Following a rapid recovery from the 2008 09 recession, growth has slowed in the second half of 2011 and the economy is facing a soft patch with significant downside risks to activity. On the domestic front, a return to lower growth rates from the strong prior upswing was to be expected from a cyclical perspective as potential growth remains weak. This downswing is exacerbated by the substantial deterioration of world trade growth and a loss of confidence due to the euro area debt crisis.
In the current situation, policymakers are faced with a multitude of challenges. As the economy goes through this soft patch, it is essential to let automatic stabilisers work fully as allowed by the fiscal rule. On the structural side, Germany has made major progress, notably on the labour market, which paid off handsomely in the recent recession. However, still more needs to be done to strengthen the growth potential, not least in view of rapid population ageing. Structural policies should focus on the following areas:
• Strengthening domestic demand
Reforms to foster domestic demand should focus on improving competition enhancing framework conditions for investment and innovation in Germany’s domestic sector. This includes lowering the strict regulation in some services sectors, notably professional services, and improving innovation support, for example by introducing a tax credit for R&D complementing direct R&D support. In addition to raising productivity and potential growth, such reforms would also contribute to reducing the structurally high current account surplus and thus make a contribution to reducing global imbalances in a way which benefits Germany as well as others.
• Raising labour input
Past reforms of the labour market contributed to the strong resilience of employment during the past recession by raising working hour flexibility and reducing structural unemployment. The focus now needs to be on raising labour input and avoiding skill shortages. This includes notably increasing female full time labour participation by lowering fiscal disincentives for second earners and further improving childcare supply. In addition, employment of older workers should be promoted by further removing work disincentives and fostering employability, including by continued reforms of the education and training system, aiming at a higher participation in life long learning. Importantly, labour migration needs to be better focused on economic needs, which requires lowering the hurdles for high skilled migrants, for example by introducing a point system.
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• Exploiting new sources of growth in climate change mitigation
Environmental policies are becoming more important for growth, not least due to the government’s recent decision to accelerate the phase out of nuclear power and the ambitious national targets for emission reduction and renewable energy sources. In this context it is essential to implement climate change mitigation policies in a cost effective way, for example by strengthening the carbon price signal, and to carefully monitor the generosity of the feed in tariffs system. Furthermore, competition in energy sectors should be a priority together with fostering framework conditions for eco innovation.
How to obtain this publication
The complete edition of the Economic Survey of Germany is available from:
For further information please contact the Germany Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Felix Hüfner and Caroline Klein under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.