Germany

   

Economic Policies

#4
Key Findings
With a stable, growing economy, Germany falls into the top ranks internationally (rank 4) with regard to economic policies. Its score on this measure has improved by 0.2 points relative to 2014.

Germany’s economy has been growing steadily for nearly a decade. Neither rising wages nor greater government regulation have undermined export performance or employment growth. The country’s stability during the euro crisis has allowed it to benefit from extraordinarily low interest rates on government bonds.

Growth has boosted tax revenue substantially, producing several years of balanced budgets. Fears of international tax competition are growing, but have not been reflected in policy change. The strong economy has reduced the debt-to-GDP ratio significantly, though concerns over future spending commitments are rising.

Unemployment rates are at a 20-year low, aided by a comprehensive toolbox of active labor-market policies. Fears that the massive influx of refugees would push up unemployment rates have proved unfounded. The country continues to play a leading role on issues such as the European sovereign debt crisis and the push for a financial transactions tax.

Economy

#11

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 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


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


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

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.
Economic Policy
8
Germany’s economic structure is characterized by a healthy mix of service and industrial sectors. In the five years following the reform plan “Agenda 2010” of 2003, Germany’s economic policy successfully addressed numerous serious economic weaknesses prevalent in the post-unification period. This wave of reforms has affected labor market institutions, unemployment benefits, the pension system, corporate taxation, the constitutional debt brake and liberalized labor migration from outside the European Union. It has also improved Germany’s competitiveness and increased its attractiveness as a destination for foreign investment. Moreover, the European sovereign debt crisis has further strengthened the country’s reputation as a safe haven for financial and real investment. As a result, the German state and wider German economy currently benefits from extremely low interest rates. The ongoing employment boom, rising real wages and pensions, very low interest rates, buoyant construction investment, very strong export performance and increasing public expenditure have created almost ideal growth conditions lifting GDP growth above 2% in 2017. The chances are excellent that Germany will experience a tenth year of continuous growth in 2018 (Sachverständigenrat 2017/18). The only current downside to this situation has been the first symptoms of a cyclical overheating with job market vacancies exceeding one million and an increasing share of companies producing at total capacity.

As the result of robust economic growth and employment, the last government abandoned the liberalizing policy agenda of the first decade of the millennium in favor of greater regulation. For example, the policies of the grand coalition 2013 – 2017 included the introduction of a statutory minimum wage, an expansion of the pension system, an increase in state support for nursing care and plans to more tightly regulate temporary forms of employment. Moreover, although trade unions and employers’ associations have eschewed ideology in setting wage policy and granted firms significant flexibility, there has been a change in wage policies. Germany’s recent robust economic performance and buoyant labor market have led to an increase in wages and a slight increase in unit labor costs. Yet, so far, neither greater government regulation nor increased wages have undermined Germany’s export performance or employment growth.

Citations:
Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (2017): Jahresgutachten 2017/2018. https://www.sachverstaendigenrat-wirtschaft.de/jahresgutachten-2017-2018.html

Labor Markets

#4

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
9
Germany’s success in reducing structural unemployment since the mid-2000s has been impressive. According to the German Council of Economic Experts (Sachverständigenrat), more than 44.3 million people were employed in Germany in November 2017, 0.6 million more than the previous year’s record. Unemployment rates are at their lowest level in 20 years (4.0% according to the OECD) and are further decreasing. Germany’s youth unemployment rate is the third lowest in the OECD (7.0%), attributable largely to a highly effective vocational training system. The unemployment rate is expected to further decline in 2018. Increasingly, the German labor market shows signs of a labor shortage with 1.1 million unfilled vacancies in the third quarter 2017 (Institut für Arbeitsmarkt- und Berufsforschung 2017).

Germany has a comprehensive toolbox of active labor market programs, which includes financial support for vocational training programs, support for self-employed individuals, provision of workfare programs and the subsidized employment of long-term unemployed individuals. Traditional instruments, such as job creation and training programs, are now seen as combinable. Tailored to individual needs, these instruments are designed to facilitate the reintegration of long-term unemployed individuals into the labor market.

The expansion of atypical employment contracts – such as temporary employment programs (Leiharbeit), part-time and agency work – reflects an increase in industrial flexibility over recent years. Atypical employment contracts may to some extent mirror employees’ preferences (e.g., with respect to part-time contracts). Nevertheless, atypical employment may have negative consequences for social justice, such as increasing risk of poverty in old age or higher risk of unemployment, although unemployment has decreased sharply given the increasing shortage of labor. Atypical employment has only slightly decreased from 20.8 (2015) to 20.7 (2017) but recently has fallen more quickly. While the number of employed people increased by 638,000 in 2017 to 2018, the number of people working “Minijobs” or self-employed fell in the same period (Statistisches Bundesamt 2018).

A national minimum wage has been in effect since January 2015. There are exemptions, in particular for adolescents and the long-term unemployed. In addition, during a transitional period ending in 2017, sector specific minimum wages may be lower than the general minimum wage. The current minimum wage is set at €8.84 and will be reviewed after five years by a commission comprising representatives of employers and employees. The minimum wage has elevated the earnings of four million employees, about 11% of employed people. The German Council of Economic Experts has not reported any detrimental macroeconomic effects, though it is too early to assess the long-term consequences of a national minimum wage.

The enormous increase in refugees claiming asylum in Germany is a key challenge for future labor market policymaking. Reducing barriers to labor market access, especially the regular labor market, as well as support for training and education will be crucial for the successful integration of refugees. The German Council of Economic Experts estimates a constantly decreasing unemployment rate of refugees during the next years from 76.2% in 2016 to 43.1% in 2022 (Sachverständigenrat 2017/2918: 150). Concerns that the 2015 wave of refugees would push up the total unemployment rate have so far not materialized with unemployment further declining throughout 2017.

Citations:
Institut für Arbeitsmarkt- und Berufsforschung 2017: www.iab.de/de/befragungen/stellenangebot/aktuelle-ergebnisse.aspx

OECD 2017: https://data.oecd.org/jobs.htm#profile-Unemployment

Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2017/18): Für eine zukunftsorientierte Wirtschaftspolitik, Jahresgutachten 17/18, Sachverständigenrat: Wiesbaden. Online: https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/gutachten/jg201718/JG2017-18_gesamt_Website.pdf.

Statistisches Bundesamt 2018: Pressemitteilung Nr. 001 vom 02.01.2018: Zahl der Erwerbstätigen im Jahr 2017 um 1.5 Prozent gestiegen.

Taxes

#19

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
In recent years, German tax policy lost steam. As a consequence of falling interest rates on public debt and buoyant public revenue growth, the reform vigor of the previous decade gave way to a complacent uncertainty regarding the future direction of tax policy. Between 2010 and 2017, total tax revenues rose by more than 38% from €531 billion to €735 billion (Bundesfinanzministerium 2017). Since 2014, this has enabled the ministry to achieve its aim of balancing the public budget, despite considerable costs related to the refugee crisis. In addition, the soaring labor market created significant surpluses in the social security system. The guiding principle of today is “steady as you go.” Legislative changes to taxation have largely been limited to areas that the Federal Constitutional Court had ruled were unconstitutional, such as inheritance tax and privileges for corporate wealth. With regard to the former, following a ruling by the Constitutional Court, a revised inheritance tax provides new regulations that spare company capital (Bundesfinanzministerium 2016).

With respect to some major indicators, Germany is performing well at the moment. Earnings-related direct taxation and social security contributions are lower than, or have at least held constant with, previous levels. Indirect taxes, such as value-added taxes, are above the OECD average. The top marginal personal income tax rate (47.5%) is comparable to the OECD average (47.8%), but the average marginal rate continues to be a key challenge for Germany’s competitiveness since it is 15 percentage points higher than OECD average. The OECD report concludes that this is particularly harming the integration of single parents into the labor market (OECD 2016) as well as creating substantial work disincentives for a household’s second earner. Furthermore, the complexity of the German tax system imposes high compliance costs on households and firms.

Germany’s inefficient municipal tax system requires much needed reform, though municipalities have created budget surpluses in the past couple of years. Also, despite perennial discussions envisaging a tackling of bracket creep, there is no effective regulation for a systematic dissolution of the problem in sight. However, a one-off measure took effect in 2016 through an adjustment of the income tax schedule, which compensates taxpayers for a bracket creep effect of approximately two years. Finally, the German Council of Economic Experts has criticized the fiscal equalization scheme between states as inefficient and harmful to growth (Sachverständigenrat 2017/18: 293).

In summary, German tax policy performs well in terms of revenue generation. However, especially for middle income earners the system generates excessive work disincentives. The redistributive capacity of the tax system has decreased as indirect taxes have taken a larger role. The Global Competitiveness Report considers Germany’s tax rates and tax regulations to be the most problematic factors for doing business in Germany. However, given the overall positive economic environment these challenges have not as yet undermined Germany’s relative attractiveness. With the far-reaching U.S. tax reform, and the perspective of lower corporate tax rates in France and the United Kingdom, Germany’s tax-related competitiveness is in a process of erosion. So far, political parties seem to be unaware of this new wave of tax competition.

Citations:
Bundesfinanzministerium (2017): https://www.bundesfinanzministerium.de/Monatsberichte/2017/09/Inhalte/Kapitel-4-Wirtschafts-und-Finanzlage/4-2-steuereinnahmen-august-2017.html

https://de.statista.com/statistik/daten/studie/166381/umfrage/steuereinnahmen-laut-steuerschaetzung/

Bundesfinanzministerium (2016): Ge­setz zur An­pas­sung des Erb­schaft­steu­er- und Schen­kung­steu­er­ge­set­zes an die Recht­spre­chung des Bun­des­ver­fas­sungs­ge­richts. Online: http://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Verordnungen/2016-11-09-G-z-Anpassung-d-ErbStR-u-SchenkSt-a-d-Rspr-d-BVerfG.html

Global Competitiveness Report 2017/2018: World Economic Forum. http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCom¬petitive-nessReport2017%E2%80%932018.pdf

OECD (2016): Top statutory personal income tax rate and top marginal tax rates for employees. Online: http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7 (last checked on 12/11/2016).

Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2017/2018): Für eine zukunftsorientierte Wirtschaftspolitik, Jahresgutachten 17/18, Sachverständigenrat: Wiesbaden. Online: https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/gutachten/jg201718/JG2017-18_gesamt_Website.pdf

Budgets

#13

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
For Germany, the 2009 global recession and its aftermath implied higher budget deficits and gross public debt following revenue shortfalls, anti-crisis spending packages and bank bailout costs. Since then, however, Germany’s budgetary outlook has considerably improved. Germany’s debt-to-GDP ratio has continued to decrease from 81.0% in 2010 to 66.0% in the second quarter of 2017 (Eurostat 2017). This decrease resulted from surpluses in the general government balances since 2014, stable growth and historically low government bond interest rates. In addition to this favorable environment, a constitutional debt limit was introduced (Schuldenbremse) that restricts the federal government’s cyclically adjusted budget deficit to a maximum of 0.35% of GDP and requires German states to maintain balanced cyclically adjusted budgets from the year 2020 onwards.

Given the financial burdens associated with the refugee crisis, this positive development is even more astonishing. For 2016 and 2017, the German Council of Economic Experts estimates total expenses directly associated with refugees and asylum-seekers to be €10 to €13 billion, roughly 0.3% to 0.4% of GDP (Sachverständigenrat 2016: 343). The Ministry of Finance stated that it would cover the cost of these additional funds through increasing tax revenue, the sale of mobile phone licenses and decreasing interest amortization spending. The long-run fiscal consequences will crucially depend on how well immigrants integrate into the labor market.

While the federal budget remains balanced, uncertainties concerning the medium- to long-term budgetary outlook remain substantial. Germany’s aging population will mean that recent increases to welfare spending (e.g., increased pension payments for mothers and allowances for nursing care) combined with very dynamic increases in health care expenditures will pose a significant challenge to future federal budgets. According to recent calculations of “implicit debt” (i.e., future liabilities resulting from uncovered payment promises by the social security system and other government programs), the sustainability gap slightly decreased between 2016 and 2017 as a consequence of the falling debt level and the revenue boom (Stiftung Marktwirtschaft 2017b). However, major new risks emerge from the current competition between political parties to offer more generous pension and health care systems, and the refusal to raise the pension age due to increasing life expectancy. Recent calculations indicate that higher pension levels (relative to last active income) would push up implicit debt dramatically (Stiftung Marktwirtschaft 2017a).

Citations:
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2016): Zeit für Reformen, Jahresgutachten 16/17, Sachverständigenrat: Wiesbaden. Online:
http://www.sachverstaendigenrat-wirtschaft.de/jahresgutachten-2016-2017.html

Stiftung Marktwirtschaft (2017a): Ehrbarer Staat? Generationenbilanz Update 2017, 12. Juli 2017.

Stiftung Marktwirtschaft (2017b): EU-Nachhaltigkeitsranking 2017, Nicht mehr kleckern, sondern klotzen!, Pressemitteilung 12. Dezember 2017.

Eurostat 2017: http://ec.europa.eu/eurostat/web/products-datasets/-/tsdde410

Research and Innovation

#5

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
9
Germany’s performance in the area of research and development remains positive. According to the World Economic Forum, Germany’s capacity for innovation ranks among the world’s top performers. In the Global Competitiveness Report 2017/2018, Germany’s ranking improved to 5 out of 140 countries, trailing less than 0.3 points behind leading nation Switzerland in the area of technological development, and product and process innovation (p.126-127). Furthermore, Germany ranked 7 out of 140 countries for patent applications per inhabitant, a one position deterioration over the previous year. The quality of scientific research institutions remains in need of improvement, with Germany ranked only 11 out of 140 (Global Competitiveness Report 2017/2018: 127).

Regarding funding, the German government continues to raise budgets on research and development. Its spending remains above the European average. The budget of the Ministry of Education and Research was increased to €14.0 billion in 2014, €15.3 billion in 2015, €16.4 billion in 2016 and €17.6 billion in 2017, a record setting mark.

In contrast to numerous other European countries, Germany does not offer general R&D tax incentives, but rather concentrates on targeted funding of specific programs. Companies’ expenditures on R&D are strong, but public-private partnerships and collaboration between universities and industry leave room for improvement. The government started its so-called excellence initiative within the tertiary education sector in 2005 and modified the scheme in June 2016. The federal government and states have agreed to resume the Joint Initiative for Research and Innovation, and intend to increase the program’s budget by 5% every year. All these measures appear to be effective to some extent. Over the past years, the quality of its scientific research institutions has improved slightly. In the Global Competitiveness Report 2017/18 edition Germany performs well in higher education and training. Germany improved by one position to 15 out of 138 countries (p.127).

Citations:
Global Competitiveness Report 2017/2018. World Economic Forum.

Bundesministerium für Bildung und Forschung – BMBF (2017): Der Haushalt des Bundesministeriums für Bildung und Forschung. Internet source:
https://www.bmbf.de/de/der-haushalt-des-bundesministeriums-fuer-bildung-und-forschung-202.html

Global Financial System

#4

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 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


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


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
9
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 has assumed a leading role in the fight against the sovereign debt crisis in Europe, and has accepted substantial explicit and implicit liabilities. For example, Germany’s maximum financial guarantee for the European Stability Mechanism amounts to €190 billion and the country is also exposed to indirect risks through the Bundesbank’s claims in the European Central Bank’s TARGET payment system which, as a consequence of the European Central Bank asset purchases, are increasing.

Germany has been an early advocate of a 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 is one of the driving forces that helped to develop 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 of state-owned savings banks (Sparkassen). The government remains concerned that pooling Europe’s deposit insurance systems too early could result in the European collectivization of bad bank debts.

Although skeptical at first, the German government ultimately revised its position regarding the implementation of an EU level financial transaction tax (FTT). The European Commission proposed to introduce an FTT within the European Union by 2014. In December 2017, a Progress Report underlined that only limited progress has been made (European Parliament 2017). While there has been limited progress, Germany and France remain the strongest proponents of an EU FTT. Now that its strongest opponent, the United Kingdom, is leaving the European Union, a FTT seems more likely to be established for the remaining ten participants. The issue is currently at a standstill in the European Council. In June 2017, the ECOFIN reiterated that further work at the European Council and its preparatory bodies is still required.

Citations:
European Parliament (2017): http://www.europarl.europa.eu/legislative-train/theme-deeper-and-fairer-internal-market-with-a-strengthened-industrial-base-taxation/file-financial-transaction-tax
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