Economic Sustainability
#4Key Findings
Germany places in the sample’s top group (rank 4) with respect to economic sustainability.
A circular economy strategy aimed at reducing the use of primary raw materials is being developed. A critical infrastructure strategy focuses on prevention, reaction and sustainability, but is not legally binding. A number of laws and plans contain legally binding targets for emissions reductions and the shift to renewable energy sources.
Labor market shortages are increasing, pushing employers to retain employees and develop their skills. A well-established short-time work scheme has helped the economy weather crises such as the COVID-19 pandemic. Social protection is comprehensive, including a minimum-income support program.
The tax system produces robust revenues, but high marginal rates serve as a disincentive to employment and investment. Corporate taxes are not internationally competitive. A “debt brake” fiscal rule helped reduce the debt-to-GDP ratio before the pandemic. The use of off-budget funds to address recent crises has raised concerns about budgetary transparency.
A circular economy strategy aimed at reducing the use of primary raw materials is being developed. A critical infrastructure strategy focuses on prevention, reaction and sustainability, but is not legally binding. A number of laws and plans contain legally binding targets for emissions reductions and the shift to renewable energy sources.
Labor market shortages are increasing, pushing employers to retain employees and develop their skills. A well-established short-time work scheme has helped the economy weather crises such as the COVID-19 pandemic. Social protection is comprehensive, including a minimum-income support program.
The tax system produces robust revenues, but high marginal rates serve as a disincentive to employment and investment. Corporate taxes are not internationally competitive. A “debt brake” fiscal rule helped reduce the debt-to-GDP ratio before the pandemic. The use of off-budget funds to address recent crises has raised concerns about budgetary transparency.
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How committed is the government to driving the transition toward a circular economy?
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9
9
The government is clearly committed to transitioning to a circular economy.
8
7
6
7
6
The government is largely committed to transitioning to a circular economy.
5
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3
4
3
The government is somewhat committed to transitioning to a circular economy.
2
1
1
The government is not at all committed to transitioning to a circular economy.
In general, the ministry responsible for circular economy policies is the Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV). Germany does not yet have a circular economy strategy. However, as of April 2024, the government – particularly the BMUV – is developing a National Circular Economy Strategy (NKWS). The foundation for this strategy was published in April 2023. The strategy will be based on the EU Circular Economy Action Plan and is intended to serve as a framework for combining existing strategies relevant to raw material policy. Nevertheless, the strategies contributing to the goals of the NKWS, such as the National Bioeconomy Strategy and the National Lightweighting Strategy, are to remain independent.
The overall goal of the strategy is to reduce the consumption of primary raw materials. While no concrete measures to achieve this goal exist yet, they are supposed to improve market conditions for secondary raw materials (materials obtained through recycling) to increase their share in the use of raw materials. Additionally, the measures aim to promote resource efficiency and product design focused on long service life, circularity, and reparability (BMUV, 2023).
As the full strategy does not yet exist, there are no sector-specific action plans in the strategy so far. However, the strategy will focus on eight fields of action, such as plastic, metals, and textiles. The BMUV plans to monitor progress regarding the measures and goals through a set of indicators. While it is still unclear what indicators the BMUV intends to use, the plan is to adapt measures in line with the Agenda 2030 for Sustainable Development. Again, as the strategy is still being developed, no statement can be made on its comprehensiveness (BMUV, 2023).
There are, however, a few existing policies supporting the transition to a circular economy. As of 2012, Germany has a Circular Economy Act with the goal of protecting natural resources through a circular economy and promoting environmentally sound waste management to protect the environment and humans. The act was adapted in 2020 following an EU directive (BMUV, 2022).
An important area of German waste management policy is the product responsibility of manufacturers, which ensures environmentally sound waste prevention at the production level. This contributes to resource efficiency through various acts, such as the Packaging Act and the Waste Oil Ordinance (BMUV, 2020a).
Additionally, Germany introduced the German Resource Efficiency Program III in 2020, which includes 118 measures to improve efficiency and indicators to monitor set targets. Specifically, the program includes four goals for a circular economy, such as promoting and preparing reuse. One priority measure is to facilitate donations by retailers to avoid the destruction of unusable products from returns, for instance (BMUV, 2020b).
The Circular Economy Act, after its adjustment in 2020, obligated federal institutions and agencies to give preference to the purchase of resource-friendly, low-waste, repairable, low-pollutant, and recyclable products as long as no unreasonable additional costs occur based on that purchase (BMUV, 2022). Public procurement will also be a field of action included in the NKWS. Whether current public procurement policy aligns with that strategy will be seen once the NKWS is published.
Overall, Germany had a resource productivity, defined as the GDP divided by domestic material consumption, of 2.8 compared to the EU27 average of 2.1 in 2022 (Eurostat, 2024a). Additionally, the country had a circular material use rate – the share of material recycled and fed back into the economy – of 13% in 2022, whereas the EU27 average was 11.5%, indicating an increase since 2010 (Eurostat, 2024b).
Lastly, market surveillance, aimed at ensuring the effective implementation of waste regulations within the context of a circular economy, is conducted by the states while considering regional conditions. The supreme state authorities responsible for waste law collaborate in the Federation/Länder Working Group on Waste (LAGA) to promote the exchange of information and experiences. Additionally, LAGA maintains relationships with relevant associations and works on the development of statutory provisions (BMUV, 2021).
Citations:
BMUV. 2020. “Product Responsibility.” https://www.bmuv.de/en/topics/water-management/circular-economy-overview/overview-waste-policy/product-responsibility
BMUV. 2020. “Deutsches Ressourceneffizienzprogramm III – 2020 bis 2023 Programm zur nachhaltigen Nutzung und zum Schutz der natürlichen Ressourcen.” https://www.bmuv.de/fileadmin/Daten_BMU/Pools/Broschueren/ressourceneffizienz_programm_2020_2023.pdf
BMUV. 2021. “Marktüberwachung.” https://www.bmuv.de/themen/kreislaufwirtschaft/marktueberwachung
BMUV. 2022. “Kreislaufwirtschaftsgesetz.” https://www.bmuv.de/gesetz/kreislaufwirtschaftsgesetz
BMUV. 2023. “Die Nationale Kreislaufwirtschaftsstrategie (NKWS), Grundlagen für einen Prozess zur Transformation hin zu einer zirkulären Wirtschaft.” https://www.bmuv.de/fileadmin/Daten_BMU/Download_PDF/Abfallwirtschaft/nkws_grundlagen_bf.pdf
Eurostat. 2024a. “Resource Productivity.” https://ec.europa.eu/eurostat/databrowser/view/CEI_PC030/default/table?lang=en
Eurostat. 2024b. “Circular Material Use Rate.” https://ec.europa.eu/eurostat/databrowser/view/cei_srm030/default/bar?lang=en
The overall goal of the strategy is to reduce the consumption of primary raw materials. While no concrete measures to achieve this goal exist yet, they are supposed to improve market conditions for secondary raw materials (materials obtained through recycling) to increase their share in the use of raw materials. Additionally, the measures aim to promote resource efficiency and product design focused on long service life, circularity, and reparability (BMUV, 2023).
As the full strategy does not yet exist, there are no sector-specific action plans in the strategy so far. However, the strategy will focus on eight fields of action, such as plastic, metals, and textiles. The BMUV plans to monitor progress regarding the measures and goals through a set of indicators. While it is still unclear what indicators the BMUV intends to use, the plan is to adapt measures in line with the Agenda 2030 for Sustainable Development. Again, as the strategy is still being developed, no statement can be made on its comprehensiveness (BMUV, 2023).
There are, however, a few existing policies supporting the transition to a circular economy. As of 2012, Germany has a Circular Economy Act with the goal of protecting natural resources through a circular economy and promoting environmentally sound waste management to protect the environment and humans. The act was adapted in 2020 following an EU directive (BMUV, 2022).
An important area of German waste management policy is the product responsibility of manufacturers, which ensures environmentally sound waste prevention at the production level. This contributes to resource efficiency through various acts, such as the Packaging Act and the Waste Oil Ordinance (BMUV, 2020a).
Additionally, Germany introduced the German Resource Efficiency Program III in 2020, which includes 118 measures to improve efficiency and indicators to monitor set targets. Specifically, the program includes four goals for a circular economy, such as promoting and preparing reuse. One priority measure is to facilitate donations by retailers to avoid the destruction of unusable products from returns, for instance (BMUV, 2020b).
The Circular Economy Act, after its adjustment in 2020, obligated federal institutions and agencies to give preference to the purchase of resource-friendly, low-waste, repairable, low-pollutant, and recyclable products as long as no unreasonable additional costs occur based on that purchase (BMUV, 2022). Public procurement will also be a field of action included in the NKWS. Whether current public procurement policy aligns with that strategy will be seen once the NKWS is published.
Overall, Germany had a resource productivity, defined as the GDP divided by domestic material consumption, of 2.8 compared to the EU27 average of 2.1 in 2022 (Eurostat, 2024a). Additionally, the country had a circular material use rate – the share of material recycled and fed back into the economy – of 13% in 2022, whereas the EU27 average was 11.5%, indicating an increase since 2010 (Eurostat, 2024b).
Lastly, market surveillance, aimed at ensuring the effective implementation of waste regulations within the context of a circular economy, is conducted by the states while considering regional conditions. The supreme state authorities responsible for waste law collaborate in the Federation/Länder Working Group on Waste (LAGA) to promote the exchange of information and experiences. Additionally, LAGA maintains relationships with relevant associations and works on the development of statutory provisions (BMUV, 2021).
Citations:
BMUV. 2020. “Product Responsibility.” https://www.bmuv.de/en/topics/water-management/circular-economy-overview/overview-waste-policy/product-responsibility
BMUV. 2020. “Deutsches Ressourceneffizienzprogramm III – 2020 bis 2023 Programm zur nachhaltigen Nutzung und zum Schutz der natürlichen Ressourcen.” https://www.bmuv.de/fileadmin/Daten_BMU/Pools/Broschueren/ressourceneffizienz_programm_2020_2023.pdf
BMUV. 2021. “Marktüberwachung.” https://www.bmuv.de/themen/kreislaufwirtschaft/marktueberwachung
BMUV. 2022. “Kreislaufwirtschaftsgesetz.” https://www.bmuv.de/gesetz/kreislaufwirtschaftsgesetz
BMUV. 2023. “Die Nationale Kreislaufwirtschaftsstrategie (NKWS), Grundlagen für einen Prozess zur Transformation hin zu einer zirkulären Wirtschaft.” https://www.bmuv.de/fileadmin/Daten_BMU/Download_PDF/Abfallwirtschaft/nkws_grundlagen_bf.pdf
Eurostat. 2024a. “Resource Productivity.” https://ec.europa.eu/eurostat/databrowser/view/CEI_PC030/default/table?lang=en
Eurostat. 2024b. “Circular Material Use Rate.” https://ec.europa.eu/eurostat/databrowser/view/cei_srm030/default/bar?lang=en
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How committed is the government to updating and protecting critical infrastructure?
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9
The government is clearly committed to updating basic technical infrastructure.
8
7
6
7
6
The government is largely committed to updating basic technical infrastructure.
5
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3
4
3
The government is somewhat committed to updating basic technical infrastructure.
2
1
1
The government is not at all committed to updating basic technical infrastructure.
The German National Strategy for Critical Infrastructure Protection (CIP Strategy) was developed in 2009 and serves as the central strategic basis for CIP, although it is not legally binding. The strategy focuses on three main goals: prevention, reaction, and sustainability. This means avoiding serious disruptions and failures of important infrastructure services, minimizing potential consequences if avoidance is not possible, and regularly evaluating measures and analyzing national and international disruptions to foster continuous learning (BMI, 2009).
The CIP strategy does not specify concrete measures, goals, or indicators. Instead, it provides a framework for existing and planned activities, guiding a structured approach to protecting critical infrastructure and coordinating tasks between ministries. It does not include sector-specific action plans but has led to the development of various action plans, programs, and laws for the protection of essential technical infrastructure, such as digital, transport, water, and energy sectors, all of which have precautionary and safeguarding laws.
For instance, the Energy Security Act (Energiesicherungsgesetz) regulates the energy sector, the Water Security Act (Wassersicherstellungsgesetz) covers the water sector, and the Traffic Safety Act (Verkehrssicherstellungsgesetz) governs the transport sector. Additionally, the IT Security Act (IT-Sicherheitsgesetz) addresses the protection of digital infrastructure (BBK, 2020).
To date, Germany does not have a comprehensive law specifically for the protection of critical infrastructure. However, based on the current government’s coalition agreement, the BMI proposed a draft law in July 2023 to identify critical infrastructures at the federal level and define minimum standards for CIP operators. The aim is to create a framework that encompasses the various critical infrastructure sectors currently regulated individually (BMI, 2023a).
Germany’s policy efforts to protect critical infrastructure mainly focus on cybersecurity. Besides the IT Security Act, the BMI published a cybersecurity strategy in 2016, which was updated in 2021. This updated strategy, resulting from the monitoring and evaluation process, formulates multiple guidelines, fields of action, and strategic goals, including the protection of critical infrastructure from cyberattacks. The strategy outlines measures to prevent and protect against such threats and describes three criteria to monitor the progress of these measures. The strategy is evaluated every four years and is updated every four to six years (BMI, 2021). For the protection of railways and maritime infrastructure, the Federal Police use surveillance measures, including cameras, sensors, and task forces (BMI, 2023b).
The BMI, as the ministry tasked with civil protection, coordinates strategies, measures, and activities related to critical infrastructure protection. It is supported by the Federal Office of Civil Protection and Disaster Assistance, the Federal Office for Information Security, and the Federal Agency for Technical Relief. In October 2022, the BMI introduced a joint critical infrastructure unit (GEKKIS) to provide situational reports and facilitate structured information exchange between departments to address challenges jointly (BMI, 2023b).
To ensure effective policy implementation, the cybersecurity strategy plans to involve critical infrastructure operators in a nationwide information exchange on a voluntary basis. Operators are also required to regularly submit information on IT security measures to the Federal Office for Information Security (BMI, 2021).
In conclusion, while Germany has policies targeting the protection of critical technical infrastructure, an overall strategy with clearly defined measures is still lacking. However, the government is committed to updating and improving the protection of basic technical infrastructure.
Citations:
BMI. 2009. “Nationale Strategie zum Schutz Kritischer Infrastrukturen (KRITIS-Strategie).” https://www.bmi.bund.de/SharedDocs/downloads/DE/publikationen/themen/bevoelkerungsschutz/kritis.pdf?__blob=publicationFile&v=3
BMI. 2021. “Cyber Security Strategy for Germany 2021.” https://www.bmi.bund.de/SharedDocs/downloads/EN/themen/it-digital-policy/cyber-security-strategy-for-germany2021.pdf;jsessionid=73F6C4FB9C3B6FEBB37E3D5EE960D2C4.live892?__blob=publicationFile&v=4
BMI. 2023a. “Entwurf eines Gesetzes zur Umsetzung der CER-Richtlinie und zur Stärkung der Resilienz kritischer Anlagen.” https://www.bmi.bund.de/SharedDocs/gesetzgebungsverfahren/DE/KRITIS-DachG.html
BMI. 2023. “Schutz Kritischer Infrastrukturen.” https://www.bmi.bund.de/DE/themen/bevoelkerungsschutz/schutz-kritischer-infrastrukturen/schutz-kritischer-infrastrukturen-node.html
The CIP strategy does not specify concrete measures, goals, or indicators. Instead, it provides a framework for existing and planned activities, guiding a structured approach to protecting critical infrastructure and coordinating tasks between ministries. It does not include sector-specific action plans but has led to the development of various action plans, programs, and laws for the protection of essential technical infrastructure, such as digital, transport, water, and energy sectors, all of which have precautionary and safeguarding laws.
For instance, the Energy Security Act (Energiesicherungsgesetz) regulates the energy sector, the Water Security Act (Wassersicherstellungsgesetz) covers the water sector, and the Traffic Safety Act (Verkehrssicherstellungsgesetz) governs the transport sector. Additionally, the IT Security Act (IT-Sicherheitsgesetz) addresses the protection of digital infrastructure (BBK, 2020).
To date, Germany does not have a comprehensive law specifically for the protection of critical infrastructure. However, based on the current government’s coalition agreement, the BMI proposed a draft law in July 2023 to identify critical infrastructures at the federal level and define minimum standards for CIP operators. The aim is to create a framework that encompasses the various critical infrastructure sectors currently regulated individually (BMI, 2023a).
Germany’s policy efforts to protect critical infrastructure mainly focus on cybersecurity. Besides the IT Security Act, the BMI published a cybersecurity strategy in 2016, which was updated in 2021. This updated strategy, resulting from the monitoring and evaluation process, formulates multiple guidelines, fields of action, and strategic goals, including the protection of critical infrastructure from cyberattacks. The strategy outlines measures to prevent and protect against such threats and describes three criteria to monitor the progress of these measures. The strategy is evaluated every four years and is updated every four to six years (BMI, 2021). For the protection of railways and maritime infrastructure, the Federal Police use surveillance measures, including cameras, sensors, and task forces (BMI, 2023b).
The BMI, as the ministry tasked with civil protection, coordinates strategies, measures, and activities related to critical infrastructure protection. It is supported by the Federal Office of Civil Protection and Disaster Assistance, the Federal Office for Information Security, and the Federal Agency for Technical Relief. In October 2022, the BMI introduced a joint critical infrastructure unit (GEKKIS) to provide situational reports and facilitate structured information exchange between departments to address challenges jointly (BMI, 2023b).
To ensure effective policy implementation, the cybersecurity strategy plans to involve critical infrastructure operators in a nationwide information exchange on a voluntary basis. Operators are also required to regularly submit information on IT security measures to the Federal Office for Information Security (BMI, 2021).
In conclusion, while Germany has policies targeting the protection of critical technical infrastructure, an overall strategy with clearly defined measures is still lacking. However, the government is committed to updating and improving the protection of basic technical infrastructure.
Citations:
BMI. 2009. “Nationale Strategie zum Schutz Kritischer Infrastrukturen (KRITIS-Strategie).” https://www.bmi.bund.de/SharedDocs/downloads/DE/publikationen/themen/bevoelkerungsschutz/kritis.pdf?__blob=publicationFile&v=3
BMI. 2021. “Cyber Security Strategy for Germany 2021.” https://www.bmi.bund.de/SharedDocs/downloads/EN/themen/it-digital-policy/cyber-security-strategy-for-germany2021.pdf;jsessionid=73F6C4FB9C3B6FEBB37E3D5EE960D2C4.live892?__blob=publicationFile&v=4
BMI. 2023a. “Entwurf eines Gesetzes zur Umsetzung der CER-Richtlinie und zur Stärkung der Resilienz kritischer Anlagen.” https://www.bmi.bund.de/SharedDocs/gesetzgebungsverfahren/DE/KRITIS-DachG.html
BMI. 2023. “Schutz Kritischer Infrastrukturen.” https://www.bmi.bund.de/DE/themen/bevoelkerungsschutz/schutz-kritischer-infrastrukturen/schutz-kritischer-infrastrukturen-node.html
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How committed is the government to fully decarbonizing the energy system by 2050?
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9
The government is clearly committed to transitioning to a decarbonized energy system.
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7
6
7
6
The government is largely committed to transitioning to a decarbonized energy system.
5
4
3
4
3
The government is somewhat committed to transitioning to a decarbonized energy system.
2
1
1
The government is not at all committed to transitioning to a decarbonized energy system.
With a score of 68.3 on a scale from 0 to 100, Germany ranks 18th out of 115 countries on the 2021 Energy Transition Index. This places Germany above the world average of 59.35, making it a leading country in the energy transition. The country’s transition readiness is scored at 69.2 points, placing Germany ninth (World Economic Forum, 2021).
In general, the Federal Ministry for Economic Affairs and Climate Action (BMWK) is responsible for energy policies. It is currently working on developing a system development strategy (Systementwicklungsstrategie) that will function as a cross-sectoral strategy for transforming the energy system. In November 2023, the BMWK published a progress report on the strategy. The report suggests that the strategy will define robust transformation paths and focus on the industry, building, and transport sectors while also covering energy supply and infrastructure (BMWK, 2023).
Although Germany does not yet have an overarching strategy for transforming its energy system, the government has formulated specific goals for the energy sector. Measures to achieve these objectives are included in other existing programs and plans.
First, the Federal Climate Change Act (Klimaschutzgesetz) sets legally binding greenhouse gas (GHG) emission targets for individual sectors, including the energy sector. For 2030, the emission volume is set at a maximum of 108 million tons of CO2-equivalents, representing a 77% reduction compared to 1990. These emission goals are continuously monitored. If the sector does not meet its emission target, the responsible ministry must develop and implement an immediate program with measures to meet the required target (Umweltbundesamt, 2023).
Second, measures to reach these targets are outlined in the Action Plan 2050 (Klimaschutzplan 2050) and the Climate Protection Program 2030 (Klimaschutzprogramm 2030), which specify multiple actions to achieve climate neutrality. For example, the Climate Protection Program 2030 includes the gradual reduction and eventual end of coal-fired power generation. Onshore wind energy is also to be expanded, specifically by accelerating planning procedures, involving local citizens at an early stage, and improving the permit situation (BMU, 2019).
Third, through the adaptation of the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG), a primary target for the energy sector is to increase the share of renewable energy sources to a minimum of 80% by 2030, supporting the measure of significantly scaling back fossil-based energy. To achieve this, a set of immediate measures was adopted by the parliament in 2022, including actions such as accelerating the planned expansion of onshore wind turbines (BMWK, 2024).
In 2022, Germany had electricity production capacities – the maximum amount of power that can be generated – of 66,163 megawatts for wind energy, 10,974 megawatts for hydro energy, and 1,592 megawatts for energy from solid biofuels. The wind energy capacity was particularly notable, increasing from 33,477 megawatts in 2013. Germany’s wind energy capacity is the highest among countries in the Euro area. For wind energy, Germany ranked sixth and fourth for solid biofuel energy. Germany also had the highest solar energy capacity in the Euro area in 2020, with 53,671 megawatts (Eurostat, 2024a).
Finally, due to a lack of specific information, no informed statement can be made on whether the government monitors the effective implementation of policies if the implementation is delegated or whether it can intervene if the implementation is endangered.
Citations:
BMU. 2019. “Klimaschutzprogramm 2030 der Bundesregierung zur Umsetzung des Klimaschutzplans 2050.” https://www.bundesregierung.de/resource/blob/974430/1679914/c8724321decefc59cca0110063409b50/2019-10-09-klima-massnahmen-data.pdf?download=1
BMWK. 2023. “Zwischenbericht der Systementwicklungsstrategie.” https://www.bmwk.de/Redaktion/DE/Publikationen/Energie/20231122-zwischenbericht-der-systementwicklungsstrategie.pdf?__blob=publicationFile&v=11
BMWK. 2024. “Das steckt im Osterpaket.” https://www.bmwk-energiewende.de/EWD/Redaktion/Newsletter/2022/04/Meldung/topthema.html
Eurostat. 2024a. “Electricity production capacities for renewables and wastes.” https://ec.europa.eu/eurostat/databrowser/view/NRG_INF_EPCRW/default/table?lang=en
Umweltbundesamt. 2023. “Treibhausgasminderungsziele Deutschlands.” https://www.umweltbundesamt.de/daten/klima/treibhausgasminderungsziele-deutschlands#nationale-treibhausgasminderungsziele-und-deren-umsetzung
World Economic Forum. 2021. “Fostering Effective Energy Transition 2021 Edition.” https://www.weforum.org/publications/fostering-effective-energy-transition-2021/in-full/rankings
In general, the Federal Ministry for Economic Affairs and Climate Action (BMWK) is responsible for energy policies. It is currently working on developing a system development strategy (Systementwicklungsstrategie) that will function as a cross-sectoral strategy for transforming the energy system. In November 2023, the BMWK published a progress report on the strategy. The report suggests that the strategy will define robust transformation paths and focus on the industry, building, and transport sectors while also covering energy supply and infrastructure (BMWK, 2023).
Although Germany does not yet have an overarching strategy for transforming its energy system, the government has formulated specific goals for the energy sector. Measures to achieve these objectives are included in other existing programs and plans.
First, the Federal Climate Change Act (Klimaschutzgesetz) sets legally binding greenhouse gas (GHG) emission targets for individual sectors, including the energy sector. For 2030, the emission volume is set at a maximum of 108 million tons of CO2-equivalents, representing a 77% reduction compared to 1990. These emission goals are continuously monitored. If the sector does not meet its emission target, the responsible ministry must develop and implement an immediate program with measures to meet the required target (Umweltbundesamt, 2023).
Second, measures to reach these targets are outlined in the Action Plan 2050 (Klimaschutzplan 2050) and the Climate Protection Program 2030 (Klimaschutzprogramm 2030), which specify multiple actions to achieve climate neutrality. For example, the Climate Protection Program 2030 includes the gradual reduction and eventual end of coal-fired power generation. Onshore wind energy is also to be expanded, specifically by accelerating planning procedures, involving local citizens at an early stage, and improving the permit situation (BMU, 2019).
Third, through the adaptation of the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG), a primary target for the energy sector is to increase the share of renewable energy sources to a minimum of 80% by 2030, supporting the measure of significantly scaling back fossil-based energy. To achieve this, a set of immediate measures was adopted by the parliament in 2022, including actions such as accelerating the planned expansion of onshore wind turbines (BMWK, 2024).
In 2022, Germany had electricity production capacities – the maximum amount of power that can be generated – of 66,163 megawatts for wind energy, 10,974 megawatts for hydro energy, and 1,592 megawatts for energy from solid biofuels. The wind energy capacity was particularly notable, increasing from 33,477 megawatts in 2013. Germany’s wind energy capacity is the highest among countries in the Euro area. For wind energy, Germany ranked sixth and fourth for solid biofuel energy. Germany also had the highest solar energy capacity in the Euro area in 2020, with 53,671 megawatts (Eurostat, 2024a).
Finally, due to a lack of specific information, no informed statement can be made on whether the government monitors the effective implementation of policies if the implementation is delegated or whether it can intervene if the implementation is endangered.
Citations:
BMU. 2019. “Klimaschutzprogramm 2030 der Bundesregierung zur Umsetzung des Klimaschutzplans 2050.” https://www.bundesregierung.de/resource/blob/974430/1679914/c8724321decefc59cca0110063409b50/2019-10-09-klima-massnahmen-data.pdf?download=1
BMWK. 2023. “Zwischenbericht der Systementwicklungsstrategie.” https://www.bmwk.de/Redaktion/DE/Publikationen/Energie/20231122-zwischenbericht-der-systementwicklungsstrategie.pdf?__blob=publicationFile&v=11
BMWK. 2024. “Das steckt im Osterpaket.” https://www.bmwk-energiewende.de/EWD/Redaktion/Newsletter/2022/04/Meldung/topthema.html
Eurostat. 2024a. “Electricity production capacities for renewables and wastes.” https://ec.europa.eu/eurostat/databrowser/view/NRG_INF_EPCRW/default/table?lang=en
Umweltbundesamt. 2023. “Treibhausgasminderungsziele Deutschlands.” https://www.umweltbundesamt.de/daten/klima/treibhausgasminderungsziele-deutschlands#nationale-treibhausgasminderungsziele-und-deren-umsetzung
World Economic Forum. 2021. “Fostering Effective Energy Transition 2021 Edition.” https://www.weforum.org/publications/fostering-effective-energy-transition-2021/in-full/rankings
Graph View
To what extent do existing labor market institutions support or hinder the transition to an adaptive labor market?
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Labor market institutions are fully aligned with the goal of an adaptable labor market.
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Labor market institutions are largely aligned with the goal of an adaptable labor market.
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Labor market institutions are only somewhat aligned with the goal of an adaptable labor market.
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1
Labor market institutions are not at all aligned with the goal of an adaptable labor market.
Germany’s labor market increasingly faces shortages across all sectors and qualification levels. In this setting, employers have a growing self-interest in retaining and developing the skills of their workforce. Moreover, Germany has a tradition of long and stable employment where employees tend to stay with their employers for extended periods. The average duration of employment with a given company is 11.2 years (2020) and has not substantially changed from the levels in the 1990s (iwd, 2022). This environment encourages employers to invest in their workforce’s skills.
However, participation in training measures is only at 8% (the survey asks about participation in a measure in the past four weeks), which is clearly below the EU average of 12% with much higher numbers in Scandinavia (Destatis, 2023). Regulation on paid leave for external training measures is the responsibility of the federal states. In 14 of the 16 states, there is a legal claim for this type of paid leave amounting, in most cases, to 5 days per year (DGB, 2022).
Employers and employees alike must be incentivized to invest in their skills. Germany faces an issue due to high marginal tax rates (see “Policies Targeting Adequate Tax Revenue”), which not only disincentivize longer working hours but also higher skill-related salaries. Moreover, Germany’s labor market is heavily regulated with high hurdles for dismissals. On one hand, this provides job security; on the other hand, it can reduce incentives for demotivated workers to invest in their skills.
Germany leads the countries with a particularly generous and established short-time work scheme system. The German system provided a template for many other industrial countries, especially during the COVID-19 pandemic. In severe crises like the pandemic, the support is intensified.
The mission of the Federal Agency for Labor (Bundesagentur für Arbeit: BA) is to support worker mobility across firms, industries, regions, and countries. Current evaluations of the BA’s effectiveness are lacking. Although high employment growth in recent years suggests effective mobility, it is unclear whether the BA has played a significant role in this success.
Citations:
Destatis. 2023. “Weiterbildung: Teilnahmequote in Deutschland mit 8 % unter dem EU-Durchschnitt, Zahl der Woche Nr. 42 vom 17. Oktober 2023.”
DGB. 2022. “Bildungsurlaub: Wie beantragen? Wer hat Anspruch? Wer zahlt?” www.dgb.de/urlaub/++co++fe6281e0-b9eb-11e5-a576-52540023ef1a#uuid-b23937a4-66a0-11ee-8b49-001a4a160123
Iwd. 2022. “Betriebszugehörigkeit: Lange im Betrieb.” Informationsdienst des Instituts der deutschen Wirtschaft, February 17.
However, participation in training measures is only at 8% (the survey asks about participation in a measure in the past four weeks), which is clearly below the EU average of 12% with much higher numbers in Scandinavia (Destatis, 2023). Regulation on paid leave for external training measures is the responsibility of the federal states. In 14 of the 16 states, there is a legal claim for this type of paid leave amounting, in most cases, to 5 days per year (DGB, 2022).
Employers and employees alike must be incentivized to invest in their skills. Germany faces an issue due to high marginal tax rates (see “Policies Targeting Adequate Tax Revenue”), which not only disincentivize longer working hours but also higher skill-related salaries. Moreover, Germany’s labor market is heavily regulated with high hurdles for dismissals. On one hand, this provides job security; on the other hand, it can reduce incentives for demotivated workers to invest in their skills.
Germany leads the countries with a particularly generous and established short-time work scheme system. The German system provided a template for many other industrial countries, especially during the COVID-19 pandemic. In severe crises like the pandemic, the support is intensified.
The mission of the Federal Agency for Labor (Bundesagentur für Arbeit: BA) is to support worker mobility across firms, industries, regions, and countries. Current evaluations of the BA’s effectiveness are lacking. Although high employment growth in recent years suggests effective mobility, it is unclear whether the BA has played a significant role in this success.
Citations:
Destatis. 2023. “Weiterbildung: Teilnahmequote in Deutschland mit 8 % unter dem EU-Durchschnitt, Zahl der Woche Nr. 42 vom 17. Oktober 2023.”
DGB. 2022. “Bildungsurlaub: Wie beantragen? Wer hat Anspruch? Wer zahlt?” www.dgb.de/urlaub/++co++fe6281e0-b9eb-11e5-a576-52540023ef1a#uuid-b23937a4-66a0-11ee-8b49-001a4a160123
Iwd. 2022. “Betriebszugehörigkeit: Lange im Betrieb.” Informationsdienst des Instituts der deutschen Wirtschaft, February 17.
To what extent do existing labor market institutions support or hinder the transition to an inclusive labor market?
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9
9
Labor market institutions are fully aligned with the goal of an inclusive labor market.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of an inclusive labor market.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of an inclusive labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an inclusive labor market.
The German welfare state provides a generous level of support through a guaranteed minimum-income citizens’ benefit for job-seekers (Bürgergeld). Bürgergeld and financial support for housing costs (Wohngeld) are also available for low-income workers. Income from work is offset against the Bürgergeld and Wohngeld, but not fully. In general, transfer recipients can increase their available income by taking up work. However, there is an ongoing debate about whether the often marginal increase in income is sufficient to create incentives to work. The debate has intensified after significant increases in the level of Bürgergeld due to the semi-automatic inflation indexation of the system. Low-skilled individuals are confronted with effective hourly wages (in terms of additional money compared to non-work) of just a few euros. This may effectively prevent the unemployed from sacrificing their leisure time for a very limited monetary return. Current studies propose reducing the margin by which work income reduces transfers to increase work incentives (ifo and zew, 2023). Other concepts suggest cutting back the generosity of transfers and/or increasing financial sanctions for transfer recipients refusing to take up a job offer (MDR, 2023).
The German labor market policies have always included a wide range of measures: activation and vocational integration, career choice and vocational training, special programs for taking up employment, participation of people with disabilities, and employment-creating measures (see for details GIB, 2020).
Young people receive special attention in all these measures and participate disproportionately in these programs. Moreover, some active labor market policies explicitly target young individuals, such as measures aimed at the beginning of occupational training. This may include special courses to prepare certain groups for their occupational training (GIB, 2020).
Germany has a developed welfare state with extensive regulations on regular and special-purpose unpaid holidays – such as for family tasks, illness, and care – working times, and work safety. Social partners also pay significant attention to continuously adjusting rules to match changing life realities and the possibilities of remote work. This creates a solid foundation for workers to achieve a work-life balance. The very low hours worked per capita – much lower than in most other OECD countries – also indicate that workers in Germany have ample opportunity to spend their time outside of work.
So far, employers are not legally obliged to accept remote work. However, in many sectors, remote work has become the norm, and competition among companies for qualified workers supports this development. In 2022, 24.2% of workers regularly worked from home, which is double the pre-pandemic level (Destatis, 2024).
Citations:
Destatis. 2024. “Erwerbstätige, die von zu Hause aus arbeiten.” www.destatis.de/DE/Themen/Arbeit/Arbeitsmarkt/Qualitaet-Arbeit/Dimension-3/home-office.html
GIB. 2020. “Arbeitsmarktpolitische Maßnahmen.” G.I.B. Kurzbericht 1/2020: Statistik zum Arbeits- und Ausbildungsmarkt.
Ifo and ZEW. 2023. “Bürgergeld: Mehr Netto vom Brutto erhöht Beschäftigung.” www.zew.de/das-zew/aktuelles/buergergeld-mehr-netto-vom-brutto-erhoeht-beschaeftigung
MDR. 2023. “Union und FDP wollen Bürgergeld-Erhöhung stoppen.” www.mdr.de/nachrichten/deutschland/politik/buergergeld-haushalt-debatte-finanzierung-100.html
The German labor market policies have always included a wide range of measures: activation and vocational integration, career choice and vocational training, special programs for taking up employment, participation of people with disabilities, and employment-creating measures (see for details GIB, 2020).
Young people receive special attention in all these measures and participate disproportionately in these programs. Moreover, some active labor market policies explicitly target young individuals, such as measures aimed at the beginning of occupational training. This may include special courses to prepare certain groups for their occupational training (GIB, 2020).
Germany has a developed welfare state with extensive regulations on regular and special-purpose unpaid holidays – such as for family tasks, illness, and care – working times, and work safety. Social partners also pay significant attention to continuously adjusting rules to match changing life realities and the possibilities of remote work. This creates a solid foundation for workers to achieve a work-life balance. The very low hours worked per capita – much lower than in most other OECD countries – also indicate that workers in Germany have ample opportunity to spend their time outside of work.
So far, employers are not legally obliged to accept remote work. However, in many sectors, remote work has become the norm, and competition among companies for qualified workers supports this development. In 2022, 24.2% of workers regularly worked from home, which is double the pre-pandemic level (Destatis, 2024).
Citations:
Destatis. 2024. “Erwerbstätige, die von zu Hause aus arbeiten.” www.destatis.de/DE/Themen/Arbeit/Arbeitsmarkt/Qualitaet-Arbeit/Dimension-3/home-office.html
GIB. 2020. “Arbeitsmarktpolitische Maßnahmen.” G.I.B. Kurzbericht 1/2020: Statistik zum Arbeits- und Ausbildungsmarkt.
Ifo and ZEW. 2023. “Bürgergeld: Mehr Netto vom Brutto erhöht Beschäftigung.” www.zew.de/das-zew/aktuelles/buergergeld-mehr-netto-vom-brutto-erhoeht-beschaeftigung
MDR. 2023. “Union und FDP wollen Bürgergeld-Erhöhung stoppen.” www.mdr.de/nachrichten/deutschland/politik/buergergeld-haushalt-debatte-finanzierung-100.html
To what extent do existing labor market institutions support or hinder the mitigation of labor market risks?
10
9
9
Labor market institutions are fully aligned with the goal of protecting individuals against labor market risks.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of protecting individuals against labor market risks.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of protecting individuals against labor market risks.
2
1
1
Labor market institutions are not at all aligned with the goal of protecting individuals against labor market risks.
Social protection in Germany is generally comprehensive. The Bürgergeld minimum-income support is available to all job-seekers, regardless of prior employment, and includes health insurance and access to public services, including the free public education system. Additionally, states and municipalities provide targeted support to low-income households through subsidized public transport and free access to various public services. However, the German pension insurance system bases pensions on individual contributions. Consequently, workers with extensive part-time employment or marginal employment (geringfügige Beschäftigung) may face low pension entitlements in old age. In these cases, the Bürgergeld system offers basic protection, supplemented by various instruments aimed at bolstering the pensions of workers with limited employment (see “Policies Aimed at Old-Age Poverty” Prevention).
Every worker has the right to join a trade union, but union membership has been declining, dropping from 9.8 million in 1994 to 5.6 million in a DGB trade union in 2022 (Statista, 2024). Interest in trade union membership is particularly low among high-skilled employees in the service sector, whereas the industry and public sectors have higher membership rates. Worker representation, independent of trade union membership, is supported by guaranteed company co-determination.
The Betriebsverfassungsgesetz (Works Constitution Act), effective since 1952, defines comprehensive information, consultation, and co-determination rights for works councils. However, coverage is not universal and is declining, with only 41% of workers employed by companies with a works council (IAB, 2023). Co-determination is more prevalent in older, larger, and industrial companies, and less common in newer, smaller companies in the service sector.
There are no significant restrictions on the portability of pensions or social insurance, as social insurance is not tied to a specific employer or sector. Private pension claims against a former employer are generally portable, with limitations only for very short employment contracts. Typically, after a few years, the non-forfeitability (Unverfallbarkeit) of private pension claims is reached, allowing the worker to transfer the contract to a new employer or receive financial compensation.
Citations:
IAB. 2023. “Tarifbindung und Mitbestimmung: Keine Trendumkehr in Westdeutschland, Stabilisierung in Ostdeutschland.” IAB-Forum, July 20. www.iab-forum.de/tarifbindung-und-mitbestimmung-keine-trendumkehr-in-sicht/
Statista. 2024. “Anzahl der Mitglieder des Deutschen Gewerkschaftsbunds (DGB) von 1994 bis 2022.” https://de.statista.com/statistik/daten/studie/3266/umfrage/mitgliedszahlen-des-dgb-seit-dem-jahr-1994/
Every worker has the right to join a trade union, but union membership has been declining, dropping from 9.8 million in 1994 to 5.6 million in a DGB trade union in 2022 (Statista, 2024). Interest in trade union membership is particularly low among high-skilled employees in the service sector, whereas the industry and public sectors have higher membership rates. Worker representation, independent of trade union membership, is supported by guaranteed company co-determination.
The Betriebsverfassungsgesetz (Works Constitution Act), effective since 1952, defines comprehensive information, consultation, and co-determination rights for works councils. However, coverage is not universal and is declining, with only 41% of workers employed by companies with a works council (IAB, 2023). Co-determination is more prevalent in older, larger, and industrial companies, and less common in newer, smaller companies in the service sector.
There are no significant restrictions on the portability of pensions or social insurance, as social insurance is not tied to a specific employer or sector. Private pension claims against a former employer are generally portable, with limitations only for very short employment contracts. Typically, after a few years, the non-forfeitability (Unverfallbarkeit) of private pension claims is reached, allowing the worker to transfer the contract to a new employer or receive financial compensation.
Citations:
IAB. 2023. “Tarifbindung und Mitbestimmung: Keine Trendumkehr in Westdeutschland, Stabilisierung in Ostdeutschland.” IAB-Forum, July 20. www.iab-forum.de/tarifbindung-und-mitbestimmung-keine-trendumkehr-in-sicht/
Statista. 2024. “Anzahl der Mitglieder des Deutschen Gewerkschaftsbunds (DGB) von 1994 bis 2022.” https://de.statista.com/statistik/daten/studie/3266/umfrage/mitgliedszahlen-des-dgb-seit-dem-jahr-1994/
Graph View
To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
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9
9
The tax system is fully aligned with the goals of ensuring adequate tax revenues.
8
7
6
7
6
The tax system is largely aligned with the goals of ensuring adequate tax revenues.
5
4
3
4
3
The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
2
1
1
The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
Germany’s tax system has effectively generated dynamic revenue growth. From 2019, the last year before the COVID-19 pandemic, to 2023, revenues increased from €799 billion to €916 billion, a rise of 14.6% despite the strong economic downturn caused by the pandemic (BMF 2023 a,b). Current tax projections indicate continued strong growth, with revenues expected to surpass €1 trillion in 2025 (BMF, 2023a).
However, the German tax system must today be seen as one of the significant reasons for a declining German growth potential. High marginal tax rates disincentivize both employment and corporate investment.
The top marginal personal income tax rate of 47.5% is comparable to the OECD average (OECD 2023), but the average marginal rate remains a key challenge for Germany’s competitiveness. An average single earner pays marginal taxes, including social security contributions, of 58.4% of labor costs. This places Germany at a top position in the OECD and 15 percentage points above the OECD average (OECD 2023: 75). These high marginal tax rates reduce the willingness to work and incentivize a cutback of working hours. This situation has serious consequences for the country’s growth potential given the shrinking labor force due to the aging population.
The corporate tax system in Germany lacks international competitiveness. Over the past decade, Germany’s position in effective corporate tax rate comparisons has steadily declined. In 2022, very few industrial countries impose a higher tax burden on companies. Among 35 European countries, Japan, and the United States, Germany ranks third in its effective average tax rate on companies, which includes all details of tax base definitions (ZEW, 2023). In Europe, only Spain imposes a slightly larger tax burden on companies. Consequently, Germany has lost considerable tax appeal as a destination for foreign direct investment. Although Germany is among the initiators of the new OECD rules on international minimum corporate tax rates, this project is unlikely to improve German tax competitiveness since the international minimum tax rate will be set far below the German level.
The German tax administration, by international standards, effectively collects revenues and combats tax evasion. International estimates on the size of the shadow economy consistently report GDP shares for Germany that are clearly below the average for EU and OECD countries (Hassan and Schneider, 2016).
Citations:
BMF. 2023a. Datensammlung zur Steuerpolitik. Berlin: Bundesministerium der Finanzen.
BMF. 2023b. “Ergebnisse der Steuerschätzung vom 24. bis 26. Oktober 2023.” Monatsbericht des BMF, November.
Hassan, M., and F. Schneider. 2016. “Size and Development of the Shadow Economies of 157 Worldwide Countries: Updated and New Measures from 1999 to 2013.” Journal of Global Economics 4 (3): 1–14.
OECD. 2023. Taxing Wages, Indexation of Labour Taxation and Benefits in OECD Countries. Paris: OECD Publishing.
ZEW. 2023. “Mannheim Tax Index.” www.zew.de/mannheim-tax-index
However, the German tax system must today be seen as one of the significant reasons for a declining German growth potential. High marginal tax rates disincentivize both employment and corporate investment.
The top marginal personal income tax rate of 47.5% is comparable to the OECD average (OECD 2023), but the average marginal rate remains a key challenge for Germany’s competitiveness. An average single earner pays marginal taxes, including social security contributions, of 58.4% of labor costs. This places Germany at a top position in the OECD and 15 percentage points above the OECD average (OECD 2023: 75). These high marginal tax rates reduce the willingness to work and incentivize a cutback of working hours. This situation has serious consequences for the country’s growth potential given the shrinking labor force due to the aging population.
The corporate tax system in Germany lacks international competitiveness. Over the past decade, Germany’s position in effective corporate tax rate comparisons has steadily declined. In 2022, very few industrial countries impose a higher tax burden on companies. Among 35 European countries, Japan, and the United States, Germany ranks third in its effective average tax rate on companies, which includes all details of tax base definitions (ZEW, 2023). In Europe, only Spain imposes a slightly larger tax burden on companies. Consequently, Germany has lost considerable tax appeal as a destination for foreign direct investment. Although Germany is among the initiators of the new OECD rules on international minimum corporate tax rates, this project is unlikely to improve German tax competitiveness since the international minimum tax rate will be set far below the German level.
The German tax administration, by international standards, effectively collects revenues and combats tax evasion. International estimates on the size of the shadow economy consistently report GDP shares for Germany that are clearly below the average for EU and OECD countries (Hassan and Schneider, 2016).
Citations:
BMF. 2023a. Datensammlung zur Steuerpolitik. Berlin: Bundesministerium der Finanzen.
BMF. 2023b. “Ergebnisse der Steuerschätzung vom 24. bis 26. Oktober 2023.” Monatsbericht des BMF, November.
Hassan, M., and F. Schneider. 2016. “Size and Development of the Shadow Economies of 157 Worldwide Countries: Updated and New Measures from 1999 to 2013.” Journal of Global Economics 4 (3): 1–14.
OECD. 2023. Taxing Wages, Indexation of Labour Taxation and Benefits in OECD Countries. Paris: OECD Publishing.
ZEW. 2023. “Mannheim Tax Index.” www.zew.de/mannheim-tax-index
To what extent do existing tax institutions and procedures consider equity aspects?
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9
9
The tax system is fully aligned with the goal of ensuring equity.
8
7
6
7
6
The tax system is largely aligned with the goal of ensuring equity.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of ensuring equity.
2
1
1
The tax system is not at all aligned with the goal of ensuring equity.
In principle, the German tax system treats entities with similar tax-paying abilities in a similar manner. Exemptions often relate to sectoral tax subsidies. For example, farmers are exempt from paying the motor vehicle tax (Kfz-Steuer) and benefit from a tax subsidy on diesel fuel consumption. These exemptions often have historical origins and are defended by special interest groups, even if they have clearly lost their justification. Following a 2023 ruling of the Federal Constitutional Court on the Debt Brake, the government has proposed phasing out these sectoral tax exemptions, which, from the perspective of equal sectoral treatment, would represent progress.
A specific feature of the German income tax system is its attention to the details of each individual tax case. Taxpayers can claim reductions for a multitude of special circumstances. Although this attempt to ensure maximum fairness for each case creates significant complexity, it contributes to vertical equity.
Germany’s tax and transfer system is notably effective in redistributing income between the rich and the poor among OECD countries. This system significantly reduces inequality in market incomes, resulting in a more equitable post-tax scenario. The Gini coefficient, which is 0.49 for pre-tax market incomes, drops to 0.29 for disposable incomes after applying all redistributive tax and transfer mechanisms (Sachverständigenrat 2019). Thus, the tax and transfer system excels in achieving its redistributive objectives and equalizing incomes.
Germany taxes inheritances but allows generous provisions for corporate wealth. There is no wealth tax, and the idea is highly controversial. Therefore, while income is significantly equalized through the tax system, this is less true for wealth.
Citations:
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung. 2019. Den Strukturwandel meistern, Jahresgutachten 19/20. Wiesbaden: Sachverständigenrat.
A specific feature of the German income tax system is its attention to the details of each individual tax case. Taxpayers can claim reductions for a multitude of special circumstances. Although this attempt to ensure maximum fairness for each case creates significant complexity, it contributes to vertical equity.
Germany’s tax and transfer system is notably effective in redistributing income between the rich and the poor among OECD countries. This system significantly reduces inequality in market incomes, resulting in a more equitable post-tax scenario. The Gini coefficient, which is 0.49 for pre-tax market incomes, drops to 0.29 for disposable incomes after applying all redistributive tax and transfer mechanisms (Sachverständigenrat 2019). Thus, the tax and transfer system excels in achieving its redistributive objectives and equalizing incomes.
Germany taxes inheritances but allows generous provisions for corporate wealth. There is no wealth tax, and the idea is highly controversial. Therefore, while income is significantly equalized through the tax system, this is less true for wealth.
Citations:
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung. 2019. Den Strukturwandel meistern, Jahresgutachten 19/20. Wiesbaden: Sachverständigenrat.
To what extent do existing tax institutions and procedures minimize compliance and collection costs?
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9
9
The tax system is fully aligned with the goal of minimizing compliance and collection costs.
8
7
6
7
6
The tax system is largely aligned with the goal of minimizing compliance and collection costs.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of minimizing compliance and collection costs.
2
1
1
The tax system is not at all aligned with the goal of minimizing compliance and collection costs.
The German income tax system is one of the most differentiated and complex in the global tax landscape. While standard tax declarations for employees’ wages are generally straightforward, the ambition to account for all the individual features of a single tax case has resulted in substantial complexities and reporting requirements.
Hence, tax compliance costs in Germany are significant. Digital tax declaration possibilities have advanced in recent years, with more information, such as from employers and health insurers, being centrally provided. Still, an SME in Germany needs a relatively high number of hours to comply with its tax reporting and declaration requirements (World Bank 2020).
Citations:
World Bank. 2020a. “Doing Business, Paying Taxes: Time (Hours per Year) [PAY.TAX.TM].” https://databank.worldbank.org/source/doing-business
Hence, tax compliance costs in Germany are significant. Digital tax declaration possibilities have advanced in recent years, with more information, such as from employers and health insurers, being centrally provided. Still, an SME in Germany needs a relatively high number of hours to comply with its tax reporting and declaration requirements (World Bank 2020).
Citations:
World Bank. 2020a. “Doing Business, Paying Taxes: Time (Hours per Year) [PAY.TAX.TM].” https://databank.worldbank.org/source/doing-business
To what extent do existing tax institutions and procedures internalize negative and positive externalities?
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9
9
The tax system is fully aligned with the goal of internalizing externalities.
8
7
6
7
6
The tax system is largely aligned with the goal of internalizing externalities.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of internalizing externalities.
2
1
1
The tax system is not at all aligned with the goal of internalizing externalities.
Since the ecological tax reforms of the late 1990s, the German tax system has included “green” taxes designed to internalize the ecological damage produced by certain polluting activities. German industry is subject to the European emissions-trading system, which features market-based pricing of CO2 emissions. In 2021, Germany took another significant step toward comprehensive CO2 pricing by introducing a national price on CO2 for fossil fuels used for heating and cars. This CO2 levy is increasing from its starting price of €25 in 2021 to €45 in 2024 and €55 in 2025. In 2027, a European emission trading system is planned to cover emissions from traffic and buildings. With this system, the CO2 price will then be determined as the market price in this trading system (Bundesregierung, 2024).
Critics argue that the government could do more with price incentives. The current administration seeks to steer the green transition through regulations that mandate specific technologies. A recent example is the new Building Energy Act (Gebäudeenergiegesetz). This act prescribes in detail which technology must be used under certain circumstances. The concept of a price mechanism is to leave these decisions to the voluntary actions of agents, potentially leading to higher efficiency.
Subsidies and tax incentives are largely focused on measures with ecological or research-related justifications. Among the largest federal subsidies are support for energy efficiency in buildings, support for microelectronics, hydrogen infrastructure, charging and fueling infrastructure, measures for natural climate protection, and climate protection contracts with industry (BMF, 2023). The financial capacity of the government to fund these incentives has been curtailed by the Federal Constitutional Court’s ruling on the German Debt Brake, forcing the government to reprioritize these subsidies. However, the government remains committed to using substantial financial incentives to support the green transition.
Citations:
BMF. 2023. Subventionsbericht des Bundes 2021-2024. Berlin: Bundesministerium der Finanzen.
Bundesregierung. 2024. “CO2-Preis steigt auf 45 Euro pro Tonne.” Pressemitteilung 1. Januar. www.bundesregierung.de/breg-de/aktuelles/co2-preis-kohle-abfallbrennstoffe-2061622
Critics argue that the government could do more with price incentives. The current administration seeks to steer the green transition through regulations that mandate specific technologies. A recent example is the new Building Energy Act (Gebäudeenergiegesetz). This act prescribes in detail which technology must be used under certain circumstances. The concept of a price mechanism is to leave these decisions to the voluntary actions of agents, potentially leading to higher efficiency.
Subsidies and tax incentives are largely focused on measures with ecological or research-related justifications. Among the largest federal subsidies are support for energy efficiency in buildings, support for microelectronics, hydrogen infrastructure, charging and fueling infrastructure, measures for natural climate protection, and climate protection contracts with industry (BMF, 2023). The financial capacity of the government to fund these incentives has been curtailed by the Federal Constitutional Court’s ruling on the German Debt Brake, forcing the government to reprioritize these subsidies. However, the government remains committed to using substantial financial incentives to support the green transition.
Citations:
BMF. 2023. Subventionsbericht des Bundes 2021-2024. Berlin: Bundesministerium der Finanzen.
Bundesregierung. 2024. “CO2-Preis steigt auf 45 Euro pro Tonne.” Pressemitteilung 1. Januar. www.bundesregierung.de/breg-de/aktuelles/co2-preis-kohle-abfallbrennstoffe-2061622
Graph View
To what extent do existing budgetary institutions and procedures support or hinder sustainable budgeting?
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9
9
Budgetary institutions and policies are fully aligned with the goals of sustainable budgeting.
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6
7
6
Budgetary institutions and policies are largely aligned with the goals of sustainable budgeting.
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3
4
3
Budgetary institutions and policies are only somewhat aligned with the goals of sustainable budgeting.
2
1
1
Budgetary institutions and policies are not at all aligned with the goals of sustainable budgeting.
Germany enacted its current constitutional fiscal rule, the Debt Brake (Schuldenbremse), in 2009. The rule’s full application was phased in over several years and took full effect for the federal budget in 2016 and for the states in 2020. The Debt Brake is established in Articles 109 and 115 of the German Basic Law, comprising both structural and cyclical elements. The structural component restricts the federal government from incurring new debt beyond 0.35% of the nominal gross domestic product annually. The cyclical element permits additional borrowing during economic downturns, with the obligation to repay when economic conditions recover. Additionally, there is an escape clause that enables the Bundestag to temporarily lift the Debt Brake by a simple majority in cases of natural disasters or other exceptional emergencies beyond the state’s control. The states have to balance their budgets without an allowance for a deficit but, like the federal level, can incur deficits in a downturn and also activate an escape clause.
Germany’s Debt Brake has served as an effective fiscal rule, helping the government counteract the inherent biases in the political process. Unlike many other EU and OECD countries, Germany managed to reduce its debt-to-GDP ratio following the financial crisis. By 2019, when the country faced the fiscal consequences of the pandemic, Germany was in the favorable situation of having significant fiscal buffers, with a debt-to-GDP ratio of approximately 60%.
In reaction to the pandemic and the energy crisis, the federal government has increasingly used budgetary cosmetics to expand its debt leeway through extra-budgetary funds such as the Climate and Transformation Fund (Klima- und Transformationsfonds: KTF). Through the KTF, a deficit allowance justified by the pandemic emergency was shifted for use in later years. This practice was halted by a significant ruling in November 2023 by the Federal Constitutional Court (FCC). The Court declared this creative construction unlawful and the related budget void. Consequently, in a turbulent and conflict-ridden process, the government had to adjust both the 2023 and 2024 budgets with spending cuts and cuts to tax exemptions that had benefited the restaurant sector and farmers.
The FCC’s ruling has clearly strengthened the Debt Brake’s effectiveness. The budgetary reactions have demonstrated how helpful such a fiscal rule is for a government to prevail against fierce lobbying pressure. Without the pressure from the strengthened fiscal rule, the government would not have been able to cut tax subsidies for restaurants and farmers, although these cuts find overwhelming support from tax and public finance experts.
Whether the tight Debt Brake presents an obstacle to public investment or other future-oriented spending is the subject of an intensive debate. The Debt Brake does not include a golden rule or similar provisions that would permit additional debt for investment spending. In a recent survey of German economists, a large majority supports the Debt Brake in principle, but 44% favor reforming it (ifo, 2023). Reform supporters often wish to exempt gross or net investment from the deficit ceiling.
The annual budgetary process is embedded in medium-term financial planning. Each year, the government provides budgetary projections for the next five years, adding foresight to the budgetary process. Once per legislative term, the government publishes a Report on the Sustainability of Public Finances (the last report: BMF, 2020), which adopts a very long-term perspective.
The role of off-budget funds outside the core budget has significantly increased in recent crisis years. Fiscal support to cope with various crises – from the pandemic to flood damage and the energy crisis – has been mobilized through these special funds. Experts have criticized this reliance on off-budget funds, arguing that it damages budgetary transparency. The Constitutional Court’s ruling has now initiated a correction. As a consequence of the ruling, the government has announced plans to decrease or close down key special funds.
The German Ministry of Finance has recently implemented a system of SDG tagging, where ministries classify their spending with respect to the SDGs. In the future, the federal budget will more transparently show how it supports the SDGs. Germany has committed to several spending targets, including the NATO spending target of 2.0% of GDP on defense and the development spending target of 0.7% of GDP. However, the government increasingly aims to implement principles of performance budgeting, which implies taking a critical view of mere input spending targets. Instead, the government wants to assess the budget more on the basis of outcomes and impact achieved.
Citations:
BMF. 2020. Tragfähigkeitsbericht 2020, Fünfter Bericht Tragfähigkeit der öffentlichen Finanzen. Berlin.
Ifo. 2023. “The German Debt Brake – Anchor of Stability or Blocker of Investments?” www.ifo.de/en/facts/2023-12-08/german-debt-brake-anchor-stability-or-blocker-investments
Germany’s Debt Brake has served as an effective fiscal rule, helping the government counteract the inherent biases in the political process. Unlike many other EU and OECD countries, Germany managed to reduce its debt-to-GDP ratio following the financial crisis. By 2019, when the country faced the fiscal consequences of the pandemic, Germany was in the favorable situation of having significant fiscal buffers, with a debt-to-GDP ratio of approximately 60%.
In reaction to the pandemic and the energy crisis, the federal government has increasingly used budgetary cosmetics to expand its debt leeway through extra-budgetary funds such as the Climate and Transformation Fund (Klima- und Transformationsfonds: KTF). Through the KTF, a deficit allowance justified by the pandemic emergency was shifted for use in later years. This practice was halted by a significant ruling in November 2023 by the Federal Constitutional Court (FCC). The Court declared this creative construction unlawful and the related budget void. Consequently, in a turbulent and conflict-ridden process, the government had to adjust both the 2023 and 2024 budgets with spending cuts and cuts to tax exemptions that had benefited the restaurant sector and farmers.
The FCC’s ruling has clearly strengthened the Debt Brake’s effectiveness. The budgetary reactions have demonstrated how helpful such a fiscal rule is for a government to prevail against fierce lobbying pressure. Without the pressure from the strengthened fiscal rule, the government would not have been able to cut tax subsidies for restaurants and farmers, although these cuts find overwhelming support from tax and public finance experts.
Whether the tight Debt Brake presents an obstacle to public investment or other future-oriented spending is the subject of an intensive debate. The Debt Brake does not include a golden rule or similar provisions that would permit additional debt for investment spending. In a recent survey of German economists, a large majority supports the Debt Brake in principle, but 44% favor reforming it (ifo, 2023). Reform supporters often wish to exempt gross or net investment from the deficit ceiling.
The annual budgetary process is embedded in medium-term financial planning. Each year, the government provides budgetary projections for the next five years, adding foresight to the budgetary process. Once per legislative term, the government publishes a Report on the Sustainability of Public Finances (the last report: BMF, 2020), which adopts a very long-term perspective.
The role of off-budget funds outside the core budget has significantly increased in recent crisis years. Fiscal support to cope with various crises – from the pandemic to flood damage and the energy crisis – has been mobilized through these special funds. Experts have criticized this reliance on off-budget funds, arguing that it damages budgetary transparency. The Constitutional Court’s ruling has now initiated a correction. As a consequence of the ruling, the government has announced plans to decrease or close down key special funds.
The German Ministry of Finance has recently implemented a system of SDG tagging, where ministries classify their spending with respect to the SDGs. In the future, the federal budget will more transparently show how it supports the SDGs. Germany has committed to several spending targets, including the NATO spending target of 2.0% of GDP on defense and the development spending target of 0.7% of GDP. However, the government increasingly aims to implement principles of performance budgeting, which implies taking a critical view of mere input spending targets. Instead, the government wants to assess the budget more on the basis of outcomes and impact achieved.
Citations:
BMF. 2020. Tragfähigkeitsbericht 2020, Fünfter Bericht Tragfähigkeit der öffentlichen Finanzen. Berlin.
Ifo. 2023. “The German Debt Brake – Anchor of Stability or Blocker of Investments?” www.ifo.de/en/facts/2023-12-08/german-debt-brake-anchor-stability-or-blocker-investments
Graph View
How committed is the government to utilizing research and innovation as drivers for the transition to a sustainable economy and society?
10
9
9
The government is clearly committed to utilizing research and innovation as drivers for the transition to a sustainable economy and society.
8
7
6
7
6
The government is largely committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
5
4
3
4
3
The government is somewhat committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
2
1
1
The government is not at all committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
With the FONA strategy (Forschung für Nachhaltigkeit, research for sustainability) published at the end of 2020, the Federal Ministry of Education and Research (BMBF) has aligned its research funding for climate protection and greater sustainability with the United Nations 2030 Agenda. The FONA strategy focuses on the global SDGs and outlines three strategic goals to which research can significantly contribute. These goals are detailed in eight priority fields of action, each with specific measures to achieve the strategic objectives. For instance, to meet climate goals, one action involves establishing green hydrogen. To preserve habitats, another action is developing the biodiversity monitor for Germany. Like all such strategies, FONA expresses a political commitment, but it is not legally binding.
Startups benefit from various federal and state support schemes. However, like any other companies, they suffer from intense regulation and bureaucratic burdens in Germany across various fields, such as labor market, taxation, data protection, and environmental regulation. Venture capital markets are underdeveloped in Europe compared to the US. The German venture capital market has shown high growth rates over recent years, with investment more than doubling between 2018 (€1.5 billion) and 2021 (€4.0 billion) (Statista, 2024). After this peak, investment volumes decreased due to the difficult environment of high inflation and interest rates.
Since 2020, Germany has applied an R&D tax incentive. Since then, spending on R&D staff has benefited from a 25% tax allowance that will be paid out if the entity makes a loss. The allowance can be applied to a maximum of €2 million, which limits the subsidy to €500,000 per company per year. This amount was doubled for the period between mid-2020 and mid-2026 in the context of pandemic support measures (Bundestag, 2023).
Responsibility for promoting science and research is divided between the federal government and the state governments. For example, the federal government exercises legislative powers in areas such as research funding and training grants (Art. 74 (1), no. 13 GG). The higher education sector, however, is fundamentally the responsibility of the federal states (Art. 30, 70 GG). The federal and state governments have two coordinating and advisory bodies at their disposal: the Gemeinsame Wissenschaftskonferenz (Joint Science Conference, GWK) and the Wissenschaftsrat (Science Council, WR). At the federal level, the Federal Ministry of Education and Research takes the lead.
The government continuously monitors the progress of its research and innovation policies and their outcomes. A key in-depth report is the Bundesbericht Forschung und Innovation (Federal Report Research and Innovation). The Federal Report is the standard reference work on Germany’s research and innovation policy. It provides an overview of the activities of the federal and state governments in research and innovation and presents data and facts in a structured manner. The report is published every two years, with the most recent edition from 2022 (BMBF, 2022). Research and innovation policy is also evaluated annually by the independent Commission of Experts for Research and Innovation (EFI).
Agencies and research associations that receive public research funds are subject to continuous monitoring. This includes audits from state and federal audit institutions and, more important, performance-related reporting requirements to their sponsors. Moreover, responsible ministries send their delegates to the supervisory bodies of the sponsored units.
Citations:
BMBF. 2022. Bundesbericht Forschung und Innovation 2022. Berlin: BMBF.
Bundestag. 2023. Steuerliche Förderung von Forschung und Entwicklung, Wissenschaftliche Dienste Deutsche Bundestag, WD 4 - 3000 - 074/23.
Statista. 2023. “Volume of venture capital investments in Germany from 2012 to 2022.” www.statista.com/statistics/1332187/venture-capital-investments-germany/
Startups benefit from various federal and state support schemes. However, like any other companies, they suffer from intense regulation and bureaucratic burdens in Germany across various fields, such as labor market, taxation, data protection, and environmental regulation. Venture capital markets are underdeveloped in Europe compared to the US. The German venture capital market has shown high growth rates over recent years, with investment more than doubling between 2018 (€1.5 billion) and 2021 (€4.0 billion) (Statista, 2024). After this peak, investment volumes decreased due to the difficult environment of high inflation and interest rates.
Since 2020, Germany has applied an R&D tax incentive. Since then, spending on R&D staff has benefited from a 25% tax allowance that will be paid out if the entity makes a loss. The allowance can be applied to a maximum of €2 million, which limits the subsidy to €500,000 per company per year. This amount was doubled for the period between mid-2020 and mid-2026 in the context of pandemic support measures (Bundestag, 2023).
Responsibility for promoting science and research is divided between the federal government and the state governments. For example, the federal government exercises legislative powers in areas such as research funding and training grants (Art. 74 (1), no. 13 GG). The higher education sector, however, is fundamentally the responsibility of the federal states (Art. 30, 70 GG). The federal and state governments have two coordinating and advisory bodies at their disposal: the Gemeinsame Wissenschaftskonferenz (Joint Science Conference, GWK) and the Wissenschaftsrat (Science Council, WR). At the federal level, the Federal Ministry of Education and Research takes the lead.
The government continuously monitors the progress of its research and innovation policies and their outcomes. A key in-depth report is the Bundesbericht Forschung und Innovation (Federal Report Research and Innovation). The Federal Report is the standard reference work on Germany’s research and innovation policy. It provides an overview of the activities of the federal and state governments in research and innovation and presents data and facts in a structured manner. The report is published every two years, with the most recent edition from 2022 (BMBF, 2022). Research and innovation policy is also evaluated annually by the independent Commission of Experts for Research and Innovation (EFI).
Agencies and research associations that receive public research funds are subject to continuous monitoring. This includes audits from state and federal audit institutions and, more important, performance-related reporting requirements to their sponsors. Moreover, responsible ministries send their delegates to the supervisory bodies of the sponsored units.
Citations:
BMBF. 2022. Bundesbericht Forschung und Innovation 2022. Berlin: BMBF.
Bundestag. 2023. Steuerliche Förderung von Forschung und Entwicklung, Wissenschaftliche Dienste Deutsche Bundestag, WD 4 - 3000 - 074/23.
Statista. 2023. “Volume of venture capital investments in Germany from 2012 to 2022.” www.statista.com/statistics/1332187/venture-capital-investments-germany/
Graph View
How committed and credible is the government in its activities to guide the effective regulation and supervision of the international financial architecture?
10
9
9
The government is clearly committed to ensuring the stability of the global financial system.
8
7
6
7
6
The government is largely committed to ensuring the stability of the global financial system.
5
4
3
4
3
The government is somewhat committed to ensuring the stability of the global financial system.
2
1
1
The government is not at all committed to ensuring the stability of the global financial system.
Germany is ranked seventh on the 2022 Financial Secrecy Index by the Tax Justice Network, scoring 57 out of 100 points, where 100 points indicate full secrecy, and zero points signify full transparency. According to the index, Germany still has some way to go to achieve full transparency. Additionally, with a score of 58 out of 100, Germany ranks 24th on the 2021 Corporate Tax Haven Index, which assesses jurisdictions based on their complicity in helping multinational corporations underpay corporate income tax. Overall, Germany loses approximately $26 billion in taxes per year due to global tax abuse, amounting to 2.7% of tax revenue. This is slightly below the global average of 2.8% and the regional average of 3.1% (Tax Justice Network, 2023).
According to the Tax Justice Network (2022: secrecy indicator 20), Germany demonstrates above-average participation in international transparency commitments and engagement in international judicial cooperation on money laundering and other criminal matters. The country has ratified relevant international agreements, such as the Multilateral Tax Convention and the UN Convention Against Corruption (Tax Justice Network, 2022). Additionally, Germany is a member of the Financial Action Task Force (FATF), whose recommendations are recognized as global standards for anti-money laundering and counter-terrorist financing.
According to the FATF’s follow-up report on Germany in 2023, 17 recommendations are ranked as compliant for the country, while 20 are ranked as largely compliant, and 3 as only partially compliant. This shows an improvement, as two recommendations were upgraded to the largely compliant ranking (FATF, 2023). Overall, based on the 2022 FATF report, Germany has made significant reforms since 2017. However, it remains at high risk of terrorist financing, and the FATF suggests that it could be more proactive by freezing terrorist assets as a preventive measure.
Nevertheless, the report acknowledges that Germany performs well in investigating, prosecuting, and disrupting financing activities related to terrorism. It also highlights the positive introduction of the Transparency Register, a federal government initiative to prevent money laundering and terrorist financing (FATF, 2022).
In October 2023, the Federal Ministry of Finance (BMF) proposed a new strategy to combat financial crime based on the draft law “Combating Financial Crimes Act” (Finanzkriminalitätsbekämpfungsgesetz). A key change will be the establishment of the Federal Financial Crime Agency (FFCA) in 2024, which will begin operations in 2025. The agency will consolidate core competencies to facilitate and enhance cooperation. One focus area of the FFCA will be investigating cases of international money laundering. Additionally, the quality of the data in the Transparency Register is to be improved (BMF, 2023).
To enhance information transparency in international financial markets, Germany is part of the Financial Stability Board (FSB), an international body that makes recommendations on the global financial system to promote financial stability. One of the FSB’s goals is to encourage coordination and information exchange among authorities, including national financial authorities and international standard-setting bodies (FSB, 2020). Additionally, as of July 2020, credit institutions, tax consultants, lawyers and auditors are required to report tax structuring models. The group for international information exchange in the special task force against tax structuring models – created in 2022 – is responsible for using these reports for quick reactions to avoid tax losses (BMF, 2022).
Lastly, the BMF campaigns for what it refers to as fair corporate taxation on an international level (BMF, 2024). In this regard, Germany supports and has argued for the two-pillar solution to address tax challenges arising from the digitalization of the economy, which was agreed upon by the members of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in 2021. The two-pillar solution proposes a reform to the global financial system. The objective of pillar one is to ensure a fair international distribution of taxes, while the aim of the second pillar is to introduce a global minimum corporate tax of 15% (OECD, 2021).
Citations:
BMF. 2022. “Fragen und Antworten zur Sondereinheit gegen Steuerhinterziehung und Steuerumgehung.” https://www.bundesfinanzministerium.de/Content/DE/FAQ/sondereinheit-gegen-steuerhinterziehung-und-steuerumgehung.html
BMF. 2023. “Stepping up the Fight Against Financial Crime.” https://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Priority-Issues/Financial-Crime/fight-against-financial-crime.html
BMF. 2024. “Auf dem Weg zu einer fairen internationalen Besteuerung.” https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_Steuerrecht/BEPS/schaedlichen-steuerwettbewerb-bekaempfen.html
FATF. 2022. “Germany’s Measures to Combat Money Laundering and Terrorist Financing.” https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-germany-2022.html
FATF. 2023. “Germany’s progress in strengthening measures to tackle money laundering and terrorist financing.” https://www.fatf-gafi.org/content/fatf-gafi/en/publications/Mutualevaluations/germany-fur-2023.html
FSB. 2020. “About the FSB.” https://www.fsb.org/about/
Tax Justice Network. 2022. “Country Detail, Germany.” https://fsi.taxjustice.net/country-detail/#country=DE&period=22
Tax Justice Network. 2023. “Germany, Country Profile.” https://taxjustice.net/country-profiles/germany/
OECD. 2021. “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.” https://www.oecd.org/tax/beps/brochure-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf
According to the Tax Justice Network (2022: secrecy indicator 20), Germany demonstrates above-average participation in international transparency commitments and engagement in international judicial cooperation on money laundering and other criminal matters. The country has ratified relevant international agreements, such as the Multilateral Tax Convention and the UN Convention Against Corruption (Tax Justice Network, 2022). Additionally, Germany is a member of the Financial Action Task Force (FATF), whose recommendations are recognized as global standards for anti-money laundering and counter-terrorist financing.
According to the FATF’s follow-up report on Germany in 2023, 17 recommendations are ranked as compliant for the country, while 20 are ranked as largely compliant, and 3 as only partially compliant. This shows an improvement, as two recommendations were upgraded to the largely compliant ranking (FATF, 2023). Overall, based on the 2022 FATF report, Germany has made significant reforms since 2017. However, it remains at high risk of terrorist financing, and the FATF suggests that it could be more proactive by freezing terrorist assets as a preventive measure.
Nevertheless, the report acknowledges that Germany performs well in investigating, prosecuting, and disrupting financing activities related to terrorism. It also highlights the positive introduction of the Transparency Register, a federal government initiative to prevent money laundering and terrorist financing (FATF, 2022).
In October 2023, the Federal Ministry of Finance (BMF) proposed a new strategy to combat financial crime based on the draft law “Combating Financial Crimes Act” (Finanzkriminalitätsbekämpfungsgesetz). A key change will be the establishment of the Federal Financial Crime Agency (FFCA) in 2024, which will begin operations in 2025. The agency will consolidate core competencies to facilitate and enhance cooperation. One focus area of the FFCA will be investigating cases of international money laundering. Additionally, the quality of the data in the Transparency Register is to be improved (BMF, 2023).
To enhance information transparency in international financial markets, Germany is part of the Financial Stability Board (FSB), an international body that makes recommendations on the global financial system to promote financial stability. One of the FSB’s goals is to encourage coordination and information exchange among authorities, including national financial authorities and international standard-setting bodies (FSB, 2020). Additionally, as of July 2020, credit institutions, tax consultants, lawyers and auditors are required to report tax structuring models. The group for international information exchange in the special task force against tax structuring models – created in 2022 – is responsible for using these reports for quick reactions to avoid tax losses (BMF, 2022).
Lastly, the BMF campaigns for what it refers to as fair corporate taxation on an international level (BMF, 2024). In this regard, Germany supports and has argued for the two-pillar solution to address tax challenges arising from the digitalization of the economy, which was agreed upon by the members of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in 2021. The two-pillar solution proposes a reform to the global financial system. The objective of pillar one is to ensure a fair international distribution of taxes, while the aim of the second pillar is to introduce a global minimum corporate tax of 15% (OECD, 2021).
Citations:
BMF. 2022. “Fragen und Antworten zur Sondereinheit gegen Steuerhinterziehung und Steuerumgehung.” https://www.bundesfinanzministerium.de/Content/DE/FAQ/sondereinheit-gegen-steuerhinterziehung-und-steuerumgehung.html
BMF. 2023. “Stepping up the Fight Against Financial Crime.” https://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Priority-Issues/Financial-Crime/fight-against-financial-crime.html
BMF. 2024. “Auf dem Weg zu einer fairen internationalen Besteuerung.” https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_Steuerrecht/BEPS/schaedlichen-steuerwettbewerb-bekaempfen.html
FATF. 2022. “Germany’s Measures to Combat Money Laundering and Terrorist Financing.” https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-germany-2022.html
FATF. 2023. “Germany’s progress in strengthening measures to tackle money laundering and terrorist financing.” https://www.fatf-gafi.org/content/fatf-gafi/en/publications/Mutualevaluations/germany-fur-2023.html
FSB. 2020. “About the FSB.” https://www.fsb.org/about/
Tax Justice Network. 2022. “Country Detail, Germany.” https://fsi.taxjustice.net/country-detail/#country=DE&period=22
Tax Justice Network. 2023. “Germany, Country Profile.” https://taxjustice.net/country-profiles/germany/
OECD. 2021. “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.” https://www.oecd.org/tax/beps/brochure-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf