The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of Germany 2006 published on 30 May 2006.
The German economy appears to be in a position where it could now realise a shift from a regime where demand tended to undershoot supply to one in which more expansionary supply conditions and resulting improved growth prospects feed through into more buoyant demand. The challenge in this context is to make improvements in a variety of areas – long-term growth, employment creation, public finance sustainability – while at the same time preserving what could well be a genuine recovery in short-run activity extending beyond the export sector. A well-integrated strategy is necessary, with policies interacting positively with each other, including further progress in areas with a potential to boost aggregate growth and labour income. Both domestic and international factors can contribute to assuring a dynamic expansion, although only domestic factors are subject to policy measures which the German government can choose. Internationally, continued strong world growth and favourable monetary conditions are important. Domestically, product market reform (the in-depth chapter of this Survey) is precisely an area that has the potential to boost long-term growth and labour income and reduce public deficits through a strengthening of the tax base.
Fiscal consolidation on the spending side needs to be linked to public sector reform. While significant progress has been made in recent years in curbing spending, deficit targets have repeatedly been missed and the debt-to-GDP ratio is high. A credible consolidation policy is needed that links expenditure control with public sector reform covering federal fiscal relations, removing distortions in the tax system and making the key government services more efficient. VAT will be increased in order to rapidly reduce the structural deficit by compensating for revenue losses from past reductions in direct taxation. A considerable part of increased revenues will be used to lower social security contributions. It is important to make clear that further consolidation focus on the expenditure side.
The efficiency of the education system needs to be increased. Securing the supply of highly skilled workers is crucial for the generation and absorption of new technologies. Schools should be regularly evaluated against country-wide or state-wide standards, while leaving schools more freedom in determining suitable ways to reach their targets. Allocation of government funding to universities should be more strongly oriented toward output indicators. All universities should be made independent entities and given the opportunity to introduce student fees coupled with a loan scheme and income-contingent repayments.
Continued labour market reform is necessary to boost employment. Major steps in labour market reform were implemented over the last three years. Many measures are steps in the right direction. However, reform needs to be deepened and broadened to create the momentum for sustainable improvements in employment. Further institutional reform of the Public Employment Service is required to better activate the unemployed. Hurdles to labour force participation of older employees and females need to be further reduced. Moreover, more flexible employment contracts are necessary, while at the same time avoiding labour market segmentation. Wage rigidities need to be reduced further to fight very high unemployment rates among the low-qualified.
Regulation of domestic markets for goods and services needs to become more competition-friendly. While Germany’s outward policies are largely open, and the general competition legislation and enforcement framework is, in most respects, effective, measures need to be taken to reduce the administrative burdens on entrepreneurship and reduce the involvement of the government in business sector activities, notably through accelerated privatisation. Policies favouring small enterprises need to be revised, exposing them to competition of larger firms and avoiding disincentives to grow. In network industries, non-discriminatory access of market entrants needs to be improved. Regulation of professions is among the tightest in the OECD, requiring deregulation in order to reduce barriers to entry. Similarly, qualification-related entry requirements in the crafts sector should be abolished.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Der Policy Brief (pdf-Format) steht zum Herunterladen zur Verfügung. Er enthält die Gesamtbeurteilung und die Empfehlungen der OECD aber nicht alle Abbildungen auf den Seiten oben.
The complete edition of the Economic Survey of Germany 2006 is available from:
For further information please contact the Germany Desk at the OECD Economics Department at firstname.lastname@example.org . The OECD Secretariat's report was prepared by Eckhard Wurzel and Andrés Fuentes under the supervision of Andreas Wörgötter.
Economic Survey of Germany 2006