Chapter 1. Macroeconomic developments and policy challenges
After years of subdued growth and weak demand, Germany may now be in a position to enjoy a robust recovery. Further progress in economic reforms could turn this cyclical upswing into a sustained expansion, with stronger supply conditions and higher permanent incomes feeding back into more buoyant current demand. The challenge confronting Germany in this context is to improve its performance in a variety of areas – generating higher employment and productivity growth, securing the sustainability of public sector finances – while at the same time preserving what could well be a genuine recovery extending beyond the export sector. For this end, a comprehensive strategy is required. Public sector expenditure control should be linked to public sector reform. Labour market reform needs to be deepened and broadened in order to reduce hurdles to labour supply and demand. Increasing the efficiency of the education system is important to reinforce Germany’s growth potential and secure living standards in the future. Furthermore, strengthening product market competition helps to raise productivity growth and implies a redistribution of real incomes in favour of consumers.
Chapter 2. Regaining fiscal credibility and improving public sector efficiency
Despite substantial structural reductions in government spending relative to GDP in recent years, the government debt ratio has reached high levels and expected ageing-related spending increases remain significant. While steps have been taken to lower the government deficit from 2007 onwards, including an increase in the standard VAT rate, further measures to ensure that government finances are on a sustainable basis should include further consolidation through better prioritisation of government spending. A stronger commitment to consolidation at all levels of government is necessary, inter alia by ending the bailing-out of states in financial difficulties. Reform of fiscal federal relations should include disentangling legislative responsibilities and reducing co-funding across levels of government, as well as widening the scope for sub-national governments to raise their own tax revenue. While tax revenues are modest, effective tax rates on enterprises and workers are high, with adverse effects on potential output, calling for a further widening of tax bases through the removal of tax expenditures, such as in the taxation of capital income.
Chapter 3. The performance of the education system needs to improve
While average educational attainment in the population of working age is relatively high, with most individuals possessing at least an upper secondary degree, the tertiary graduation rate is one of the lowest in the OECD and secondary schooling outcomes are in need of improvement. Improving access to early childhood education, as well as a more consistent evaluation of school performance against nation wide or state-wide performance standards, coupled with more school autonomy, notably in staffing decisions, can contribute to raising secondary education outcomes. Universities need to be given better incentives to offer attractive degree programmes with relatively short study duration, by making funding of universities more outcome-oriented and by further strengthening their autonomy with respect to budgetary, administrative and personnel decisions as well as student admissions. Student fees, coupled with a loan scheme and an income-contingent repayment scheme, should be introduced in all states.
Chapter 4. Labour market reform should go on
Major steps in labour market reform have been implemented over the last three years. These need to be followed up in several respects in order to raise the economy's capacity to generate employment. The present tax and transfer system still implies significant disincentives for labour supply of older people and spouses, which should be eliminated. Unemployment related benefits and active labour market policies can be better geared toward activating the unemployed, while institutional reform of the Public Employment Service should continue. On the labour demand side, there remains scope to raise the efficiency of Germany’s employment protection system. Also, provisions should be made to allow for a higher degree of wage flexibility across qualifications and regions to fight unemployment.
Chapter 5. Fostering product market competition would have large benefits
Much scope remains to make regulation of product markets more conducive to competition –notwithstanding progress in recent years –, with substantial benefits for consumer welfare, productivity and employment. While the general competition legislation and enforcement framework is mostly effective, measures need to be taken to reduce 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, with a view to fully exposing them to competition and avoiding disincentives for small firms to grow. Substantial regulatory challenges exist in specific sectors, notably in the energy and railways industries, where non-discriminatory access of market entrants to networks needs to be improved. In the telecommunications industry, competition in the local loop can be strengthened. Regulation of the liberal professions is among the most restrictive in the OECD. Entry barriers need to be eliminated in the crafts, and restrictions on large-scale retailing development could be eased.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assesment 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:
Also available: "Germany's economy: Back to new strength" http://www.oecdobserver.org/news/fullstory.php/aid/1856/
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 Eckhard Wurzel and Andres Fuentes under the supervision of Andreas Wörgötter.