European Commission gives Germany a mixed report

The European Commission has published the country report on Germany. Alongside praise for stable economic growth and low unemployment, there was also criticism – for a lack of enthusiasm when it comes to reform and for macroeconomic imbalances.

The European Commission thinks that the German economy is on the right track. The growth dynamic is likely to continue following an increase of 1.9 percent in 2016. Investments as a proportion of gross domestic product once more reached the 20 percent mark and continue to grow moderately. Public debt is on a solid downward path. Flies in the ointment continue to be the trade surplus and little enthusiasm for reform.

he 7.5 percent German trade surplus in the reference year of 2015 and a further increase to just under 9 percent in 2016 is above the threshold value of 6 percent – yet again. The European Commission regards this as a macroeconomic imbalance, because domestic demand is lagging behind the successful export economy. Given global uncertainties, companies are holding back with investments and households with consumer spending. And that will also not change in the short term. In this situation, policy-makers at national level and across Europe need to improve the conditions for public and private investments. The key to this would be less red tape, priority for the digital and energy single market as well as more resources for transport infrastructure.

Commission calls on Germany to make greater reform efforts

According to the European Commission, Germany in particular shows little ambition when it comes to the necessary reforms. There has been only minor progress in implementation of the 2016 country-specific recommendations. The Federal Government pays the innovation and education sector insufficient attention, the potential for public investments is not being fully exploited, the tax system is complicated and inefficient, pension insurance sends the wrong signals. The “to do” list from Brussels is long – and the Federal Government’s performance in working through it has been unsatisfactory.

The country report contains many reform priorities which will be part of the new country-specific recommendations in May. These also include numerous points which BDI and its sister employer association BDA had been driving forward in Brussels. For instance, the Commission encourages the introduction of tax support for research and development in order to increase productivity growth. It also calls for stronger incentives for a later and more flexible retirement age to enable an appropriate reaction to the ageing German population. All these reforms would be the best recipe for correcting the macroeconomic imbalances.