Launch of the 2012 OECD’s Economic Survey of Germany


Remarks by Angel Gurría, OECD Secretary-General

14 February 2012
Berlin, Germany

(As prepared for delivery)
Ladies and Gentlemen:
The OECD’s 2012 Economic Survey of Germany recognises the remarkable development of Germany whose growth model has been so successful in navigating through the stormy waters of the crisis. This success owes much to the timely implementation of important and sometimes painful reforms: labour market reforms have substantially lowered unemployment, green growth policies have contributed to sharp falls in greenhouse gas emissions and, a prudent fiscal framework is helping to reduce the budget deficit.  So please accept our sincere congratulations for a well-managed economy!

However, as today’s German economy is competing with fast moving speed-boats in the emerging world; it is time to build on the lessons from Germany’s export led manufacturing success and apply them to create a more dynamic, knowledge-based domestic economy.  To achieve this necessary and vital transition, we have identified a number of key policy challenges in our report. Let me name the three major ones:

  • allowing domestic demand to thrive; developing the service sector and making the framework conditions more conducive to dynamic innovation;
  • raising labour input by adjusting the incentives, continuing education reforms, investing in skills and attracting the best talents  - including from abroad;
  • by further “greening” the economy and by continuing to focus on climate change mitigation.

Of course, when talking about Germany, we also need to look at the situation in the Euro area. Any solution to the Euro crisis will depend on the strength of Germany’s economy, just as Germany’s strength depends on the stability and prosperity of Europe. The policy reforms we recommend for Germany are meant to strengthen Germany’s growth, but they will also contribute to stronger and more balanced growth in Europe.

Strengthening domestic demand and increasing long-term growth potential

Our main message is that Germany needs to go beyond successful crisis management and address the longer-term underpinnings of growth. 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. GDP may only grow by half a percent this year, due to internal and external factors. On the domestic front, given that potential growth remains weak, a return to lower growth rates from the strong prior upswing was to be expected. This downswing is exacerbated by the deterioration of world trade growth and a loss of confidence due to the euro area debt crisis.

Given this mediocre outlook, policy makers are faced with a multitude of challenges. As the economy goes through a soft patch, it is essential to let automatic stabilisers work fully, as allowed by the fiscal rule. On the structural side, Germany made major progress which kept unemployment relatively low in the 2008/09 recession. However, more needs to be done to increase the growth potential, not least in view of rapid population ageing and the transition towards a knowledge-based economy.

Our report presents ways in which structural reforms can contribute to strengthen domestic demand, helping to reduce the structurally high current account surplus - and thus global imbalances - in a way that benefits both Germany and the world.  Reforms to foster domestic demand should focus on improving conditions for competition, investment and innovation.

This includes relaxing the strict regulations in some services sectors, notably professional services, and improving support for innovation, for example by introducing a tax credit for R&D to complement existing direct R&D support. Innovation and services will be the key new drivers of long-term growth, as Germany transitions towards a knowledge-based economy.

Don’t rest on your laurels - Raising labour input remains a policy priority

The performance of the German labour market over the past years has been very impressive. In 2005, the German unemployment rate was the 6th highest among OECD countries at close to 11%. By 2011, the German rate had almost halved and was among the ten lowest rates in the OECD.

Past reforms of the labour market contributed to the strong resilience of employment during the crisis by raising working hour flexibility and reducing structural unemployment. Stronger work incentives boosted employment, job placement became more efficient and fewer early retirement options meant that older workers were not laid off as in previous recessions. Let me pay tribute here to the role of the social partners in Germany and to the instrument of ‘Mitbestimmung’.

To lay the foundations for long-term growth in a rapidly ageing society, the focus needs to be on raising labour input and avoiding skill shortages. Thus, particular attention should be focused on in the following areas;

  • In Germany more than one-third of all women work part-time, compared to one quarter in the average OECD country. And the gender earnings gap is the third highest among OECD countries. Increasing full-time female labour participation by lowering fiscal disincentives for second earners and further improving childcare supply has to be a key policy priority.
  • 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 towards life-long learning.
  • Importantly, labour migration needs to be better focused on economic needs, which require lowering the hurdles for high-skilled migrants, for example by introducing a points system.

Staying at the top - Exploiting new sources of growth by greening the economy

Green growth can continue to be another important engine for Germany’s successful and sustainable development, 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.

Germany has been a leader in greenhouse gas reductions: It has surpassed its Kyoto targets ahead of time. Only a few OECD countries have achieved this! Germany is also a leader in the development of green technologies. Investment in renewable energies rose three-fold over the last decade. By 2008, Germany had the largest installed photovoltaic capacity and the second largest wind capacity in the world. Among OECD countries, Germany is the third largest producer of patents in technologies related to climate protection.

In the long term, Germany could become one of the greenest and most energy efficient economies in the world. To this end, it has set ambitious environmental targets beyond its EU commitments. By 2030, for instance, the share of renewables in energy consumption is projected to triple.

But achieving these targets also poses a formidable challenge. Developing renewable energy sources, reducing energy consumption and adopting environmental friendly technologies requires investment and financial support. It is thus more urgent than ever to make climate-change policies more cost-efficient. This can be achieved through a wide range of reforms:

  • Putting a clear and predictable price on greenhouse gas emissions. In sectors where the EU emission-trading scheme does not apply, an effective carbon tax should be created, as, for example, in Sweden.
  • Phasing out environmentally harmful subsidies: they cost money, they are socially regressive and are at the same time bad for the environment, so removing them is a win-win-win reform.
  • Modify the support for renewable energy sources. This should include an adjustment in the generous feed-in tariffs – which currently add up to around ½% of GDP.

Such reforms should be accompanied by policies to foster innovation. No green economies without green technologies! The cost of climate change mitigation could be halved if renewable technologies were made more competitive. The world will demand more and more green products and processes. Encouraging innovation in these markets will help to create new sources of growth. This is a unique opportunity for Germany as a first mover. Introducing an R&D tax credit, as is already done in other OECD countries, could contribute to that objective.

Ladies and Gentlemen:
Germany is a central pillar for Europe. A central pillar also for the OECD. By addressing its structural challenges, it will not only set best practices and lead the way in the political economy of reform; it will also enhance its own economic performance, while helping Europe overcome the current crisis and restart growth. Much will therefore depend on Germany’s leadership to turn the European project into a success. The OECD stands ready to support Germany to promote better policies for better lives – in the best interest of Germany, Europe and the world.

Thank you very much!