October 1995 - IMF eLibrary...1995 International Monetary Fund October 1995 IMF Staff Country Report No. 95/100 Germany—Recent Economic Developments This report on recent economic

1995 International Monetary Fund

October 1995

IMF Staff Country Report No. 95/100

Germany—Recent Economic Developments

This report on recent economic developments in Germany was preparedby a staff team of the International Monetary Fund as backgrounddocumentation for the periodic consultation with this member country. Inreleasing this document for public use, confidential material may havebeen removed at the request of the member.

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INTERNATIONAL MONETARY FUND

GERMANY

Recent Economic Developments

Prepared by a Staff Team I/

Approved by the European I Department

August 11, 1995

Contents Page

Basic Data iv

I. Output, Employment, and Inflation 11. Output 1

a. Overview 1b. Aggregate demand 3

2. Employment and unemployment 63. Wages 64. Prices 8

II. The Public Finances 101. Institutional developments 102. Developments in 1994 123. Developments in 1995 134. 1996 budget plans 155. Longer-term demographic pressures 17Annex. Fiscal Consolidation Since Unification 19

III. Monetary Policy and Developments 221. Monetary targets and the policy framework 222. Developments in interest and exchange rates 243. Developments in money and credit 26

IV. The Balance of Payments 281. The current account and the exchange rate 282. The capital account 34

I/ H. Vittas, R. Corker, T. van der Willigen (all EU1), P. Mauro (EP,PDR) and C. Thimann (EP, EU1).


- ii -

Contents Page

V. Structural Issues 361. Labor market 362. Deregulation 373. Privatization 394. Transfers to eastern Germany 40

VI. Trade Policy and Overseas Development Assistance 431. Trade policy 432. ODA and aid to transition economies 43

Text Tables

1-1. Germany: Output in Manufacturing and Construction 21-2. Germany: Main Expenditure Components of GDP 41-3. Germany: Inflation 9II-l. Germany: Demographic Trends 18II-2. Germany: Structural Budget Balances 20III-l. Monetary Targets and Performance 23III-2. Growth in Monetary Aggregates and Main Counterparts 25IV-1. Recent Exchange Rate Changes with respect to Germany's

Most Important Trading Partners 30IV-2. Germany: Balance of Payments 32V-l. Transfers to Eastern Germany 40V-2. Main Means of Support for Investment in Eastern Germany 42VI-1. Germany: Aid and Other Resource Flows to Developing

Countries and Multilateral Agencies 44VI-2. Support for Economies in Transition 45

Charts

1-1. Germany: Output and Unemployment 2a1-2. Western Germany: Components of Demand During Recessions 2b1-3. Germany: Exports and Exchange Rate 4a1-4. Germany: Domestic Demand 4b1-5. Germany: Wages and Inflation 6aII-l. Germany: Deficits and Debt lOaII-2. Germany: General Government Revenue and Expenditure lObIII-l. Germany: Monetary Policy Targets and Instruments 24aIV-1. Germany: External Current Account 28aIV-2. Germany: Competitiveness Against Selected

Countries and Groups 30a


- iii -

Contents

Statistical Appendix

Al.A2.A3.A4.A5.A6.A7.A8.A9.A10.All.A12.A13.A14.A15.A16.A17.

A18.

Germany :Germany :Germany :Germany :Germany :Germany:Germany :Germany :Germany :Germany :Germany :Germany :Germany :Germany :Germany :Germany :Germany :Payment;

Germany :Payment;

Key Data on Output, Income and Demand in 1994Aggregate DemandHousehold Income, Consumption, and SavingLabor MarketWages and PricesGeneral Government FinancesTerritorial Authorities' FinancesFederal Government FinancesLaender Government FinancesMunicipalities' FinancesTax Revenue of the Territorial AuthoritiesSocial Security FundsInterest RatesMonetary SurveyExchange Rate DevelopmentsTrade Flows by DestinationLong-Term Capital in the Balance of; AccountsShort-Term Capital in the Balance of; Accounts

Page

46474849505152535455565758596061

62

63


- iv -

Area und populationTotal areaTotal population (1994)GNP per capita (1994)Western GermanyEastern Germany

Germany: Basic Data

357,041 square kilometers81.4 million

$24.947$27,584$13,808

1991 1992 1993 1994

(Percentage changes at 1991 prices)

Private consumptionPublic consumptionGross fixed investmentConstructionMachinery and equipment

Total domestic demandExports of goods andnonfactor services

Imports of goods andnonfactor services

Foreign balance 17

GDP

5.40.19.64.016.96.1

-1.3.

12.0-3.1

2.8

3.04.54.29.9-2.43.0

0.2

3.3-0.8

2.2

0.5-1.2-4.52.8

-13.8-1.2

-6.2

0.0

-1.1

1.31,24.37.9-1.12.6

7.2

6.10.2

2.9

(In millions)

Employment and unemploymentLabor forceEmployment 2/Unemployed(In percent of labor force)

Prices and incomesGDP deflatorConsumer price index

39.236.62.66.6

4.94.6

38.935.93.07.7

(Percentase chunges )

5.54.9

38.735.33.48.8

3.94.7

38.735.03.79.6

2.23.1

I/ Change as percent of previous year's GDP.2/ According to place of residence.

Germany

-6.1

Deman and supply


- v -

Germany: Basic Data (continued)

Western Germany 1991 1992 1993 1994

(Percentage changes at 1991 prices)

Demand and supplyPrivate consumptionPublic consumptionGross fixed investmentConstructionMachinery and equipment

Total domestic demandExports of goods andnonf actor services

Imports of goods andnonfactor servicesForeign balance I/

GDPManufacturing output

5.70.35.82.79.5A. 9

11.5

12.50.4

5.0

2.24.00.34.3-4.21.3

5.4

4.40.6

1.8-1.9

0.2-1.2-8.3-0.8-17.6-2.2

-3.2

-5.30.4

-1.7-8.0

0.81.11.24.1-3.11.7

7.7

7.10.7

2.33.3

(In millions)

Employment and unemploymentLabor forceEmployment 2/Unemployed(In percent of labor force)

Prices and incomesGDP deflatorConsumer price indexAverage hourly earnings(industry)

Unit labor costs (total economy)Real disposable income 3/Personal saving ratio(In percent)

Eastern Germany

Real gross domestic productReal fixed investment

(In percent of GDP)

Employment 2/Unemployment(In percent of labor force)

Consumer pricesGDP deflator

30.729.01.75.5

3.93.5

7.33.55.1

13.3

1991

-18.740.944.7

-14.9

10.7

...16.6

30.929.11.85.8

(Percentage

4.44.0

7.14.91.7

12.9

1992

(Percentage

7.827.853.0

-10.4

14.7

11.118.2

30.928.72.37.3

changes )

3.24.1

6.13.5-0.5

12.3

1993

changes )

5.814.157.1

-3.0

14.8

8.99.9

30.928.42.68.3

2.03.0

1.6-1.1-0.5

11.1

1994

9.216.560.9

0.8

14.6

3.32.9

I/ Change as percent of previous year's GDP.2/ According to place of residence.3/ Deflated by the national accounts deflator for private consumption.


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Germany: Basic Data (concluded)

Germany 1991 1992 1993 1994

(In billions of deutsche marks)

Public finances JL/General governmentExpenditureRevenueFinancial balance(In percent of GDP)

Deficit of the territorialauthorities(In percent of GDP)

Borrowing requirementof the Treuhand

Federal governmentFinancial balance(In percent of GDP)

General government debt(In percent of GDP)

Balance of paymentsTrade balance (f .o.b./f .o.b. ) 2/Services balanceNet private transfersNet official transfersCurrent account(In percent of GDP)

Foreign exchange reserves(e.o.p)

Monetary dataMoney and quasi -money (M3)Domestic bank lendingOf which lending to:Public authoritiesPrivate nonbanks

Interest ratesThree month money market rateYield on government bonds

Exchange ratesDM per US$ (end of period)DM per US$ (annual average)Nominal effective rate (1990=100)Real effective rate (1990-100)

1,394.51,300.6-93.9-3.3

-122.7-A. 3

19.9

-53.2-1.9

1,173.941.1

29.9-28.9-15.1-47.5-31.9-1.1

94.8

10.711.9

8.013.0

9.28.6

1.521.6699.199.5

1.526.7 11,436.4 1-90.3-2.9

-116.9-3.8

28.9

-39.4-1.3

1,345.2 143.7

41.4-42.6-16.7-38.4-33.7-1.1

141.4

8.510.6

8.411.2

(Period averages in

9.58.0

(Levels)

1.611.56102.1102.4

,593.3,488.2-105.1-3.3

-137.7-4.4

39.0

-67.0-2.1

,509.247.8

65.7-52.2-16.4-41.1-25.8-0.8

120.1

8.29.8

18.67.5

percent)

7.26.3

1.731.65106.1110.6

1,663.51,581.1-82.4-2.5

-116.1-3.5

39.5

-50.6-1.5

1,654.749.8

82.4-62.7-16.8-44.4-33.4-1.0

113.6

8.59.5

10.99.1

5.36.7

1.551.62106.4110.4

I/ Data for the federal government and the territorial authorities are on an administrativebasis. Data for the general government are on a national accounts basis. In recent years,a persistent difference between the general government deficit on a national accounts andon an administrative basis has mainly reflected sizable net lending to support reconstructionin eastern Germany. Debt data are end-of-year data for the territorial authorities, includingthe German Unity Fund and eastern Germany from 1990.2/ Including supplementary trade items.

(Percantage changes to annual averages)


I. Output. Employment. and. Inflation I/

1. Output

a. Overview

The German economy has entered its third year of recovery, followingthe boom-bust cycle triggered by the unification-related fiscal expansion(Chart 1-1). After falling a little over 1 percent in 1993, real GDP grewby close to 3 percent in 1994. 2/ According to staff estimates, an outputgap of some 1 3/4 percent remained in western Germany at the end of1994. 3/

Regional developments remain quite disparate, though less so than inthe past. The broad trends in the all-German data are all but determined bydevelopments in western Germany, which accounts for some 90 percent of all-German GDP. West German output reached a trough in the first quarter of1993, and grew by 2 1/4 percent in 1994. Its recovery has followed thepattern of previous cycles, starting with exports and spreading toinvestment (Chart 1-2). Eastern Germany, by contrast, has been growingrapidly since 1991, following the output collapse that occurred withunification, with growth reaching over 9 percent in 1994. Investment, andespecially construction, has been the main driving force here. While eastGerman "exports" (including to western Germany) have been growing rapidlyrecently, their level remains very low and their contribution to growthsimilarly small. Fiscal consolidation has put a damper on consumption inboth parts of Germany, but higher wage increases in the east have allowedconsumption there to grow somewhat faster than in the west.

Mirroring trends in the components of demand, sectoral developmentshave also been distinct in western and eastern Germany. In western Germany,the manufacturing sector was the centre of cyclical weakness, with outputdropping by 8 percent in 1993, before recovering by 3 1/4 percent in 1994(Table 1-1). In eastern Germany, growth has been led by the construction

I/ Supporting data are provided in Appendix Tables A1-A5.2/ Growth during 1994 (Q4/Q4) was at a similar pace. Adjusted for the

number of working days in each quarter, however, growth during 1994 wassubstantially higher, at close to 4 percent.j3/ The staff estimates west German potential output based on a Cobb-

Douglas production function, using the actual capital stock and working agepopulation, cyclically-adjusted labor force participation rates, trendworking hours, and an estimate of the non-accelerating inflation rate ofunemployment (NAIRU) . Capacity utilization in manufacturing, relative toits long-run average, is used in an attempt to isolate the cyclicalcomponent of total factor productivity (TFP), and a flexible trend isapplied to the noncyclical component of TFP. For an explanation of themethodology and an application to both Germany and France, see the forth-coming background papers for the 1995 Article IV consultation with France.


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sector, which has registered growth in excess of 20 percent in each yearsince 1991, as well as by services. However, with the improvement in exportperformance, the manufacturing sector too has been gaining momentum.

Table 1-1. Germany: Output in Manufacturing and Construction

(Percentage changes at 1991 prices) I/

1992 1993 1994 1995 Ql g/

Western GermanyManufacturingConstruction

Eastern GermanyManufacturingConstruction

-1.96.3

-0.229.5

-8.0-2.2

10.321.4

3.34.7

19.626.7

2.2-5.0

17.112.1

Source: Deutsche Bundesbank.\J Data are adjusted for the number of working days in each quarter.2/ Percent change over 1994 Ql. Data for manufacturing are subject to

large margins of uncertainty--see caveats in text.

In earlv 1995. both western and eastern Germany seemed well-poised tocontinue on their respective growth paths. However, the economy was thenconfronted by a sharp nominal appreciation of the deutsche mark (translatinginto a 5 1/2 percent real effective appreciation between December 1994 andJune 1995, most of it during February), which brought with it significantrisks to exports and thereby to investment and to the recovery in general.

Unfortunately, this key event coincided with the emergence of whatmight be termed a statistical vacuum. Severe lags in data availabilityarose from the beginning of 1995, as the coverage of many statistics shiftedfrom a west German to a united German basis, and sectoral classificationswere brought into line with EU standards. No national accounts are yetavailable for the first quarter of 1995, and other real sector data thathave been released are likely to be subject to substantial revisions.

For what they are worth (and the Federal Statistical Office hascautioned against putting too much credence on them), industrial productiondata suggest a decline in the early months of 1995; but surveys by the Ifoeconomic research institute show capacity utilization in west Germanmanufacturing rising further in the first two quarters of 1995 (from84.6 percent in December 1994, to 86.1 percent in June 1995). Output in thewest German construction sector--where the data are more reliable, as thechangeover to EU-standard sectoral classifications will not take place until1996--declined significantly in the first quarter of 1995, but part of this


- 2a -CHART 1-1Germany

Output and Unemployment

Source: Deutsche Bundesbank; and IMF staff estimates.1/ Based on an estimated production function in which factor inputs are set to theirassumed full employment levels.2/ Data through 1991 estimated on the basis of official unemployment rate as a percentageof dependent labor force.


- 2b -

CHART 1-2Western Germany

Components of Demand During Recessions I/(Peak=100)

Source: Deutsche Bundesbank.I/ Data are seasonally- and calendar-adjusted, and in 1991 prices.2/ 1974 quarter one for 1974-75 recession; 1980 quarter one for 1980-82 recession;1992 quarter one for 1992-93 recession.


- 3 -

fall was probably due to bad weather conditions. Other indicators too aremixed, as will be noted below. All in all, it would seem that growthcontinued in the first half of 1995, though probably at a somewhat slowerpace than during 1994. Leading indicators recorded a marked deteriorationin the wake of the appreciation, but have shown signs of stabilizing.

b. Aggregate demand

Following the pattern of previous recoveries, growth was initially ledby exports (Chart 1-3, and Table 1-2). After registering a fall of 6 per-cent in 1993, exports rose by 7 percent in real terms in 1994, and by closeto 10 percent during the course of the year. \J The strengthening ofexports was underpinned by growth in the US, the UK, and some developingcountries, and later in the rest of continental Europe, as well as byimportant restructuring efforts in industry, which yielded largeproductivity gains. The volume of foreign orders, at the end of 1994, stood18 percent above its level at end- 1993, with a good part of this rise havingcome in the last four months of the year.

More recently, export prospects have been clouded by the markedappreciation of the deutsche mark. Like other developments, exportperformance in the early part of 1995 is difficult to assess. No officialdata on export volumes have been released, but values and (not veryreliable) price indices suggest a pause in export growth during the firstfour months of the year. Nevertheless, the strong growth in foreign orderstoward the end of 1994 points to significant increases in exports still inthe pipeline. The official data on export orders, for their part, show agradual and significant weakening from end- 1994 through April 1995, with apick-up in May. These data, however, are bedeviled by problems related tothe change in sectoral classification. Surveys of export orders in theengineering and automobile industries (representing some of Germany's mostprominent exports) have as usual produced volatile results, but not such asto suggest a worsening trend during the first half of the year- -quite theopposite in the case of the automobile industry. Export expectations, whichhad begun to weaken in late 1994, fell sharply from February onward, butstabilized in May. 2/ Business confidence followed a similar pattern.

I/ Despite substantial upward revisions since the first data releases, itis possible that 1993 exports remain underrecorded as a result of thechangeover to new EU-wide data collection procedures under INTRASTAT. Inturn, a small part of the (year-average) rise in exports in 1994 may reflecta reversal of this development, as recording appears to have improved duringthe course of 1993.2/ The index of export expectations consists of the percentage of survey

respondents who expect an increase in their exports over the next sixmonths, less the percentage who expect a reduction.


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Table I - 2. Germany: Main Expenditure Components of GDP

(Percentage changes from a year ago)

Memorandum items:West German GDPEast German GDP

19941994 Ql Q2

2.39.2

2.29.8

2.310.2

Q3

2.38.1

Q4

Private consumptionGovernment consumptionFixed investmentMachinery and equipmentConstruction

Stockbuilding I/Domestic demandExportsImports

Foreign balance \JGDP

1.31.24.3-1.17.90.72.67.26.10.22.9

2.70.62.2-7.28.81.03.22.03.6-0.42.7

1.10.93.5-2.77.30.62.210.06.70.73.0

1.00.94.10.66.11.02.67.06.00.12.8

0.42.47.13.89.60.22.69.77.80.43.0

2.59.0

Source: Statistisches Bundesamt.I/ Contribution to the growth of GDP.

The various components of private fixed investment have shown a mixedpattern (Chart 1-4). In eastern Germany, sharp increases in investment(especially in construction, but also in machinery and equipment) have beenthe mainstay of rapid growth since it began. Nor was the picture forinvestment uniformly negative in western Germany even during the recession,which saw solid growth in residential construction, resulting from animmigration-related backlog in housing demand. In 1994, housingconstruction was further boosted by temporary tax concessions, so that itrose by close to 9 percent. As expected, residential construction orders inwestern Germany dropped sharply in the first quarter of 1995, when the taxconcessions expired, but there remains a backlog of orders to fill.

At the same time, business investment in western Germany was one of themain factors behind contracting domestic demand .during the recession. In1993, it fell by 14 percent in real terms--an absolute amount greater thanthe entire reduction in west German GDP. However, as capacity utilizationneared its long-run average, business investment began to turn around in thelatter part of 1994, with year-on-year growth in real terms reaching2 1/2 percent by the end of the year. According to the latest survey ofinvestment intentions, conducted in March-June 1995 (after the exchange rateappreciation, though perhaps before firms had had time to take it fully into



Exports and Exchange Rate

Sources: Deutsche Bundesbank; Bundesministerium fuer Wirtsehoft; and IMF, international Financial Statistics.I/ Based on relative normalized unit labor costs in manufacturing.2/ Three-month moving overage. Western Germany before July 1990.3/ Western Germany. Breaks in series January 1991 and January 1995. Changes in reportingprocedures cast doubt on the reliability of data from January 1995 onward.4/ Percentage of firms surveyed expecting an increase in exports, less percentage expecting a reduction.5/ Percentage of firms surveyed expecting an improvement In their situation, less percentage expectinga deterioration.


- 4b -

CHART 1-4Germany

Domestic Demand I/(DM billions, 1991 prices)

Source: Deutsche Bundesbank; and IMF staff estimates.I/ Seasonally and calendar adjusted.


- 5 -

account in their plans), manufacturing firms are planning to increase theirinvestment by no less than 12 percent in real terms in 1995. Thus despitethe appreciation and the fall in business confidence that followed it, fixedinvestment still seems set to take over from exports some of the role ofsupporting the recovery.

Private consumption, in the meantime, has remained subdued in the wakeof tax increases, wage restraint, and persistently high unemployment. Realhousehold disposable income is estimated to have risen only a little in1994, after falling in 1993. I/ As households smoothed their consumptionpatterns in the face of these setbacks, and as interest rates declined, thesaving ratio, which had already dropped by 3/4 percentage point in 1993,fell further by perhaps 1/2 percentage point. Real private consumption thusgrew modestly (1 1/4 percent) in 1994 (Chart 1-4).

There is little information available on developments in privateconsumption thus far in 1995. Retail sales--the data for which are subjectto considerable uncertainties due to the changeover in statistical methods--have been erratic, but have generally hovered around their level of thesecond half of 1994. In general, consumption is likely to have remainedsubdued, despite rather higher wage increases than last year, because of theweakness of employment and the reimposition in January 1995 of the7 1/2 percent "solidarity" surcharge on income tax. Consumer confidence,which had climbed steeply through the third quarter of 1994, has sinceremained fairly stable.

Both public consumption and public investment, meanwhile, have beenheld back by fiscal consolidation. Public consumption rose a modest1 1/4 percent in real terms in 1994, while public investment grew by only3/4 percent.

Thanks to the strengthening of investment in particular, and to theusual contribution from stockbuilding in the early stages of a recovery,total domestic demand rose by a healthy 2 1/2 percent in real terms in 1994.In turn, the growth in demand brought a rise in imports. by 6 percent inreal terms, following a contraction by a similar amount in 1993. £/ Earlyindications from import values and price indices suggest that the volume ofimports in the first few months of 1995 stagnated, but it was still some6 percent higher than a year earlier.

I/ Official national accounts for 1994 show a 1/4 percent decline in realhousehold disposable income, but predate a major upward revision (close to1/2 percent of GDP) in net investment income inflows in the balance ofpayments. These inflows will have boosted household disposable incomebeyond that recorded in the national accounts.

2J The changeover to INTRASTAT means that the same caveat applies toimports as to exports (see footnote 1, page 3).


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On balance, for Germany as a whole, the foreign sector made a small(1/4 percent of GDP) positive contribution to growth in 1994. However,eastern Germany's heavily negative, and still deteriorating, foreign balancelooms large in this result: in western Germany alone, in keeping with therole of exports in boosting the recovery there, the foreign balance made acontribution to growth of 3/4 percent of GDP.

2. Employment and unemployment

The flipside of the major restructuring efforts and productivityimprovements in industry has been that unemployment has declineddisappointingly slowly as the recovery has taken hold (see Chart 1-1).

In western Germany, unemployment (seasonally adjusted) reached a peakof close to 2.6 million people, or 8.3 percent of the labor force, in May1994. Net job losses had by then been occurring uninterruptedly for overtwo years, to total some 900,000, or 3 percent of total employment. Joblosses continued, though at a slower pace, throughout the remainder of 1994and into 1995, before employment finally appeared to stabilize in April1995. At the same time, and reflecting the usual cyclical response of thelabor force, unemployment declined by some 60,000 people (the equivalent ofless than 0.2 percent of the labor force) from its peak in May 1994 toFebruary 1995. Half of this decline, however, was undone in the followingfour months as unemployment crept back up, probably in response to the twinshocks of the exchange rate appreciation and higher-than-expected wageincreases, and the accompanying uncertainty and erosion of businessconfidence.

Developments have recently been rather more encouraging in easternGermany. Following its collapse after unification, employment appears tohave reached its trough around the turn of 1993-94, and most recently (April1995) its year-on-year growth rate has reached 2 1/2 percent. At the sametime, the number of these workers who were on short-time work has fallenfurther. Admittedly, about half of the growth in employment over the pastyear has been in jobs supported by active labor market policies. But it isclear that the long-awaited turnaround in the east German labor market hastaken place. Reflecting the rise in employment, unemployment has fallennoticeably, by some 170,000 (about 2 percent of the labor force), betweenthe first half of 1994 and the first half of 1995. Nonetheless, unemploy-ment remains high, at 13 1/2 percent (seasonally unadjusted) in June 1995.

3. Wages

The weak labor market in 1994 brought considerable wage restraint(Chart 1-5). In western Germany, negotiated hourly wage increases averaged2 percent, compared with inflation of 3 percent, and, because of reductionsin hours, monthly wages rose a mere 1 3/4 percent. In parallel, in easternGermany, the process of wage convergence with the west slowed downsignificantly. At an average 9 percent, negotiated hourly wage risesremained high, but they were only about half as high as those registered the



Wages and Inflation(Percent change from a year ago)

Source: Deutsche Bundesbank; and IMF staff estimates.1/ United German CPI is calculated from western and eastern CPIs, using the weightsof east and west in total private consumption.2/ Western Germany.3/ Western Germany through 1990, united Germany thereafter.


- 7 -

year before. Here again, monthly wage increases, at 7 1/2 percent, fellshort of the hourly increases negotiated.

Of potentially even greater significance in the 1994 wage round werepath-breaking agreements in a few sectors to increase flexibility in wagesand in working practices. The metal-working and chemical industries agreedon "corridors" for working hours, whereby within the corridor weekly workingtime could be shortened or lengthened with proportionate changes in pay. Inaddition, the chemical industry agreed to allow new recruits to be paid (fora year) wages 5-7 1/2 percent below the negotiated tariff, and 10 percentbelow if they were recruited out of long-term unemployment.

The 1995 wage round, however, took a rather different course. A pace-setting agreement in the west German metal-working sector, concluded justprior to the exchange rate appreciation, provided for monthly wage increasesof 4 percent in 1995, and 3 percent in 1996 (by way of exception, thisagreement covered two years). It also reaffirmed a reduction in weeklyworking time to 35 hours, to be implemented in October 1995, so that hourlywages will rise on average by 4 3/4 percent in 1995 and by 5 percent in1996.

As is usually the case, the headline monthly wage increase in themetal-working industry served as a benchmark for other sectors in westernGermany; but in the absence of widespread agreements on reductions in hours,hourly wage increases elsewhere were generally kept in the range of3 1/2 to 4 percent. Public sector employees in the west settled for anincrease of 3 percent in 1995. The average negotiated hourly wage increase,economy-wide in western Germany, is thus in the neighborhood of 3 1/2 per-cent--well above the 2 percent of 1994, despite inflation that is now abouta percentage point lower than it was then.

In eastern Germany, the process of wage convergence continues, at apace that varies from sector to sector. In the key metal-working industry,tariff wages were raised from 87 percent to 94 percent of the west Germanlevel in mid-1995, so that--taking into account wage increases in the west--they will have risen over 15 percent during 1995. Many employers in theeast, though, continue to pay below-tariff wages. In surveys conducted inearly 1995, one third of enterprises, accounting for 16 percent of eastGerman employment, reported paying wages below the tariff. I/ Unlike inwestern Germany, where most firms pay above-tariff wages, only 6 percent ofeast German enterprises, accounting for a similar fraction of employment,reported paying wages above the tariff. Only 27 percent of employers in

I/ Because this practice is illegal for members of employers'associations, self-reporting is likely to have yielded an underestimate.


- 8 -

eastern Germany were found to belong to employers' associations, and onethird of these were considering revoking their membership. I/

There were virtually no further advances toward flexibility in wagesand working practices in the 1995 wage round. An exception to this was theadoption, in the chemical industry (traditionally the most radical), of aclause that would permit a firm to "opt out" of full payment of theChristmas bonuses stipulated in the collective agreement, subject only tothe agreement of the firm's Workers' Council. This move, while minor initself, does represent a departure from the traditional pattern whereby"opt-outs" have had to be ratified by the trade union (which is less likelyto grant approval than the workforce itself, if, for instance, jobs arethreatened).

4. Prices

Consumer price inflation had proved surprisingly resilient during therecession (Chart 1-5, and Table 1-3). While, in western Germany, producerprices for goods stabilized as early as 1992, consumer prices continued torise under the influence of increases in the cost of housing (related inpart to east-west migration) , rises in the prices of services provided bycash-strapped local authorities, and indirect tax increases (particularlythe January 1994 increase in the tax on mineral oil). On average in 1994,CP1 inflation still amounted to 3 percent, down from a (year-on-year) peakof 4 3/4 percent in early 1992.

By late 1994, however, the (three- and six-month) annual!zed rate ofCPI inflation was running at 2 to 2 1/4 percent, a level near which itstayed in the first few months of 1995. An uptick in inflation in June 1995was associated mainly with a rise in travel prices--which may have beensomewhat overstated in the index, which does not take discounts intoaccount--and preliminary data suggest that inflation went back to itsearlier pace in July.

CPI inflation in eastern Germany, which was for years well above thewest German rate, has declined noticeably as the eastern price level hasapproached that of the west. Since late 1994, east German CPI inflation hasbeen running at levels comparable to, or below, west German ones--althoughone more increase in eastern rents took effect on August 1, 1995, and willprobably temporarily push eastern inflation back above the western level.

i/ NGesamtwirtschaftliche und unternehmerische Anpassungsfortschritte inOstdeutschland--Dreizehnter Bericht," Deutsches Institut fur Wirtschafts-forschung. Wochenbericht 27-28/95 (July 1995).


- 9 -

Table 1-3. Germany: Inflation

(Percentage change from a year ago)

Ql1994

Q2 Q3 Q4 Ql1995

Q2

CPI, westernGermany 3.4Excluding indi-rect taxes I/ 2.7

Food 0.9Other goods 2.1Services 5.1Rents 4.8

CPI, easternGermany 3.6

Producer priceindex, westernGermany 0.2

Import price index -0.2

3.0

2.51.41.74.54.8

3.3

3.0

2.42.21.74.04.4

3.3

0.3 0.6

0.8 0.7

2.8

2.21.61.83.54.3

3.0

1.3

1.8

2.3

2.22.10.93.24.1

1.9

1.7

1.7

2.3

2.21.61.03.34.0

2.0

2.0

0.8

Source: Deutsche Bundesbank; and staff estimates.I/ Based on staff estimates of the impact of the mineral oil tax increase

in January 1994.2/ April-May 1995 over April-May 1994.

In the meantime, (west German) producer prices began to edge up during1994, with their (three-month) annualized rate of increase reaching3 1/4 percent in February 1995. Rises in import prices, and particularlyincreases in commodity prices, played an important role in this regard. ByDecember 1994, import prices--which had fallen almost continuously from mid-1991 to late 1993--stood some 2 1/4 percent above their level of a yearearlier. The sharp appreciation of the deutsche mark, however, providedrelief on this front, and import prices fell a cumulative 1 1/2 percentbetween January and May 1995. In turn, import prices provided relief forproducer prices, which rose very little between February and May.

2/

2/


- 10 -

II. The Public Finances

Over the past two years, Germany has made considerable further progressin addressing the budgetary consequences of unification. The generalgovernment deficit has been reduced to 2 1/2 percent of GDP and off-budgetborrowing substantially curtailed. Corrected for the economic cycle, theunderlying deficit is even smaller and the public debt ratio, which hasballooned in recent years, has probably now reached its peak (Chart II-l).Progress on the institutional front has also been made with the new Laenderbeing integrated into the revenue sharing arrangements between the FederalGovernment and the Laender as of this year. Responsibilities for servicingunification-related debt have been clarified and the cost to the publicaccounts made more transparent.

Fiscal policy continues to be oriented toward completing the job offiscal consolidation. At the same time, reducing the high tax burden,itself partly a legacy of the success to date in reining in the budgetdeficit (Chart II-2), has moved up the list of policymakers' priorities.Sizable tax cuts are the main item on the 1996 budget agenda--although forthe most part the timing and shape of these cuts have been dictated byconstitutional court rulings. Provided there is continued restraint onexpenditure growth at the lower levels of Government, the draft budgetproposal would accommodate the tax cuts without a rise in the generalgovernment structural deficit, even though the federal deficit would widensomewhat. Over the medium term, the aim of fiscal policy is to limitexpenditure growth to no more than 3 percent a year (about 1/2 percent ayear in real terms). Under the authorities' macroeconomic projections, thiswould bring the ratio of expenditure to GDP back to the level in westernGermany immediately prior to unification and provide room for both areduction of the general government deficit to 1 percent of GDP in 2000 andadditional tax cuts equivalent to about 1 1/2 percent of GDP. Beyond 2000,Germany is expected to face considerable pressures on social spendingassociated with a rapidly aging population.

1. Institutional developments

The territorial authorities comprise the Federal Government, the statesor Laender, and the local authorities (Gameindent > plus a number ofsubsidiary budgets or special funds, which for the most part grew out of theprocess of unification. The general government sector comprises theterritorial authorities and the social security funds.

At the beginning of 1995, the temporary agreement in the UnificationTreaty for the funding of the new Laender was replaced by more permanentarrangements. The German Unity Fund (GUF), which was set up as a temporaryconduit for resources to the new Laender to compensate for their low taxbase, ceased current operations and the new Laender were formally integrated


- lOa -CHART II-1Germany

General Government: Deficits and Debt I/(In percent of GDP)

Sources: Data provided by the authorities; and IMF staff estimates.1/ Data before 1991 are for western Germany only.


- lOb -CHART n-2Germany

General Government Revenue and Expenditure I/(In percent of GDP)

Source: Statistisches Bundesamt; and data provided by the authorities.1/ Data for western Germany only before 1991.


- 11 -

into Germany's system of revenue sharing. I/ At the same time,unification-related debt was gathered into a new fund, the Inherited DebtFund (Erblastentilgungsfonds). The new fund took over, at the beginning of1995, DM 102 billion in debts of the Credit Fund (Kreditabwicklungsfonds)and DM 205 billion in debts of the Treuhand privatization agency, which waswound up at end-1994. In addition, just over DM 30 billion in debts ofeastern German housing enterprises was incorporated in mid-1995. TheTreuhand and housing debt, together amounting to nearly 7 percent of GDP,had formerly been outside the general government sector.

The Federal Government is a net loser in financial terms from the newarrangements, which were agreed in 1993 under the so-called Solidarity Pact. 2/While it will no longer make substantial transfers to the GUF, it willreceive a lower share of VAT revenue, provide additional transfers to otherlevels of government (mainly in the east) , contribute the bulk of thefinancing for the new Inherited Debt Fund, and finance the three successorcompanies charged with tying up the Treuhand's unfinished business.However, the re-imposition of the solidarity surcharge on income taxes isexpected to limit the net cost of the new arrangements to the FederalGovernment to about DM 13 billion in 1995. I/ From the beginning of 1996,the federal budget will also bear the full cost of financing the deficit ofthe Railway Fund (Bundeseisenbahnvermogen) that arises from servicingrailway debt and pension liabilities.

At the lower levels of government, the western Laender are also (small)net losers out of the Solidarity Pact: although they gain additional VATrevenue and save on transfers to the GUF, they will have to make substantialequalization transfers to the eastern Laender under Germany's system ofresource pooling among states. By contrast, the financial position of theeastern Laender is improved.

In other institutional developments, the Post Office (Bundespost) andtelephone company (Deutsche Telekom) were converted from public enterprisesto public limited companies in 1995. Currently, both remain 100 percentpublicly owned, although it is the intention to privatize part of DeutscheTelekom next year and use the cash raised from the sale to capitalize thecorporation. Finally, a new long-term nursing care fund was added to thesocial security sector in 1995.

I/ The GUF had been financed by transfers from the old Laender and theFederal Government, and by borrowing. For more details, see Germany -Economic Developments and Issues. SM/92/199 (November 1992).2/ The Solidarity Pact is described in Germany - Economic Developments

and Selected Background Issues. SM/93/151 (July 1993).I/ The Federal Government is the only recipient of revenue--expected to

amount to DM 26 billion in 1995--from the solidarity surcharge.


- 12 -

2. Developments in 1994 I/

Fiscal consolidation continued in 1994. The authorities' Savings,Consolidation and Growth Program, in conjunction with very low public sectorwage increases, provided the basis for expenditure restraint. £/ Inaddition, revenues were augmented by an increase in petroleum taxes.Against a background of an unexpectedly strong resumption of economic growthafter the 1993 recession, the consolidation efforts were reflected in adecline in the general government deficit to 2 1/2 percent of GDP from3 1/4 percent in 1993. The 1994 outcome for the general government deficitwas 1 percent of GDP below that anticipated in Germany's EU Convergence Planof November 1993. Allowing for the considerable slack still existing in theeconomy the general government structural deficit is estimated to have beenabout 1 1/4 percent of GDP in 1994. However, on top of this, extra-budgetary borrowing by the Treuhand amounted to over 1 percent of GDP.

Owing in part to the unexpected strength of the economic recovery--atthe time of the draft budget, real GDP growth in 1994 was projected to beonly 1 to 1 1/2 percent, or less than half the eventual outcome--the federaldeficit fell some DM 20 billion (0.6 percent of GDP) short of originalestimates. Favorable cyclical factors were most evident in net savings ofDM 3-4 billion in transfers to the unemployed and higher-than-expected taxrevenue. The federal budget also benefitted from one-time revenues fromhigher Bundesbank profits, asset sales, and income from state-owned firms inthe east.

The deficits of the I,-fl*irrfftr and local authorities also fell short ofthe 1994 Financial Plan estimates and the collective deficit of the lowerlevels of government remained broadly unchanged from its 1993 level.Expenditure growth was limited to under 2 percent in the western Laender andlocal authorities mainly because low pay settlements kept growth inpersonnel expenditures (which represent about 40 percent of the totalbudget) in check, and because of cuts in investment spending. Expendituregrowth in the eastern Laender was somewhat faster, in large part becausefurther wage catch up to western levels added considerably to personnelexpenditures. However, in the eastern local authorities expenditure wasunchanged from 1993 levels, as the effects of wage catch up were offset bysizable job cuts. Even so, staffing levels at the local level remained wellabove west German norms (see tabulation below). The deficit of the specialfunds of the territorial authorities shrank by DM 5 billion, to DM 10 bil-lion, owing to a sharp reduction in borrowing by the GUF (as planned) , whichwas only partly offset by the new Railway Fund recording a DM 5 billiondeficit.

I/ Supporting data are provided in Tables A6-A12.2/ The most prominent expenditure measure was a cut in the replacement

ratios for claimants of unemployment benefit and unemployment assistance.For more details, see Germany - Economic Developments and SelectedBackground Issues. SM/94/213 (August 1994), p.39-40.


- 13 -

Regional Population per Public Worker I/

1991 1992 1993 1994Laender :Western GermanyEastern Germany

Local authorities:Western GermanyEastern Germany

3325

4824

3327

4824

3428

4826

3430

4933

I/ Staff estimates based on data supplied by theMinistry of Finance.

The social security funds remained in surplus equivalent to about1/4 percent of GDP in 1994. A sizable increase in contribution rates (from17.5 percent to 19.2 percent) enabled the pension funds to reduce theiroverall deficit despite rapid growth of expenditure in eastern Germany dueto further adjustment of pension rates to western levels and a reduction ofthe processing backlog. I/ Despite the deficit, the pension funds'fluctuation reserves--which had risen sharply in 1990-92--remainedcomfortably above the required statutory level of cover for one month'sexpenditure. The reduced deficit of the pension funds was counterbalancedby a decline in the surplus of the health funds, which experienced a strongrebound in expenditure growth following a fall in expenditure in 1993, theyear when health reform was introduced. 2/ Net borrowing by the Treuhand,in what was its last operational year, amounted to nearly DM 40 billion orabout 1 1/4 percent of GDP.

3. Developments in 1995

A further significant withdrawal of fiscal stimulus is taking placethis year. The main source of withdrawal is the reintroduction of the7 1/2 percent "solidarity" surcharge on income taxes, expected to generateDM 26 billion (3/4 percent of GDP) in additional revenue. An increase inthe tax on insurance (from 12 to 15 percent) and a doubling of the wealthtax on most assets to 1 percent will raise a further DM 4 billion (0.1 per-cent of GDP). The tax increases will broadly offset the cost to theterritorial authorities of servicing the newly transferred debts of the

i/ In the east, pension rates were adjusted up by about 3 1/2 percent atboth the beginning and middle of the year, and overall expenditures onpensions in the region went up by some 23 percent in 1994. By contrast,pension rates in the west were increased by 3.4 percent in mid-year only andoverall expenditure growth was limited to 6.4 percent.

2/ In order to avoid increases in fees in 1993, some scheduled dental andmedical work was brought forward into 1992, thereby artificially loweringexpenditures in 1993. Health care reform is described in more detail inGermany - Economic Developments and Selected Background Issues. SM/94/213(August 1994).


- 14 -

Treuhand and eastern German housing sector and a decline in the surplus ofthe social security funds, leaving the general government deficit unchangedat 2 1/2 percent of GDP. As the economy is still estimated to be operatingbelow potential, the general government structural balance would be about1 1/2 percent of GDP. While this would be a little higher than in 1994, itwould be a more representative measure of the underlying fiscal positionbecause sizable off-budget borrowing by the Treuhand would have beeneliminated. Indeed, including the effect of eliminating this borrowing, theamount of fiscal withdrawal would be close to 1 percent (see Annex) . Grosspublic debt is expected to rise to 58 percent of GDP at end-1995, comparedwith 50 percent at end-1994, but the rise is almost fully accounted for bythe assumption of the Treuhand and housing debt.

The 1995 federal budget, which only received parliamentary approval inearly June 1995, calls for a deficit of DM 49 billion--roughly unchangedfrom the 1994 outturn despite the additional net burden to the FederalGovernment of the institutional changes described in section 1 above. JL/The revised budget target is some DM 20 billion below the draft budgetestimate, which had been formulated in the summer of 1994 when it was stillexpected that the economic recovery would be weak and the 1994 deficitoutturn considerably higher. In addition, the 1995 federal deficit willbenefit from one-time revenue gains of about DM 13 billion from the returnof unused cash reserves from the Treuhand and two east German banks that arebeing privatized.

The authorities expect the lower levels of government to reduce theircollective deficit in 1995--the eastern Laender and local authorities signi-ficantly so on account of the more generous intra-government transfers theywill receive. In the case of the western Laender, this will require growthin expenditures (excluding the effect of higher transfers to the east) to belimited to 3 percent, a limit that appears feasible in light of the latestpublic pay settlement. 2J The new long-term nursing care fund is expectedto generate some savings on social assistance for the local authorities.The deficit of the special funds is expected to remain at DM 10 billion asan increase in the borrowing by the Railway Fund (to DM 9 billion) would beoffset by the elimination of the deficit on the German Unity Fund.

Official estimates anticipate a decline in the surplus of the socialsecurity funds in 1995. Following a partial reversal (to 18.6 percent) oflast year's increase in contribution rates, the pension funds are expectedto experience a rising deficit that is to be financed by a further drawdownin reserves. The surplus on the health funds is expected to dwindle, helped

i/ A proposed measure to introduce a two-year limit on eligibility forunemployment assistance was not passed. However, since the limit would onlyhave come into effect in October, the cost to the Federal Government willonly be about DM 1 billion in 1995.

2/ The settlement calls for an increase in negotiated wages in westernGermany of 3 1/4 percent from April 1995, which would be consistent withaverage increases in real wages of about 1 percent.


- 15 -

by a reduction of the contribution rate to 13.0 percent in 1995 from13.2 percent in 1994. However, the new long-term care fund is expected toshow a surplus of the order of DM 5 billion largely because contributions,levied at a rate of 1 percent, went into effect at the beginning of the yearbut benefits (for outpatient care only) were not available until April 1.Benefits for inpatient care will begin on July 1, 1996 when the contributionrate is to be raised to 1.7 percent.

4. 1996 budget plans

The 1996 budget agenda is dominated by the need to accommodate tworulings by the Constitutional Court that imply significant revenue losses.The first, dating from a decision in September 1992, mandates thatsubsistence income should be exempt from taxation. The authorities'proposals in this regard would cost about DM 16 billion (1/2 percent ofGDP). I/ The second more recent ruling outlaws the coal penny (Kohle-pfennig), a tax on electricity use for financing subsidies to the coalindustry, that would have raised about DM 7 billion (0.2 percent of GDP) in1996. In addition, the authorities have sanctioned an increase in childbenefits at a budgetary cost of DM 4-5 billion (just over 0.1 percent ofGDP) , which can be taken in the form of either a higher tax allowance orhigher direct benefits (Kindergeld). The revenue loss of these measures isthus expected to be on the order of DM 30 billion (3/4 percent of GDP), ofwhich two thirds would fall on the Federal Government. 2J However anumber of measures to eliminate tax loopholes would claw back aboutDM 4 billion of this. 3/ Proposals for a third stage of business taxreform have so far been rejected by Parliament because no consensus could bereached on how to compensate the local authorities for the scrapping of thelocal business capital tax (Gewerbekapitalsteuer) , even though the lost

I/ The proposals, plus those for the increase in family allowances (seebelow) , were modified only slightly by an all-party mediation committee andare expected to be approved by Parliament in late August 1995. SeeChapter III of the accompanying paper on Selected Background Issues for adetailed description of the tax reform plans and an analysis of the implica-tions for effective marginal tax rates and for potential poverty traps.

2/ The effects on the gross revenue and expenditure of the territorialauthorities on an administrative basis will be much greater for accountingreasons. First, the new child benefit options will probably be distributedvia deductions from pay packets, irrespective of whether the tax deductionor Kindergeld benefit is chosen. Hence, Kindergeld expenditures of roughlyDM 21 billion in 1995 are likely to disappear from the accounts entirely,with a corresponding additional decline in tax revenues. Second, theabolition of the coal penny, which hitherto has not been recorded as eitherexpenditure or revenue, will appear as an increase in expenditures onsubsidies. National accounts treatment of the measures will produce fewerchanges.

3/ These tax measures were agreed upon after the publication of the StaffReport (SM/95/183).


- 16 -

the territorial authorities as a whole would have been made up through lessgenerous depreciation allowances. \J

Against this background, the draft 1996 federal budget calls for tightexpenditure restraint. Adjusted for the definitional changes associatedwith the new system for distributing child allowances, expenditure would be1.3 percent below the expected 1995 outturn. Some of this decline wouldreflect cyclical factors. But even after deducting the most obvious sourceof cyclical saving--the expected elimination of DM 7-8 billion of transfersto the Federal Labor Off ice--other federal expenditure would barely grow innominal terms and would decline by 1 1/2 to 2 percent in real terms.Measures for restraining expenditure include: personnel reductions of 1 per-cent, on top of decisions not to fill vacancies from 1995 and to eliminatesome so-called temporary jobs; cuts in investment, including a freeze onrailroad spending at 1994 levels; and cuts in unemployment assistance. 2/Expenditure restraint would limit the increase in the federal deficit in1996 to DM 11 billion, taking it to DM 60 billion, despite the DM 20 billioncost of the tax cuts and the abolition of the coal penny, a reduction ofDM 15 billion in the exceptionally high level of nontax revenue received in1995, and the cost of taking over the financing of the Railway Fund(DM 10 billion).

Official plans assume that the Laender and local authorities will limitexpenditure growth in 1996 to the medium-term target of 3 percent. If thisis achieved and federal budget plans met, the deficit of the territorialauthorities (administrative basis) would be unchanged at just under 3 per-cent of GDP. After taking into account differences in accounting practicesas well as an expected surplus of 1/4 percent of GDP for the social securityfunds, this would translate into a general government deficit of about 2 per-cent of GDP on a national account basis. I/ Under staff macroeconomicassumptions (which are very close to official projections), this would implya 1/4 percent of GDP decline in the structural deficit, to 1 1/4 percent ofGDP. By this measure, fiscal policy would be contractionary, but the amountof withdrawal would be very small by comparison with the experience of thepast four years.

I/ The business capital tax is levied on the book value of equity plus aportion of long-term debt. It is unrelated to profits.2/ The savings in unemployment assistance would largely come from

enforcing the link between benefits and potential (as opposed to past)earnings, and from excluding those who had not contributed to unemploymentinsurance.I/ Sizable net lending in recent years, particularly by the European

Recovery Program Fund in eastern Germany has contributed to a persistent"wedge" between the general government deficit on a national accounts basisand on an administrative basis, because such lending is treated asexpenditure in the administrative accounts. Timing differences in therecording of transactions and different sectoral coverage also contribute tothe wedge, which is projected to be DM 20 billion (0.5 percent of GDP) in1996, compared with DM 14 billion (0.4 percent of GDP) in 1995.


- 17 -

5. Longer-term demographic pressures

A rapidly aging population is likely to place considerable strains onthe public finances in the first quarter of the next century. These strainswill be felt most keenly by the social security funds, where future pensionliabilities are unfunded and where demand for age-related medical care islikely to increase substantially. Pensions for public sector workers willalso be a source of rising expenditure pressure for the territorialauthorities. Under current institutional arrangements, the already highsocial security contribution rates would have to rise steeply to finance thefuture expenditure pressures. This suggests both a need for early reform ofthe social security system and a need to continue the process of fiscalconsolidation in order to provide a sound fiscal base to meet longer-termchallenges.

Demographic projections portray a rapidly aging population after theyear 2000. Under various scenarios for immigration, the proportion of thepopulation aged 60 and over would increase to 33-35 percent by 2030, from23 percent in 2000 and 20 1/2 percent in 1992 (Table II-l). Over the sameperiod, the number of persons of prime working age is projected to shrink inabsolute terms. Thus, despite a projected decline in the proportion of thepopulation aged under 20, the overall dependency ratio would increaseconsiderably: by 2030 the total number of children and old people wouldroughly equal the number of persons of prime working age compared with adependency ratio of 0.72 in 1992. These trends in demographic profile arenot unique to Germany, but are rather more pronounced than in many otherOECD countries.

Rising outlays and a shrinking tax base will put a double squeeze onthe finances of the social security funds, despite the passage of pensionreform legislation in 1992. Key elements of that legislation included:linking the adjustment of pensions to changes in net, as opposed to gross,wages; phasing in between 2001 and 2012 a retirement age of 65 for both menand women; I/ and linking the adjustment of the annual federal grant tothe pension funds to developments in the contribution rate as well aschanges in gross earnings. Even so, projections made by the Social AdvisoryBoard in July 1994 estimate that, in the absence of further reforms, thecontribution rate for the pension funds would have to rise to about 27 per-cent in 2030, compared with 18.6 percent in 1995. This estimate is broadlyreplicated in scenarios prepared by a private research group, PROGNOS AG,which projected that the contribution rate would have to rise to 25.5 to27.8 percent by 2030, depending on various assumptions, particularlyregarding immigration. 2/

I/ Current provisions allow pensions to begin before the standard age of65 is reached for men and 60 for women. The average retirement age for menis at present 59 1/2.2/ See Bundesbank Monthly Report (March 1995), pp. 17-31.


- 18 -

Table II-1. Germany: Demographic Trends

(In millions)

1992 2000 2010 2020 2030

Assuming net immigrationof 100,000 a year:

Total population

Aged under 20(Percent of total)

Aged 20 to 60(Percent of total)

Aged 60 and over(Percent of total)

Dependency ratio I/

Assuming net immigrationof 300,000 a year:

Total population

81.0

17.4(21.5)47.1(58.1)16.5(20.4)

0.72

83.3

17.7(21.2)46.4(55.7)19.3(23.2)

0.80

82.0

15.2(18.5)46.1(56.2)20.7(25.2)

0.78

81.0 84.1 84.9

78.6

13.4(17.0)42.6(54.2)22.7

0.85

83.7

73.7

12.3(16.7)35.9(48.7)25.5

(28.9) (34.6)

1.05

81.1

Aged under 20(Percent of total)

Aged 20 to 60(Percent of total)

Aged 60 and over(Percent of total)

Dependency ratio \J

Memorandum items:OECD projections of percent

17.4(21.5)47.1(58.1)16.5(20.4)

0.72

of

17.9(21.2)46.9(55.8)19.3(23.0)

0.79

15.8(18.6)48.2(56.7)20.9(24.6)

0.76

14.4(17.2)46.2(55.1)23.2(27.7)

0.81

13.7(16.9)40.9(50.4)26.5(32.7)

0.98

population aged 65 and over in:United StatesJapanWestern GermanyFranceU.K.ItalyCanadaG-7 averageOECD average

...

...

...

...

...

. . .

...

...

...

12.215.217.115.314.515.312.814.613.9

Sources: Statistisches Bundesamt, Wirtschaft

12.818.620.416.314.617.314.616.415.4

und Statistik

16.220.921.719.516.319.418.618.918.0

, July

19.520.025.821.819.221.922.421.520.6

1994;and OECD Social Data Bank, 1988.i/ Ratio of population aged under 20 and 60-and-over to population

aged 20 to 60.


- 19 -

Given the link between the federal grant and contribution rates, upwardpressures on contribution rates would also place an expenditure burden onthe Federal Government. A further direct fiscal burden of aging will comefrom a rising number of retired civil servants, whose pensions are theresponsibility of the territorial authorities. The problem is especiallygreat for the Laender and local authorities. Estimates suggest that, helpedby rising life expectancy, the number of retired civil servants couldincrease by more than 50 percent to over 1.2 million by the year 2030.

An alternative way of looking at the impact of the aging population isto estimate the budgetary consequences if there were no increase in taxes orcontribution rates to meet projected pension and health spending pressures.Estimates by the OECD (forthcoming Economic Survey) . for example, show thatwith taxes and other expenditures unchanged as a percent of GDP, the generalgovernment primary balance would move from a surplus of 1 1/4 percent of GDPin 2000 to a deficit of nearly 5 percent by 2030. Because of unfavorabledebt dynamics, the rise in the overall deficit would be even greater.Depending on interest rate assumptions, it would rise to 9 to 11 percent by2030, when the net debt ratio would be more than twice its 1995 level.

Fiscal Consolidation Since Unification ANNEX

Developments in the cyclically adjusted general government balancesince unification indicate a considerable fiscal adjustment effort, eventhough the actual deficit has remained in a fairly narrow range (2 1/2 per-cent to 3 1/2 percent of GDP). To derive the structural balance, revenuesare scaled by the ratio of potential-to-actual output while unemploymentbenefits (benefit payments by the Federal Labor Office plus unemploymentassistance paid by the Federal Government) are scaled by the ratio of thestructural (NAIRU)- to -actual unemployment rate. In this way, the estimatedstructural balance compensates for weak tax receipts and unusually largeexpenditures on unemployment benefits when the economy is operating belowpotential, as it has been in the last few years.

From a position of balance in 1989, the general government accountsswung to a deficit of 3 1/2 percent of GDP in 1991, the first year afterunification. Adjusted for an overheated economy, the structural deficit isestimated to have exceeded 5 percent of GDP--the swing to deficit beingentirely due to an increase in structural spending to some 51 percent ofpotential GDP (Table II-2). In 1995, however, it is estimated that thestructural deficit will have been reduced to 1 1/2 percent of GDP. Roughlytwo thirds of the underlying improvement in the fiscal accounts has beeneffected through revenue measures and one third through expenditurerestraint.


- 20 - ANNEX

Table II-2. Germany: Structural Budget Balances

(In percent of potential GDP)

General government:

Structural revenueStructural expenditure

1989 1991WesternGermany

45.9 45.645.9 50.9

1992 1993 1994 1995Staff

estimate

46.7 47.1 47.6 48.150.7 49.3 48.8 49.6

Structural balance

Borrowing by Treuhand

Structural balance lessTreuhand borrowing

Fiscal impulse I/

Memorandum items:

Actual general governmentbalance 2/

Borrowing by Railways,Post and Telekom 3/

Output gap 4/Unemployment rate (in percent)NAIRU (in percent)

45.945.9

--

--

45.650.9

-5.3

0.7

-6.0

46.710^7

-4.0

0.9

-5.0

1.1

47.149.3

-2.2

1.2

-3.4

1.5

47.648.8

-1.2

1.2

-2.4

1.1

48.149.6

-1.5

--

-1.5

0.9

0.1

0.2

0.16.87.0

-3.3

0.6

3.46.68.1

-2.9 -3.3 -2.5 -2.5

0.8

2.07.78.1

0.6

-2.08.88.1

0.6

-2.09.68.1

-1.69.18.1

Sources: Ministry of Finance; Bundesbank, Monthly Report. February 1995;and staff estimates.I/ Change in general government structural balance less Treuhand

borrowing. A positive number represents a withdrawal of fiscal stimulus.2/ In percent of actual GDP.3/ Post Office only in 1994.4/ Actual minus potential output as a percent of potential output.


- 21 - ANNEX

Nevertheless, the general government accounts do not give a completepicture of fiscal developments because of the sizable amount of off-budgetpublic borrowing that has taken place since unification. In particular,borrowing by the Treuhand averaged just over 1 percent of GDP in each of1991-94, while borrowing by the Railways and Post Office, largely to financeinvestment in eastern Germany, together averaged about 3/4 percent of GDP.The elimination by 1995 of much of this borrowing--or its assimilation intothe accounts of the territorial authorities--implies that the consolidationeffort since 1991 has been even greater than is measured by the decline inthe general government structural deficit alone.

The winding up of the Treuhand at end-1994 had two particularlyimportant consequences for the interpretation of fiscal developments in1995. First, the Treuhand's accumulated debt is now being serviced by theterritorial authorities at a cost of approximately 1/2 percent of GDP ayear--which is a measure, in some sense, of the permanent fiscal legacy ofthe Treuhand. The extra interest expenditures more than account for anestimated small rise in the structural general government deficit in 1995;i.e., under a consistent institutional coverage, the structural deficitwould have fallen slightly in 1995. Second, other deficit-financed spendingof the Treuhand of about 3/4 percent of GDP was eliminated in 1995. I/Since this would have a direct impact on economic activity it should beincluded in a measure of the fiscal withdrawal. Overall, the fiscalwithdrawal would be of the order of 1 percent of GDP in 1995, made up of asmall fall in the general government structural deficit (when adjusted forthe accounting effect of bringing the Treuhand's debt service cost on-budget) , plus the elimination of non-interest Treuhand expenditures.

I/ A much smaller amount of related expenditures will continue throughthe Treuhand's successor agencies. But these are now financed by theFederal Government and are, accordingly, reflected in the general governmentaccounts.


- 22 -

III- Monetary Policy and Developments I/

Monetary policy is conducted within a framework of annual targets forbroad money (M3) with the objective of achieving lasting price stability.Beginning in September 1992, and with the economy in recession, theBundesbank began to reverse the earlier increases in official short-terminterest rates that had been necessary to counter strong unification-relatedinflationary pressures. The process of lowering rates continued into theeconomy's recovery phase--despite often conflicting signals from M3--but washalted in mid-1994. However, after official rates had been kept constantfor about nine months, declining money supply and a steep appreciation ofthe deutsche mark provided grounds for a further cut in the discount rate inMarch 1995. The exchange rate has subsequently stabilized and there hasbeen a modest resumption of monetary growth.

1. Monetary targets and the policy framework

Even though monetary growth has continued to be erratic, the Bundesbankhas persevered in its practice of announcing target ranges for M3 reflectingits belief that over the medium term the relationship between M3 andinflation remains stable. The target range for 1995--which was reaffirmedin July 1995--is 4-6 percent, the same range as for 1994. It is based ongrowth of potential output of 2 3/4 percent a year, 2 percent inflation, anda 1 percent decline in trend velocity implying a point estimate for theannual average warranted growth of M3 of 5 3/4 percent. 2/ A downwardadjustment was made to compensate for high average monetary growth in 1994,and the resulting target was expressed as a range, anchored as usual on thefourth quarter of the preceding year.

Two minor modifications to the target framework were made in 1995. Thefirst was presentational: in the first few months of the target period,annualized monetary growth rates are now calculated and reported withreference to both the current and the previous year's target base period.The objective is to provide perspective on fluctuations in M3 at thebeginning of the year, which can be magnified out of all proportion whengrowth rates are annual ized over a short time span. The second innovationwas to increase the attention paid to developments in M3-extended inrecognition of the potentially distortionary effects on the monetaryaggregates of portfolio adjustments between money and near-moneysubstitutes. 3/ This modification was motivated by the introduction inAugust 1994 of money market funds, which are now included in M3-extended butnot in M3 on the grounds that, despite their liquidity, they are more in thenature of an interest-sensitive investment asset with no direct paymentfunction. No formal target exists for M3-extended, but its development is

I/ Supporting data are provided in Appendix Tables A13-A15.2/ See Bundesbank, Monthly Report. January 1995.3/ M3-ex tended is made up of M3, domestic non-bank deposits at German

banks' foreign branches and subsidiaries, and short-term bank debtsecurities, as well as investments in money market funds.


- 23 -

now discussed (with a one-month reporting lag) in the Bundesbank's monthlypress releases.

The record of monetary targeting since unification has been poor.M3 overshot the target range in each of the three years 1991-93, with theamount of overshooting quite sizable in 1992 (Table III-l). The target wasmet in 1994, but only after a decline in M3 in the second half of the yearreversed considerable earlier overshooting, while in the first six months of1995, M3 growth has been way below its target range. The main problem formonetary targeting appears to be short-run instability of money demand.Over a long period of time, it is quite possible that money demand isstable, as was the case before unification: indeed, despite all the targetovershooting in the early 1990s, M3 growth between the beginning of 1991 andmid-1995 has been at little more than a 6 percent annual pace--not muchfaster than growth of nominal GDP. I/ But over shorter periods of time,M3 growth has clearly been very erratic (Chart III-l).

Table III-l. Monetary Targets and Performance

(In percent)

Target range M3 growth (Q4/Q4) I/

1991: initialrevised

1992199319941995

4-63-5

3*4-5*44*4-6*44-64-6

5.69.67.55.70.4 2/

I/ Based on period-average seasonally adjusted data, except for 1991,which uses an average of unadjusted end-month data.

2/ Annualized growth rate from 1994:Q4 to June 1995.

In other institutional developments, the Bundesbank lowered the minimumreserve requirement ratio for sight deposits from 5 percent to 2 percent,and for savings deposits from 2 to 1 1/2 percent, effective August 1, 1995.Ratios for time deposits remain at 2 percent. At the same time, banks willno longer be able to offset average domestic cash holdings against reserverequirements. The latest cut in reserve requirements was the third in as

I/ In addition, some recent empirical studies by the OECD (EconomicSurvey, 1994) and the BIS (Working Paper No. 21, September 1994) providesupport for the continued long-term stability of money demand. The staff'sown analysis (Germany - Economic Developments and Selected BackgroundIssues. SM/94/213, August 1994) reaches more qualified conclusions.


- 24 -

many years and was aimed at reducing the competitive disadvantage of Germanbanks and the circumvention of reserve requirements via offshore deposits.Nevertheless, the Bundesbank remains committed to retaining minimum reserverequirements as a tool of monetary management and is lobbying for their useby the future European Central Bank. The lowering of reserve requirementswould release DM 7 billion in bank liquidity, but this is to be siphoned offthrough the Bundesbank's repurchase operations.

2. Developments in interest and exchange rates

In the middle of 1994, the policy of gradually lowering short-termofficial interest rates was halted and a new phase of stable rates began.At that point, official rates stood at roughly half their August 1992 peaklevels: the discount rate had been reduced to 4 1/2 percent and the keysecurities repurchase (repo) rate to 4.85 percent. These rates wereconsistent with 3-month interbank rates of around 5 percent, a level deemedappropriate for economic conditions that were characterized by steadyrecovery and falling (albeit slowly) inflation. In the second half of 1994and early 1995, inflation-adjusted short-term interest rates fluctuated in a2 to 2 3/4 percent range, somewhat below the historical average of about3 percent. The slope of the yield curve was relatively steep following theearlier cuts in short-term rates and the sustained increase in long-termbond yields during 1994, although this is not unusual during a phase ofeconomic recovery. I/

The final cuts in interest rates in the first half of 1994 were madedespite exceptionally strong growth in M3 (Table III-2). This growth wasattributed in large part to special factors, including the partial phasingout of tax concessions for owner-occupied housing and the extension of theinterest withholding tax to overseas investment funds. The latter changeresulted, in early 1994, in a sizable amount of funds that had formerly beenrecycled into the German capital market via Luxembourg being parked indomestic monetary assets. Moreover, a flat yield curve and the turbulencein international bond markets that began around the time the Federal Reservestarted to tighten U.S. monetary policy in February 1994, deterred investorsfrom moving into longer-maturity assets. In this context, the Bundesbank(encouraged by very low pay settlements in the Spring round) came to theconclusion that a cut in short-term interest rates could facilitate aresolution of the monetary "logjam" by steepening the yield curve and thusencouraging a revival of demand for "monetary capital" (i.e., longer-termliabilities of the banking system that are not included in M3).

I/ The spread between 10-year bond yields and three-month money marketrates was around 2 1/2 percentage points between mid-1994 and the firstquarter of 1995 compared with a historical average of about 1 percentagepoint. However, the spread was 3 percentage points on average in the18 months following the trough of the previous three recessions.


- 24a -CHART III-lGermany

Monetary Policy Targets and Instruments(In percent)

Source: Deutsche Bundesbank.1/ Annualized growth from fourth quarter of preceding year minus central target growth rate.2/ Monthly average data.


- 25 -

Table III-2. Growth in Monetary Aggregates and Main Counterparts I/

(In percent)

MlMonetary aggregates 2/M2 M3 M3-

extended

Selected counterpartsLending to Monetary

enterprises & capitalindividuals 3/ formation

199219931994

(Average annual change)

6.69.39.8

11.78.56.8

8.17.88.9

9.310.29.8

11.38.79.2

(Change over last 6 months at an annual rate)

8.04.06.0

1994Jan.Feb.Mar.Apr.MayJuneJulyAug.Sep.Oct.Nov.Dec.

1995Jan.Feb.Mar.Apr.MayJune

14.611.911.311.99.09.25.38.06.75.43.81.6

5.33.62.92.56.55.9

10.810.212.212.09.85.41.60.8-2.9-5.1-7.8-10.7

-8.5-9.1-8.4-8.2-3.7-2.6

12.012.513.714.513.29.86.03.83.10.5-0.6-1.7

-2.8-2.5-2.9-1.9-1.01.3

14.714.313.913.411.68.15.04.13.62.11.30.4

-0.1-0.3-1.1-0.90.4

9.910.09.79.49.89.09.29.58.98.78.88.2

7.47.76.86.96.47.1

5.35.85.15.25.75.66.96.87.88.18.910.1

10.210.710.610.410.29.0

Source: Deutsche Bundesbank, Monthly Report and SaisonbereinigteWirtschaftszahlen.I/ Growth rates are adjusted to correct for changes in statistical

coverage.2/ End-month data for Ml and M2. Monthly average data for M3 and M3-

extended, where the latter are calculated from end-month levels.3/ Excluding Bundesbank lending. Including lending in the form of

securities.


- 26 -

This "perverse" interest rate strategy had the hoped-for impact on themoney supply and M3 stabilized between April and October 1994, therebyhelping to disperse the earlier liquidity overhang. In the final quarter of1994, the money supply began to fall. By February 1995, M3 wassignificantly below its 1994 fourth quarter level and, from a longerperspective, had only grown at a 3.7 percent annualized rate since thefourth quarter of 1993. M3-extended also declined around the turn of theyear. At the same time, the deutsche mark began to strengthen considerablyagainst the U.S. dollar and major European currencies--notably the Frenchfranc, pound sterling, and Italian lira. The combination of falling moneysupply and an appreciating exchange rate led to a reappraisal of monetaryconditions. Accordingly, the discount rate was lowered by 1/2 percentagepoint (to 4 percent) at the end of March 1995 and the repo rate was reducedby 35 basis points to 4.50 percent. I/ No further changes in officialrates have been made since, although on August 9, 1995, the Bundesbankallowed the repo rate to edge down by 5 basis points to 4.45 percent.

Since March, 3-month market interest rates have remained close to4 1/2 percent. The deutsche mark has eased slightly from a post-war high ofbelow DM 1.35 per dollar at one point in March 1995 to fluctuate aroundDM 1.40. Within Europe, the last discount rate cut helped ease tensions inthe ERM and the French franc has recovered somewhat against the deutschemark. Nonetheless, in nominal effective terms, the deutsche mark was, inJune 1995, about 4 1/2 percent above its level at the end of 1994. M3 hasbeen growing at a modest pace since March.

Bond yields have also declined significantly since the beginning of theyear after having risen steeply during the course of 1994. Like last year'srise--which saw 10-year bond yields increase from a historically low levelof 5 1/2 percent at end-1993 to almost 7 1/2 percent in the final quarter of1994--the decline in 1995 has been a global phenomenon. Also in common withlast year, the latest swing in the German bond market has been lesspronounced than in the U.S. market. As a result, the small negativedifferential that had existed for most of 1994 between German and U.S. bondyields has been reversed. In April-July 1995, 10-year bond yields settledaround 6 3/4 percent, about 1/2 percentage point above U.S. yields.

3. Developments in money and credit

Stagnant and at times declining M3 provided the salient feature of muchof 1994 and early 1995 as earlier distortions to the monetary aggregatesgradually unwound. By the second quarter of 1995 it appeared that theadjustment was over and M3 was showing signs of recovery. Nevertheless, inJune 1995, M3 was barely above its level in the fourth quarter of 1994 (the

I/ Shortly thereafter, the Bundesbank also reverted to volume tenders forits repurchase transactions after having relied on fixed-rate tenders sinceJuly 27, 1994. The latter had been used to send clearer signals about thelevel and direction of official interest rates in what, at times, had beenturbulent market conditions.


- 27 -

base period for the 1995 target). Credit growth remains relatively firm,although it has slowed considerably relative to its pace in 1993 and 1994.

The surge in the money supply that was partly due to tax factors peakedin April 1994 with M3 about 6 percent above its level in the fourth quarterof 1993. I/ The surge mainly took the form of increased demand forshort-term time and savings deposits at a time when rising bond yieldsencouraged a wait-and-see attitude on behalf of capital market investors.However, with the yield curve steepening (helped in May 1994 by a furthercut in the discount rate), monetary funds began to flow into long-termassets and M3 stagnated in Hay-September 1994. In this period, there was aparticularly pronounced flow out of demand deposits of less than four years.By contrast, demand for short-term savings deposits continued to expand,reflecting in part a more secular trend stemming from the introduction ofsavings accounts that pay more market-related (and attractive) interestrates. The main counterpart to the stagnation of M3 was a revival ofmonetary capital formation (mainly investment in bank bonds and long-termtime deposits), which accelerated to a 10 percent annualized pace.

The introduction of money market funds (foreign-based in August 1994and domes tic-based in September 1994) had a further dampening effect on M3,which began to decline in the fourth quarter of the year. Demand for suchfunds was at first moderate but picked up sharply in December largelybecause money market funds were exempted from the 1/2 percentage point risein wealth tax (to 1 percent) that took place at end-1994. £/ Investmentin money market funds totalled approximately DM 36 billion (DM 30 billion inGerman-based funds and DM 6 billion in foreign-based funds), or 1 3/4 per-cent of the stock of M3, in the fourth quarter of 1994. Coming on top ofcontinuing underlying weakness in money demand, the accompanying switch outof monetary assets contributed to a (seasonally adjusted) 1 percent fall inM3 between September and December 1994. 3/ M3-extended, which includesmoney market funds, stagnated in the same period.

The money supply (and MS-extended) continued falling in January andFebruary 1995, despite small net sales of money market funds. One possiblecontributory factor was the (correct) perception that a bond market rallywas beginning; certainly monetary capital formation continued at a vigorous12 percent annual pace in this period. In more recent months, with bondyields stable again, money growth has revived slightly and the pace ofmonetary capital formation has slowed.

i/ For more details of the special factors, see Germany - EconomicDevelopments and Selected Background Issues. SM/94/213 (August 1994).2/ For more details, see Chapter I of the accompanying paper on Selected

Background Issues.3J The net impact on M3 would have been less than the total investment in

money market funds because some of these funds are effectively repackagedbank deposits. In addition, investors could have liquidated capital marketinvestments, as opposed to monetary assets, to finance their purchases ofmoney market funds.


- 28 -

Credit growth also slowed during 1994 and the first half of 1995. Theslowdown was most pronounced in credit growth to the public sector, whichhad been growing at a 13-14 percent annual pace at the beginning of 1994 butwhich slowed to a 6-7 percent pace after the first quarter of 1994. Creditgrowth to private enterprises and households slowed more gradually, fromaround a 10 percent pace at the beginning of 1994 to 7 percent by end-1994,at which rate it continued to expand in the early part of 1995. Growth ofprivate credit was fuelled primarily by lending for housing construction in1994--up 13 percent--helped in part by the phasing out of tax concessionsfor the purchase of owner-occupied houses at end-1994. By contrast, banklending to trade and industry rose by only 3 1/2 percent, while consumercredit expanded by 6 percent in 1994.

IV. The Balance of Payments JL/

1. The current account and the exchange rate 2/

With unification, Germany's current account position shifted abruptlyfrom large surpluses (4 to 5 percent of GDP) in the late 1980s, to deficitsclose to 1 percent of GDP in 1991-94 (Chart IV-1). From a savings-investment perspective, the shift to deficit reflected both the largeinvestment demands of eastern Germany and a fall in national savings; thelatter was mainly the counterpart, at first, to the deterioration of thepublic finances, but later also to a (at least partly cyclical) decline inhousehold savings and business profits. A sharp appreciation of thedeutsche mark in early 1995 has significantly affected the outlook for thebalance of payments, and is likely to push the current account further intodeficit.

The current account deficit, which widened slightly to 1 percent of GDPin 1994 from 3/4 percent of GDP in 1993, appears to be structural in thesense that it cannot be fully explained by cyclical and other transientfactors. On the one hand, Germany's relative cyclical position probablycontributed to the deficit: although imports were suppressed by the factthat the economy was operating below potential in 1994, the output gap incountries forming Germany's main export markets was even larger on average,suggesting that exports may have been suppressed even more. On the other

I/ Supporting data are provided in Appendix Tables A15-A18.2/ Germany has accepted the obligations of Article VIII, Sections 2, 3,

and 4 of the IMF's Articles of Agreement and operates an exchange systemfree of restrictions on current international transactions, with theexception of exchange restrictions that have been imposed against theFederal Republic of Yugoslavia (Serbia/Montenegro), Iraq, and Lybia incompliance with UN Security Council resolutions. The Fund has been notifiedof these restrictions in accordance with Executive Board Decision No. 144-(52/51).


- 28a -

CHART IV-1Germany

External Current Account(In percent of GDP)

Sources: IMF, WEO database.1/ Data before 1990 refer to western Germany.2/ There are data discontinuities in 1990.3/ Current account minus public savings-investment balance.4/ General government balance less Treuhand borrowing.


- 29 -

hand, the current account probably did not yet fully reflect the effect of asizable appreciation of the deutsche mark in 1992. I/

Germany's current account would not be expected to remain in structuraldeficit in the long term. A return to surplus would be in keeping withGermany's traditional role (as a mature industrial economy) of supplying netsavings to the rest of the world. Moreover, as noted in section II.5 above,Germany's population is projected to age more rapidly than that of othermajor countries implying that the need for additional savings now is perhapseven greater. 2/ Of course, the speed at which the current account shouldrevert to its longer-run surplus position is a much more open question.Most estimates suggest that it will be 10-15 years before eastern Germany'scapital-output ratio and income level will have converged to western Germanlevels. Accordingly, it would be appropriate for the process of adjustmentto be drawn out, most probably to beyond the turn of the decade. Neverthe-less, the sharp appreciation of the deutsche mark in early 1995 is unhelpfulto the adjustment process and comes at a time when the effects ofunification on the balance of payments ought to be waning.

The recent exchange rate developments come on top of concerns aboutGermany's external competitiveness that had already arisen in 1992, when thedeutsche mark had appreciated by about 6 percent in nominal effective terms(see Chart 1-3). With German labor cost inflation running ahead of that inpartner countries, the real effective exchange rate based on relative unitlabor costs (ULCs) in manufacturing appreciated by about 10 percent in thatyear. Other indices, however--in particular, indices based on a widercoverage of the business sector, or on more general inflation indicators--pointed to a much smaller loss of competitiveness, of about half thisamount. 3/ In addition, German exports rebounded strongly in 1994,suggesting that whatever decline in competitiveness had occurred had by thenexerted most of its impact. Most importantly, this decline in competitive-ness was in any event in line with the requirements of Germany's saving-investment position, as it served to fuel an increased demand for importsand the diversion of some of western Germany's exports to within the new,post-unification borders.

The most recent appreciation of the deutsche mark, however, hasengendered new worries. After a small further appreciation during thecourse of 1994 (by December, the nominal effective exchange rate was about1 1/4 percent above its year-average level) , the deutsche mark jumped by4 1/2 percent in nominal effective terms between December 1994 and June

I/ On the basis of MULTIMOD equations, there would have been at most a1/2 percent of GDP further increase in the deficit still in the pipeline in1994, assuming a 10 percent real appreciation in 1992. As noted below, thereal appreciation, properly measured, may well have been smaller than this.2/ Germany would need to run a surplus of about 3/4 percent of GDP just

to stabilize its current ratio of net foreign assets to GDP.3/ See Germany - Economic Developments and Selected Background

Issues. SM/94/213, Chapter III (August 1994).


- 30 -

1995, with most of this appreciation occurring during February. Theappreciation was particularly marked against the US, the UK, and Italy--three of Germany's main trading partners--as well as against Sweden andSpain (Table IV-1, and Chart IV-2). By contrast, against ERM members thedeutsche mark appreciated rather less or not at all, and against Japan--animportant competitor on emerging Asian markets--it depreciated by 5 percent.With German manufacturing ULCs tentatively estimated to have risen a littlefaster than those of competitors over this period, the correspondingappreciation of the (ULC-based) real effective exchange rate is put at5 1/2 percent.

Table IV-1. Recent Exchange Rate Changes with Respect toGermany's Most Important Trading Partners

Rank Trading Partner Weight I/ Exchange rate change(in percent) June 1995 vs. Dec. 1994

(in *, -f-apprec. of DM)

1.2.3.4.5.6.7.8.9.10.11.

Sources

FranceUnited StatesItalyUnited KingdomJapanBelgiumNetherlandsAustriaSwitzerlandSpainSweden

: IMF Information

13.211.411.19.78.88.38.25.85.53.73.2

Notice System (INS);

+ 2.0+ 12.3+ 12.6+ 9.8- 5.2

- 0.1- 2.2+ 3.2+ 8.4

IMF International FinancialStatistics: and IMF staff calculations.I/ Competitiveness weights used in INS, and based on Wickham, A Revised

Weighting Scheme for Indicators of Effective Exchange Rates. IMF WorkingPaper WP/87/87 (December 1987). The weights capture the relative importancein German trade of the respective country, as a destination market orsupplier, in trade in manufactures and in non-oil primary commodities.

The recent appreciation has had a marked impact on export expectations(see Chapter I), and is likely to affect export orders and export volumeslater in 1995. Nonetheless, there are several reasons to think the likelyloss of export market share will be kept within bounds. First, because somany imports, especially of raw materials, are priced in US dollars, the


- 30a -CHART IV-2Germany

Competitiveness Against Selected Countries and Groups I/(1985=100)

Source: IMF, Research Department.

1/ Real effective exchange rates based on relative normalized unit labor costsin manufacturing.


- 31 -

sizable appreciation against the dollar should translate into substantialdeclines in many import prices, and should give exporting firms relief onthe cost side. I/ Second, the commodity composition of German exports islikely to work in their favor in the current phase of world economicrecovery. Investment goods account for over half of all Germany's exports.And after falling by a cumulative 3 1/2 percent between 1991 and 1994, realfixed investment in Europe is expected to rise by over 5 percent annually ineach of 1995 and 1996, and by 4 percent annually in the remainder of thedecade. 2/ Finally, perhaps partly because of the prominence of highlydifferentiated investment goods among German exports, and thanks to theirreputation for quality and reliability, many German products are subject torelatively price-inelastic demand. Continuous improvements in non-pricefactors in the past have also contributed to a strengthening of Germany'sworld market share beyond what could be accounted for by the geographicaland commodity composition of exports. 3/

In 1994, exports rebounded from their depressed (and possiblyunderestimated--see Chapter I) level of the previous year, expanding by9 percent in value and almost as much in volume (Table IV-2). 4/Following a surge in exports toward the end of 1994, there appears to havebeen a pause in export growth in the first five months of 1995.

I/ SITC groups 2 and 3, largely made up of raw materials, account forabout 11 percent of German imports, but only 3 percent of German exports.The US itself, as a destination and supplier, accounts for similarproportions--? 1/2-8 percent--of German exports and imports.2/ World Economic Outlook. May 1995. "Europe" is defined as OECD

countries in Europe.3y See Germany - Economic Developments and Selected Background Issues.

SM/94/213, Chapter III (August 1994).4/ Revised estimates from the Federal Statistical Office suggest that

total exports and imports in 1994 were both about 1 percent higher than thelevels shown in Table IV-2, with little effect on the trade balance. Thenew estimates were released too late to be incorporated into the analysis.


- 32 -

Table IV-2. Germany: Balance of Payments

(In billions of deutsche mark)

Merchandise trade, net 2/Exports, f.o.b.Imports, f.o.b. ,37

Nonf actor services, netReceiptsPayments 3/Of which: Travel

Factor incomes, netReceiptsLabor incomeInvestment income

PaymentsLabor incomeInvestment income

Transfer payments, netPrivateOf which: Foreign workers'remittances

OfficialOf which: Transfers toEU, net

CURRENT ACCOUNT BALANCE(Percent of GDP)

CAPITAL TRANSFERS BALANCE

Direct investment, netSecurities transactions, netOther capital flowsOf which:Long-term bank creditsShort-term bank credits

CAPITAL ACCOUNT BALANCE

Errors and omissions

1990 I/

112.1663.8-551.7

-21.4101.2-122.6-48.1

27.2101.53.897.6-74.3-5.6-68.7

-38.8-14.7

-7.1-24.1

-13.6

79.03.1

-2.1

-34.7-5.7-50.2

-19.62.1

-90.5

24.6

1991

29.9667.6-637.7

-28.9105.8-134.8-51.9

29.7118.74.1

114.5-89.0-6.6-82.3

-62.6-15.1

-6.4-47.5

-21.9

-31.9-1.1

-1.0

-32.541.312.1

-27.740.5

20.9

12.3

1992

41.4671.6-630.2

-42.6104.5-147.1-57.6

22.5121.84.1

117.7-99.2-7.9-91.3

-55.1-16.7

-6.8-38.4

-25.3

-33.7-1.1

1.1

-26.845.371.8

13.967.1

90.3

11.1

1993

65.7632.6-566.9

-52.2102.6-154.8-62.7

18.2125.74.0

121.7-107.5-8.9-98.6

-57.5-16.4

-6.8-41.1

-27.3

-25.8-0.8

0.9

-23.7177.3-147.4

12.0-99.7

6.1

-17.0

1994

82.4690.2-607.8

-62.798.8

-161.5-67.2

8.0122.64.2

118.4-114.6-8.9

-105.7

-61.2-16.8

-7.5-44.4

-31.9

-33.4-1.0

1.2

-28.7-44.6130.4

15.8125.8

57.1

-12.7

1994Jan-May

27.0277.5-249.0

-16.241.6-57.8-24.0

5.055.41.753.8-50.5-3.2-47.2

-22.4-7.1

-3.1-15.3

-10.0

-6.6...

0.7

.-10.8-47.799.9

9.7105.9

41.4

-34.4

1995 2/Jan-May

34.6296.8-260.9

-19.842.3-62.1-24.8

1.055.61.753.8-54.6-3.2-51.4

-21.2-6.8

-3.1-14.4

-10.0

-5.4...

-2.0

-16.89.833.3

20.035.5

26.2

-6.3

Valuation adjustments w.r.t.Bundesbank's external position -5.1

Change in Bundesbank's netexternal assets (+ * increase) 5.9

0.5

0.8

-6.3

62.4

1.5

-34.2

-3.7

8.6

-1.2.

12.5

Source: Deutsche Bundesbank, Monthly Report. Supplement 3.\/ Before July 1990, western Germany only. GDP used for 1990 is the average of western and united German GDP.2/ In Jan.-May 1994 and 1995, so-called "Supplementary trade" is included in the trade balance but not in exports

or imports.

3/ In Jan.-May 1994 and 1995, merchandise imports are c.i.f.


- 33 -

Exports to the buoyant US and UK economies, as well as to Italy, roseparticularly strongly in 1994, but their growth tapered off during the yearas the currencies of these three countries depreciated sharply against thedeutsche mark (by between 4 percent and 9 percent during 1994) , and other EUcountries began to play a bigger role in German exports as recovery tookhold across Europe. Exports to countries in transition and to developingcountries were strong, rising at double-digit rates. The appreciation ofthe Japanese yen (by 6 1/2 percent against the deutsche mark on average in1994) no doubt contributed to export growth of over 20 percent to the newly-industrializing economies of Asia, and to robust growth of exports to Japanitself (up 14 percent), despite the sluggishness of the Japanese economy.

The global recovery provided a boost to Germany's main exports, ofinvestment goods and producer goods, which together account for 80 percentof total exports and which grew in 1994 by 10-13 percent. Exports of con-sumer goods, including food, also rose, but much more slowly (by 5 percent).

Imports too rose significantly in 1994, by some 8 percent in value andonly a little less in volume, as demand revived. Early indications are thatthe volume of imports in the first five months of 1995 broadly stagnated.EU countries were the main beneficiaries of the increased demand for importsin 1994, but countries in transition too succeeded in sharply increasing (byalmost 20 percent) their exports to Germany, albeit from a still rather lowbase.

While the trade balance strengthened in 1994 (to DM 82 billion or2 1/2 percent of GDP), the deficit on nonfactor services continued on therising trend it has exhibited for many years, reaching almost DM 63 billionor close to 2 percent of GDP. I/ The rise in the deficit was fuelledmainly by a continuing rise in expenditures on foreign travel, stillreflecting in part the pent-up demand for travel by east Germans, and by afurther decline in receipts from foreign military agencies for troopsstationed on German territory. Similarly continuing its trend of the lastfew years, the factor incomes surplus dwindled further in 1994, to reach amere DM 8 billion. The post-unification current account deficits havecontinued to erode Germany's net foreign assets, and since a large part ofthe latter are denominated in US dollars, they suffered too in 1994 (indeutsche mark terms) from the appreciation of the deutsche mark against thedollar. In both the nonfactor services and factor incomes balances, thedeclining trends of 1994 appear to have continued in the first five months

I/ The official classification of the German balance of payments hasrecently been changed to distinguish explicitly between nonfactor servicesand factor incomes, which were previously grouped together. The staff makesa further, approximate adjustment to the official presentation to includethe freight and insurance charges associated with imports in nonfactorservices rather than in merchandise trade.


. 34 -

of 1995. I/ The deficit on transfers rose slightly to DM 61 billion in1994, reflecting higher net transfers to the EU.

2. The capital account

The 1994 current account deficit, of DM 33 billion, was more thanfinanced by DM 57 billion in inflows on the capital account. £/ Withinthe capital account, however, strong outflows at the long end offset stronginflows at the short end--the opposite pattern from the one that prevailedin 1993. The portfolio shift in 1994 was most likely driven by a worldwideshift in maturity preferences that accompanied the normalization andsteepening of the yield curve. The effect of this maturity shift wasparticularly marked in the early part of the year, and some reversal wasevident by the fourth quarter, when long-term capital inflows turnedpositive again and there was some outflow of short-term funds.

Following record inflows (over DM 200 billion) into German bonds in1993, foreign interest in German bonds fell drastically in early 1994, asbond prices started falling. Interest revived sufficiently later in theyear to offset the sizable net outflows experienced in the first half of1994, but overall net inflows were less than DM 20 billion, and much of thisamount is thought to have come from German investment funds in Luxembourg,which reinvested in German bank bonds some of the funds they raised inGermany from the sale of money market certificates. Net foreign investmentsin German equities were minimal, at DM 1 billion.

At the same time, German residents were increasingly attracted toportfolio investment abroad, which rose by over 60 percent to DM 86 billion.Foreign currency bonds, and especially--in light of the yield differentialthat prevailed throughout most of 1994--those denominated in US dollars,proved much more popular than the previous year, and outflows into foreignequities also increased. Money market funds of German origin, which wereset up for the first time in August 1994 in Luxembourg, attracted sizableamounts of funds, accounting for an increased outflow into foreigninvestment fund certificates.

Foreign direct investment in Germany has generally been rather small,typically fluctuating between DM 1-5 billion annually, and indeed turned

JL/ However, factor income receipts may be somewhat understated in the1995 data, because interest income from investment funds based abroad ispoorly recorded. The official balance of payments data for 1994, but not asyet 1995, have been corrected for such underrecording.2/ In addition, a very small positive balance was recorded under capital

transfers, a new heading in the official balance of payments presentationwhich consists of transfers of a capital rather than recurrent nature, andwhich includes notably forgiveness of developing country debt. Negativeerrors and omissions (which may represent unrecorded capital outflows)registered DM 13 billion.


- 35 -

negative in 1994, as large losses (i.e. negative reinvested earnings) bookedby foreign-owned firms swamped the usual small inflows. German directinvestment abroad in 1994 remained at about DM 24 billion, the same as theprevious year, but down significantly from the very high levels reached inthe early 1990s, in the wake of the investment boom that followed thecreation of the single European market. Overall, net long-term credits toenterprises and banks, with inflows of DM 14 billion, remained close totheir level of the previous year.

The bulk of credit transactions in the balance of payments consists ofshort-term credit transactions, which swung from large net outflows in 1993to large net inflows in 1994. In 1993, both banks and other private agentsin Germany had engaged in a considerable build-up of short-term externalassets--the counterpart to the enormous inflow into the German securitiesmarket, and, in the case of the nonbank sector, a reflection of theintroduction of the withholding tax on interest income. By contrast, in1994 enterprises and individuals built up more normal amounts of externalassets, and banks drew down both assets and credit lines in order to financeoutflows on the current account and the long-term capital account.

Data for the first five months of 1995 suggest that short-term capitalinflows again gained momentum, while long-term inflows remained positive, asthey had been toward the end of 1994. At DM 26 billion, total capitalinflows in January-May were robust--going some way toward explaining theappreciation of the deutsche mark--but not massive, suggesting that theexchange rate also responded to a widespread reappraisal of the value ofexisting holdings.

With capital inflows more than financing the current account deficit,the net external assets of the Bundesbank rose (on a transactions basis) byabout DM 12 billion during 1994. I/ Unlike in 1992-93, when ERM criseshad been reflected in major fluctuations in the level of reserves (of overDM 80 billion in September 1992, and over DM 40 billion in August 1993), thepattern of reserves during the course of 1994 was relatively smooth. In thesix months through June 1995, when the exchange rate appreciated, reservesrose (again on a transactions basis) by DM 14.5 billion--an amount greaterthan in the whole of 1994, but still far smaller than at times in 1992-93.

I/ Negative valuation adjustments following the deutsche mark'sappreciation, particularly against the dollar, reduced the recorded rise inreserves to about DM 9 billion.


- 36 -

V. Structural Issues

1. Labor market

The Government took a large number of initiatives in the area of labormarkets last year. I/ Most importantly, replacement ratios for unemploy-ment benefits and unemployment assistance were reduced in January 1994; 2/a new program of employment subsidies was introduced for unemployed personsfinding work in selected sectors; restrictions on working time, includingthe prohibition of work on Sundays and holidays, were loosened; and privatejob intermediation was permitted.

In addition, the Government had proposed as part of the 1995 budgetthat the currently indefinite duration of unemployment assistance becurtailed to two years (for a total duration of benefits of three years).However, this proposal failed in Parliament. In the hope of neverthelesssecuring the budgetary savings and some of the structural improvements thatwould have ensued from its original proposal, the Government has nowproposed a set of other restrictions on unemployment assistance. Amongother things, it has proposed abolishing so-called originareArbeitslosenhilfe- -unemployment assistance that is payable for one year tothose who do not qualify for unemployment benefit (e.g., civil servants andsoldiers, who do not contribute to the unemployment insurance scheme, andothers who have contributed for only a short period) . The Government alsoproposes to begin enforcing the link that already exists in law betweenunemployment assistance and potential earnings, whereby unemploymentassistance should be calculated as a fraction of current potential earnings,rather than of earnings in the last occupation. The precise modalitieswhereby this rule would be implemented remain to be determined.

Several new, or renewed, active labor market policies were introducedin 1995. First, an earlier program of employment subsidies for the long-term unemployed, which was due to expire in 1994, was modified and extendedto 1999. Under the new program, persons finding employment who have beenunemployed for more than a year are entitled to a subsidy amounting to60 percent of the wage (not including employers' social securitycontributions) for the first six months and 40 percent of the wage for thenext six months. These percentages are 80 percent and 60 percent,respectively, in the case of workers who have been unemployed for over threeyears. In contrast to the previous program, where firms had to grantpermanent contracts from the start, firms can now give test contracts of

i/ See Germany - Economic Developments and Selected Background Issues.SM/94/213 (August 1994), pp. 26-28 and pp. 43-49 for a complete discussion.

2/ Unemployment benefit (Arbeitslosengeld) is payable for the first yearof unemployment, now at 60-67 percent of previous wages (depending on familystatus). Unemployment assistance fArbeitslosenhilfe) is, subject to means-testing, payable indefinitely thereafter, now at 53-57 percent of previouswages. Unemployment assistance is also currently payable in the first yearof unemployment to people who are not entitled to unemployment benefit.


- 37 -

three months, and there are signs that this innovation has significantlyincreased the program's attractiveness to. employers. DM 3 billion has beenallocated to this program for the period 1995-99, and 180,000 people areexpected to benefit from it.

Second, training programs are being instituted, with the support of theEU Social Fund, directed at disadvantaged workers and those with learningdifficulties, and focusing on basic skills such as punctuality and language.DM 3 1/2 billion has been allocated to this program for the period through1999.

Third, the least costly but most innovative program will support theestablishment of temporary employment agencies that would "lend" difficult-to-place unemployed workers to firms willing to "borrow" them undertemporary contracts, and would thus reduce the risk employers perceive theyexpose themselves to by hiring such workers. The temporary employmentagencies will receive subsidies in the form of loans (to be repaid when theagency begins to make a profit) to help with set-up costs.

Finally, in July 1995, the Government approved a set of proposals, tobe presented to Parliament in the fall, aimed at facilitating the entry ofsocial assistance (Sozialhilfe) recipients into the labor market, andcurtailing the costs of the social assistance system. I/ The proposalwould set limits on the generosity of social assistance by limiting annualincreases in social assistance benefits over the next three years to thenational average increase in net income, and by capping social assistance,from 1999, at a level 15 percent below average net income for a five-personhousehold in the lowest wage-earning group. In order to strengthenincentives to work, social assistance recipients would become eligible forbenefits (reduced over time) during their first six months in employment,and would suffer a 25 percent reduction in the basic allowance for socialassistance (equivalent to a 10-15 percent reduction in total benefits) ifthey refuse a job deemed acceptable by the local labor office. Finally,provision would be made for firms to receive employment subsidies, for aperiod of up to two years, when they hire a difficult-to-place recipient whohas been on social assistance for six months or more.

2. Pere gulation

In addition to measures in the area of labor markets, the Governmenthas taken a number of other initiatives to deregulate the economy, manyunder the heading of the 1993 Report on Securing Germany's Economic Future(the Standort report). 2/ Measures taken in this area over the past year

I/ See Chapter III of the accompanying paper on Selected BackgroundIssues for a detailed examination of incentives to work in the socialassistance system, and of options for reform.2/ See Germany - Economic Developments and Selected Background Issues.

SM/94/213 (August 1994), pp. 25-26, for a summary of the measures proposedunder the Standort program.


- 38 -

include a relaxation of the rules regulating professions (in particular aloosening of the prohibition against advertising, and a new partnership lawthat will make it easier to build large firms), and a revision of thegenetic engineering law that eased safety rules and made the approvalsprocess faster and simpler. Proposals to repeal the 1933 law that virtuallybans discounts in retail trade failed to pass. Proposals to reexamine therestrictive shop opening hours law have also met with considerable politicalopposition, but the Government has commissioned a study in this area.

Efforts are underway to simplify the planning and approval process forinvestments generally. A recent study of large European industrialcompanies, commissioned by the Ministry of Economy, found that among sixEuropean countries the German planning authorities took the longest (anaverage of 12 months, and up to three years) to approve a building licensefor a manufacturing plant. In addition, more extensive technical detailswere required to be provided in Germany than elsewhere.

Proposals to lighten the planning and approval burden were made in late1994 by a panel of experts, the Schlichter Commission, and have beenreferred to a government working group. A key recommendation of theSchlichter Commission is that investors be offered a "palette" of options,ranging from lengthy ones that would offer complete certainty that a projectcan go ahead exactly as planned, to quicker ones that would allow theinvestor to start building subject to minor modifications that may be calledfor later in the approval process.

Deregulation at the EU level was one of the objectives of the Germanpresidency of the EU in the second half of 1994. In September 1994, atGermany's initiative, the European Commission charged a group of expertswith the task of reviewing EU laws with a view to identifying regulationthat was not cost-effective.

In the related area of competition policy, the Government is working ona new energy law and a new cartel law in line with EU legislation. The newenergy law would outlaw restrictions on .competition such as demarcationagreements between producers, and would improve the possibilities forpotential competitors to gain access to supply infrastructure. The newcartel law, in line with EU standards, would no longer feature the exemptioncurrently provided for the energy sector, nor those for the transport,banking, and insurance sectors (although the practical effect of removingthese latter exemptions is expected to be small). In addition, under thenew law, firms would be able to complain directly to the courts aboutviolations of the cartel law; fines would be higher; and there would nolonger be a provision empowering the Minister to grant exceptions.


- 39 -

3. Privatization

1994 saw the end of the second phase of privatization (1982-1994) bythe Federal Government. I/ In this phase, the number of firms under (fullor partial) federal government ownership was reduced from 958 to under 400,and privatization revenues amounted to DM 12.5 billion. The main focus ofthis phase lay on the industrial sector, where the Government sold all butone (the coal mining company Saarbergwerke AG) of its stakes, and on thebanking sector, where a number of medium-sized banks were turned over to theprivate sector.

A third phase of privatization is planned to begin in 1996 and will--compared with the second phase--include fewer, but very large enterprises.In particular, it has been decided to sell part of Telekom AG, the remainingshares in Lufthansa AG, shares in some smaller banks, part of the postalservices Post AG, and in principle Postbank AG (although in this last caseno target date has yet been set). In addition to these large-scaleprivatizations, the Government plans to sell its shares in a number ofairport companies, the federal printing office, a publishing company, theNeckar AG (whose task is to improve the river Neckar as a waterway) , and thecompany that owns motorway rest stations. No decision has yet been takenwith regard to the railways Deutsche Bahn AG, or privatization of somemotorways. With a view to improving the efficiency of service provisionunder public ownership and/or to easing future privatization, Deutsche Bahnwas created as a joint stock company in 1994 and underwent a major financialrestructuring, and Telekom, Post, and Postbank were turned into joint stockcompanies in 1995. £/

Among the large-scale privatizations, the selling of the remainingshare of Lufthansa owned by the Government (about half) will be the moststraightforward one, using standard practices via commercial banks andGerman stock exchanges. In contrast, the selling of, as is currentlyplanned, half of Telekom will be much more complex. Because of the sheersize of the company a multiple privatization strategy is planned: someparts will be sold via German commercial banks at German stock markets,others will be sold to international corporate investors or an internationalconsortium. It is also planned to offer shares at the New York StockExchange. No official estimates of expected privatization revenues areavailable, but on the basis of some (widely varying) estimates of thepossible market value of the firm these could be in the range DM 15 billionto DM 25 billion. These proceeds will be used to top up the very low equitybase of Telekom.

In contrast to earlier privatizations, in particular in the first phasewhere low income earners received special incentives to buy shares, no such

I/ The first phase (1957-65) involved the privatization of Volkswagen AG,Veba AG, and Preussag AG.2/ See Germany - Economic Developments and Selected Background Issues.

SM/94/213 (August 1994), pp. 31-34.


- 40 -

measures are planned for future privatizations. The Government plansinstead to rely on an attractive offer price and competition between issuingbanks to secure a wide distribution of shares across the economy.

There is an even greater potential for privatization on the level ofthe Laender and local authorities. Many of the Laender own or have sharesin banks, insurance companies, utilities, radio stations, and housing, aswell as in some industrial companies. An attempt to set up a joint federal-Laender committee aimed at providing support for privatization projects wasnot successful, and privatization at this level is therefore left to thediscretion of the individual authorities involved.

4. Transfers to eastern Germanv

Five years after unification, the east German economy remains highlydependent on transfers from western Germany. Net transfers rose by7 3/4 percent to DM 139 billion in 1994, and in 1995 they are expected torise to DM 155 billion, slightly faster than eastern Germany's nominal GDP,implying at least a pause in the decline of the "support ratio" of nettransfers to east German GDP (Table V-l).

Table V-l. Transfers to Eastern Germany

(In DM billion)

1991 1992 1993 1994 1995

Gross transfersFederal GovernmentWestern LaenderGerman Unity FundEuropean UnionFed. Labor OfficePension InsuranceTotal

ReceiptsTaxes and fees

Net transfers

Net transfers asa percentage of:WestEast

GermanGerman

GDPGDP

451

.0

.44.43.

18

4.42.

53

4.40.

75

5.040.6

Source: Deutsche Bundesbank, Monthly Report. July 1995.

75531424zz.139

33

106

88524525

152

37

115

1141015515

168

39

129

128145614

181

42

139

15114

714

200

45

155

5 9 14 14


- 41 -

For western Germany, the "support burden," expressed as net transfersin relation to GDP, has actually been rising, to 4 3/4 percent in 1994, andis expected to reach 5 percent in 1995 (Table V-1). The main reason behindthis increase is that the bulk of the transfers is spent for social andlabor market purposes and for pensions, and is therefore linked to thedevelopment in wages in eastern Germany. Since these have risen at double-digit rates (from 30 percent of western levels in 1990 to some 80 percent in1995), wage and income replacement payments have likewise increasedsharply- -far ahead of GDP growth in western Germany.

With about 60 percent of all transfers spent on consumption and socialpurposes , the rest is support for public and private investment in easternGermany . However, the amount of investment support that shows up in theform of transfers --mainly direct subsidies and tax reliefs- -is only afraction of the total support for investment. In addition to investmenttransfers there exists a voluminous program of publicly subsidized creditfor financing investment. In total, cumulative public support forinvestment in eastern Germany has amounted to DM 170 billion (on a cashbasis) from 1990 through 1994, equivalent to about one quarter of totalinvestment in eastern Germany over that period. I/ Of this amount,special loans from public banks and special funds comprised DM 117.5 bil-lion, tax reliefs DM 26.6 billion, and direct grants DM 26.3 billion.Industrial investment has been subsidized at rates of up to 35 percent, andeven 50 percent in exceptional cases; public investment, in particular bylocal communities in eastern Germany, has been supported at rates of up to75 percent by transfers from western Germany.

The main elements of support to eastern Germany will remain unchangeduntil the end of 1996. Many programs were originally due to expire at thattime, but the 1996 tax reform proposals include provision for theirextension, in modified form, to the end of 1998. Under these proposals, thegenerosity of two of the main means of support- -the investment subsidy andthe special depreciation allowance --will be reduced after 1996, and thesetwo instruments will also be targeted more strongly to relevant sectors inorder to avoid free -rider effects. Compared with an unchanged prolongationthrough 1998, these changes are expected to reduce the fiscal burden by acumulative DM 16-18 billion in 1997-1998.

Under the new proposals , manufacturing will become one of two favoredsectors, in view of its still underdeveloped nature in eastern Germany.Thus in 1997-98 the investment subsidy of 5 percent will apply to the manu-facturing sector only. In addition, the special depreciation allowance --which allows a write-off of 50 percent in addition to linear depreciation inthe first five years after the investment- -will be prolonged until end- 1998,but reduced to 20 percent for all sectors except manufacturing, where itwill be 40 percent.

I/ On a commitments basis, support for east German investment amounted toDM 206 billion over 1990-94.


The second favored sector after the shift in policy will be small andmedium-sized enterprises. These firms in general have very low equity,which has resulted in two disadvantages: high risk of bankruptcy in adversebusiness conditions, and difficulties in access to external financingbecause of lack of collateral (even as these firms are likely to beparticularly dependent on outside financing). Special treatment for smalland medium*sized firms will consist of special investment support, includingan.enhanced investment subsidy of 10 percent until end-1998 for smallmanufacturing firms; special credit programs requiring less collateral;special treatment with regard to value added tax (payment only at the timeof payment by the customer, rather than at accrual, up to an annual turnoverof DM 1 million; previously the threshold was DM 0.25 million); and ofspecial incentives for providers of equity.

Table V-2. The Main Means of Support for Investment in Eastern Germany

(As of July 1995)

Instrument Support Policy change Volume 1990-1994rates for 1997-98until 1996

Investment subsidy i/ 52 all 52 manuf.sector DM 15.0 billion(Investitionszulage) 102 small firms

manuf. sector

Investment grant £/ 202 Reduction in DM 26.3 billion(Itivestitiopszusclmss) (average) volume 3/

Accelerated depreciation 502 on top 402 manuf. sector DM 11.6 billion 4/(Sonderabschreibungen) linear depr.. 202 other sectors

Special credit programs Multiple £/ Some expiring DM 117.5 billion

Source: Deutsche Bundesbank. Monthly Report- July 1995.I/ Subsidy applies to equipment investment only and is tax free.2J Cumulation of grant--mainly with investment subsidy—up to 35 percent

total support is allowed in some cases.JJ/ The investment grant is decided upon on an annual basis in the budgetary

planning process. After 1996 a reduction is planned, but no decision has yet beentaken as to the magnitude of the reduction.4/ Tax relief from accelerated depreciation (DM 9.2 billion) and other tax

measures, excluding the investment subsidy.£/ The loan programs entail multiple subsidization aspects, in particular:

below-market interest rates, special grace periods, and lower collateralrequirements.

- 42 -


- 43 -

VI. Trade Policy and Overseas Development Assistance

1- Trade policy

Germany had warmly welcomed the completion of the Uruguay Round.Considerable benefits are expected for the German economy from theagreements to bind and cut tariffs, the reductions in nontariff tradebarriers, the new rules on government procurement, the agreement on trade inservices, the agreement on intellectual property rights, and the overallstrengthening of the multilateral trading system, with new possibilities forenforcement.

Following the completion of the Round, Germany considers it crucialthat efforts toward further multilateral liberalization continue,particularly in the areas of financial services, maritime transport,telecommunications, the movement of persons, civil aircraft, and steel.Germany also supports a continuation of international discussions about theinterface between trade and, respectively, the environment, domesticcompetition, and social standards. All of these issues are under discussionunder the aegis of the OECD, and environmental issues also within the WTO.In Germany's view, the complex issue of social standards needs furtherstudy, and in the first instance the ILO needs to intensify its efforts toenforce the relevant conventions.

Closer to home, the EU has, over the last year and with Germany'ssupport, made some further moves toward liberalizing trade in sensitiveproducts with Central and Eastern European Countries (CEECs) and countriesof the Former Soviet Union (FSU). Imports of steel from FSU countries otherthan Russia, Ukraine, and Kazakhstan were liberalized in 1995, and theamounts permitted to be imported under the voluntary restraint agreementswith Russia, Ukraine, and Kazakhstan raised significantly. Tariff quotas onimports of steel from the Czech and Slovak republics remain in place and aredue to expire at end-1995. In addition, agreements were reached to allowtariff-free outward processing of textiles in a number of CEECs (althoughquotas remain in place). There were also some further concessions on tradein meat and dairy products.

2. ODA and aid to transition economies

Official development assistance to DAC countries (ODA) totaledDM 10.9 billion in 1994 (Table VI-1), some 6 percent below the level of1993. The ratio of ODA to GDP has gradually decreased in recent years, from0.40 percent in 1991 to 0.33 percent in 1994. While the ODA ratio hadstarted to fall in the mid-1980's, its more recent decline can be attributedin part to budgetary pressures related to unification and to the provisionof substantial assistance to economies in transition, especially Russia.


Table VI-1. Germany: Aid and Other Resource Flows to Developing Countries and Multilateral Agencies \/

(Het disbursements in DM millions)

Official Development AssistanceBilateralGrantsTechnical Cooperation £/Other grants £/

Loans/other capitalaid/debt relief

MultilateralGrantsShares/subscriptionsLoans

Other Official FlowsBilateralExport creditsRescheduling (refinancing Other credits

MultilateralPrivate Flows at Market TermsBilateralInvestments and othercapital transactions

Export creditsMultilateral

Net Grants by PrivateVoluntary Organisations jj

Total Het DisbursementsOOA at a percentage of GDP

1980

6,476.14,219.04,098.31,798.92,299.4

120.72,257.11,164.01,079.7

13.41,144.11,149.5344.0760.445.1-5.4

10,923.98,461.9

5, 939; 2,522.32,462.0

763.919,308,0

0.44

1985

8,656.75,826.14,197.72,576.31,621.4

1,628.42,830.61,608.01,235.3-12.7

1,985.02,017.1798.5

1,179.339.3-32.1

4,314.03,194.2

2,504.0690.2

1,119.8

1,246.916,202.6

0.47

1990

10,213.37,238.37,312.72,917.34,395.4

-74.42,975.01,796.11,196.-18.

3,410.3,412.137.

3,243.30.-2.

7,073.5,939.2

3,396.72,542.51,133.8

1,222.721,918.9

0.41

1991

11,446.67,601.36,518.32,879.73,638.6

1,083.03,845,32,703.21,160.8-18.7

3,103.63,100.6628.6

2,327.8144.23.0

5,939.58,163.3

5,348.82,814.5-2,223.8

1,266.921,756.6

0.40

1992

11,825.88,174.96,938.73,103.23,835.5

1,236.33,650.92,460.21,210.0-19.3722.3717.4312.8145.8258.9

*•&28.7

3,262.6

153.23,109.4-3,234.0

1,335.013,911.7

0.38

1993

11,604.67,472.95,978.53,211.72,766.8

1,494.44,031.72,487.1,564.-20.

3.033.3,001.437.

1,053.1,510.

31.9,449.28,053.7

4,698.33.355.41,395.4

1,324.525,411.9

0.37

1994

10,948.26,610.95,843.53,543.82,299.7

767.44,337.3

0.33

Source: OECD Development Assistance Committee; Federal Ministry of Finance.i/ Prior to October 1990, data refer to western Germany only. GDP used for 1990 is a weighted average of western and united German GDP.2/ From 1989 onward, DAC figures, excluding grants to churches and private agencies.3/ Primarily grants for financial cooperation, food aid, and humanitarian aid.A/ Grants given by non-governmental organizations (e.g. churches, societies) from their own funds or donations.


- 45 -

Germany continues to provide generous assistance to economies intransition. On a cash basis, these payments were of the same order ofmagnitude as the ODA budget in 1994 (Table VI-2). From 1990 to 1994, thoverall accrued value of financial support committed to transition economies(including transferable ruble balances built up in 1990, and their accruedinterest cost, as veil as die German share of EU loans and loan guarantees)has totaled DM 145 billion, of which DM 45 billion was furnished tocountries in central and eastern Europe. Of the total amount, DM 31 billionwas provided in the form of grants, and DM 79 billion in the form of loans,guarantees, and debt rescheduling (the remainder consisting mainly of thecost of the transferable ruble balances).

Table VI-2. Support for Economies in Transition I/

(Billions of deutsche ii|jirlc)

1992 1993 1994Actual Actual Budget

Central and eastern Europe 0.92 0.83 0.54

Russia andother transition economies

Not attributable

Total(percent of GDP)

5.57

0.18

6.67(0.22)

10.78

0.39

12.00(0.38)

8.21

0.65

9.40(0.28)

Source: Federal Ministry of Finance.I/ Cash basis.


-46 -

STATISTICAL APPENDIX

Table Al. Germany: Key Data on Output, Income and Demand in 1994

Gross national product

Gross domestic product

Domestic demand

Private consumption

Public consumption

Gross investment

Labor income I/

Household disposable income

Population 2/

Employment 3/

GDP per employed person

Average monthly labor income l/r .4 /

Investment • per employed person

Unit labor costs 5/

Sources: Statistisches Bundesamt,

Total

3,294.3

3,321.1

3,302.1

1,906.4

639.9

755.8

1,8*8.6

2,141.9

81.4

34,886

95,046

3,881;

21,630

102.9

West

(In billions of *deutsche

2,977-.T

2,736.8

1,644.5

520.f2

572.1

1,55:5.6

1,850.3

(In millions)

65.8

(In thousands)

28,619

(In deutsche mark)

104,046

4,107

19,. 9.90

(West Germany * 100)

100.0

East-:in.percent

East of. west

mark)

349^6 11.8

343J4' i 11.5

565.2 20.7

261.9 15.9

119.7 23.0

183.7 32.1

263.0 16.9

291.6 15.8

1B":6 23.7

6,267

54,310 52.2

2,953 Si.

29, .Q53 145.3

132.8 132.8

Volkswirtschaftliche Gesamtrechnuncren; Bundesbank, Monthly Report;

and staff estimates.

I/ According to place of residence.

2/ Estimate.

3/ According to place of work.

4_/ Excludes social security contributions paid by employers.

!>/ Evaluated at 1994 prices.

2.945.3

21.9


- 47 -

Table A2. Germany: Aggregate Demand


Germany


Stockbuilding I/Total domestic demand

Export of goods andnonf actor services

Imports of goods andnonf actor services

Foreign balance I./Gross domestic product

Nest Germany



Export of goods andnonf actor services

Imports of goods andnonf actor services

Foreign balance I/Gross domestic product

East Gcrwioy



Exports of goods andnonfactor services

Imports of goods andnonfactor servicesForeign balance I/Gross domestic product

Sources: Statistisches Bundes

In billions cdeutsche marlat currentprices in 19!

1,906.4639.9742.9

483.3

259.6

12.9

3,302.1

731.5

712.5

19.0

3,321.1

1,644.5

520.2

564.1

358.4

205.6

8.0

2,736.8

984.8

743.9

240.9

2,977.7

261.9119.7

178.9

124.9

54.0

4.8

565.2

67.6

289.4

-221.8

343.4

amt Volkswirts<

KWS at 1991 or ices)

>f

t 1990 1991

»4

5.4

0.1

9.6

4.0

16.9

0.9

6.1

-1.3

12.0

-3.1

2.8

5.4 5.7

2.2 0.3

8.5 5.8

4.9 2.7

13.2 9.5

-0.1 0.2

5.2 4.9

10.4 11.5

9.4 12.5

0.8 0.4

5.7 5.0

2.

-0.

40.

12.

103.

7.3

15.7

32.3

117.4

-37.9

-18.7

1992

3.0

4.5

4.2

9.9

-2.4

-0.6

3.0

0.2

3.3

-0.8

2.2

2.2

4.0

0.3

4.3

-4.2

-0.8

1.3

5.4

4.4

0.6

1.8

9.6

6.9

27.843,4

9.0

2,3

15.0

10.3

21.3

-18.2

7.8

1993

0.5

-1.2

-4.5

2.8

-13.8

-0.2

-1.2

-6.2

-6.1

0.0

-1.1

0.2

-1.2

-8.3

-0.8

-17.6

-0.2

-2.2

-3.2

-5.3

0.4

-1.7

2.7

-1.2

14.1

18.5

7.0

0.7

5.4

5.5

5.0

-4.2

5.8

1994

1.3

1.2

4.3

7.9

-1.1

0.7

2.6

7.2

6.1

0.2

2.9

0.8

1.1

1.2

4.1

-3.10.7

1.7

7.7

7.1

0.7

2.3

4.5

1.8

16.5

21.6

7.4

0.2

7.7

22.6

9.4

-5.0

9.2

I/ Change in percent of last year's GDP.



Table A3. Germany: Household Income, Consumption, and Saving

(Percentage changes')

1990 1991 1992 1993 1994

GermanyGross compensation of employees

Per employee .Net compensation ofemployees ~ .,.

Disposable income I/Final consumption expenditureReal disposable income JL/ 2/,.Real final consumptionexpenditure

Saving ratio \J .

Western GermanyGross compensation of .employeesPer employee

Net compensation ofemployees

Disposable income \JFinal consumption expenditureReal disposable income i/ 2/Real final consumptionexpenditure

Saving ratio I/

Eastern GermanyGross compensation of employeesPer employee

Net compensation ofemployees

Disposable income I/Final consumption expenditureReal disposable income I/ 2/Real final consumptionexpenditure

Saving ratio \J

Sources: Statistisches Bundesamt

7.74.7

10.79.98.27 .

""" 5 . 13.8

8.211.2

5.310.610.45.6

5.413.0

8.06.0

4.89.09.75.1

5.713.3

9.931.0

5.123.116.18.5

2.47.5

7.810.1

5.57.87.83.1

- 3.013.0

6.25.7

4.85.56.01.7

2.212.9

'19.535.1

12.529.221.716.4

9.612 . 8

. Volkswirtschaftliche

1.94.1

1.43.54.4-0.4

0.512.3

1.02.9

1.12.73.4-0.5

0.212.3

7.511.6

6.310.711.32.2

2.712.4

1.62.5

0.22.54.0-0.2

1.311.0

0.61.8

-0.92.23.5-0.5

0.811.1

8.07 .6

6.15.07.62.0

4.510.2

Ges jntrechnungenI/ Disposable income and the saving ratio in the official national accountsin 1994 are understated because of underrecording of net investment incomeinflows from abroad.2/ Deflated by private consumption deflator.

- 48 -



Table A4. Germany:. Labor Market

Source: Deutsche Bundesbank; and staff estimates.

I/ Unless otherwise indicated, data are not seasonally adjusted.2/ According to place of work.3y Percentage change from a year ago.4/ Labor force calculated from employment and unemployment data.5J Seasonally adjusted.

Germany

Employment 2/Percent change

Unemp loymentIn percent of labor force 4/

Vacancies

Western Germany


UnemploymentIn percent of labor force 4/

Vacancies

Eastern Germany


Of which:Short- time workersPersons employed under empl-oyment promotion schemes

Persons undergoing vocationaltraining

UnemploymentIn percent of labor force 4/

Vacancies

1992

35,838-1.8

2,9797.8356

29,4520.9

1,8085.8324

6,386-12.8

370

388

4891,17014.733

1993

35,190-1.83,4198.8279

28,994-1.62,2707.3243

6,196-3.0

181

260

3831,14914.836

1994

34,886-0.93,6989.6285

28,619-1.32,5568.3234

6,2671.1

97

280

2591,14214.651

1995

Ql I/

34,659-0.1 3/3,7849.9325

28,513 5/-0.7 3/

2,531 5/8.2 5_/271 5_/

6,3102.6 3/

83

318

2641,09214.653

1995Q2 I/

3,5089.1356

2,545 5/8.2 5/278 5_/

82

325

2681,01313.556

- 49 -

fin thousands, unless otherwise indicated)


- 50 -

Table A5. Germany: Wages and Prices

(Percentage changes)


GDP deflatorPrivate consumption deflatorFixed investment deflatorExport deflator (goods)Import deflator (goods)

Producer price index 3/Producer goodsCapital goodsConsumer goods

Consumer price indexWestern GermanyEastern Germany

Unit labor costsWestern GermanyOverall economy 4/Producing sector 5J

Eastern GermanyOverall economy 4/Producing sector j>/

Negotiated hourly wagesWestern GermanyOverall economyProducing sector 5/

Eastern GermanyOverall economyProducing sector 5y

1990

2.21.74.10.1-1.6

1.7-0.32.62.4

2.7

2.02.1

5.56.2

1991

4.94.75.10.61.9

2.40.62.92.8

3.5

3.54.2

35.1

7.06.9

41.741.4

1992

5.54.64.50.3-2.8

1.4-1.22.71.6

4.011.1

4.95.7

10.9-12.5

6.15.9

28.830.2

Sources: Statistisches Bundesamt. Volkswirtschaftl

1993

3.93.93.00.5-1.6

-0.0-2.61.30.4

4.18.9

3.53.6

2.5-12.2

4.65.9

17.318.8

iche

1994

2.22.71.5-0.0-0.2

0.62.30.20.3

3.03.3

-1.1-6.1

-0.1-11.8

2.01.9

9.314.6

1995 QI I/

1.7

1.8 2/1.7 2/

1.75.10.92.7

2.31.9

3.85.3

7.913.1

Gesamtrechnunzen :Deutsche Bundesbank, Monthly Report.I/ Percentage change from a year ago.2/ For 1995, export and import price indices rather than unit values.3J Western Germany.4/ Evaluated in 1994 prices.5/ Excluding construction and energy.



Table A6. Germany: General Government Finances I/

Total expenditure

Expenditure on goodsand servicesPublic consumptionPublic investment

Transfer paymentsSocial benefitsSubsidiesInterestOther

Total revenue

Tax revenueIndirect taxesDirect taxes

Social securitycontributions

Other revenue

Financial balance(in percent of GDP)Of which:Territorial authoritiesSocial security system

1991

1,394.5

628.0554.274.4

765.4475.268.477.2145.1

1,300.6

689.0358.2330.8

513.3

98.3

-93.8(-3.3)

-117.323.4

1992

1,526.7

697.0612.886.2

827.7531.363.1101.2132.1

1,436.4

754.5388.9365.6

561.6

120.3

-90.3(-2.9)

-89.0-1.4

1993

1,593.4

769.6623.086.6

883.8580.163.3104.6135.8

1,488.2

771.4408.1363.3

596.3

120.5

-105.1(-3.3)

-114.99.8

1994

1,663.5

728.6639.988.7

934.9618.668.4114.1133.8

1,581.1

810.5442.8367.7

639.3

131.3

-82.4(-2.5)

-91.18.7

1995 2/

1,757.2

751.7661.290.5

1,005.5651.776.1140.4137.3

1,674.7

875.7458.4417.3

675.4

123.6

-82.4(-2.4)

-84.11.6

Sources: Federal Statistical Office staff; and Federal Ministry of Finance.

i/ Including the German Unity Fund.2/ Interim technical projections provided by the authorities.

- 51 -

(In billions of deutsche mark; national accounts basis)


- 52 - STATISTICAL APPENDIX

Table A7. Germany: Territorial Authorities' Finances

1991 1992

Total expenditure 972.3 1,065.2

Current expenditure 805.0 875.4Of which:Wages and salaries 291.9 319.3Goods 146 .2 152 . Interest 77 . 100 . 6Current transfers 294.0 304.8

Capital expenditure 167.3 189.9Of which:Investment 88 . 101 .Capital transfers 42.7 52.1Loans 31.6 33.2

Total revenue 849.6 948.3

Current revenue 823.3 920.9Taxes 661.7 732.4Other 161 .6 188 .

Capital revenue 26.3 27.4

Financial balance -122.7 -116.9(In percent of GDP) (-4.3) (-3.8)Of which:Federal Government -53.2 -39.3States (west) 2/ -16.5 -16.1States (east) 3/ -12.4 -15.0Municipalities (west) -6.0 -10.1Municipalities (east) 1.9 -7.7German Unity Fund -30.6 -22.4Other special funds 4/ -5.9 -6.3

Sources: Federal Ministry of Finance.

1. Interim technical projections provided2J Including Berlin (west) .I/ Including Berlin (east).

1993

1,119.3

934.4

336.0158.3102.0339.1

184.9

98.850.534.2

981.5

946.5749.5197.0

34.9

-137.7(-4.4)

-66.9-22.4-19.8-9.2-4.3-13.5-1.7

1994

1,163.5

982.5

355.1159.5113.9351.3

180.9

94.245.438.6

1,047.4

998.0785.8212.2

49.4

-116.0(-3.5)

-50.6-24.0-19.7-5.5-5.7-3.0-7.4

1995 I/

1,2261*

1.035H

366H165140363

191

9549H43

1,124

1.067H850217H

56H

-W2h(-2.9)

-49-22-I2h-5-42

-12

by the authorities.

4/ European Recovery Program (ERP) , Burden Equalization Fund (LAF) , EuropeanCommunity accounts, Credit Repayment Fund (KAF), Bundeseisenbahnvermogen (BEV)(1994), Entschadigungsfonds (from 1994), Erb las tent ilgungsfonds (ELF, from 1995)

(Administrative basis; in billions of deutsche mark)

1


Table A8. Germany: Federal Government Finances

(Administrative bails: in billions of deutsche mark)

Total expenditure

Current expenditureWages and salariesGoodsInterestCurrent transfers to other levelsof government

Other current transfersOther current expenditure

Capital expenditureInvestmentCapital transfers and loans toother levels of government

Other capital transfersand loans

Total revenue

Current revenueTaxesOther

Capital revenue

inancial balance(In percent of GDP)

Source: Federal Ministry of Finance.

I/ As approved by the Cabinet, July2/ Including unspecified expenditure

1991Actual

401.8

339.148.743.139.6

40.9166.8

--

62.611.0

24.8

26.8

348.6

342.8317.925.0

5.7

-53.2(-1.9)

1995.cuts.

1992Actual

427.2

359.951.543.143.8

56.4165.1

--

67.213.8

21.7

31.8

387.8

383.3352.930.4

4.5

-39.3(-1.3)

3/ Includes an approximate DM 20 billion reduction due to

Draft

435.7

371.154.544.947.2

60.5164.0

~~

65.513.9

•19.0

32.6

396.8

393.5367.526.0

3.2

-38.9(-1.2)

1993AmendedDraft

458.1 y

390.752.644.445.5

64.9183.4

--

69.313.4

20.5

35.5

389.7

383.9356.127.7

5.8

-68.5(-2.2)

reclassification of child

Actual

457.5

391.252.741.145.8

61.6190.0

—66.312.5

20.3

33.5

390.5

386.2356.030.1

4.3

-66.9(-2.1)

allowances

Draft

478.4

412.252.541.552.9

79.5185.8-0.1

66.313.2

18.8

34.3

410.4

406.6377.928.7

3.8

-68.1(-2.1)

from an

1994AmendedDraft

480.0

414.352.341.252.8

83.4189.9-5.3

65.613.2

18.4

34.0

410.3

404.5375.229.4

5.8

-69.7(-2.2)

expenditure

1995Actual

471.2

408.552.739.153.1

78.9184.8

-•

62.712.0

18.7

32.1

420.6

413.7379.034.8

6.9

-50.6(-1.5)

to a tax

Draft

484.1

408.554.239.555.3

64.8194.7-0.1

75.713.0

26.3

36.4

425.0

417.2381.036.2

7.8

-59.1(-1.7)

deduction.

AmendedDraft

477.7

404.053.839.654.2

64.3192.1-0.1

73.812.9

26.3

34.6

428.2

408.9382.726.2

19.3

-49.5(-1.4)

1996Draft I/

452.0 3/

383.654.239.955.6

68.9164.9 3/-0.2

68.712.3

25.9

30.5

392.0 I/

384.6 3/361.3 3/23.2

7.4

-60.0(-1.6)


Table A9. Germany: Laender Government Finances

(Administrative basis: in billions of deutsche mark)

1991West

1992East West

Germany £/ Germany 3/ Germany g/

Total expenditure

Current expenditureWages and salariesGoodsInterestCurrent transfers toother levels ofgovernment

Other current transfers

Capital expenditureInvestmentCapital transfers

and loansOther capital transfersand loans

Total revenue


Capital revenue

Financial balance(In percent of GDP) 2/

Source: Federal Ministry of

320.1

271.5134.234.124.0

44.634.6

48.614.4

16.2

18.0

303.6

286.6216.270.4

17.0

-16.5(-0.6)

Finance.

ji/ Interim technical projections provided\l Including Berlin (west).£/ Including Berlin (east).

88.5

60.619.28.60.2

19.912.8

27.94.3

12.3

11.3

76.1

65.018.346.6

11.1

-12.4(-0.4)

by the

336.

287.142.35.25.

48.36.

49.14.

17.

18.

320.

304.234.69.

16.

-16.(-0.

8

2303

07

61

0

4

6

155

5

15)

EastGermany 3/

100.3

69.224.89.90.5

21.212.8

31.15.1

11.4

14.6

85.3

76.425.251.2

8.9

-15.0(-0.5)

1993West

Germany J/

352.8

303.6149.439.226.4

52.436.2

49.213.7

17.0

18.5

330.3

313.6241.672.0

16.7

-22.4(-0.7)

EastGermany £/

110.1

77.930.010.92.0

23.311.7

32.25.6

11.8

14.8

90.4

79.327.851.5

11.1

-19.8(-0.6)

1994West East

Germany 2/ Germany 3/

357.3

310.2152.540.626.9

54.136.1

47.112.8

15.9

18.4

333.2

314.3244.369.9

18.9

-24.0(-0.7)

114,1

83.731.511.73.1

24.612.9

30.36.1

9.9

14.3

94.3

83.434.149.3

10.9

-19.8(-0.6)

1995 (Pro.i.) I/West East

Germany 2/ Germany 3/

375

326%158%4228%

6236

48%13%

16%

18%

353

335266%68%

17%

-22(-%)

122

88%33124%

2613%

33%6%

11%

15%

109%

92%70%22%

17

-12%(-%)

authorities .1


Table A10. Germany: Municipalities' Finances

(Administrative basis: in billions of deutsche mark)

1991

Total expenditure

Current expenditureWages and salariesGoodsInterestCurrent transfers toother levels ofgovernment

Other current transfers

Capital expenditureInvestmentCapital transfersand loans

Other capital transfersand loans

Total revenue


Capital revenue

Financial balance(In percent of GDP)

WestGermany

228.9

175. A71.648.68.9

4.941.4

53.545.7

1.8

6.0

222.9

196.275.6120.6

26.7

-6.0(-0.2)

EastGermany

48.2

34.818.112.00.2

--4.4

13.412.7

0.3

0.5

50.1

38.12.235.9

12.0

1.9(0.1)

1992West

Germany

250.7

193.076.952.49.7

5.948.2

57.649.1

1.4

7.1

240.5

211.781.4130.3

28.9

-10.1(-0.3)

EastGermany

64.2

43.623.812.80.6

0.46.0

20.619.6

0.2

0.8

56.5

43.74.0

39.7

12.8

-7.7(-0.2)

1993West

Germany

260.9

204.979.854.310.2

6.554.1

56.147.7

1.5

6.9

251.6

221.982.0139.8

29.8

-9.2(-0.3)

EastGermany

67.

47.24.13.1.

0.8.

20.19.

0.

1.

63.

48.5.43.

14.

-4.(-0.

7

2130

43

63

2

0

5

725

7

31)

1994West

Germany

264.2

211.580.055.310.2

7.658.5

52.644.3

1.5

6.9

258.6

227.081.2145.9

31.5

-5.5(-0.2)

EastGermany

67.3

46.922.513.61.3

0.68.9

20.419.0

0.3

1.2

61.5

49.16.642.5

12.4

-5.7(-0.2)

1995 (Prol.i I/WestGermany

271

2208356%10%

762%

5142%

1%

7

266

23382151

33

-5(0)

EastGermany

70

48%22%142

%9%

21%19%

%

1

66

52844%

13%

-3%(0)


\f Interim technical projections provided by the authorities.


Table All. Germany: Tax Revenue of the Territorial Authorities I/

Total tax revenue

By type of taxPersonal income taxCorporate taxWealth taxTrade tax £/Value-added tax I/Petroleum taxTobacco taxMotor vehicle taxOther taxes

By level of governmentFederal GovernmentlAnder 4_/Municipalities jj/European Communities &/

1991

661.9

267.131.76.741.3179.747.319.611.057.5

317.8234.578.031.5

1992

731.7

300.131.26.844.8197.755.219.313.363.3

352.9259.285.434.2

1993

749.1

314.027.86.842.3216.356.319.514.152.1

356.0268.987.536.6

1994

786.2

323.519.66.644.1235.763.820.314.258.4

378.9278.588.040.7

1995Estimate,May 1995

845.8

341.525.57.745.0239.065.520.714.086.9

378.5336.889.840.8


I/ Tax revenue data in this table are calculated on a cash basis, and may differ from data on anadministrative basis.

2/ Tax based on capital stock of businesses and on return to capital.3/ Including turnover tax on imports.4/ Including municipal taxes in Berlin, Bremen, and Hamburg.5/ Excluding municipal taxes in Berlin, Bremen, and Hamburg.6/ Collection of import duties and the EC's share of value-added tax collections. Also includes other

revenue which is calculated based on GNP.

(Cash basis: in billions of DM)



Table A12. Germany: Social Security Funds I/

(In billions of DM)

Total Revenue(In percent of GDP)

Contributions

Other current transfersOf which:From territorial authorities

Other revenue

Total expenditure(In percent of GDP)

Consumption (net)

Social transfers

Other expenditure

Financial balance(In percent of GDP)

1991

573.9(20.1)

486.1

76.2

74.1

11.6

550.4(19.3)

187.9

353.2

9.3

23.4(0.8)

1992

627.7(20.4)

532.1

82.8

80.8

12.8

629.0(20.5)

216.3

398.1

14.5

-1.4(--)

1993

681.3(21.6)

565.5

103.1

101.1

12.7

671.5(21.3)

218.9

437.3

15.3

9.8(0.3)

1994

715.1(21.5)

604.9

98.4

96.3

11.8

706.4(21.3)

234.3

457.5

14.6

8.7(0.3)

1995 I/

749.1(21.4)

640.6

96.9

94.9

11.6

747.5(21.4)

246 . 8

482.5

18.2

1.6(--)


JL/ On a national accounts basis.2/ Interim technical projections provided by the authorities.



Table A13. Germany: Interest Rates

(In percent per annum, period averages)

198919901991199219931994

1992IIIIIIIV

1993IIIIIIIV

1994I

IIIIIIV

1995I


1995Jan.Feb.Mar.Apr.MayJuneJuly

Sources :Deutsche Bundesbank;nal FiStatistics.n

DiscountRate i/

6.06.08.08.25.84.5

8.08.08.28.2

7.57.26.25.8

5.24.54.54.5

4.0

5.85.25.25.04.54.54.54.54.54.54.54.5

4.5.454.04.04.04.04.0

Securites LombardRepur-chase

6.68.08.99.47.45.3

9.49.69.78.8

8.57.86.96.3

6.05.34.94.8

4.8

6.06.05.95.65.35.14 .94 .64.84.84.84.8

4.84.84.84.54.54.54.5

Rate I/

8.08.59.49.56.86.0

9.89.89.69.5

9.08.57.46.8

6.86.06.06.0

6.0

6.86.86.86.66.26.06.06.06.06.06.06.0

6.06.06.06.06.06.06.0

Money GovernmentMarketRate

789975

9998

8766

5555

5

555555455555

5554444

.1

.4

.2

.5

.2

.3

.6

.7

.7

.9

.3

.6

.8

.3

.8

.2

.0

.2

.1

.8

.9

.8

.5

.1

.0

.9

.0

.0

.2

.2

.3

.1

.0

.0

.6

.5

.5

.5

BondYield 2/

788866

8887

6665

5677

7

556666667777

777666•

.1

.9

.6

.0

.3

.7

.1

.2

.2

.3

.7

.6

.2

.6

.8

.5

.0

.4

.3

.5

.8

.2

.3

.4

.9

.7

.9

.3

.4

.3

.4

.5

.3

.1

.8

.5

.4

Lending RatesCurrentAccountLoans

9.911.612.513.612.811.5

13.413.413.913.7

13.513.112.712.1

11.911.511.311.2

11.3

11.911.911.811.811.511.311.311.211.211.211.211.2

11.311.211.211.111.011.011.0

3 -monthDiscount TimeLoans Deposits

6.98.49.4

10.59.16.9

10.310.310.910.5

10.19.58.78.0

7.66.96.66.6

6.6

7.87.77.47.26.86.76.66.66.66.66.66.6

6.66.66.66.26.26.16.1

6.17.68.28.56.74.8

8.68.78.88.1

7.67.16.45.8

5.44.94.54.6

4.6

5.55.35.35.14.84.64.54.54.54.54.64.8

4.64.54.64.34.24.14.2

12 -monthSavingsDeposits

3.13.53.63.63.43.0

3.63.63.63.6

3.53.43.33.1

3.03.03.03.0

3.0

3.13.03.03.03.03.03.03.03.03.03.03.0

3.03.03.03.03.02.92.9

I/ End-period data.2/ Average over all bonds with a remaining maturity of more than three years.



Table A14. Germany: Monetary Survey

(Percentage changes from a year earlier)

(In. billions of

deutsche mark

at end 1994)

Mar.

1993 1994 1995

June Sep. Dec. Mar. June Sep. Dec. Mar. June

Banking assets

Lending to domestic non-banks 4,149.0

Of which:

Enterprises and individuals 3,210.9

Public authorities 926.2

External assets, net I/ 287.5

Other assets, net i/ 2/ -161.4

10.4 9.1 10.2 9.8 9.9 9.8 9.1 8.1 7.3

8.2

19.6

0.2

5.1

6.8

19.0

2.9

5.2

7.2

23.1

0.3

5.9

9.0

13.7

4.4

4.2

9 .0

13.6

1.5

2.7

9.2

12.3

-2.1

0.3

9.3

8.6

-3.7

-0 .7

7.5

10.2

-6.6

-2.1

5.4

14.5

-4.9

-0.9

7.0

5.1

Banking liabilities

Money stock (M3) 1,937.0

Currency in circulation 225.9

Sight deposits 538.2

Time deposits 518.6

Savings deposits at 3-months'

notice . 654.3

Monetary capital 3/ 2,338.1

Memo items:

Narrow money (Ml)

Money stock (M2)

764.1

1,282.7

8.3 8.4 6.6 10.9 11.1 9.8 7.5 1.6 -0.9

14.

7.

9.

5.

6.

.6

,5

,7

.5

.7

13,

8.

9.

6.

6 ,

.0

.1

.1

.5

.8

11.

8.

2.

8.

7.

.2

.6

.1

.1

2

5.

9,

12,

12.

7,

.7

.7

.5

.5

.9

11

9

10

12

7

.9

.8

.4

.6

.1

10.

11.

4.

13.

6 ,

.1

,7

.5

.6

.9

9,

8,

-1,

14,

7,

.5

.7

.0

.6

.2

6

4

-12

11

8

.6

.6

.5

.4

.9

3.3

3.2

-17.5

11.0

10.5

9.6

9.6

9.6

9,3

9.4

5.9

8.5

10.3

10.4

10.4

11.2

8.1

8.9

4 .3

5.2

-2.8

3.3

-6.6

Sources: Bundesbank, Monthly Report.

I./ Change in percent of M3 one year earlier.

2/ Including counterpart of coins in circulation and excess of interbank liabilities.

3/ Time deposits for 4-years and over; savings deposits at agreed notice; bank savings bonds; bearer bonds

outstanding; capital and reserves.



Table A15. Germany: Exchange Rate Developments

DM/$ FF/DM Y/DM DM/£ EffectiveExchange Rates

Nominal Real I/

198619871988198919901991199219931994

1992IIIIIIIV

1993IIIIIIIV

1994IIIIIIIV

1995I


1995— Jan.Feb.Mar.Apr.MayJuneJuly

Sources: IMF* Internatic

2.171.801.761.881.621.661.561.651.62

1.621.611.461.55

1.631.621.681.68

1.721.661.561.54

1.48

1.741.741.691.701.661.631.571.571.551.521.541.57

1.531.501.411.381.411.401.39

3.193.343.393.393.373.403.393.433.42

3.403.373.393.40

3.393.373.473.47

3.403.423.423.43

3.49

3.403.403.413.423.423.423.433.433.423.423.433.44

3.463.483.543.513.543.513.48

77.5780.4373.0673.4289.5581.2981.2667.3463.02

79.4480.7685.3979.46

74.0268.0162.9964.33

62.4362.1563.4564.05

64.99

63.9461.2262.1360.9062.5662.9962.7963.8563.7164.7663.6963.70

65.1365.4364.4260.6460.3560.3662.79

3.192.943.123.082.872.932.752.482.48

2.872.922.792.44

2.412.482.522.51

2.562.502.422.45

2.34

2.602.572.522.522.492.482.432.412.422.442.452.45

2.412.362.252.222.242.232.22

91.997.296.695.9100.099.1102.1106.1106.4

100.199.9102.6105.7

106.6105.5105.8106.6

104.6105.5107.5107.8

110.9

104.5104.1105.3104.7105.5106.1107.2107.7107.5107.9107.8107.7

108.9110.1113.7113.8112.6112.4

90.096.196.194.6100.099.5102.4110.6110.4

98.799.2103.5108.1

111.3109.7109.4112.1

110.8108.1110.0112.5

116.4

110.8110.9110.6108.3107.7108.4109.6109.9110.5112.0112.8112.8

114.1115.6119.7119.9118.9118.9...

>nal Financial Statistics

I/ Based on relative normalized unit labor costs in manufacturing.



Table A16 . Germany: Trade Flows by Des


Exports

Industrial countriesOf which:EUOther Europeancountries

U.S.A.Japan

Countries intransition

Developing countriesOf which:NIEs I/OPEC countries

Other

Imports

Industrial countriesOf which:EUOther Europeancountries

U.S.A.Japan

Countries intransition

Developing countriesOf which:NIEs I/OPEC countries

Other

1991

665.8

538.7

420.4

51.441.716.5

48.4

77.6

16.321.3

1.1

643.9

513.5

382.9

4i:242.239.7

51.9

78.3

22.614.8

0.2

1992

671.2

540.0

424.9

49.242.714.7

48.2

82.0

17.322.8

1.0

637.5

510.1

380.3

42.342.438.0

52.5

74.7

21.214.9

0.3

ttinatior

1

1993

628.4

487.5

367.8

48.546.815.8

57.0

82.3

20.218.2

1.6

566.5

439.1

317.5

40.940.334.1

54.8

72.4

21.513.7

0.2

i

1994

685.3

527.8

395.5

50.554.217.9

64.0

92.2

24.317.5

1.2

611.1

469.0

338.7

45.044.434.0

65.5

76.5

22.712.8

0.2

Sources: Bundesbank. Monthly Report.I/ Hong Kong, Korea, Singapore, and Taiwan, Province of China.


-62- STATISTICAL APPENDIX

Table A17. Germany: Long-Term Capital in the Balance of Payments Accounts

1990 I/ 1991 1992 1993 1994 1995 Ql

Foreign investment in GermanyDirect investmentPortfolio investmentOf which:BondsEquities

Advances and loans of enterprisesAdvances and loans to banksOfficialOther

German investment abroadDirect investmentPortfolio investmentOf which:Foreign currency bondsDeutsche mark bondsInvestment certificatesEquities

Advances and loans of enterprisesAdvances and loans of banksOfficial 2/Other

Balance on long-term capital account

Source: Deutsche Bundesbank. Monthly

43.74.019.4

19.8-3.04.617.5-1.5-0.4

-108.9-38.7-25.1

-4.4-20.11.10.6-0.6-37.1-5.3-2.1

-65.2

Report.

77.86.871.2

58.83.15.7-5.5-0.4-0.1

-98.5-39.3-29.9

-3.8-8.8-12.6-2.1-1.6-22.3-2.4-3.2

-20.8

Supplement 3.

151.33.7

120.8

120.2-4.36.523.3-2.8-0.2

-122.7-30.5-75.5

-0.4-7.3-61.0-1.4-0.6-9.4-4.1-2.6

28.6

279.50.4

230.4

208.18.46.938.33.5

—-113.2-24.1-53.2

-6.5-6.5-18.7-8.1-0.5-26.3-6.6-2.6

166.3

69.2-4.941.4

18.61.0-2.237.1-2.0-0.2

-138.3-23.8-85.9

-20.6-6.5-28.0-11.60.5

-21.3-5.2-2.6

-69.2

20.94.13.7

15.5-11.0-0.314.2-0.8

—

-16.3-14.2-1.0

-0.2-3.70.20.70.20.1-0.6-1.0

4.6

I/ Before July 1990. western Germany only.




Table A18. Germany: Short-Term Capital in the Balance of Payments Accounts

1990 I/ 1991 1992 1993 1994 1995 Ql

Banks

AssetsLiabilities

Enterprises and individuals

Financial craditsAssatsLiabilities

Trada craditsAssatsLiabilities

OfficialAssatsLiabilities

Balance on short-tern capital account

Source: Deutsche Bundesbank. Monthly

2.1

-23.125.2

-21.7

-20.3-36.015.7

-1.4-8.06.6

-5.7-7.31.6

-25.3

Report . SUPD!<

40.5

19.820.7

7.8

12.7-11.824.5

-4.9-9.34.4

-6.6-6.2-0.5

41.7

ment 3.

67.1

16.950.2

0.3

-26.9-32.25.2

27.228.2-1.1

-5.7-6.20.5

61.7

-99.7

-120.020.3

-58.1

-60.0-59.8-0.3

2.03.9-1.9

-2.4-5.12.7

-160.1

125.8

51.973.9

-15.5

-14.5-14.4

-1.0-12.711.7

15.98.77.2

126.3

33.8

4.129.7

-5.9

-2.8-8.75.9

-3.1-4.51.3

-4.00.9-4.8

24.0

I/ Before July 1990, western Germany only.



Documents

October 1995 - IMF eLibrary...1995 International Monetary Fund October 1995 IMF Staff Country Report No. 95/100 Germany—Recent Economic Developments This report on recent economic