung und Innovation), 2018: Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands, Berlin. https://www.e-fi.de/fileadmin/Assets/Gutachten/2018/EFI_Gutachten_2018.pdf (accessed: 6 February 2022)
Harhoff, Dietmar, Henning Kagermann, and Martin Stratmann (eds): Impulse für Sprunginnovationen in Deutschland. acatech DISKUSSION, https://www.acatech.de/publikation/impulse-fuer-sprunginnovationen-in-deutschland/download-pdf?lang=de (accessed: 6 February 2022)
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
Stifterverband (2022): Forschung und Entwicklung, https://www.stifterverband.org/forschung-und-entwicklung (accessed: 4 January 2022).
World Economic Forum (2019): The Global Competitiveness Report 2019. World Economic Forum.
World Economic Forum (2020): The Global Competitiveness Report, Special Edition 2020, How Countries are Performing on the Road to Recovery.
However, in a more recent special report by the World Economic Forum with a focus on coronavirus-induced transformation challenges from 2020, Germany is ranked only 10th out of 37 countries with respect to its incentives for investments in research, innovation and invention “that can create the markets of tomorrow” (World Economic Forum 2020). In general, many have criticized in recent years that, in spite of Germany’s first-class research output, very few developments from research institutions have been successfully commercialized. In addition, many criticize the fact that while the German innovation system achieves incremental progress, no disruptive innovations result (Harhoff/Kagermann/Stratmann 2018; EFI 2018: p. 62). However, the Federal Agency for Disruptive Innovation, established in 2019 following the example of DARPA in the United States, does not seem to enjoy enough freedom to fulfill its mission (Bernau 2021).
Regarding funding, the German government has continuously increased R&D over recent years with spending levels above the European average. The total spending on R&D was at 3.17% of GDP in 2019 and slightly fell to 3.14% in 2020 due to the crisis-induced decline of spending in the private sector, whereas funding in the public sector was stable (Stifterverband 2022). The new coalition government has confirmed the past government’s commitment to increasing the ratio of R&D spending to GDP to 3.5% by 2025 (Koalitionsvertrag 2021, p. 19).
In 2020, Germany introduced an R&D tax incentive that involves providing entities a 25% tax credit for spending on R&D staff that will be paid out if the entity makes a loss. The tax subsidy is currently capped at €1 million per company per year.
In recent years, as Germany has increased its research and education budget and pursued its excellence initiative within the tertiary education sector, the quality of its scientific research institutions has improved slightly. In the World Economic Forum’s Global Competitiveness Report 2019, Germany performs well in the areas of higher education and training. However, the country was at only 21st place with regard to digital skills among the population (World Economic Forum 2019, p. 240).
Citations:
Bernau, Patrick, 2021: “Deutschland scheitert in kleinen Schritten.” https://zeitung.faz.net/fas/wirtschaft/2021-05-30/fe89e2d58aeac7fb63fbf74704468576/ (accessed: 6 February 2022)
EFI (Expertenkommission Forschung und Innovation), 2018: Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands, Berlin. https://www.e-fi.de/fileadmin/Assets/Gutachten/2018/EFI_Gutachten_2018.pdf (accessed: 6 February 2022)
Harhoff, Dietmar, Henning Kagermann, and Martin Stratmann (eds): Impulse für Sprunginnovationen in Deutschland. acatech DISKUSSION, https://www.acatech.de/publikation/impulse-fuer-sprunginnovationen-in-deutschland/download-pdf?lang=de (accessed: 6 February 2022)
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
Stifterverband (2022): Forschung und Entwicklung, https://www.stifterverband.org/forschung-und-entwicklung (accessed: 4 January 2022).
World Economic Forum (2019): The Global Competitiveness Report 2019. World Economic Forum.
World Economic Forum (2020): The Global Competitiveness Report, Special Edition 2020, How Countries are Performing on the Road to Recovery.
To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of financial markets.
In the aftermath of the financial crisis, policy initiatives in the field of financial market governance underwent a strategic realignment from private self-regulation toward public regulation, with the aim of in the future avoiding costly public bailouts of private banks.
Germany was been an early advocate of the European Banking Union, integrating several elements into national law (e.g., rules for bank restructuring in a crisis) before EU standards emerged. Internationally, Germany argued vigorously in favor of coordinated, international steps to reform the global financial system and to eliminate tax and regulatory havens. In addition, Germany was one of the crucial players that helped turn the G-20 summit into a first-class forum for international cooperation. Despite these efforts, however, Germany has also clearly defended the interests of its domestic banking system, particularly with respect to the special deposit-insurance programs operated by public savings banks (“Sparkassen”). The government remains concerned that pooling Europe’s deposit-insurance systems through the envisaged European Deposit Insurance Scheme (EDIS) too early could result in the collectivization of southern European banks’ risky loan portfolios and excessive sovereign-debt exposure. In its coalition agreement, the new government has announced that it is ready to accept EDIS as an element of a comprehensive reform package that includes risk-dependent contributions and takes steps to prevent an excessive sovereign risk exposure of banks (Koalitionsvertrag 2021, p. 168).
Germany has been one of the initiators of measures aimed at limiting international competition over corporate taxes and developing new globally coordinated strategies to tax digital business models as well. This process reached an important milestone with 134 countries agreeing to participate in the summer of 2021 (OECD 2021).
Citations:
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
OECD (2021): Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy – 1 July 2021, https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.htm (accessed: 4 January 2022).
Germany was been an early advocate of the European Banking Union, integrating several elements into national law (e.g., rules for bank restructuring in a crisis) before EU standards emerged. Internationally, Germany argued vigorously in favor of coordinated, international steps to reform the global financial system and to eliminate tax and regulatory havens. In addition, Germany was one of the crucial players that helped turn the G-20 summit into a first-class forum for international cooperation. Despite these efforts, however, Germany has also clearly defended the interests of its domestic banking system, particularly with respect to the special deposit-insurance programs operated by public savings banks (“Sparkassen”). The government remains concerned that pooling Europe’s deposit-insurance systems through the envisaged European Deposit Insurance Scheme (EDIS) too early could result in the collectivization of southern European banks’ risky loan portfolios and excessive sovereign-debt exposure. In its coalition agreement, the new government has announced that it is ready to accept EDIS as an element of a comprehensive reform package that includes risk-dependent contributions and takes steps to prevent an excessive sovereign risk exposure of banks (Koalitionsvertrag 2021, p. 168).
Germany has been one of the initiators of measures aimed at limiting international competition over corporate taxes and developing new globally coordinated strategies to tax digital business models as well. This process reached an important milestone with 134 countries agreeing to participate in the summer of 2021 (OECD 2021).
Citations:
Koalitionsvertrag (2021): Mehr Fortschritt wagen, Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit, Koalitionsvertrag zwischen SPD, Bündnis 90/Die Grünen und FDP.
OECD (2021): Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy – 1 July 2021, https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.htm (accessed: 4 January 2022).