Council Opinion

of 17 February 2005

on the updated stability programme of Germany, 2004-2008

(2005/C 136/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1], and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 17 February 2005 the Council examined the updated stability programme of Germany, which covers the period 2004-2008. The programme complies broadly with the data requirements of the revised "code of conduct on the content and format of stability and convergence programmes". The programme uses mostly rounded figures and mixes incompatible data. However, improvements are noted in terms of details, e.g. in using ESA 95 as a consistent statistical framework in the parts on the macroeconomic scenario and the budgetary projections. Accordingly, Germany is invited to achieve compliance with the data requirements.

(2) The macroeconomic scenario underlying the programme projects real GDP growth at 1.7 % for 2005, practically unchanged from an expected rate of 1.8 % in 2004. Adjusted for substantial calendar effects, the figures imply, however, an acceleration of growth by 34 pp. in 2005. In the final three years covered by the programme, growth is expected to remain flat at 2 % p. a. From the current perspective, this scenario appears plausible, although the growth forecast for 2005 appears rather favourable. The programme's projections for inflation are deemed to be on the high side.

(3) On 21 January 2003, the Council decided that an excessive deficit existed in Germany and recommended that this be corrected by 2004 at the latest. However, for reasons detailed in the Communication from the Commission to the Council and the European Parliament on "the situation of Germany and France in relation to their obligation under the excessive deficit procedure following the judgement of the Court of Justice" adopted on 14 December 2004 [2], the Commission concluded that 2005 should be considered the relevant deadline for the correction of the excessive deficit since the Council conclusions of November 2003 had produced legal effects until annulled by the Court. In line with this Communication, the primary aim of the budgetary strategy of the programme is to bring the deficit below 3 % of GDP by 2005. The programme also targets a continuous decline in the general government deficit in the subsequent years. The deficit is projected to decline steadily by 12 percentage point of GDP per year as from 2005 to reach a level of a rounded 112 % of GDP in 2008. According to Commission calculations based on the projections of the programme and the commonly agreed methodology, the cyclically-adjusted deficit would narrow by slightly less than 12 pp. as from 2005, to around 1 % of GDP in 2008. As in previous updates, the medium-term budgetary strategy aims at a balance of structural reforms, budgetary consolidation and cyclical stabilisation.

(4) Based on current information, the measures announced by the German authorities in November 2004 should be sufficient to reduce the deficit to 2.9 % of GDP in 2005, compared with the deficit projected at 3.4 % by the Commission services autumn forecast of October 2004. The budgetary situation remains vulnerable. Correction of the excessive deficit requires effective full implementation of all the measures envisaged, and of additional measures in case of adverse developments that could jeopardise the target of a deficit below 3 % of GDP in 2005. In the years after 2005, the budgetary outcome could be worse than projected in the programme, although the general government deficit is likely to remain below 3 % of GDP. In view of the improvement in the cyclically-adjusted balance towards the end of the programme period by less than 0.5 pp., the adjustment projected in the update is quite small, despite the implementation of remarkable structural reforms likely to reduce medium-term expenditures. Moreover, the path of budgetary adjustment seems rather optimistic towards the programme horizon. In addition, the one-off measures announced in November 2004 to bring the deficit below 3 % of GDP in 2005 weaken to some extent the budgetary situation towards the end of the programme period and beyond.

(5) In view of this risk assessment, the budgetary stance in the programme does not seem to provide a sufficient safety margin against breaching the 3 % deficit threshold with normal macroeconomic fluctuations before 2008; nor is sufficient to ensure that the Stability and Growth Pact's medium-term objective of a budgetary position of close to balance is achieved within the programme period.

(6) The debt ratio is estimated to have reached 6512 % of GDP in 2004, above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to rise to 66 % in 2005 and 2006 and to decline from 2007 onwards to 65 % of GDP in 2008. However, the evolution of the debt ratio is likely to be less favourable than projected, given the risks to the budgetary targets mentioned above.

(7) As regards long-term sustainability of public finances, Germany appears to be at some risk. Germany could be in a relatively favourable position provided that the structural reforms underlying the programme are actively implemented and the reform efforts are continued to improve further the long-term sustainability. However, long-term sustainability hinges crucially on the achievement of the planned budgetary consolidation in the medium-term and on reducing the debt level; both the federal states and social security systems play a role in this. The already legislated structural reforms of "Agenda 2010" and in particular the pension reform is likely to reduce the budgetary impact of ageing, although the expenditure-reducing effect of the ongoing reforms is subject to uncertainty, in particular for health care.

(8) The economic policies outlined in the 2004 update are partly consistent with the country-specific broad economic policy guidelines in the area of public finances. In particular, no reduction of the cyclically-adjusted deficit has occurred in 2004. In addition, the planned medium-term adjustment in the cyclically adjusted balance from 2007 onwards is below 12 pp. of GDP and, moreover, subject to risks. It will not lead to a close-to-balance budgetary position over the period covered by the programme. Germany has implemented important structural reforms, notably concerning the labour market and pension systems that put the country in a better position to face the consequences of an ageing population. It remains crucial for Germany to succeed in moving to higher trajectories of actual and potential growth by mobilising its underutilised employment reserves.

In view of the above assessment, the Council is of the opinion that Germany should:

(i) do the necessary to ensure the correction of the excessive deficit in 2005;

(ii) implement budgetary adjustments in the years beyond 2005 and make the necessary effort in structural terms to achieve a budgetary position of close to balance by the end of the period covered by the programme; and

(iii) continue with structural reforms in order to further improve the long-term sustainability of public finances in particular as regards the health care system.

| 2004 | 2005 | 2006 | 2007 | 2008 |

Real GDP(% change) | SP Dec 2004 | 1,8 | 1,7 | 1 34 | 2 | 2 |

COM Oct 2004 | 1,9 | 1,5 | 1,7 | ‘�| ‘�|

SP Jan 2004 | 1,7 | 2 14 | 2 14 | 2 14 | ‘�|

HICP inflation(%) | SP Dec 2004 | ‘�| ‘�| ‘�| ‘�| ‘�|

COM Oct 2004 | 1,7 | 1,3 | 1,1 | ‘�| ‘�|

SP Jan 2004 | ‘�| ‘�| ‘�| ‘�| ‘�|

General government balance(% of GDP) | SP Dec 2004 | -3 34 | -2,9 | -2 12 | -2 | -1 12 |

COM Oct 2004 | -3,9 | -2,9 | -2,6 | ‘�| ‘�|

SP Jan 2004 | -3 14 | -2 12 | -2 | -1 12 | ‘�|

Primary balance(% of GDP) | SP Dec 2004 | - 12 | 0 | 12 | 1 12 | 2 |

COM Oct 2004 | -0,8 | 0,2 | 0,5 | ‘�| ‘�|

SP Jan 2004 | - 14 | 12 | 1 | 1 12 | ‘�|

Cyclically-adjusted balance(% of GDP) | SP Dec 2004 | -3,0 | -2,4 | -1,9 | -1,6 | -1,3 |

COM Oct 2004 | -3,4 | -2,4 | -2,1 | ‘�| ‘�|

SP Jan 20041 | -2,5 | -2,1 | -1,6 | -1,4 | ‘�|

Government gross debt(% of GDP) | SP Dec 2004 | 65 12 | 66 | 66 | 65 12 | 65 |

COM Oct 2004 | 65,9 | 66,7 | 67,1 | ‘�| ‘�|

SP Jan 2004 | 65 | 65 12 | 65 12 | 65 | ‘�|

[1] OJ L 209, 2.8.1997.

[2] Document COM(2004) 813 of 14 December 2004.

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