On 12 February 2008, the Council examined the updated stability programme of Germany, which covers the period 2007 to 2011. Economic growth in Germany was significantly stronger in 2006 and 2007 compared with the first half of the decade. Sustained wage restraint as well as structural reforms helped to regain competitiveness and stimulate employment growth. The marked improvement on the labour market supports the projection of a steady recovery of domestic demand, helping to balance an expected lower growth contribution from net external demand.

The main goal of the medium-term budgetary strategy is to ensure the long-term sustainability of public finances. To achieve this, the programme proposes to continue budgetary consolidation, while improving the conditions for growth and employment. The medium-term objective (MTO), which is a balanced position in structural terms (i.e. the cyclically-adjusted balance net of one-off and other temporary measures), was broadly reached in 2007.

In view of this risk assessment, the budgetary stance in the programme seems sufficient to return to the MTO by 2010, as envisaged in the programme. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be provided throughout the programme period.

Overall conlusions
The overall conclusion is that, benefiting from continued strong growth, Germany has used unexpected revenues for deficit reduction and therefore broadly achieved its medium-term objective in 2007, much earlier than envisaged in the previous programme, a result to be commended.

The speed of budgetary consolidation has been remarkable. The general government balance swung from a deficit of almost 3,5 % of GDP in 2005 to a small surplus in 2007. Similarly, the structural deficit was reduced by 2,5 percentage points of GDP between 2005 and 2007. The control of government expenditure was key in the consolidation, with a reduction from almost 47 % of GDP in 2005 to below 44 % in 2007. This owes to the consolidation measures adopted since 2005, but also to the fact that unexpectedly high tax revenues were not spent, but used for deficit reduction.

In view of the above assessment Germany is invited to:

1. Preserve the positive results achieved in 2007 by maintaining firm control over expenditures in line with programme targets and by using unexpected extra revenues for debt reduction;
2. Improve the long-term sustainability of public finances, by continuing to implement the growth- and employment-promoting economic reforms enacted and by underpinning the achieved fiscal consolidation with a strengthening of budgetary institutions, in particular through the ongoing revision of federal fiscal relations.