Germany`s new strength? From stimulus to growth

Transcription

Current Issues
Germany’s new strength?
Germany
October 7, 2010
From stimulus to growth
“Germany is back.” Its economic rebound and stable government cast
Germany in a positive light by international comparison. Buoyant demand from
abroad and the stimulus from the government‘s economic policies have dragged
German industry out of recession. But clouds on the economic horizon for
important trade partners harbour risks.
German economic policy is better than its reputation. After the 2009
federal election Germany‘s policymakers got off to a rocky start. An economic
stimulus package at the end of 2009 was followed by political attempts at
clarification in an effort to make good lost ground amid hefty criticism from the
media. But the substance of the government‘s economic policy is considerably
better than its outward perception.
However, a broad growth agenda is still in its infancy. The relationship
between the market and state needs to be recalibrated – and not just since the
crisis interventions. The debate over social justice will have to be conducted more
intensively, if only for reasons of intergenerational fairness.
Fiscal policy must be set on a new track. Above and beyond the austerity
package already presented, the top priority is a government spending review
focusing on the contribution this expenditure makes to economic growth. Tax
breaks and subsidies need serious pruning, accompanied by income tax relief in
the medium term. Windfall revenues must be used to reduce deficits more quickly.
Social policy financing issues are reducing growth opportunities.
Delinking the financing of social protection from wages remains on the agenda.
At the same time the risks inherent in the social welfare system must be brought
under control. Latent growth potential in the healthcare system should be
leveraged.
Authors
Barbara Böttcher
+49 69 910-31787
[email protected]
High levels of employment are a key factor in strengthening domestic
demand. Labour policy should continue down the successful path of greater
Editor
Dieter Bräuninger
flexibilisation. Consistent regulation must minimise the problematic interaction
between minimum wages, additional earnings regulations and incentives to work.
The supply-side prerequisites for consistently higher economic momentum also
include a better level of education for the population and sufficient supply of skilled
staff.
Technical Assistant
Judith Runge
An integrated energy and climate policy must remain a growth driver.
Klaus Günter Deutsch
+49 30 3407-3682
[email protected]
Deutsche Bank Research
Frankfurt am Main
Germany
Internet: www.dbresearch.com
E-mail: [email protected]
Fax: +49 69 910-31877
Managing Director
Thomas Mayer
To retain a pioneering role in innovation, it is urgently necessary to put down
markers in coal-based power generation, grid and storage development and grid
regulation, building renovation, goods traffic and the institutional framework. Little
stands in the way of the rise of renewables.
Current Issues
Contents*
New government, economic recovery – everything rosy?.........................................................3
Deep in the valley of tears, recovery champion? ................................................................................4
Subdued economic outlook……………… .............................................................................................6
An outline of measures by the German government 2008-2010 .......................................................7
German pragmatism in economic policy…………………………………………………………………...8
A growth agenda……………………………………………………………………….……….…..…………..…8
Modern economic policy – more balanced growth profile
and reassessment of the welfare state……………………………………………………………….……...9
Fiscal policy beyond cost-cutting………………………………………………………………….……......11
Challenges remain for labour market policy……………………………………………………………....13
Setting social policy on a sensible track………………………………………………………….………..15
Climate and energy policy ...………………………………………………………………………………….18
Literature……………………………………………………………………………………….………………...…22
*
2
Translation of the study ―Deutschlands neue Blüte? Von der Konjunkturpolitik zur Wachstumsagenda.‖
Published in German on September 29, 2010. Data have not been adjusted since then.
October 7, 2010
Germany‟s new strength? From stimulus to growth
New government, economic recovery – everything
rosy?
German Bundestag
election results
1990-2009, percentage of second votes
50
40
30
20
10
0
1990 1994 1998 2002 2005 2009
CDU/CSU
SPD
FDP
Alliance 90/The Greens
The Left Party - PDS
Others
Source: Federal Returning Officer, Schmidt (2007)
1
Distribution of seats in
the 17th German Bundestag
622 seats in all
68
76
239
146
93
CDU/CSU
FDP
SPD
The Left Party
Alliance 90/The Greens
Source:Bundestag
2
Distribution of seats
in the Bundesrat
69 seats in all
8
9
31
4
3
3
11
CDU/FDP
CDU/Greens
SPD
SPD/The Left Party
In its post-war history Germany has gone through cycles of
international acclaim and criticism. Germany has alternately been a
model, a ‗locomotive‘; then again it has held the red lantern and
been the ‗sick man of Europe‘. The situation was no different in the
recent economic crisis – first the waterfall drop in economic output
and now a powerful recovery. Such strong alternations have equally
occurred in the realm of politics. The difficult years of German
reunification were followed by the comparatively low-key end to the
conservative-liberal coalition government. In Chancellor Schröder‘s
SPD-Green Party coalition, periods of friction and weak leadership
(1998, 2002, 2005) alternated with periods of strong political
governance in which reforms were embraced (2000 tax reform,
2001/02 pensions reform, 2003/2004 labour market reforms). The
1
―Schröder cycle‖ culminated after seven years in early elections
2
and loss of the chancellorship in 2005. At least the Social
Democrats managed to scramble into an unwanted Grand Coalition
led by Chancellor Angela Merkel from the CDU. Whilst the audience
liked the orchestra and music (sound public finances, more
environmental protection, more welfare state, crisis management),
polarisation heightened again between the political parties.
Following a long drawn-out electoral campaign, in the 2009 federal
election voters brought about a change in government to a centreright administration, marking a return to rule by a coherent political
camp rather than a tripartite constellation such as the so-called
‗Jamaica alliance‘ referencing the trademark colours of the
conservative CDU/CSU (black), liberal Free Democrats (FDP –
yellow) and Greens or a ‗traffic light‘ (red/yellow/green) combination
3
of SPD, FDP and Greens. However, opinion polls revealed that
most Germans were satisfied with the Grand Coalition‘s performance and that – unlike the situation in 1969, 1982 and 1998 –
there was no dominant change of sentiment. At the same time the
SPD imploded, while the CDU/CSU turned in a consistently weak
performance, which – given the high proportion of second votes
captured by the FDP – sufficed for a comfortable CDU/CSU/FDP
majority. Ultimately the clear election campaign pledge by the FDP
and CDU/CSU to form a ‗black-yellow‘ coalition paid off. During the
election campaign promises to cut taxes fuelled expectations of a
centre-right change of course. However, following the rapid
negotiation of a coalition agreement and the formation of a new
government, the CDU/CSU and FDP had to resolve issues over
their policy direction in practically all areas, with the result that at
first no clear government agenda was apparent. After a moderate
tax cut of somewhat more than EUR 8 bn had been rushed through
the necessary institutions in late 2009, very little else happened.
Loss of the May 2010 state election in North Rhine-Westphalia
(NRW) and the centre-right‘s ejection from office then prompted the
announcement of another fresh beginning, bringing the
CDU/CSU/FDP coalition round to a clear policy of consolidation at
the expense of any further tax relief.
CDU/SPD
CDU/Greens/FDP
SPD/Greens
1
Source: Bundesrat
3
2
3
October 7, 2010
Raschke (2010).
See Egle, Ostheim, Zohlnhöfer (2003) and Egle, Zohlnhöfer (2007) for a review of
the two legislative periods and Egle, Zohlnhöfer (2010) and Dyson (2010) on the
Grand Coalition.
See the articles in ―Aus Politik und Zeitgeschichte‖ (2009).
3
Current Issues
State parliament elections
2011
Date
Federal state
March 20
Saxony-Anhalt
March 27
BadenWürttemberg
March 27
RhinelandPalatinate
May 22
Bremen
Sept. 4
Berlin
Sept. 4
MecklenburgWestern
Pomerania
Government*
CDU, SPD
CDU
SPD
SPD, Greens
SPD, Left Party
SPD, CDU
* Present majorities
Source: DB Research
4
Germany – a “Grand Coalition nation”
— Parliamentary system with coalition
governments as the norm
— Distinct division of power in the federal
system with the Bundesrat (the upper
chamber of parliament representing the
states) sharing decision-making in many
policy areas
— Different party-political majorities in the
Bundestag and Bundesrat ―par for the
course‖
— Many veto players in the decision-making
process
— Delegation of important policy areas to
self-governing bodies and semiautonomous administrative units in the
social welfare system
Source: Schmidt (2007), p. 198.
Germany is therefore labouring at present under an interpretation
deficit. Economic euphoria and criticism of the government dominate
the headlines. Are we gambling away the future, as the Sachverständigenrat, the panel of economic advisors to the German
government, pondered last autumn? Or have we emerged older and
4
wiser from the crisis? Are we currently a recovery champion and
growth star in Europe or a repeat offender expanding again at other
nations‘ expense? Are we belt-tightening too soon and too
rigorously, or is it not our duty to consider our ageing society?
An economic and political close-up of the situation in Germany in
the wake of the deepest recession in the past 60 years reveals an
unusually high degree of uncertainty. Economic question marks
hang not only over the sustainability of global economic recovery as
monetary and fiscal stimuli are gradually wound down, but also over
the possibility of inflation-free trend growth thereafter and the state
of public finances. Political question marks include the direction of
government policy, which has to pick its way through the minefield of
limited strategic scope in the tripartite alliance between CDU, CSU
and FDP, the potential of the Bundesrat (the upper chamber of
parliament representing the states) to block the passage of legislation since the formation of a state government in NRW has left it
without a CDU/CSU/FDP majority, and the need to court public
opinion. And looming on the horizon in 2011 are elections in
important federal states in which the CDU forms part of a coalition
government (see sidebar). Calls for a clear political orientation are
thus growing more strident.
In our opinion Germany is not alone with these uncertainties – quite
the contrary. By international standards Germany is in a good
position to put the crisis behind it in the coming two to three years. It
has an administration with a parliamentary majority, the next federal
elections are not until 2013, and the economic situation is
comparatively good. It is therefore very likely that in the next few
years Germany will still be able to pursue a stability-oriented fiscal
policy, an economic and labour market policy creating jobs and a
consistent climate and energy policy. And of course there is also
considerable scope to get to grips with the growth deficits in
education and integration policy and with structural reforms in the
healthcare and financial systems and on the goods and services
markets. However, no major course corrections are to be expected
in the costly welfare state – competition between the political parties
for the approximately 40% of voters who depend directly on welfare
5
transfer payments will see to that. Nevertheless, it has usually been
the case in the past that, for all the obstacles standing in the way of
concrete decisions, reforms were engineered that had a sustained
impact on the economy and society. The last two governments at
least achieved this with the 2003 labour law reform and the 2009
‗debt brake‘. Initially, neither project featured prominently in government planning. Viewed in this light, the present administration still
stands a good chance of laying down markers.
4
5
4
Sachverständigenrat (2009), Economist (2010).
Schmidt (2010), pp. 319-320, estimates the narrowly defined number of German
citizens entitled to vote who profit directly from social benefits at 22.4 m (36% of
the electorate in 2005); adding temporary recipients of transfer payments to this
brings up the number to 27 m or 40% of the electorate. And counting the
administrators of these benefits, the grand total comes close to the 50% mark.
October 7, 2010
Deep in the valley of tears, recovery champion?
Growth contributions
To price-adjusted GDP
in percentage points, yoy
4
2
0
-2
-4
-6
2006 2007 2008 2009 2010 2011
Investment
Private consumption
Foreign balance
Government spending
Real GDP
Sources: Federal Statistical Office, DB Research
5
Imports, exports and
industrial production
% yoy
40
30
20
10
0
-10
-20
-30
05
06
07
08
09
10
Imports
Exports
Industrial production
Source: Deutsche Bundesbank
6
Unemployment*
In %
11
9
7
5
3
2005
2006
2007
2008
2009
Germany
OECD
EU
Japan
The force of the crisis. The global crisis brought Germany‘s
6
temporary economic and political resurgence between 2006 and
the summer of 2008 to an abrupt end as the country felt the full
7
force of the slump in world trade. The German banking system also
acted as an important channel for the transmission of seriously
misguided developments and declines in asset values on the US
real estate market. Having racked up far too much exposure to
structured US mortgage-backed securities, a number of German
banks suffered heavy losses. Some were rescued by other, healthier
banks and some bailed out by the state with liquidity guarantees,
injections of equity and nationalisation.
Within mere weeks, the loss of confidence in the international
financial markets triggered by the insolvency of Lehman Brothers on
September 15, 2008 caused world trade and investment to collapse.
Germany‘s merchandise exports and imports and its manufacturing
output plummeted by more than 20% in six months, with order
books in some of its industry champions shrinking even more
dramatically. Ultimately, overall economic output in 2009 fell by
4.7%. But thanks to resolute political action to stem the tide with
economic stimulus packages and further relief legislation, by the
second quarter of 2009 gross domestic product was already back in
positive territory (quarter-on-quarter). While private consumer
spending in Germany was dented only slightly, particularly in
comparison to other countries, public-sector consumption and
investment expenditure up to autumn 2010 picked up the slack
created by sluggish private demand, particularly from abroad. The
second quarter of 2010 saw net exports spurring the German
economy to its fastest rate of expansion for 20 years with growth of
2.2% quarter-on-quarter (4.1% year-on-year).
Flexible labour market, low unemployment. Given such drastic
fluctuations in manufacturing output and overall economic activity,
developments in the German labour market stand out conspicuously. Many companies entered the crisis with excellent
earnings and financial figures, having already coped with their
restructuring in the first half of the decade, when business was poor.
At the same time corporate Germany had massively improved its
competitiveness as trends in unit labour costs diverged within the
European Monetary Union. Even in the recession, this ‗buffer zone‘
for corporate cost increases was not entirely exhausted. Furthermore, companies made flexible use of various human resources
management tools. Employees scaled back overtime, took time off
to balance out their ‗working time accounts‘ and took advantage of
the contractually negotiated leeway to reduce their regular weekly
working hours. Additionally, given the shortage of skilled staff many
companies embraced the instrument of short-time work, which was
8
expanded during the crisis, in order not to lose their core workers.
The number of people on short time peaked at more than 1.5
million. However, this figure has already fallen to just over 700,000,
and new applications have fallen dramatically.
USA
6
*Number of jobless as percentage of civilian labour
force; ILO definition
Source: OECD
October 7, 2010
7
7
8
Böttcher, Deutsch (2007).
For a detailed discussion see Gräf, Schneider (2010a, b), Gräf (2010), Heymann,
Just (2010).
In autumn 2008 the government increased the entitlement periods for short-time
working allowances from six to first 18 and subsequently (in January 2009) 24
months.
5
Current Issues
Unemployed, labour force
and short time workers
In millions
6
41
5
40
4
40
3
39
2
39
1
0
2005
2006
2007
2008
2009
38
June
2010
Unemployed (lhs)
Short time workers (lhs)
Labour force (rhs)
Sources: Federal Labour Agency,
Federal Statistical Office
8
Real GDP
Private consumption
Government
spending
Fixed capital
formation
Machinery and
equipment
Construction
Germany thus achieved the feat of weathering a global recession
without its labour market suffering any major harm. Instead of the
rise to upwards of 4 million unemployed in 2010 that the Sachverständigenrat, for example, was predicting only a year ago, we
can probably expect considerably fewer than 3.5 million on average
for 2010 (not quite 3.2 million were registered in August 2010).
Whether expiry of the various state measures and sluggish business
activity at many trade partners will lead to a renewed rise in 2011 is
not yet clear. However, we consider it unlikely that an economic
slowdown would entirely wipe out the positive tendencies of rising
employment with a decline in the supply of labour and presumably
10
slightly falling unit labour costs in 2010. The Federal Labour
Agency is reckoning with not quite 3 million unemployed in 2011.
Subdued economic outlook
Forecast at a glance
% yoy
This pattern of adjustment to the recession initially caused the
volume of work to contract by 3% in 2009 and labour productivity to
decline steeply, not picking up again until spring 2010. As a
reflection of this, unit labour costs soared by 5%. The unemployment
rate (ILO definition on a seasonally adjusted basis) edged up only
marginally and briefly, and in June 2010 it stood at 6.9%. Meanwhile, joblessness in June 2010 hit 10% in the euro area and 9.5%
in the US, only slightly below their respective highs. In absolute
terms the number of people out of work in Germany on average for
9
2009 climbed by just 155,000 year-on-year to not quite 3.5 million.
On the whole, the number of people in work has even increased
since 2007 and did not fall in any crisis year.
2009 2010E 2011E
-4.7
3.4
1.7
-0.2
0.0
0.5
2.9
2.9
0.7
-10.1
5.2
2.0
-22.6
8.2
4.5
-1.5
2.6
-0.6
Exports
-14.3
15.5
7.3
Imports
-9.4
13.9
6.2
Sources: Federal Statistical Office, DB Research
9
Germany‘s economic outlook is mixed. This year we are pencilling in
growth of around 3.5%, driven by a sharp acceleration in exports (by
12%), chiefly to Asia (there, in turn, with China as the major
customer) and in machinery and equipment investment (by 8.2%).
Industrial output will also gather steam. Although Germany has not
yet returned to the production levels and capacity utilisation rates
seen in the summer 2008 boom period, the export-centric capital
goods and high-end consumer goods industries are on a rapid
upward path with new orders up 20-30% on the previous year.
Germany‘s four export industry champions – automotive,
mechanical engineering, electrical engineering and chemicals – are
doing particularly well: the better the fit between the regional
structure of exports in any one sector and the uneven pattern of
global economic recovery, the stronger the stimulus. Mechanical
engineering could therefore benefit from Asia‘s growth. However,
business activity in the US, Japan and the euro area is fragile. Many
EU countries running high debt levels and facing critical developments on their sovereign debt markets have launched austerity
packages. Germany itself presented a catalogue of measures in
July 2010. Although fiscal policy remains expansive in 2010, the
debt-reduction drive will start to bite in 2011. At the moment, all the
stimulus is coming from buoyant growth in Asia and some emerging
markets (Turkey, Brazil).
9
10
6
The statistics were adjusted in 2009; some of the people previously registered as
out of work were no longer included.
Boss et al. (2010), pp. 39-40.
October 7, 2010
An outline of measures by the German government 2008-2010
General
— Cut in the unemployment insurance contribution rate (from 4.2% to 3.3% w.e.f. 2008 to 2.8% w.e.f. 2009) and increases in contribution
rates for nursing care insurance (0.25 percentage points) and statutory health insurances (0.6 percentage points) w.e.f. January 1,
2009
— Commuter allowance: return to legal situation in 2006
— Abolition of the homeowner subsidy
— Increase in truck toll
Financial market stabilisation acts (October 2008 / July 2009)
— Creation of the Financial Market Stabilisation Fund (SoFFin) under which guarantees can be issued up to a total of EUR 400 bn (EUR
147 bn drawn down), equity injections made up to EUR 80 bn (EUR 28 bn drawn down) and toxic assets acquired from the banks
— ―Bad Bank Act‖ on the transfer of toxic structured securities or non-strategic business areas to special purpose vehicles with the
SoFFin and the establishment of winding-up agencies
First and Second Economic Stimulus Package (Nov. 2008 / Jan. 2009) (EUR 85 bn)
— Labour market policy: Extension of the entitlement period for short-time working benefits to 18 (ESP I) and 24 months (ESP II) up to
the end of 2010 and subsidisation of short-time working allowances, prolonged until mid-2012; and setting of the unemployment
insurance contribution at 2.8% until the end of 2010 and federal subsidy to the Federal Labour Agency (EUR 16 bn)
— Cuts in taxes and other levies worth EUR 60 bn: Reduction in income tax scale in two stages, temporary lowering of statutory health
insurance contribution rate of by 0.6 percentage points from July 2009 until the end of 2010, reintroduction of declining balance
depreciation method and other relief for businesses
— Increase in public-sector investment by EUR 20 bn (EUR 6 bn for motorways and railways; EUR 10 bn (Federal government) for
education infrastructure and local infrastructure; EUR 3.3 bn (regional governments) for these purposes
— Car scrappage bonus scheme: EUR 5 bn in subsidies
Loan and credit guarantee programme (March 2009)
— Wirtschaftsfonds Deutschland (German Business Fund): EUR 100 bn max. (EUR 75 bn for credit guarantees, EUR 25 bn to provide
loans to large SMEs and big business)
— Special KfW programme: EUR 15 bn for the provision of loans to SME businesses
Citizens Relief Act (June 2009) (EUR 10.6 bn)
— Improved tax-deductibility of contributions to health insurance and nursing care insurance (EUR 9.5 bn)
— Application of a higher tax threshold to the interest barrier (Zinsschranke) in corporate taxation
Act to Accelerate Economic Growth (January 2010) (EUR 8.3 bn)
— Tax relief of altogether EUR 8.3 bn p.a. with measures including: relief for families (EUR 4.6 bn) by increasing the tax-free child
allowance from EUR 6,024 to 7,008 and increasing child benefits
— Relief for businesses (EUR 3.3 bn) by relaxing the existing restrictions on deducting losses and interest, improving write-off
possibilities and amending corporation tax
— Reduction of VAT to 7% in the hotel trade
— Changes to inheritance tax (EUR 420 m)
“Austerity package” (July 2010) (EUR 82 bn of budget consolidation*)
— Welfare cuts (EUR 29.5 bn): cuts in compulsory benefits in the Social Code Books II + III, improved efficiency inter alia
— Burdens on corporate sector (EUR 19.2 bn): tax compensation from the nuclear energy industry, railway dividend, financial market tax
and fiscal privilege
— Cuts in government administrative expenditure (EUR 13.4 bn)
— Reduction in subsidies (EUR 10 bn): reducing tax privileges in the field of ecological taxation and introduction of an air transportation
tax
— Others (EUR 17.8 bn): interest savings, reform of armed forces, cuts in parenting and housing allowances and lower spending across
the board
*With budgetary effects in the fiscal years 2010-2014 vs previous budgetary planning
Sources: BMWi (2009a, b, 2010), Sachverständigenrat (2010), p. 65; Boss et al. (2010), p. 32; BMF (2010).
October 7, 2010
7
Current Issues
German pragmatism in economic policy
Current account balances
As % of GDP
8
6
4
2
0
-2
-4
-6
2005
2006
2007
2008
Germany
OECD
EU
Japan
2009
USA
Source: OECD
10
Rates of growth
In %
3
2
1
0
-1
-2
-3
-4
-5
-6
2007
2008
Germany
OECD
EU
Japan
2009
USA
Source: OECD
11
Ratios of government
activity
At the same time the government took steps to prevent a potential
corporate credit crunch with a loan and credit guarantee programme
worth EUR 115 bn. Moreover, its response to the banking crisis in
autumn 2008, which did not come until after the collapse of Lehman
Brothers but was then rolled out swiftly with intervention concentrating on two banks, massively defused the macroeconomic
risks.
These successes notwithstanding, the government intends to
remain vigilant in its economic policy with a robust political agenda
13
designed to temper the very likely deterioration in potential growth
as a result of the crisis. In its forecast up to 2014 the government is
similarly pencilling in average real growth of only 1.5% p.a. – on the
assumption that the output gap will have closed again by then and
that (without further political reforms) medium-term potential growth
14
will amount to a scant 1% p.a. It is obvious that such meagre
growth will make the consolidation of government finances an uphill
task and that the public investment so urgently needed in areas
such as education would have to be made at the expense of other
outlays. Following the moves on economic policy in both directions –
first strong expansion and then gradual restriction – it is now therefore only logical to focus greater attention on strengthening the
forces driving growth.
A growth agenda
As % of GDP
2006 2007 2008 2009
Government
spending
45.4 43.7 43.7 47.3
Contribution ratio
39.5 39.7 39.6 40.8
- Tax ratio
23.3 24.2 24.3 23.8
- Social
contributions
ratio
Financial balance
16.2 15.5 15.3 17.0
-1.6 0.2 0.0 -3.1
Structural
budget balance
-1.9 -0.3 -1.0 k.A.
Debt-to-GDP ratio
67.6 65.0 65.9 71.8
Sources: Sachverständigenrat (2009), p. 178;
for 2009 Boss (2010)
Economic and fiscal policy made a very major contribution to this
11
development (see p. 7). There can be no question that the
government‘s macroeconomic countermeasures – diffident at first
but subsequently comprehensive – prevented the worst. Consumer
demand was stabilised and public-sector investment boosted with
the aid of three economic stimulus packages (including the
December 2009 Act to Accelerate Economic Growth – Wachstumsbeschleunigungsgesetz)) and a Citizens Relief Act (Bürgerentlastungsgesetz) providing total relief of more than EUR 90 bn,
equivalent to almost 4% of GDP spread over two years; measures
worth EUR 36 bn took effect in 2009 and the remaining EUR 54 bn
this year. The fiscal stimulus is estimated at about 1.3% of GDP in
12
2009 and 0.8% in 2010.
Stronger alignment of economic policy to the promotion of growth is
very difficult to accomplish without reviving the debate on the role of
the state versus that of the market. The economic and financial
crisis has shifted emphasis away from the market and more towards
the state. But extensive crisis intervention by the state is being
conducted on top of what is already a high level of public sector
activity. In 2007 the government sector in Germany was around
15
44%, and this year it is expected to brush 47%. Whilst there is no
ideal level for government spending ratios, the structure and type of
state activity do play a crucial part. When performance of (perceived) duties of the state permanently overtaxes its fiscal capacity,
it is high time for a fundamental rethink. Irrespective of the fiscal
(and political) cycles mentioned, since the 1970s the state sector in
12
11
12
13
14
15
8
See Enderlein (2010), Grasl, König (2010), for a critical overview Sinn (2010),
Dullien et al. (2009) and Bofinger (2009), for example.
Sachverständigenrat (2009), p. 65, pp. 166-174, Boss et al. (2010a), pp. 31-32.
See IMF (2009).
BMWi (2010c).
On average, the government sector in the EU countries this year will pass the 50%
mark, lifting it 5 percentage points above its 2007 pre-crisis level.
October 7, 2010
Social market economy
and social justice
In %
100
200
This paradox is something Germany will presumably find hard to
disregard. On the one hand, acceptance of our market-oriented
economic regime is bound up closely with the aspect of social
justice. On the other, a free market system is least able to provide
social services on a scale permanently above its financial means.
This is equally true if the funds required ultimately have to be made
available by racking up public debt despite the fact that spending,
tax and contribution ratios are all tracing an economically and
politically acceptable path. Even the sensibly launched process of
conversion from a ―welfare to a workfare state‖ (one in which the
concept of caring for people in need is replaced by the aim of
making provision to prevent people from having to rely on state
assistance in the first place) cannot be entirely free from funding
considerations. What Germany therefore needs is a fundamental
debate not only on how it produces social security but also on what
―social justice‖ actually means and where the suitable means to
achieve this – and the present-day limits to social justice – lie. In the
context of a convincing growth agenda, we must ask ourselves
whether the principle of social justice can be the foremost yardstick
by which politics is measured. In most cases the answer to this will
more likely be ―no‖ given the growing danger of missing out on
growth opportunities, suffering efficiency losses or adopting social
17
benefits today at the expense of generations to come.
150
Modern economic policy – more balanced growth profile and
reassessment of the welfare state
80
60
40
20
0
Total
popul.
Fair
Unfair
No
opinion
People who consider the
situation in Germany to be…
Opinion on social market economy:
good
negative
undecided
13
Source: Allensbacher Archiv
Social budget and GDP
Rate of change in the decade in %
100
50
0
80*
90
Social budget
00
08
GDP
*1980 vs 1970
Source: Own calculations following
Sachverständigenrat (2009)
Germany has always spent more money than it has collected in
revenues. The bulk of public spending has gone on expanding the
16
welfare state. But at the same time – and despite still-high welfare
expenditure overall – there is a growing perception in the country
that Germany‘s Social Market Economy is out of social kilter.
14
Sensible as ‗pragmatic‘ economic policy may have been in the
throes of the crisis, it will not therefore suffice to lead the current
economic upsurge onto a sustainable longer-term growth path.
Going forward, closer attention must be paid to giving vent to the
forces driving domestic growth in order to reduce reliance on trade
with other countries and to enable more evenly balanced economic
development. This calls for government activity to be reined in and
processes unleashed to improve productivity and add value in
goods and services markets, and for more business competition. It
is also a matter of leveraging the considerable value-adding
potential in healthcare, nursing care and education.
Market regulation. Unfortunately, since the reform of German crafts
legislation and implementation of the Services Directive, market
regulation policy, privatisation policy and policies to promote growth
have taken rather too much of a back seat. Negative experience
with the shelved attempt to take railroad operator Deutsche Bahn
public and the failed attempt to privatise Deutsche Flugsicherung
(German Air Traffic Control) may have something to do with this.
Regulatory policy on the postal services did not exactly go smoothly
18
either.
16
17
18
October 7, 2010
The ratio of social expenditure to GDP has climbed from 24.5% in 1970 to more
than 30% today. But back in the SDP-Green coalition period, the government
already began stabilising the level of welfare benefits as a whole. A substantial part
of the increase is due to integration of the east German states into the welfare
system.
The 2009 pension guarantee and the rekindled debate on retirement at 67 can be
taken as cautionary examples of this.
Herweg and Zohlnhöfer (2010).
9
Current Issues
Gross value added
by sectors
Growth p.a. 2000-2007, in %
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
GER
OECD
Social services
Financial and corporate services
Transport and communications
Wholesale and retail trade,
hotels and restaurants
Electricity, gas and water supply
All sectors
0.5
0.0
USA
Source: OECD 2010
15
Bad banks in Germany
In December 2009 WestLB established a
winding-up agency as a special purpose
vehicle to which assets no longer counting as
strategically essential, structured securities
and toxic assets worth altogether EUR 77 bn
have since been transferred. WestLB and its
owners have provided the agency with up to
EUR 4 bn of equity and guarantees to bear
any losses it may incur; they are also liable for
losses going beyond this. The Financial
Market Stabilisation Fund (SoFFin) further
plans to support the remaining core WestLB
with EUR 3 bn of equity capital assistance,
which still requires approval by the European
Commission under European state aid
legislation.
Hypo Real Estate Bank (HRE) transferred
EUR 173 bn of strategically non-essential
assets and risk positions to the winding-up
agency authorised this July under the aegis of
SoFFin.
Source: SoFFin
But we need to dig deeper here. For more than 15 years now the
pattern of growth in Germany has borne the stamp of marked
weakness in the service industries. The OECD recently pointed out
19
again that in the period 2000-2007 Germany fell behind the OECD
average in terms of gross value added by all major services sectors.
Regrettably, no one really seems to know exactly why and what
might be done to remedy the situation. But we do already have the
odd pointer. Whilst corporate services turned in quite reasonable
growth in absolute terms, consumer services – with the exception of
social and education services – and services for mixed users
showed very sluggish development. Generally, Germany currently
lacks resolute liberalisation and competition policies on the banking
market, in the crafts sector (despite initial successes under the
Schröder government), in the liberal professions and in other
industries that would stimulate productivity and output. At least the
government has addressed the issue of boosting competition on the
electricity and gas markets with the Bundesnetzagentur (Federal
Network Agency) – and not a moment too soon, given their
oligopolistic position.
Restructuring of the Landesbanken, which are jointly owned by the
regional state governments and the savings banks, has also slipped
out of public sight. The premiers of the states involved had
committed to this vis-à-vis the Federal government in 2009 in return
for federal legislation‘s embracing a ‗bad bank‘ solution for the
winding-up agencies installed by the states. However, the
commitment to restructure the Landesbanken by the end of this year
was a political one only – an outcome that the then federal finance
minister Steinbrück subsequently described as a ―big mistake‖
because at the last moment the federal government surrendered its
leverage for consolidation of the sector. His judgement tallies with
20
that of the Sachverständigenrat. Progress has yet to be made. The
OECD is not alone with its germane criticism that, besides a cleanup of the Landesbanken balance sheets going easy on the taxpayer
and balance sheet shrinkage in compliance with European
regulation in the four cases in which state aid has been granted,
restructuring should also comprise concentration on a sustainable
business model, a merger into one to two companies and the
21
privatisation of bank assets. WestLB is the first to begin shifting
toxic or non-strategic assets to SoFFin.
An explicit privatisation policy by the Federal and state governments
22
could also create significant leeway in the public budgets.
Furthermore, existing impediments to company start-ups and the
weaknesses in seed funding for companies through venture and
equity capital should be addressed. Important tasks likewise await
infrastructure policy, notably in goods traffic and broadband.
Additionally, the Federal government‘s otherwise laudable high-tech
strategy is still very heavily skewed to industry. At least all its costcutting measures have bypassed the increase in research funding
towards the 3% mark, and it should waste no time in including a tax
R&D component for companies.
19
20
21
22
10
OECD (2010) and Deutsch, Frank, Gornig (2006). On the services industry in
Germany in general see Ehmer (2009) and Schettkat (2010).
For a discussion of the pros and cons of banking policy see e.g. Sinn (2009),
Enderlein (2010) and Sachverständigenrat (2009), Chapter 4.
OECD (2010), pp. 81ff.; Schrooten (2009), SVR (2009), pp. 124-130 and SVR
(2008b).
In 2008 the Federal Ministry of Finance listed 61 federal shareholdings, 59 of
which would in principle be eligible for privatisation. See Herweg and Zohlnhöfer
(2010), p. 258.
October 7, 2010
Expansion and restriction
Since 2000 German fiscal policy has been
through two cycles of expansion and
restriction – rather a lot in just ten years!
While the government‘s income tax reform in
2000 and yawning public deficits featured
most prominently in the first half of the
decade, legislation passed by the Grand
Coalition, notably the hike in the general rate
of Value Added Tax from 16% to 19%,
ushered in a return to consolidation. This
policy achieved its goal of consolidating
general government finances in 2008 and
would also have worked shortly after at the
federal level had the crisis not erupted.
The German „debt brake‟
The debt brake adopted in 2009 commits the
federal government to presenting a budget
close to balance in 2016 with a structural
deficit of no more than 0.35% of GDP or
roughly EUR 10 bn. That necessitates
embarking on this in 2011 in equal stages.
Keystones of Federal
financial planning
Exit strategies. But the top priority is government withdrawal from
the crisis intervention measures before both sides become overly
accustomed to the situation. Quite correctly, the German economics
minister has taken the positive economic data as an opportunity to
confirm that the German Economic Support Fund (Wirtschaftsfonds
Deutschland ) will expire at the end of the year (although loan and
credit guarantee applications received up to December 31, 2010 will
still be processed even after official expiry of the programme). That
should prevent economic structures from solidifying beyond the
crisis due to subsidies keeping companies with (financially)
unsustainable business models afloat. Only about one-tenth of the
funds available under the programmes had been drawn down
anyway, given businesses‘ fairly sound financial structures and
consequently slack demand for credit. Measures to shore up other
economic sectors must also be rigorously reviewed to ensure that
economic agents are not relieved of their own restructuring and
consolidation obligations. A counter-example of the political handling
of crisis interventions with a limited time frame is the government‘s
short-time work scheme, in itself a sensible arrangement. It was,
however, extended twice, most recently this April, although its
original term until the end of 2010 would have sufficed to tide
companies over their demand-driven employment difficulties.
The government has embarked on the exit from its expansive,
anticyclical fiscal policy – in 2010 a general government deficit
23
equivalent to 4 ½% of GDP is expected – with a consolidation
package designed to trim federal budget deficits gradually by around
half a percentage point a year. This is expected to cost about a
24
quarter of a point of annual growth from 2011. 65% of the
measures, most of which work on the expenditure side, affect the
social budget, which makes up 55% of the federal budget. This
change of course is decreed not only by considerations of the
Stability and Growth Pact and the constitutional requirements of the
‗debt brake‘; it appears equally urgent in view of the higher level of
debt in relation to economic output (2010: 78%), which similarly
breaches the rule in the stability pact and, judging by economic
25
experience, is anything but sustainable. The debt brake will at
least see to it that the debt-to-GDP ratio falls appreciably over the
long term.
Fiscal policy beyond cost-cutting
EUR bn
2010* 2011 2012 2013 2014
Exp.
319.5 307.4 301.0 301.5 301.1
Rev.
239.3 249.9 260.9 269.9 277.0
NB**
65.2
57.5
40.1
31.6
24.1
SD***
53.2
45.8
39.0
32.1
25.1
SD****
2.2
1.9
1.6
1.3
1.0
* Finance Ministry forecast summer 2010
** Net borrowing
*** Structural deficit
**** Structural deficit as % of GDP
Source: Federal Ministery of Finance
16
In the next four to five years the financial balances of all layers of
government and the social security funds should be brought down
significantly from their present hefty deficits towards zero. This
should be accomplished primarily through the central, regional and
local authorities setting prudent spending guidelines clearly below
the expected level of nominal GDP growth and, to a limited extent,
by increasing revenues. For the latter, the possibility of taking the
axe to tax subsidies and federal and regional financial aid
immediately springs to mind: in this legislative period the government could set itself the goal of making cuts equivalent to at least
one percent of GDP (around EUR 25 bn) in subsidies and aid
26
totalling nearly EUR 130 bn. Revenues should not be increased
by raising wage, income and corporation tax rates, especially since
23
24
25
26
October 7, 2010
The structural general government deficit in 2009 was 2.1% (SVR 2009, p. 178),
but it is likely to rise sharply in 2010. Even so, reducing these fairly small deficits is
not an insurmountable problem.
See Zipfel (2010) for details of the package of measures.
Rogoff, Reinhart (2009).
Boss, Rosenschon (2010).
11
Current Issues
Money spinner
Value Added Tax
VAT revenues in EUR bn, share in %
190
180
170
160
150
140
130
120
110
100
90
36
35
34
33
32
31
30
29
28
27
01 02 03 04 05 06 07 08 09 10
Share of VAT in total tax revenues
(rhs)
VAT revenues (lhs)
Sources: BMF, own calculations
17
In %, 2010 target
3.3
Problems are looming in the medium term on the contributions front,
mainly in healthcare and social care. On the other hand, and despite
the government‘s ―pension guarantee‖, difficulties with funding for
the statutory pension insurance scheme are only likely to build up
gradually – although the contribution rate will remain high. And it
should be possible to keep funding requirements on the labour
market fairly low if all the reforms announced are put into practice.
Another item still in need of attention is carefully aligned, step-instep conversion of the funding base for ―non-insurance‖ social
security benefits, moving preferably to a tax-based instead of a
contributions-based system, and reform of the funding for healthcare
and nursing care (see below) as a whole. Experience has taught us
that it is easier to exercise fiscal control over welfare states funded
31
by taxes than over systems financed chiefly through contributions.
4.8
5.1
11.7
54.2
17.0
Social security
General public services
(administration, defence, etc.)
Interest expenditure
Commercial enterprises, assets
Education, science & research,
cultural affairs
Transport and communications
Others
Sources: BMF, DB Research
The Coalition is to be commended for the planned transition to topdown budgeting along a path of politically pre-determined monitoring
and for further institutional fiscal policy reinforcements. This kind of
approach should smooth the way for projected changes in the
context of greater budget policy coordination within the European
Union (―European Semester‖) and, conversely, be driven ahead by
them.
Similarly copious consolidation work faces Germany at regional
government level, even if spot-on compliance with the debt brake is
29
not necessary until 2020. Nonetheless, a painful consolidation
policy will be necessary very soon. At the same time, the
reorganisation of local government finance should succeed at the
30
third attempt, placing finances on a more stable footing.
Federal expenditure
by functions
3.9
these are now comfortably in the middle range on an OECD
comparison. By and large, however, the course adopted in the
austerity package with the imposition of extra, sector-specific levies
and taxes has not taken this direction; but at least some tax breaks
are up for review. Rigorous cuts in tax privileges and more stringent
taxation of external environmental effects, and possibly also increasing revenues from property tax, would be suitable mediumterm ways of creating the scope for corrections to the reform of
27
corporate taxation and for significant and fundamentally
appropriate relief for the populace in the income tax schedule – the
buzzwords being ―getting rid of the middle-class spread‖ and ―cold
progression‖, ―integration of the solidarity surcharge‖, ―extending the
28
progressive zone‖ . Estimates on the potential relief range up to
EUR 24 bn. The economically inappropriate variety of goods and
services to which the reduced rate of value added tax applies also
merits strict scrutiny.
18
But fiscal policy should not only set its sights on the broad brush of
government activity; instead it should prioritise expenditure in policy
areas that make a verifiable and demonstrable contribution to
potential growth. Undisputed candidates here are education and
research (and hence parts of government consumption), spending
on which remains obstinately inadequate; expenditure on public
infrastructure in general and on transport infrastructure and local
infrastructure in particular; and state incentives to investment in
certain areas. The Coalition‘s self-imposed commitment to increase
27
28
29
30
31
12
See e.g. Morawitz, Wiegard (2009) on this complicated issue.
OECD (2010).
See Kastrop, Sudhof, Meister-Scheufelen (2010) on the debt brake.
See Zipfel (2010a) on the situation with local finances and on possible funding
models.
Wagschal (2006), Becker et al. (2008).
October 7, 2010
Social budget
As % of GDP
10
8
6
4
2
1970
1980
1990
2000
0
2008
Illness
Unemployment
Old age
* Includes children, maternity and married couples
Source: Own illustration following
Sachverständigenrat (2009)
19
Contractual minimum
wages
Number of Minimum
workers wage (€)
Waste
management
130,000
8.02
Construction
sector
- West
289,100
10.82
- East
92,600
9.25
Roofing trade
58,200
10.60
Industrial
cleaning
700,000
- West
8.40
- East
6.83
Care provision
sector
800,000
- West
8.50
- East
Security services
e. g.*
7.50
170,000
8.46
- BadenWürttemberg
- North RhineWestphalia
- HesseMinimum
Challenges remain for labour market policy
For all the good news coming out of the labour market, key
regulatory issues remain unresolved. One is the role that minimum
wages will have to play going forward. For another, satisfying the
demand for skilled personnel merits increasing attention.
Family*
Sector
spending on education points in the right direction, although the bar
is still set far too low. Nor should policy-makers stop short of a
specific review of government spending, for instance on the big
welfare budget and most particularly the outgoings on policies for
families – all the more so since it is a well-known fact that German
welfare policy pays too much account to the interests of old people
and jobholders and too little to those of young people and out32
33
siders. This quality agenda for fiscal policy is therefore equally as
important as the observation of numerical rules and quantitative
management of budget balances required by the Stability Pact and
the EU‘s debt rule.
7.82
wages and the 7.50
basic
at6.53
odds
welfare
- East Germany incl.
Berlinbenefit
* From 01/2011, generally binding character not yet
clarified
Source: WSI-Tarifarchiv
20
Minimum wages. The government has not adopted a clear position
on the subject of minimum wages. Whilst it rejects a uniform
statutory minimum wage and has announced an evaluation of the
existing minimum wage regulations by October 2011, the
conservative-liberal coalition is pursuing the expansion of the
controversial wage limits launched by the preceding Grand
Coalition. New contractual minimum wages for various sectors have
been declared generally binding and a minimum wage ordinance
issued for the care provision sector for the first time. Moreover,
temporary employment is to be included in the Law on the Posting
of Workers. These moves are aimed at labour-intensive sectors in
which pressure on wages is also expected from the supply side of
the labour market, especially once it is opened up on May 1, 2011 to
workers from the Central European EU member states. Social
welfare associations, trade unions and the Opposition parties have
long been clamouring for nationwide minimum wages to stem further
expansion of the low wage sector.
However, there is a very serious risk here of protection for jobholders robbing jobseekers of chances to obtain employment, and of
34
legislators thus cementing labour market segmentation. Traditional
labour market theory identifies clearly negative effects on employment from minimum wages. It is true that economic theory also
admits of conditions, e.g. monopoly job-suppliers, from which other
outcomes can be deduced, but these are likely to be exceptional
cases of little overall relevance. The many empirical studies and
international comparisons are of little help to policy-makers here. As
a rule their findings are disputed – which is understandable if only
because the institutional framework of relevance to employment
varies over time and even more so from country to country. It is,
however, evident that the higher the minimum wage the more
detrimental it will be to employment.
Basically, minimum wages ill fit the basic welfare benefit currently in
35
operation in Germany (Hartz IV). This is geared to placing
recipients of state transfers as quickly as possible in employment
32
33
34
35
October 7, 2010
Cf. Schmidt (2010).
For greater detail on this see Becker et al. (2008), Kastrop (2008), SVR (2008), pp.
250-256, and SVR (2009).
Cf. Ifo Institut (2008) on the minimum wage debate.
But what does require regulation is wage-setting behaviour deliberately designed
to exploit the welfare system by setting wages so low that they are just about
tolerable for the person employed when ―topped up‖ by the minimum basic benefit.
13
Current Issues
that will secure their basic livelihood. Taking on low-paid work
(temporarily) may be a decisive step in this process, particularly for
the long-term unemployed. Here, the job serves primarily as a
means of (re)integration (learning by doing), while the basic
livelihood is secured in combination with Hartz IV benefits
(additional earnings disregard). Minimum wages block this bridge
into the jobs market to the extent that they reduce the availability of
low-skilled jobs. Given the high number of 2.2 million Hartz IV
recipients alone registered as unemployed, this should not be
allowed to happen. Alternatives such as subsidies for firms offering
jobs of this kind, or even state job creation companies, are
expensive and have proved of little use. The problem of the high
cost of combi-wages (EUR 11 bn in 2009) should be tackled by
reforming the additional earnings disregard arrangement (see
below).
Shortage of skilled staff becoming
acute
Skilled labour. Given the strong business upswing in latter months,
the shortage of skilled staff has already become an issue for some
sectors. But it is in the medium term that the problem threatens to
jeopardise potential growth. The Cologne Institute for Economic
36
Research (IW) estimates that German business will need around
four million academics by the middle of the coming decade, way
above the number of university graduates available. According to
the consultancy Prognos, by 2030 Germany could find itself short of
altogether 4.5 million skilled workers (with a university degree or
37
professional qualifications). The ever more pressing scarcity of
highly qualified staff over time is chiefly a reflection of the
demographically-related shortage of fresh talent, but it is also partly
due to failings in education. Higher birth rates would take decades at
best to alleviate the problem. Germany is therefore heavily reliant on
the influx of skilled labour from abroad, but for this it needs to
improve the institutional conditions.
Germany needs qualified immigrants
Immigration. Germany does have concepts for a rational
immigration policy like that practised in Canada, for instance; among
others, there are the recommendations by the Süssmuth
Commission. But the immigration legislation currently in force is still
quite a long way behind this, due chiefly to the rejection of a
qualification-based selection process (points-based system). Further
steps towards immigration regulations geared to longer-term labour
market requirements would therefore be welcome. Germany‘s
migration balance has been very low in recent years, if not negative.
Yet many official projections are based on the assumption of net
immigration of 200,000 people a year.
Migration balance*
8
6
4
2
0
-2
91 93 95 97 99 01 03 05 07 09
*Difference between in migration from abroad and out
migration from Germany
Source: Federal Statistical Office
21
Hunderte
In 100,000
In parallel to this, the qualification levels of the labour already
available should be furthered. In the 12 years up to 2007 the
proportion of young people with tertiary education (university and
university of applied sciences degrees) was increased from 14% to
25%. Further progress needs to be made here. In tertiary education
Germany still falls short of the 38% OECD average, but as a highwage country it should be in the top segment. Greater efforts in
respect of qualification and integration must also focus heavily on
the growing number of young people from immigrant families. In the
short term, measures to improve the transparency of qualifications
that migrants have obtained abroad could be helpful here.
36
37
14
Anger, Plünnecke (2010).
Prognos (2010).
October 7, 2010
Setting social policy on a sensible track
The cost of Hartz IV
In EUR bn
50
40
30
20
10
0
2005
2006
2007
2008
2009
Source: Federal Labour Agency
22
Hartz IV is still paradoxically widely viewed as synonymous with
cutbacks in the welfare state, even though the costs of basic
benefits remain persistently high (around EUR 46 bn in 2009). A
unilateral upward adjustment would probably do little to temper this
dissatisfaction but could cause expenditure on benefits to soar,
given around 6.9 million recipients at last count. Nonetheless there
remains broad consensus that support should focus on increases for
the not quite 1.8 million children in the Hartz IV system. To ensure
that the assistance actually reaches these children, policy-makers
are concentrating on encouraging the use of childcare, educational,
leisure and sports facilities. Alternative ways being discussed to
achieve this include issuing vouchers and electronic solutions (socalled FamilyCards) to prevent potential stigmatisation of the
recipients. However, the question that arises here is just how far
these objectives justify the additional costs involved.
Structure of Hartz IV
expenditure*
In %
9.3
12.6
49.1
29.0
Long term unemployment benefits
(ALG II)
Accommodation costs
Integration
Administration
*Excl. authorised local administrative units
23
Recipients of long term
unemployment benefits
(ALG II)
In millions
3
2
1
0
2005 2006 2007 2008 2009 2010*
* 1st half-year
Difficult tasks await social policy. The Federal Constitutional Court
ruling of unconstitutionality on the way in which the standard rate of
basic welfare benefit (Hartz IV) is calculated gives cause to review
the benefits. It is a matter of balancing considerable cost risks
against popular demands for higher payments. But legislators must
not loose sight of the primary objective – to get more people in need
of assistance back to full-time employment. Conflicts are also
looming over how to make funding of the statutory health and longterm care insurance schemes more sustainable. Good solutions
offer the prospect of a double dividend here: greater intergenerational fairness and fresh impetus to competition in dynamic
areas whose importance (generating 10.5% of GDP) and aboveaverage growth potential could make a big contribution to a more
38
domestically focused growth strategy.
24
It is evident that a blanket increase in the standard rate of basic
welfare benefits for the roughly 5 million Hartz IV recipients able to
work would cause costs to surge. But more is at stake than just the
direct costs. The standard rates form the linchpin of the welfare
system, and if they are shifted a lot could be thrown out of kilter.
Firstly, they set the benchmark for a reservation wage and hence the
minimum wage below which it is financially unattractive to take up
work (voluntarily). At roughly EUR 4.50, this minimum wage seems
moderate for single persons, but problems arise with people in need
of assistance who have unemployed spouses/partners and/or
children. Even now, the Lohnabstandsgebot, the principle that
benefits should be below the going wage, hardly applies for these
39
groups. A substantial increase in standard rates could make the
rapid integration of many recipients of benefits into the labour force
even more difficult.
Secondly, the standard rates are the fixed point for the additional
earnings disregard, in the case of Hartz IV the combi-wage. The
Coalition plans to improve this regulation to give recipients of state
benefits a greater incentive to take up full-time employment. At
present the first EUR 100 of the additional earnings disregard is not
counted towards the benefits at all. Welfare payments are reduced
38
39
October 7, 2010
Bräuninger, Rakau (2010) and Blinkert, Gräf (2009).
Boss et al. (2010b). In principle, the precept that people in work should receive
more than those that do not work has been realised – support to supplement
income falling short of the level of basic benefits, such as the child supplement and
housing benefits in particular, take care of that. However, the child supplement in
turn creates negative (lock-in) effects (professional advancement is not worthwhile), see Mauer (2006).
15
Current Issues
Hartz IV as combi-wage*
Recipients in 100,000
1,400
97
111
398
335
1,000
197
201
210
800
606
643
2007
2008
68
349
1,200
600
665
400
200
0
2009
up to € 400
more than € 800
€ 400 to 800
Others
*Number of employed Harzt IV recipients
by gross income
25
Needy persons capable
of employment
2009, in %
10
44
37
But lowering the currently high benefit withdrawal rates would only
partly solve the problem with mini-jobs, and most importantly it
40
would prove relatively expensive. Increasing the Hartz IV standard
rates will also automatically lead to rising costs. The higher
reservation wage obliges the government to raise the limit for partial
offset of earned incomes if it does not wish to weaken incentives to
take up work through higher withdrawal rates. The IZA Institute for
41
the Study of Labour calculates that lowering the benefit withdrawal
rate to 60% for incomes between EUR 100 and EUR 1,000 would
cost an extra EUR 6 bn a year, and this does not even allow for an
increase in standard benefit rates. The fiscal sensitivity of the issue
should keep a tight rein on well-meaning proposals for higher Hartz
IV benefits. Generally speaking, a situation in which fewer than 10%
of people in need of support hold down a full-time job, while almost
40% are not available (at least on a temporary basis) to the labour
market at all, should not be allowed to persist. Were it possible to
reduce this ratio to at least 30% and to halve the number of jobless
benefit seekers, employment could be boosted by no less than 1.5
million, or roughly 3 ½%. Even on the assumption that these
workers would exhibit below-average productivity the outcome could
still be one-off GDP growth of more than 1%.
Health policy. In the healthcare sector – a constant reform work in
progress – the government is planning a triple jump. Bidding to
alleviate immediate and looming funding woes in the statutory health
insurance system (SHI), where the 2011 deficit could top the EUR
10 bn mark, the Coalition aims to cut back spending, hike contribution rates and muster the courage to really start rolling out nonincome-related additional premiums. The latter is a bold step whose
political success is as yet by no means guaranteed.
10
Employment schemes
Others*
Employed persons**
Unemployed***
*E.g. Caring for relatives, illness, students, bringing up
children under 3 years
**With a gross income > € 400
***Incl. mini-jobs
by 80% of additional (net) income between EUR 100 und 800, by
90% on income above this and by the full amount of the additional
net income once it reaches EUR 1,200. This is presumably a key
reason why only 0.34 million of the more than 1.3 million recipients
of Hartz IV are in full-time employment. On the other hand, roughly
0.7 million – that is to say more than half – have a 400 euro job.
26
West German SHI
contribution rate
As % of income liable to
insurance contributions
16
15
14
13
12
11
10
9
8
7
6
Cost containment measures worth around EUR 2 ¼ bn have already
hit the pharmaceutical industry, which has been obliged inter alia to
grant the health insurance funds higher rebates on new drugs. Now
– amid recent hefty increases in expenditure – the health insurance
funds, hospitals and broad sections of office-based physicians must
likewise step up to the plate (with a contribution of altogether EUR
1 ¼ bn in 2011). Applying the brakes to spending is essential, but it
is no substitute for further structural improvements to foster
competition and efficiency. Government has yet to deliver on this.
With the increase in SHI contributions on January 1, 2011 from
14.9% at present to 15.5% (adding around EUR 6.3 bn) the
government is approaching its self-imposed cap of 40% on social
security contributions (financed equally by employees and
employers), especially as the unemployment insurance contribution
is to be raised at the same time from 2.8 to 3.0% (with pension
insurance contributions remaining at 19.9%). Indeed, factoring in the
extra 0.9% employee contribution to the SHI, this limit is clearly
40
70737578818386899194979902050710
Source: Versicherungsnetz
27
41
16
Especially if the incomes above EUR 1,200 are still subsidized, as would be
necessary to avoid major discontinuities in the withdrawal of benefits. It is
therefore worth considering not exempting the first EUR 100 but counting all or
most of it towards benefit withdrawal, as recently proposed by the Cologne
Institute for Economic Research (IW), for example (see IW 2010).
Pichl (2010).
October 7, 2010
New system of additional
contributions planned
Health expenditure
1992=100
230
210
190
170
150
130
110
90
92 94 96 98 00 02 04 06 08
SHI (statutory health insurance
system)
PKV (private health insurance)
Employers
Private*
* Private households / private not-for-profit organisations
Sources: Destatis, DB Research
28
breached. The higher contribution rates patently contradict the
necessity to reduce the burden of contributions for people in the low
and middle income range in particular. Arguably the only alternative
feasible in the short term, however, would be even higher tax
subsidies for the SHI. But already this year the federal government
is coming to the aid of the SHI with EUR 11.8 bn (fully EUR 15.7 bn
counting the additional subsidy to compensate shortfalls in revenue
resulting from the economic crisis). The 2011 shot in the arm will
cost almost EUR 14 bn.
This makes reform of SHI funding geared to the medium term all the
more important. The plans submitted point in the right direction.
Essentially, employers‘ contributions are to be frozen at 7.3%,
severing the peg to labour costs. Going forward, disproportionate
increases in healthcare spending will therefore no longer stand in
the way of employment – a step towards strengthening potential
growth. The system of additional contributions is also to be
reorganised. At present these contributions are capped at 1% of
earned income. Future planning sees the health insurance funds
being able to set the amount of additional contributions at their own
discretion. This would give them sovereignty in this area and turn
additional contributions into a potentially significant parameter in
competition for members.
To prevent people insured under the statutory scheme from being
overburdened by additional contributions, the contributions that each
individual must bear will be capped at 2% of their income liable to
social insurance contributions. Where additional contributions
overstep this level, state assistance kicks in. However, the amount
of the state refund is calculated not on the basis of the contributions
actually levied by the health insurance fund but by the target
amounts that the SHI‘s own independent administration sets for a
year in advance. If an insurance fund‘s additional contributions are
above this target level, its members will have no choice but to pay
the excess amounts – irrespective of the 2% additional contribution
cap. This gives all contributors, including those subsidised by the
state, an incentive to switch to insurance funds with lower
contributions. The state aid is to be financed by the Gesundheitsfonds, a centralised health fund. In the medium term its financial
resources will be built up through higher subsidies from tax
revenues.
People insured under private health insurance schemes (PHI) will
contribute towards the new social equalization through tax
revenues, which should silence at least part of the criticism of the
PHI. Of course, the rising transfers required in the longer term
(going forward, SHI expenditure will increase faster than labour
incomes due partly to demographic trends) will pose a further
challenge for the national budget. Even in the short term, the fact
that the insured will be able to claim their additional contributions –
which will be considerably higher next year already – against tax
could give rise to problems. Liberal critics also object to retention of
the Gesundheitsfonds and, even more so, the morbidity-based
structural risk adjustment that redistributes revenues among the
health insurance funds. But remedying this defect would take
nothing short of a revolution – the introduction of insurance
premiums geared to health risks such as have traditionally been
customary in PHI.
October 7, 2010
17
Current Issues
As a result of the reform SHI members will themselves have to
shoulder more of the expected rise in healthcare spending. From a
regulative point of view this is fitting. However, legislators should
communicate the message clearly to the people, because they are
the ones who must prepare for the situation by saving more and/or
working until later in life.
System becoming increasingly
complex
With the blueprint as it stands at present the government is moving
only partially and gradually towards the model originally favoured –
a flat-rate insurance premium or what became known as the
‗Citizens‘ Insurance Scheme‘ – along the lines designed by the
Sachverständigenrat. This is due partly to fiscal constraints. It
comes not only at the expense of time delays; more importantly
financing for the SHI system is made even more complex and
opaque and the rather inaccurate redistribution of incomes through
premiums remains in operation – even if it will become less relevant
over time.
Nursing care insurance. The CDU/CSU/FDP coalition agreement
provides inter alia for full funding of the nursing care insurance
scheme to enhance the present pay-as-you-go system. This is to be
made ―compulsory, individualised and intergenerationally fair‖. An
interministerial working group is supposed to draw up proposals on
this by early 2011. But that is no easy matter. There are very good
reasons why fully funded nursing care insurance has been on the
social policy agenda for years now. But only this legislative period
remains for policy-makers to take the plunge: any later and the
target will probably be out of range, given that building up any
capital stock of note takes much longer than a decade.
Climate and energy policy
Greenhouse gas emissions
1990-2009
In m tonnes CO2 equivalent
1,400
1,200
1,000
800
600
400
200
0
90
95
00
05
Total by source categories
Energy
Industrial processes
Agriculture
Others
Source: Umweltbundesamt
29
Climate policy trailblazer? The past twenty years have already
seen big changes in Germany‘s climate and energy policy. Faced
with the growing risks of climate change, various federal governments have tightened the reins on climate and environmental policy.
This is hitting the electricity industry hardest, because Germany‘s
energy production is heavily skewed to coal, making it one of the
biggest greenhouse gas emitters in the EU. But by modernising hard
coal-fired power plants and the network of power stations in the east
of the country, and with the rapid rise of renewables, Germany has
42
made enormous headway in lowering greenhouse gases. Moreover, since the late 1980s it has earned itself a reputation for pursuing an aspirational environmental policy, with national targets for
43
the reduction in greenhouse gas emissions , market incentives,
environmental taxes (notably the 1999 Ecotax and the truck toll on
heavy goods vehicles), subsidies for renewable energies and
pushing through emissions trading in the EU as illustrations.
Possibly the most controversial issue was, and remains, the
decision in 2002 to phase out nuclear power. The upshot of this
relatively challenging environmental policy is that German
companies have taken the innovative lead in many environmental
goods and technologies. Nonetheless, the conceptual integration of
energy and climate policy in the past decade has been a neverending project causing elements of uncertainty, especially with
regard to investment in power stations.
42
43
18
See Jänicke (2010), Schmidt (2007) and Kemfert (2007).
As early as 1990 the government set itself the target of a 25% reduction by 2005,
initially taking 1987 as the reference year and subsequently 1990.
October 7, 2010
German climate protection targets
Reduction in greenhouse gas emissions (vs
1990):
—
40% by 2020
—
55% by 2030
—
70% by 2040
—
80% by 2050
Share of renewable energy in gross
consumption of energy by end users:
—
18% by 2020
—
30% by 2030
—
45% by 2040
—
60% by 2050
Share of renewables in electricity
consumption:
—
35% in 2020
—
50% in 2030
—
65% in 2040
—
80% in 2050
Source: BMU 2010
Not that politicians have sat on their hands. Most recently, in 2008
the Grand Coalition rolled out an integrated energy and climate
protection programme. This had positive effects on growth and
employment and was intended to reduce German emissions by
between 34% and 36% (versus 1990) up to 2020. But even the
government admitted that this fell short of what was actually
required; its self-imposed target was 40%. Among the most
prominent components were work on buildings, incentives for the
generation of power from renewables, projects referring to the
transport sector, financial inducements for combined heat and power
systems and a package of measures to boost energy efficiency in
general.
Additionally the government pushed in both the G8 and the United
Nations for ambitious long-term emission reduction targets,
advocating that emissions be cut by at least 80% (on 1990) by 2050.
Meanwhile studies abound on how to achieve this or indeed to go
44
even further (up to 90 to 95%). Moreover, EU emissions trading is
designed to reduce the listed greenhouse gases by 75% up to 2050
with continuation of the pace of linear reduction for emissions
beyond the end of the third trading period (2013-2020). Outside of
the emission trading scheme, Germany has also committed within
the framework of the EU‘s integrated energy and climate package to
a 14% reduction in greenhouse gases by 2020 (taking 2005 as the
reference year). That total German emissions had already fallen by
22.4% up to 2008 was undoubtedly helpful here. Germany should
therefore be able to meet the 21% prescribed in the Kyoto Protocol
(2012/2008 on 1990).
Transforming the energy industry is a massive task. A calculable
efficiency policy reducing energy consumption, an efficient
framework for renewables, a consistent institutional environment for
coal- and nuclear-based power generation and a grid and storage
strategy represent the major long-term parameters for development
of the energy mix and compliance with climate targets.
At the beginning of September 2010 the centre-right coalition
government presented the basic outlines of an integrated energy
45
and climate policy package. The government blueprint consists of
setting long-range targets for lowering emissions, for the share of
renewable energies in gross demand by end users for energy and in
electricity generation, for the reduction of energy consumption and
for strengthening the institutional framework in this policy area.
Terms of reference are also to be put in place for monitoring and for
46
adjustments if targets are not met. The blueprint does not rely on
EU emissions trading alone, presumably because the targets set
47
were not ambitious enough (see sidebar). The price signals alone
were not therefore sufficient to trigger the necessary investment; a
complementary policy is needed for the promotion of research and
innovation, the development of an appropriate grid and storage
infrastructure, and specific incentive regulation.
Efficiency. Further adjustments also need to be made in the
efficiency strategy geared to approximately doubling the pace of
48
energy savings so far (1.5% p.a.). By 2050, for example, it is
44
45
46
47
48
October 7, 2010
See e.g. McKinsey (2007), WWF (2010).
BMWi and BMU (2010).
See Ecologic (2009), particularly on the complication of interaction between
(legally binding) targets at national and EU level.
Matthes (2010).
According to the Sustainability Report (Federal Statistical Office 2010), energy
productivity climbed between 2000 and 2008 by 1.4% p.a. To meet the official
19
Current Issues
Is emissions trading alone the road to
salvation?
Some people consider strict emissions trading
alone sufficient to enforce climate targets.
However, closer examination of the
mechanism shows this to be incorrect
because firstly, in political practice emissions
trading has not been designed with due rigour
for many reasons of political economy;
secondly, only about half the emissions in the
EU are covered; and thirdly, market
imperfections cannot be eliminated either.
An important point is the complementarities
that exist between the at least partial provision
of energy and transport infrastructures by the
public sector and private investment, for
example
— in electromobility, the electricity grid, the
storage and recharging infrastructure,
— CCS and the transport and storage
infrastructure,
— transportation infrastructure planning and
private transport investment.
Another issue is the barriers to market
introduction of low-emission technologies
competing with high-emission and/or
established technologies when external
environmental impacts are not correctly
factored in. Policy-makers must therefore use
a variety of tools, but all the while paying
attention to the interrelationships between
them. Important instruments in addition to
emissions trading are taxes and financial
incentives, regulative legislation and grid
regulation. Moreover, the toolkit must be
coordinated across the relevant EU and
national levels.
It is thus obvious that when designing
emissions trading, for example – and
emissions reduction in particular – the
promotion of renewable energies must be
taken into consideration. For coal-based
power generation and CCS technology, too,
all the tools available must be analysed
together and their mutual impacts
coordinated. The same naturally applies to the
taxes and energy carriers encompassed by
EU emissions trading.
planned to reduce electricity consumption by a quarter. It is in
buildings that the economically most attractive potential for cutting
49
back on consumption lies. There the pace of refurbishment is to be
doubled from 1% p.a. to 2% p.a. in order to slash four-fifths of
demand for heating by 2050. But the regulations governing
upgrading of the energy efficiency of existing rental property remain
the big stumbling block given that there is a user-investor dilemma
in rent law and that it is almost impossible at present to share the
economies obtained from energy efficiency upgrading. However,
amendments to rent regulations are on the agenda. Were regulation
successful, substantial investment could be expected over a long
period, with a significant impact on growth and employment. The
existing KfW programme will not create sufficient pace here: so far a
scant 3% of the existing stock of property has been upgraded. A
large number of measures are planned, including efficiency
programmes for consumers and industry.
Renewable energies. The main source of uncertainty over
renewables lies less in the technologies involved than in development of the grids and storage capacities. Only if this impediment is
successfully removed can demand and supply be brought together.
By 2020 the share of renewables is to be ramped up from around
10% to 18% of gross final energy consumption by end users. In
August 2010 the Federal government adopted a National Renewable Energy Action Plan complying with the requirements of the EU
directive on renewable energies, which provides for an increase in
the share of renewables in heating/cooling to 15.5%, in electricity to
38.6% and in transport to 13.2%. But it has at least made some
correction in its very generous feed-in tariff rates for photovoltaic.
Within just a few years greater use of market mechanisms is to be
made with a view to more cost-efficient production.
Coal. With the changeover of coal- and gas-based electricity
generation to carbon capture and sequestration (CCS), considerable
uncertainty surrounds the amounts of investment required,
clarification of the storage issue, long-range development in the
price of EU emissions trading certificates and other factors (political
resistance to storage). The introduction of CCS technology is
extremely important in terms of the economic viability of coal-based
50
electricity generation. In July the government adopted the basic
parameters for legislation on trialling CCS power stations and plans
to finalise its legislative passage by the end of the year. It also
intends to have two demonstration power plants built in Germany
and to offer incentives for CCS-enabled new-builds when old plant
becomes due for replacement. However, this falls well short of the
requirements for plannable commercial introduction, leaving the
future of coal-based electricity generation shrouded in uncertainty.
Nuclear. The major change versus SPD-Greens policy, which was
not up for debate in the Grand Coalition, refers to nuclear power. On
September 5 the new Coalition government reached agreement on
the use of nuclear energy: power reactor run times are to be
extended by an average of 12 years per plant (eight years for
reactors built before 1980 and 14 for those built in 1980 and thereafter). But owing to specific calculation based on the residual
electricity volume they may still produce, individual power plants will
49
50
20
target of doubling between 1990 and 2020, the pace needs to be stepped up to
3.5% p.a.
Auer, Heymann and Just (2008).
See Auer (2007) and Herold, von Hirschhausen (2010) for a discussion of coal in
general.
October 7, 2010
Primary energy consumption
by energy sources
Shares in %
-0.4
1.7
8.7
11.0
Grids. Devising a national grid strategy accommodating the requirements of feed-ins of electricity from offshore wind turbines in the
North Sea and the Baltic Sea, as well as from biomass and solar
panels, is also on the agenda. The development of extra-high
voltage grids connecting the new production regions in the north of
Germany to the centres of consumption in the south and west is
sadly lagging behind demand. Now the government is setting out to
address the obstacles to investment in the grid infrastructure.
Renewables development also calls for heavy investment in
distribution networks and storage facilities capable of decentralised
52
load management, so-called smart grids. Correspondingly
comprehensive are the resolutions on these strategy components,
which are to flow into a ten-year development plan and a federal
grid plan. It is not clear whether the economic incentives to invest in
the grid and storage infrastructure have been made strong enough.
34.9
21.9
11.0
11.3
Petroleum
Hard coal
Lignite
Natural gas, petroleum gas
Nuclear energy
Renewable energies
Electricity trage balance
Others
Source: Arbeitsgemeinschaft Energiebilanzen,
status June 2010
30
Power generation
by sources, 2009
As % (of altogether 596.8 Twh)
4.8
Beyond electricity. In industry, another very important factor is
reducing process heat with new materials and methods, but even in
the long term certain emissions will presumably be almost
53
inevitable. Meanwhile, in the transport sector price signals and
taxes (such as the truck toll) are being very slow to take effect. Most
important here is the gradual switchover of drive systems to low
emission technologies and fuels and shifting a substantial amount of
goods carriage from road to rail. On the other hand, the regulation of
fuel consumption for cars in the EU is already far advanced,
arguably going beyond an appropriate abatement cost level. There
are still plenty of other more efficient ways to drive climate protection
forward. Potential output growth lies not only with energy services
themselves but also in the skilled trades and construction, in software development and in small and medium-sized engineering
firms.
Barbara Böttcher (+49 69 910-31787, [email protected])
18.3
14.7
possibly remain online for considerably longer. From 2011 to 2016 a
nuclear fuel-rod tax is to be levied, with power plant operators
additionally being called upon to contribute large sums towards the
promotion of renewable energies. The main impact of this regulatory
revamp will be on nuclear plant operation, on the competitive
situation for electricity suppliers and on investment in the various
51
segments of electricity generation and grids.
Dr. Klaus Günter Deutsch (+49 30 3407-3682, [email protected])
24.5
22.6
12.9
Hard coal
2.1
Lignite
Petroleum
Natural gas
Nuclear energy
Renewables
Others
Source: BMWi website
31
51
52
53
October 7, 2010
See the study by the Institute of Energy Economics (EWI) et al. (2010) for the
German government.
Auer and Nguyen (2010).
Röttgen (2010).
21
Current Issues
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Germany`s new strength? From stimulus to growth

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