Germany

   

Economic Policies

#5
Key Findings
Though momentum is slowing after years of exceptional economic performance, Germany falls into the top ranks internationally (rank 5) with regard to economic policies. Its score on this measure has improved by 0.3 points relative to 2014.

Growth has declined substantially, as trade wars and global uncertainties have weakened exports. However, the labor market remains buoyant. Wage increases and a rise in unit labor costs have not undermined competitiveness.

The overall unemployment rate reached its lowest level since unification, at 4.8%. The minimum wage policy, in effect since 2015, has not produced any clear detrimental economic effects. Integration of the large wave of refugees has proceeded well, with unemployment rates in this population steadily declining.

The average marginal income tax rate is much higher than the OECD average. High tax rates and the complexity of the tax system have diminished Germany’s appeal as a destination for investment. The debt-to-GDP level has continued to decrease to below 60%, with the government posting successive budget surpluses. A new general tax incentive for R&D has been implemented.

Economy

#20

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
7
Germany’s economy avoided an outright recession, in 2019 but experienced a marked decline in its growth rate. In November, like many other institutions, the German Council of Economic Experts (Sachverständigenrat 2019) reduced its growth forecast, predicting that GDP would grow by 0.5% in 2019 and 0.9% in 2020 (after growth rates of above 1% in the preceding years). The weakening of international trade flows due to the trade dispute between the United States and China, and to other European and global uncertainties including the threat of a no-deal Brexit, has hit German export industries hard. Structural issues have further exacerbated these short-run cyclical factors. As of today, it is hard to predict how the country’s vital car industry will cope with the technological transition to electromobility. Overall, the period’s economic developments were split between the recessionary trends in the export industry and strength in the domestic economy driven by a continuation of the construction boom and high levels of private and government consumption.

Economic policy has continued to be rather passive. The crucial reforms still shaping labor-market institutions, unemployment benefits, the pension system, corporate taxation, the constitutional debt brake and liberalized labor migration from outside the EU are now a decade or more old. Although these reform packages of the 2000s improved Germany’s competitiveness and increased its attractiveness as a destination for foreign investment, some of these advantages are gradually eroding. Within the field of corporate taxation, for instance, numerous tax reforms in important competing countries like the United States and France have left Germany as a relative high-tax location in comparison. What is also missing are convincing answers to the questions raised by demographic change and its consequences for the availability of skilled labor. The buoyant labor market has led to an increase in wages and a slight increase in unit labor costs, although this is not yet generally considered to be a threat to competitiveness.

There has been some activity aimed at improving the country’s ability to meet the challenges of the digital transformation. In late 2018, the federal government adopted an Artificial Intelligence Strategy, with the goal of becoming a European or global leader in the development and practical use of AI technologies. This AI Strategy is intended to enhance research into artificial intelligence technologies, along with the subsequent development and implementation, thus strengthening the country’s economic development and social cohesion and sustaining its high level of economic well-being.

Citations:
Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (2019): Jahresgutachten 2019/2020. https://www.sachverstaendigenrat-wirtschaft.de/jahresgutachten-2019.html

https://www.bundesregierung.de/breg-de/themen/digital-made-in-de/strategie-kuenstliche-intelligenz-ki–1546648

Labor Markets

#2

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 show that Germany’s employment rate is still increasing despite the falling levels of GDP growth, with 45.3 million people employed by the end of the review period (+0.33 million compared to October 2018). Unemployment rates are at their lowest level since German unification, again decreasing to 4.8% (under the national definition) in October 2019 as compared to 5.1% in 2018. However, due to the deteriorating situation in the export-oriented industries, unemployment rates may be at a turning point, and may increase in the coming years. While there is still a shortage of skilled workers and the number of job vacancies remains high, this number decreased in autumn 2019 for the first time since 2010. There are also other indications that the number of vacancies may have seen its peak.

The extent to which the share of atypical employment contracts – such as temporary employment programs (Leiharbeit), part-time and agency work – should be seen as a downside of the employment boom remains a debated question. This share grew in the 1990s and early 2000s. But with the onset of the employment boom after 2009, it declined from 22.6% in 2007 to 20.1% in 2018 (Destatis 2019, Specht 2019). The largest portion of atypical employment is part-time work among women, particularly in Western Germany. On the one hand, atypical employment also reflects an increase in industrial flexibility, and may to a considerable extent also be in line with workers’ leisure preferences. On the other hand, atypical employment contracts may have detrimental consequences for the social security system due to revenue losses, and can increase social risks such as that of old-age poverty.

A national minimum wage has been in effect since January 2015. There are exemptions in particular for adolescents and the long-term unemployed. The minimum wage increased from an initial level of €8.50 to €9.19 in 2019, and €9.35 from January 2020 onward. The minimum wage has elevated the earnings of 1.4 million employees, or about 11% of the employed. In some sectors, minimum wages are higher as a result of collective-bargaining processes. 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, especially in times when the labor market is less dynamic.

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. Moreover, the subsidies for short-time working schemes (“Kurzarbeit”) have proven to provide an effective protection against dismissals in a cyclical downturn.

The enormous increase in the number of refugees claiming asylum in Germany since 2015 still poses a critical challenge for labor-market policymaking. Reducing barriers to labor-market access, especially to the regular labor market, and providing support for training and education will be crucial for the successful integration of refugees. Germany has already gone a long way toward integrating these newcomer, as illustrated by the constantly decreasing unemployment rate among refugees. In addition, given the looming shortage of labor, further training and – hopefully – further integration into the labor market must be one of the main tasks of present and future labor-market policies.

Citations:
Destatis (2019): 2018 erstmals seit 2002 wieder mehr als 70 % der Erwerbstätigen in Normalarbeitsverhältnissen, Pressemitteilung Nr. N004 vom 9. Oktober 2019.

Specht (2019): Die Zahl der atypischen Beschäftigten in Deutschland bleibt stabil, Handelsblatt vom 24.06.2019.

https://www.arbeitsagentur.de/news-arbeitsmarktzahlen-2019

https://de.statista.com/statistik/daten/studie/2903/umfrage/jahresdurchschnittswerte-des-bestands-an-offenen-arbeitsstellen/

Taxes

#13

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
German tax policy has lost steam in recent years. This was driven by macroeconomic as well as political factors. On the one hand, 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, zero or even negative interest rates on new government bonds and buoyant tax revenues indicated that there was no need to raise tax revenues further. This complacency with regard to tax policy complacency has led to a situation in which the German tax system provides a mixed impression across the four primary dimensions of performance, as noted below.

Provision of sufficient resources: Clearly, the system has been highly successful in recent years with regard to financing dynamic growth in government expenditure while simultaneously balancing budgets across all federal layers. According to the Ministry of Finance, between 2010 and 2019, total tax revenues have risen by more than 25%, from €531 billion to €793.7 billion (Bundesfinanzministerium 2019).

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 so as to achieve a more equal post-tax situation. Whereas the Gini coefficient is 0.49 for pre-tax market incomes, it is reduced to 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.

Competitiveness: Clearly, the passivity of German tax policy has had a negative impact both on work incentives and the country’s competitiveness as an investment location. 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, as it is 15 percentage points higher than the OECD average. The OECD report concludes that this is particularly harmful with regard to the integration of single parents into the labor market (OECD 2019), while also creating substantial work disincentives for households’ potential second earners. 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. After a decade of passivity, the position of Germany with regard to effective corporate-tax-rate comparisons has continuously declined. The U.S. tax reform of 2018 marks an important further step, as the United States, a former high-tax location, cut corporate-tax rates to well below the German level. The consequence is that there are today very few industrial countries left that impose a higher tax burden on their companies. Germany has thus lost considerable appeal as a destination for foreign direct investment (Heinemann et al. 2018).

Ecological sustainability: Since the ecological tax reforms of the red-green government in 1999, the German tax system has been equipped with “green” taxes designed to internalize the ecological damage produced by certain polluting activities. The most important instruments here are the energy and electricity taxes that increase the price of fuel, heating oil and gas, and electricity consumption. Moreover, the Renewable Energy Act established massive subsidies for investment into renewable energy, which is financed through a surcharge on electricity consumption. Finally, the German industry is subject to the European emissions-trading system with its market-based pricing of CO2 emissions. Together, these tax instruments have significantly increased the prices of (nonrenewable) energy consumption. However, the revenues from ecological taxes total only 1.8% of GDP as compared to the EU average of 2.4% (Umweltbundesamt 2019). The year 2019 saw one important step that could have a long-run impact on the ecological orientation of Germany’s tax policy. In the context of the climate package, policymakers elected to integrate traffic and heating into the CO2 pricing system. Although the initially envisaged level for the CO2 price was criticized as too timid (and was substantially increased in the legislative process), this institutional innovation can be seen as a milestone with regard to a more comprehensive and consistent pricing of CO2 emissions.

Several further uncertainties and deficiencies within the German tax system should also be mentioned. For example, Germany’s municipal tax system will be confronted with a reform of the housing property tax which must be fully implemented by 2024 so that valuation of property wealth better reflects actual market values. Although there are huge discrepancies in the budgetary performance of German municipalities, they have in aggregate produced budget surpluses over the past couple of years. Despite perennial discussions about the problems of bracket creep, there has been no effective solution to the problem. Finally, the German Council of Economic Experts has criticized the fiscal equalization scheme between states as inefficient and harmful to growth (Sachverständigenrat 2017: 293).

Citations:
Bundesfinanzministerium (2019):
https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Steuerschaetzungen_und_Steuereinnahmen/1-kassenmaessige-steuereinnahmen-nach-steuerarten-und-gebietskoerperschaften.html

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

Global Competitiveness Report 2019: World Economic Forum.
http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf
file:///C:/Users/RB96BD~1/AppData/Local/Temp/WEF_TheGlobalCompetitivenessReport2019.pdf

OECD (2019): 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 November 2019).

Heinemann, Friedrich, Olbert, Marcel, Pfeiffer, Olena, Schwab, Thomas, Spengel, Christoph and Kathrin Stutzenberger (2018): Implications of the U.S. Tax Reform for Transatlantic FDI, Intereconomics, 2018/2, 87-93.

Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2017): Für eine zukunftsorientierte Wirtschaftspolitik, Jahresgutachten 17/18, Sachverständigenrat: Wiesbaden.

Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2019): Den Strukturwandel meistern, Jahresgutachten 19/20, Sachverständigenrat: Wiesbaden.

Umweltbundesamt (2019): https://www.umweltbundesamt.de/daten/umwelt-wirtschaft/umweltbezogene-steuern-gebuehren#textpart-1

Budgets

#16

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, and was expected to fall below the Maastricht limit of 60% at the end of 2019 (Sachverständigenrat 2019). This decrease has resulted from surpluses in general government balances since 2010 as a consequence of dynamic employment growth, a stable GDP increase and historically low government-bond interest rates. In addition to this favorable environment, a constitutional debt limit is in place (Schuldenbremse) that restricts the federal government’s cyclically adjusted budget deficit to a maximum of 0.35% of GDP, and will require German states to maintain balanced cyclically adjusted budgets from the year 2020 onwards. The year 2019 also showed a strong positive balance, with the full surplus projected at €49.2 billion (1.4% of GDP) by the German Council of Economic Experts (Sachverständigenrat 2019). Although surpluses are now forecasted to decline, the short-run perspective remains favorable. This has even led to some debate over whether the constitutional debt brake is still appropriate, should be loosened or even given up. Arguments in favor of debt-brake reform relate to the low interest rates that are expected to stay at a low level for the foreseeable future, along with the perceived lack of public investment.

As the review period closed, the short-run budgetary outlook thus remained good despite the cyclical downturn of the economy. However, the medium- and long-run challenges resulting from demographic change are substantial. According to calculations based on the generational accounting methodology developed by Bernd Raffelhüschen and his coauthors (Bahnsen et al., 2019), Germany’s “implicit debt” (i.e., the government’s spending promises not covered by future tax revenues) are on an increasing path, and have reached 160% of GDP in 2019.This deterioration of long-run solvency is driven both by less optimistic revenue expectations and numerous political decisions that have increased spending within the social security system on a permanent basis without offering compensating revenue measures.

Citations:
Sachverständigenrat (2019): Den Strukturwandel meistern, Jahresgutachten 2019/20, Wiesbaden.

Bahnsen, Lewe, Tobias Kohlstruck, Gerrit Manthei, Bernd Raffelhüschen and Stefan Seuffert (2019): Ehrbarer Staat? Die Generationenbilanz, Update 2019, Stiftung Marktwirtschaft, Argumente zur Marktwirtschaft und Politik, Nr. 146, Berlin.

Research, Innovation and Infrastructure

#7

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 is ranked best among the world’s top performers. In the Global Competitiveness Report 2019, 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 is ranked at fourth place, a strong improvement relative to 2017, when Germany was ranked only 11th out of 140 countries (Global Competitiveness Report 2019: 241).

Regarding funding, the German government continues to raise budgets for research and development. Overall spending levels remain 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, setting a new record. In 2018, this level was kept at the same amount, but increased in 2019 to €18.3 billion (Bundesregierung 2019).

Unlike numerous other European countries, Germany has not previously offered general R&D tax incentives, instead focusing on the provision of targeted funding of specific programs. In this respect, 2019 saw a substantive turning point with the Research Allowance Act (Forschungszulagengesetz), which introduced a R&D tax incentive that will become effective starting with the year 2020. Spending on R&D staff will benefit from a 25% tax allowance that will be paid out if the entity makes a loss. The tax subsidy is capped at €500,000 per company per year.

Companies’ expenditures on R&D are significant, but public-private partnerships and collaborations between universities and industry leave room for improvement. The federal government and states have agreed to continue the Joint Initiative for Research and Innovation, and intend to increase the program’s budget by 3% every year between 2021 and 2030.

Over the past 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 (Global Competitive Report 2019: 240).

Citations:
Global Competitiveness Report 2019. World Economic Forum.

Bundesministerium für Bildung und Forschung – BMBF (2019):
https://www.bmbf.de/de/der-haushalt-des-bundesministeriums-fuer-bildung-und-forschung-202.html

Global Financial System

#3

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 ECB’s TARGET payment system.

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 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 operated by state-owned 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. However, during the period under review, the German government agreed to start negotiations on EDIS, which was generally welcomed as signaling a willingness to search for a compromise.

Although skeptical at first, the German government ultimately revised its position regarding the implementation of an EU-level financial-transaction tax (FTT). In 2019, Germany’s Finance Minister Olaf Scholz proposed draft legislation that would introduce a FTT on stock transactions as a joint initiative of 10 EU member states.
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