Germany Monitor

Since the last corporate tax overhaul in 2008, the need for reform has been continuously building in Germany. Given the ongoing criticism of Germany's current account surpluses, a reduction in corporate taxes would be a strong signal to provide new impulses to the sluggish domestic investment activity, thereby addressing a key issue of the current account discussion. The international trend towards lower tax rates also needs to be addressed, if Germany is to retain its competitiveness as a site for investment, innovation and jobs. [more]

The number of FinTech start-ups in Germany has surged in recent years. They are mostly active in crowd funding and payments. Online payment schemes offered by FinTechs or BigTechs have already become the most popular way to pay for internet purchases. Meanwhile, the biggest focus of blockchain start-ups in Germany is on financial services. Many FinTechs cooperate with banks which like them for their innovative solutions. [more]

The four-month deadlock following the inconclusive German federal elections was brought closer to its end with the coalition agreement between the CDU/CSU and the SPD. The last hurdle to Merkel's re-election is now the SPD membership ballot which is expected to give its approval, though at a thin margin. The agreement foresees significant investment in infrastructure and education but caters too much to permanent spending on social and pension policy given the largely cyclical nature of the budgetary leeway. Europe is supposed to take centre stage in the would-be coalition's policy – a signal which matters for Martin Schulz but less so for the member ballot and the German voter. The coalition commits itself to the transformation of the ESM and more spending on Europe but the red lines will only emerge when the details will be tabled. Surprisingly, the SPD will hold most of the major portfolios in the cabinet. With the foreign and the finance ministry the SPD got hold on the key portfolios for shaping the European policy course, although the key decisions will still be left to the chancellor. [more]

Metropolitan areas in Germany are booming. The current real-estate cycle started in 2009 and has led to significant price increases for residential property in many cities. Prices for apartments have as much as doubled in some cities. Strong population and employment growth and declining unemployment rates are driving demand, and supply elasticity is low. Overvaluations are rising, and the risk of a price bubble in the German housing market is increasing. The price uptrend is likely to continue for several years, at least in most major cities in Germany. [more]

Elections, referenda and politics have held quite a few surprises in the last 1 ½ years. While there is a general feeling among voters that things are moving in the wrong direction – although there are certainly differences of opinion about the direction itself – the outcomes of recent elections and polls have probably done very little to counter their disenchantment. One reason for this frustration is the increasing complexity of political issues. They just cannot be resolved using the simple answers offered by many populists. Voters crave such simple answers, however, as throughout evolution humans have been very successful in reducing complexity by applying heuristics, simple rules drawn from experience. [more]

On November 3, the Dax reached a new record high, at 13,505. It has more than doubled since 2010. However, the commonly used total return index is unsuited for international comparisons. In addition, the Dax which is dominated by manufacturing firms is not representative of the German economy as a whole, which relies much more on the services sector. Despite the recent gains, the German stock market remains underdeveloped. With a market cap of 57% of GDP, Germany continues to rank last among the large European countries. This is not least due to a pension system which hardly involves the capital market, to risk-averse retail investors and to a large share of family-owned companies. [more]

Employment in Germany has been rising for years now. However, cyclical tailwinds increasingly hide structural problems, such as tighter regulation and demographic developments. If the labour market is not to become a major obstacle to German growth, the future government will need to take quick and decisive action to counteract existing and imminent imbalances on this key market. Reducing long-term unemployment will require a mix of policy measures. The total number of jobs would probably be significantly lower, if there was no low-wage sector. Integrating refugees and the “mismatch” between the qualifications desired by employers and the qualifications which unemployed people actually possess are major challenges. Which direction is the new German government going to take in labour market policy? [more]

German Bundestag elections 2017: The winner seems to be clear, but not the next government! According to the ARD Deutschland-trend (14.09.) only a renewed Grand Coalition or a coalition between Merkel‘s CDU/CSU, the liberals (FDP) and the Greens (“Jamaica”) would be arithmetically possible. But given tight polls and their typical error margins other alternatives might become available. We are discussing coalition scenarios and their possible implications for Germany’s economic and EU policies as well as financial markets. [more]

German industrial policy has been cautious over the past few decades, especially in comparison with several other European countries. And this approach has been successful. The German government should continue to refrain from active industrial policy. Nevertheless, we believe that greater state engagement or a realignment of existing policy is vital in some areas. One area where we see a need for action is network infrastructure. When it comes to the shift in German energy policy, it would be sensible to focus more strongly on what is genuinely achievable. [more]

During the past four years, prices for owner-occupied homes have risen by c. 30% and rents by 15% across Germany. So far, the government’s housing policy has hampered rather than promoted residential construction. A few weeks ahead of the German parliamentary elections we take a look at the housing policies spelled out in the election programmes of the six largest parties. There are several ideas to make it easier for people, in particular families with children, to buy homes. However, additional policy-induced stimulus for demand might push prices upwards, particularly since supply is relatively inelastic. In that case, any electoral gifts would not benefit the families, but only the property sellers. [more]