Germany

   

Economic Policies

#4
Key Findings
Boosted by years of exceptional economic performance, Germany falls into the top ranks internationally (rank 4) with regard to economic policies. Its score on this measure has improved by 0.3 points relative to 2014.

Germany’s economy has been growing steadily for nearly a decade, with high and stable growth rates, strong employment growth, and buoyant tax and social-security revenue growth. This was driven by expansionary European Central Bank policies, capital inflows from euro zone crisis countries, but also the aftereffects of ambitious economic reforms in the 2000s.

Tax revenues have risen sharply, allowing for budget surpluses and a reduction in the debt-to-GDP ratio from 80.1% in 2010 to 59.9% in 2018. Fears of international tax competition are growing, as Germany’s effective tax burden on companies is the highest of any industrialized country. Costs of integrating the 2015 – 2016 refugee wave have been lower than expected, thanks to successful integration.

Unemployment rates are at their lowest level since reunification, at 5.2%. The new minimum wage was made uniform in 2018 after a transitional period, with no detrimental employment effects reported. Fiscal sustainability will become a more pressing issue toward 2030, as the Baby Boomer generation retires.

Economy

#10

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 economy is experiencing one of its longest upswings in its postwar history. Prior to the current SGI reporting period, the economy had performed exceptionally well with high and stable economic growth rates, strong employment growth, and buoyant revenue growth for government budgets and the social security system. To some extent this performance was due to external factors like the very expansionary policy of the European Central Bank or massive capital outflows from euro zone crisis countries to “safe havens.” However, it was also due to an ambitious series of domestic reforms in the 2000s. These reforms adjusted labor market institutions, unemployment benefits, the pension system, corporate taxation, the constitutional debt brake and liberalized labor migration from outside the European Union. Combined, these reforms improved Germany’s competitiveness and increased its attractiveness as a destination for foreign investment.

Nevertheless, the German economy’s excellent performance over the last few years should not obscure the fact that it’s confronted with various internal and external challenges. The most important external risks concern uncertainties in the European and global economies. In Europe, the future of the European Internal Market, the euro and the European Union are at risk given recent developments, such as Brexit or the rise of populist and EU-skeptic parties and governments (e.g., in Italy). For the global economy, trade conflicts (as a result of U.S. policies under the Trump administration) are highly risky for export-dependent economies, such as Germany. Leading business indicators are pointing toward a deceleration in economic growth from the end of 2018 as a consequence of lower export dynamics. Internally, Germany is facing significant challenges associated with a rapidly aging population and the need to adjust to a digital economy. One should not take for granted that the continued success of the leading German industries (e.g., the automotive industry) given the enormous speed of technological change resulting from the move toward electric and digitalized cars.

The country’s current short-run economic success may have made voters and politicians blind to the extent of the challenges that lie ahead, as the current coalition government’s economic and social policy agenda might not reflect the true necessities of the situation. In previous years, the policies of the grand coalition included the introduction of a statutory minimum wage, more generous pensions, an increase in state support for nursing care and plans to more tightly regulate temporary forms of employment. These examples indicate a strong focus on consumption and more regulation which could undermine competitiveness in the coming years. However, other examples signal that the government seems to be aware of the challenges of digitization. In late 2018, the federal government adopted an Artificial Intelligence (AI) Strategy, with the aim of becoming a global leader in the development and use of AI technologies. In August 2018, the federal government established a so-called digital council which consists of 10 members and will give advice on the most important issues concerning the new computer-based technologies. The digital strategy is based on a decision agreed upon by the federal cabinet on 18 July 2018.

In general, 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. However, this development so far does not seem to be a key risk factor for Germany’s competitiveness as it mirrors the excellent labor market situation and increasing shortages of skilled labor. But the Sachverständigenrat, in its recent report, strongly insists on the need for further tax reform to relieve taxpayers and abolish the so-called solidarity tax contribution (“Solidaritätszuschlag”). Another relative weakness of the German situation concerns the quality of infrastructure. Increasingly, critics point to the inadequacy of existing digital networks, and more and more problems in the transport networks including both rail and road.

Citations:
Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (2018): Jahresgutachten 2018/2019. https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/gutachten/jg201819/JG2018-19_gesamt.pdf

Bundesregierung (2018): https://www.bundesregierung.de/breg-de/aktuelles/digitalrat-experten-die-uns-antreiben-1504866

Labor Markets

#3

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. Most recent statistics make it clear that Germany’s employment rate is again increasing, with 45.1 million people currently in employment. This is an increase of more than 0.55 million compared to October 2017. The unemployment rate is at its lowest level since German unification, currently 5.2% compared to 5.7% in 2017. The unemployment rate is expected to decrease further in 2019. Conversely, there is a shortage of qualified workers and the number of job vacancies has increased from 0.73 million to nearly 0.8 million. Between 2009 and 2018, there has been a constant increase in the number of job vacancies in 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 and may also reflect workers’ preferences, for example, for part-time schemes. However, atypical employment contracts may have negative consequences for the social security system and, more generally, social justice. Still, according to the Federal Statistical Office, atypical employment has slightly increased by 0.17 million people to a total of 7.72 million people, a smaller increase than in previous years. The number of “minijobs” has decreased in absolute numbers since the introduction of the minimum wage. The proportion of people in atypical compared to regular employment is about 20.8% and remains more or less constant.

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, which concluded at the end of 2018, sector-specific minimum wages may be lower than the general minimum wage. Since January 2018, a uniform minimum wage has been in force and is set at €8.84. It will increase in 2019 to €9.19 and in 2020 to €9.35. The minimum wage has elevated the earnings of four million employees, about 11% of the employed workforce. 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.

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 enormous increase in refugees claiming asylum in Germany was and still is a key challenge for future labor market policymaking. Reducing barriers to labor market access, especially to the regular labor market, as well as support for training and education will be crucial for the successful integration of refugees. Germany is on the path to successfully integrating these refugees, as illustrated by the constantly decreasing unemployment rate of refugees. In addition, faced with a shortage of labor, the further training and – hopefully – further integration of refugees into the labor market is one of the main challenges confronting labor market policies.

Citations:
https://de.statista.com/statistik/daten/studie/1224/umfrage/arbeitslosenquote-in-deutschland-seit-1995/
https://de.statista.com/statistik/daten/studie/74428/umfrage/anzahl-der-erwerbstaetigen-mit-wohnort-in-deutschland/

Taxes

#15

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 has lost steam due to various causes. Sovereign debt crises in other European countries favored Germany as a business location, signaling that there was no need to overhaul the tax system for competitive reasons. Moreover, 0% interest rates on new government bonds and buoyant tax revenues indicated that there was no need to raise tax revenues further. According to the Ministry of Finance, between 2010 and 2017, total tax revenues rose by 38% from €531 billion to €734.5 billion. This has enabled the ministry to achieve its aim of balancing the budget since 2014, despite the considerable costs related to the refugee crisis. In addition, the soaring labor market created significant surpluses in the social security system.

With respect to some major indicators, Germany is performing reasonably 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 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. Due to the passivity of German tax policies, and corporate tax cuts in the United States and numerous other OECD countries, the country’s effective tax burden on companies is now among the highest of any industrial country.

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. For companies, the German tax system has lost competitiveness over recent years. The Global Competitiveness Report ranks Germany the third most competitive economy in the world. Tax rates, tax regulations and labor market regulations are seen as the most problematic factors for doing businesses in Germany. However, given to the overall positive economic environment these challenges have not as yet undermined Germany’s overall relative attractiveness.

Citations:
Bundesfinanzministerium (2018):
https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Steuerschaetzungen_und_Steuereinnahmen/1-kassenmaessige-steuereinnahmen-nach-steuerarten-und-gebietskoerperschaften.html

Global Competitiveness Report 2018: World Economic Forum.
http://www3.weforum.org/docs/GCR2018/05FullReport/TheGlobalCompetitivenessReport2018.pdf

OECD (2018): Top statutory personal income tax rate and top marginal tax rates for employees. Online: http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7 (last check October 2018).

Spengel, C., Heinemann, F., Olbert, M., Pfeiffer, O., Schwab, T. and K. Stutzenberger, Analysis of U.S. Corporate Tax Reform Proposals and their Effects for Europe and Germany, Zentrum für Europäische Wirtschaftsforschung, Mannheim.

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
7
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 80.1% in 2010 to (an expected) 59.9% at the end of 2018, just below the Maastricht threshold of 60%. This decrease resulted from surpluses in the general government balances since 2010, stable growth, strong employment 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 2020 onwards.

The costs associated with the influx of refugees were a significant driver of government expenditures in 2015 and 2016. Since then, a strong decline in the numbers of refugees arriving in Germany and the relatively successful labor market integration of refugees, these costs have been lower than expected over the last couple of years.

While the federal budget remains balanced, uncertainties concerning the medium- to long-term budgetary outlook have increased. 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 pension and health care expenditures will pose a significant challenge to future federal budgets. The demographic challenges for fiscal sustainability will grow substantially toward 2030 as the baby-boomer retirement wave peaks. Simulation studies indicate that, without substantive reforms (e.g., an increase in the state pension age, expenditure cuts and higher contribution rates), budgetary policy will be far from sustainable over the coming decades. The main reasons are substantial projected deficits in the pension and health care systems, which would have to be balanced by federal payments to the social security systems.

Citations:
Sachverständigenrat (2018): Sachverständigenrat zur Begutachtungder gesamtwirtschaftlichen Entwicklung, Jahresgutachten 2018/19, Vor wichtigen wirtschaftspolitischen Weichenstellungen, Wiesbaden.

Werding, Martin (2018): Demographischer Wandel, soziale Sicherung und öffentliche Finanzen: Langfristige Auswirkungen und aktuelle Herausforderungen, Expertise, Bertelsmann Stiftung, Gütersloh.

Research, Innovation and Infrastructure

#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 highest among the world’s top performers. In the Global Competitiveness Report 2018, Germany ranked 3rd out of 140 countries. Furthermore, Germany ranked 5th out of 140 countries for patent applications per inhabitant, a two-position improvement over the previous year. For the quality of scientific research institutions, Germany ranked 4th out of 140 countries, a strong improvement over 2017 when Germany ranked only 11th out of 140 countries.

Regarding funding, the German government continues to increase 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 in 2017, a record level. In 2018, the budget will remain the same amount, increasing in 2019 to €18.3 billion.

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 has decided to continue its support for top research and education in the tertiary education sector through the so-called Excellence Strategy from 2019 onward, which will follow the earlier “Excellence Initiatives.” While the Excellence Strategy supports university research, the Joint Initiative for Research and Innovation strengthens the non-university research institutes. All these measures appear to have slightly improved the quality of scientific research institutions. In the Global Competitiveness Report 2018, Germany performed well in higher education and training. However, concerning digital skills among the population, Germany only ranked 16th out of 140 countries.

Citations:
Global Competitiveness Report 2018. World Economic Forum.

Bundesministerium für Bildung und Forschung – BMBF (2018):
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 System
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. Its maximum financial guarantee for the European Stability Mechanism amounts to €190 billion. The country is also exposed to risks through the European Central Bank’s TARGET payment system.

Germany has 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 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 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 in 2013. While there has been limited progress since then, Germany and France remain the strongest proponents of an EU FTT. The issue is currently at a standstill in the European Council. In November 2018, France and Germany took the initiative to unlock talks on the European level. The German minister of finance, Olaf Scholz, said that the French tax would be a good basis for future talks.

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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