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IP/02/164

Brussels, 30 January 2002

Commission assesses the German Stability Programme Update (2001-2005)

The European Commission has today adopted a recommendation to the Council of Ministers on the updated Stability Programme of Germany, which covers the period 2002-2005. The baseline scenario of the programme foresees economic growth of 2 % per year over the period 2001-2005. The budget deficit for 2002 is projected to reach some 2% based on economic growth of 1¼ %. In the following years, the deficit is expected to decline steadily and reach a balanced budgetary position by 2004. Under this scenario German government finances will comply with the requirements of the Stability and Growth Pact of a position "close to balance or in surplus" from 2004 onwards. However, the Commission considers this scenario too optimistic. With growth in 2002 likely to be below 1%, the deficit is estimated to rise to above 2½ % of GDP. With a view to avoiding breaching the 3% of GDP deficit laid down in the Treaty, the Commission proposes to the Ecofin Council to give Germany an early warning on the basis of Regulation 1466/97 of the Stability and Growth Pact (SGP). Moreover, the adjustment to the envisaged medium-term target will become more difficult. As a consequence, additional savings measures above those outlined in the programme should be adopted once economic recovery is firmly established. Achieving a balanced budget in 2004 is essential to strengthen the sustainability of government finances in view of the budgetary pressures stemming from an ageing population. On the basis of the Commission's Recommendation, the Council is expected to adopt an Opinion on the updated German stability programme and the early warning on [12 February 2002].

The Commission recommendation is adopted on the initiative of Pedro Solbes, EU Commissioner for economic and monetary affairs. The Commission's main conclusions are the following:

  • The Commission takes note of the first deficit estimate for 2001 (2.6% of GDP), compared with a target of 1½ % of GDP. This divergence is mainly due to the unexpected economic slowdown. General government expenditure remained broadly on target; there are, however, exceptions, most notably in the health care sector and at the level of some regional governments (Länder).

  • The baseline macroeconomic scenario underlying the updated German stability programme assumes a growth rate of 1 ¼ % in 2002 and an average growth of 2 % per year over the period 2001-2005. These growth projections imply a substantial acceleration of growth in the years 2003-2005. The Commission considers especially the short term-outlook of the baseline scenario as overly optimistic.

  • The updated Stability Programme also presents a lower-growth macro-economic scenario assuming a 2002 growth rate of ¾ % and medium term growth of 1 ¾ %. The Commission considers this scenario more plausible.

  • In the baseline scenario, the deficit figures lie at 2% of GDP in 2002 and 1 % in 2003 and a balanced budgetary position would be attained in 2004. Based on these projections, German government finances would comply with the requirements of the Stability and Growth Pact of a position "close to balance or in surplus" from 2004 on.

  • In the more plausible lower-growth scenario, the updated stability programme estimates the 2002 deficit to lie at 2 ½ %. Achieving budgetary balance in 2004 would thus require a substantially higher adjustment effort.

  • As a consequence, additional savings measures above those outlined in the programme should be adopted once economy recovery is firmly established. Moreover, as shown once again by the budgetary outcome for 2001, respect of expenditure targets by all levels of government is crucial to attain the projected deficit targets. While the recently implemented changes to the Haushaltsgrundsätzegesetz, stating that all levels of government should contribute to the achievement of the medium-term budgetary targets, are welcome, the foreseen mechanism may not be sufficient to guarantee compliance with agreedtargets.

  • With a view to avoiding breaching the 3% of GDP deficit laid down in the Treaty, the Commission proposes to the Ecofin Council to give Germany an early warning on the basis of Regulation 1466/97 of the Stability and Growth Pact (SGP).

  • The update confirms that in the current year the debt ratio will not go below the 60% of GDP, in spite of the important revenues from privatisations and the receipts from UMTS licences used for government debt redemption in 2000 and in 2001. The debt ratio is projected to fall to 55 ½% of GDP by 2005. However, as already underlined in the past, further privatisation efforts at all levels of government would be appropriate in order to counter risks to the programme's medium-term debt objectives. A decisive lowering of the debt ratio in Germany is also called for in light of the foreseeable ageing of the German society in the decades to come.

Key figures from the stability programme of Germany (central scenario)

2001

2002200320042005
Real GDP growth (percentage change)December

2001

¾*1 ¼2 ½2 ½2 ½
October

2000

2 ¾2 ½2 ½2 ½-
General government balance

(% of GDP)

December

2001

-2 ½*-2-1-0-0
October

2000

-1 ½-1- ½0-
General government debt

(% of GDP)

December

2001

6060595755 ½
October

2000

5857 ½56 ½54 ½-

*) On 17 January the German Statistical office published preliminary figures putting growth for 2001 at 0.6% and the general government balance at -2.6% of GDP.

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