08/05/2023 - The latest OECD Economic Survey of Germany shows how the COVID-19 and energy crises have exposed structural weaknesses in the economy, underscoring the need to improve energy security, to modernise, digitalise and streamline government administration and to address skills shortages while boosting investment in the green and digital transition.

Germany’s post-COVID-19 recovery has been disrupted by the global energy crisis. A return to strong, resilient and sustainable growth for Germany requires future focused investment and reform to accelerate the green and digital transformations of the economy while tackling the economic implications of rapid population ageing.

Improving public governance and reducing the administrative burden will help to spur investment, also in the green and digital transformations of the economy. Enhancing education outcomes, providing better incentives for workforce participation, and expanding adult learning would help to counteract the economic consequences of an ageing workforce.

“Germany needs to speed up its green energy transition and the digital transformation of its economy and public administration. At the same time, rapid population ageing is exacerbating labour shortages and increasing spending pressures,” OECD Secretary-General Mathias Cormann said, presenting the Survey in Berlin alongside Germany’s Minister for Economic Affairs and Climate Action Robert Habeck and Minister for the Environment Steffi Lemke. “Tackling these challenges effectively in a fiscally sustainable way will require well prioritised and well targeted public investment.”

“On the environmental front, both the Economic Survey and the Environmental Performance Review underscore the need for Germany to stay the course and take further measures in pursuit of ambitious and effective action on climate change. For Germany as a globally focused export nation it will be important to secure a globally more coherent approach to carbon mitigation approaches, which while recognising global diversity is globally effective in reducing emissions, avoiding competitiveness distortions and carbon leakage between different jurisdictions,” Mr Cormann added.

A spike in energy prices in the wake of Russia’s war of aggression against Ukraine has fuelled inflation, reduced households’ purchasing power and sapped economic activity. Well-designed electricity and gas subsidies and a fall in energy prices, helped by gas savings from mild weather and diversification of energy supply from new Liquefied Natural Gas (LNG) terminals, have stabilised investor and consumer confidence, but uncertainty remains high.

The Survey projects GDP growing by 0.3% in 2023. Easing supply chain bottlenecks, a large order backlog and rising export demand should lift GDP growth to 1.3% in 2024. Inflation is seen averaging 6.6% in 2023, as firms continue to pass on higher input costs to consumers and wage pressures remain high. To curb inflationary pressures, the government should aim to contain the public deficit. Vulnerabilities in the financial sector should be carefully monitored.

Accelerating the green and digital transformations and addressing Germany’s infrastructure backlog will require significant public resources. Labour income taxes are among the highest in the OECD and should be reduced to raise labour supply, particularly for low-income and second earners. Given that receipts from inheritance, capital income and property taxation are low relative to other OECD countries, the Survey recommends raising property taxes and reducing favourable tax treatment and exemptions for income from selling or renting real estate as well as inheritance tax exemptions for business assets. The quality of public spending could be improved through better targeting and impact evaluation, and some flexibility could be introduced into the fiscal rules to allow for adequate investment spending.   

Germany has experienced an outflow of private capital since the 2000s due to weak domestic demand and business dynamism. Public and private investment are low compared with many other OECD countries. Modernising and lightening administrative procedures, particularly for infrastructure planning, harmonising IT standards across levels of government and improving support for research and development (R&D) would help to revive investment and innovation. The Survey also calls for a stronger competition framework and better access to finance for young firms. Including so-called legislative and regulatory footprints in the new lobby register would help to make lobbying activities that hamper competition more transparent.

High energy prices and the need to replace imports from Russia have amplified the need to speed up the shift to renewables given Germany’s goal of climate neutrality in 2045. Emissions pricing could be strengthened by introducing an emissions cap in the national trading system and aligning it with climate targets. Germany should phase out environmentally harmful subsidies and tax exemptions and expand support for green R&D. Faster planning and approval procedures, that do not ignore biodiversity concerns, would accelerate green investment.

More stringent carbon pricing should be complemented with support for public charging infrastructure for electric vehicles, greater investment in rail and electricity networks, and more rigorous energy-efficiency standards for existing buildings. Using carbon pricing revenues to support low-income households and improve active labour market policies would help to support growth and ensure the low-carbon transition does not weaken social cohesion.

The Environmental Performance Review of Germany, launched in parallel with the Survey, says that while Germany met its 2020 emissions-cutting target, the federal government will need to implement climate measures more quickly to achieve its 2030 and 2045 targets. Emission-cutting efforts in transport and buildings should rely less on individual measures such as “making cars cleaner” and shift to an integrated sustainable mobility strategy.

The land use and forestry sectors hold considerable potential for Germany to advance on its climate commitments. Building synergies between climate mitigation and nature conservation through the Federal Action Programme on Nature-based Solutions for Climate and Biodiversity is vital as declining biodiversity has left a third of species endangered.

The Review commends Germany for reducing some environmental pressures over the past decade, despite its large industrial sector and dense population. Air quality has improved overall, but less so in urban areas. Germany is one of the best performing OECD countries in waste management but more needs to be done to reduce per-capita municipal waste.

Germany’s exposure to climate change impacts, from flooding to heatwaves, is growing, and the damage it has recorded from climate-related hazards per unit of GDP from 2005 to 2021 is among the highest of OECD countries. Exposure to climate risks should be regularly assessed to help strengthen the resilience of vulnerable communities.

See an Overview of the Economic Survey with key findings and charts (this link can be included in media articles)
 

Read the complete Environmental Performance Review of Germany 2023

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