Germany: Staff Concluding Statement of the 2025 Article IV Mission

Washington, DC – November 26, 2025: An International Monetary Fund (IMF) mission, led by Kevin Fletcher and comprising Harri Kemp, Mustafa Saiyid, and Preya Sharma, conducted discussions for the 2025 Article IV Consultation with Germany during November 12-25. At the end of the visit, the mission issued the following statement:

Following several years of large economic shocks and negative growth, Germany’s landmark reform of its fiscal rule earlier this year has set the stage for economic recovery, driven by a gradual acceleration of domestic investment and consumption. Nonetheless, medium-term prospects remain constrained by rapid population aging and subdued productivity growth. It is thus essential to ensure that fiscal space now available is used judiciously to boost the economy’s longer-term productive capacity. Such efforts should be complemented by pro-growth structural reforms, including measures to foster more innovation and digitalization, cut red tape, reduce labor supply constraints—especially among women, older workers, and immigrants—and deepen European economic integration, including by reducing barriers to cross-border trade and investment and better integrating capital and energy markets. Continued prudent financial sector policies are also important to contain risks.

Recent economic developments and outlook

1. The German economy has been hit with major shocks in recent years. The energy-price shock in mid-2022 and rapid monetary tightening that was required to contain inflation combined to deliver two years of negative growth during 2023-24. The economy began to recover in late 2024 as these shocks started to dissipate, but the pace of recovery has been constrained by new trade-related headwinds, resulting in real GDP rising by a projected 0.2 percent in 2025. Weak growth in recent years also reflects lackluster underlying productivity growth, in part due to long-stalled structural reforms, and increasing competition in export markets. Weak growth has caused the labor market to soften, with the unemployment rate (ILO definition) increasing to 3.9 percent (up from a trough of 3.0 in early 2023) and with part-time employment also rising. Inflation has receded to near 2 percent, supported by lower energy prices and subdued domestic demand.
2. The authorities’ landmark reform of the debt-brake rule earlier this year is expected to help drive a gradual economic recovery. Planned fiscal easing in 2026-27 and the lagged effects of recent monetary loosening are expected to boost growth over the next few years. Real GDP growth is projected to accelerate to around 1 percent in 2026 and 1½ percent in 2027. With growth being led by domestic demand, Germany’s current account balance is expected to decline gradually over time but remain positive. Inflation is expected to stay near the ECB’s target of 2 percent.
3. However, without further bold reforms both domestically and at the EU level, Germany still faces a persistently challenging medium-term growth outlook. While higher public investment is expected to provide a boost to medium- and longer-term growth by increasing the economy’s productive capacity, growth prospects remain constrained. Headwinds include rapid population aging, as the working-age population is projected to decline more sharply than in any other G7 economy over the next five years. Productivity growth is also likely to remain modest, absent further reforms both domestically and at the EU level to improve economic efficiency and foster innovation.
4. Risks to the outlook are tilted to the downside. Key external risks include intensifying geopolitical tensions, escalating trade conflicts, and commodity price volatility, which could disrupt the supply of essential inputs into the German economy and undermine confidence, investment, and trade. Corrections in stretched global financial market valuations could depress aggregate demand and increase private-sector funding costs. Domestically, slower-than-expected productivity growth, weak implementation of public investment plans, and/or persistent labor shortages could constrain longer-term growth and exacerbate fiscal pressures. On the upside, effective policy responses and structural reforms—such as boosting labor supply, accelerating digitalization and cuts in red tape, and deepening the EU Single Market—could support a stronger recovery.

Fiscal policy

5. Fiscal policy is set to provide a welcome boost to growth. The deficit is projected to widen to about 4 percent of GDP by 2027, providing a significant fiscal impulse driven in part by higher public investment and defense spending. This much-needed stimulus will help offset weakening external demand, close the negative output gap, and reduce unemployment. Germany has fiscal space for such easing, given its relatively low debt level. Debt is projected to rise to around 68 percent of GDP by 2027, still the lowest among G7 economies.
6. Policies should ensure a high-quality fiscal easing. The authorities should ensure that additional fiscal resources from the debt-brake reform are directed mainly toward measures that boost longer-term growth, such as higher public investment and reducing high effective marginal income tax rates, or that support national priorities such as increased defense spending. Measures that are fiscally expensive and distortionary, such as reduced VAT rates for specific sectors, should be avoided. The efficiency and execution of infrastructure spending would also benefit from continued efforts to streamline permitting processes and other red tape while stepping up centralized planning services, joint procurement, and digitalization.
7. Over the medium and long term, fiscal adjustment measures will be needed to offset pressures from rising aging-related and defense spending and to stabilize the debt ratio.

• Adverse effects on growth from this consolidation can be minimized by safeguarding public investment and minimizing increases in labor tax and social insurance contribution rates, which are already relatively high.
• More growth-friendly options for fiscal adjustment include sectoral spending reviews to facilitate spending restraint and prioritization; cutting environmentally harmful subsidies and tax expenditures; closing loopholes in inheritance taxes; reducing nonstandard VAT exemptions and special rates; and raising property and alcohol excise taxes, both of which are relatively low in Germany.
• Savings could also be generated from reforms of the pension system, which faces rising pressures from an upward trend in the dependency ratio. Such reforms could include indexing pensions-in-payment to inflation rather than wage growth, a change that is likely to be progressive given that higher-income individuals tend to live longer and hence benefit more from rising real incomes in retirement. Improving the actuarial fairness of early retirement pension deductions could also generate savings while boosting growth through improved incentives for longer working lives.
• Greater use of EU-level investment, procurement, and coordination in areas where EU-level actions can generate efficiency gains and economies of scale (e.g., energy, innovation, and defense) could also reduce overall fiscal costs for Germany.
• Any further refinement of the debt brake should preserve sustainable public finances by eventually bringing all government spending within its constraints while safeguarding sufficiently high levels of public investment and flexibility to respond to shocks in a countercyclical manner.

Pro-growth structural reforms

8. The new government has prioritized reinvigorating growth through higher public investment and structural reforms to foster a more dynamic private sector. Together with higher public investment spending, reforms include incentivizing higher private investment, including through more generous investment allowances in the corporate income tax (CIT) and reductions in the CIT rate, and reducing bureaucracy and red tape. These reforms are welcome; the priority going forward should be to ensure strong implementation and further deepening of reform plans.
9. Population aging implies that labor shortages may persistently constrain medium and longer-term growth, underscoring the need for targeted reforms to boost labor supply. To help stabilize the labor force, the authorities should make it easier for women and parents to work full-time, including by continuing and deepening efforts to expand access to reliable child- and eldercare. Moving away from the current joint taxation system while providing additional child allowances could further improve work incentives by reducing high marginal tax rates on second earners, who tend to be relatively responsive to tax incentives. For lower-income earners, the current tax and transfer system is complex and creates disincentives for increasing hours worked due to high effective marginal tax rates (sometimes in excess of 100 percent) arising from benefit withdrawal rates. Merging multiple benefits and creating more uniform withdrawal rates could increase labor supply while delivering fiscal savings. Ongoing efforts to facilitate the labor market integration of immigrants are also critical.
10. Further reforms to boost productivity and entrepreneurship are also essential.

• New firm growth is especially important given that some of Germany’s existing industries are in relatively low-growth sectors and face intensifying competition in key export markets. Reforms to foster a more supportive environment for the creation and expansion of new, innovative firms include adoption of a more flexible corporate regime for start-ups—possibly in the context of a 28^th corporate regime at the EU level (see below)—and review of tax incentives (e.g., the corporate tax code’s bias in favor of debt over equity financing) that may be supporting incumbent corporate structures at the expense of equity investment in new enterprises.
• Excessive red tape remains a constraint on productivity, and the new government’s efforts in this area, including plans to create a one-stop shop in which new firms can be registered within 24 hours, are welcome. General strategies for cutting red tape that may be useful include minimizing duplication of reporting requirements, relying more on risk-based auditing of compliance with regulations rather than overly onerous reporting, accelerating permitting and licensing procedures, harmonizing regulations across regions and the EU, use of regulatory sandboxes, and establishing deadlines beyond which new objections to projects can no longer be brought. Measures of bureaucracy, such as average times to receive permits for new projects and construction, could also be enhanced to help monitor progress and identify areas where more effort is needed. That said, simplification of regulatory procedures should not water down essential safeguards, such as requiring banks to maintain adequate capital buffers.
• Further expansion of digital infrastructure and digital skills, including by expanding vocational and adult training in these areas, would also help boost productivity.

11. One of the most powerful measures that Germany can take to boost growth and resilience is by taking a lead in supporting a deepening of the EU’s Single Market. Such reforms could boost growth not only in Germany, but also in the rest of Europe, which remains by far Germany’s most important export market. If well-designed, reforms to harmonize business regulations across the EU (28^th corporate regime) could make it much easier for firms to expand across Europe and leverage economies of scale. Reforms to better integrate capital markets and financial sector oversight (Savings and Investment Union) could deepen pools of financing for start-ups and firm expansion, helping to bolster the overall ecosystem for young, innovative firms. A digital euro could improve payment system efficiency and integration across Europe. And better integration of energy markets (Energy Union) could reduce the level and volatility of energy prices.
12. Germany should also continue to assess and prepare for risks related to rising global geo-economic fragmentation. Such efforts should include identification of critical dependencies, assessment of the impact and transmission channels of different scenarios (e.g., stress tests of supply-chain disruptions), and development of strategies for coping with risks. Mutually beneficial cooperation between Germany and its trading partners on trade and cross-border flows would also help mitigate these risks.

Financial sector policies

13. The financial sector remains well positioned to extend credit to support economic growth. Banks and insurers have become significantly better capitalized and liquid since the global financial crisis, thanks to post-crisis regulatory reforms and stronger supervision, which in turn has helped the financial sector weather the recent large shocks to Germany’s economy well. Stress tests carried out by the EBA/ECB and the Bundesbank during 2025 indicated strong resilience among the 21 major banks and 1200 smaller institutions that comprise the bulk of the banking system, though there are pockets of weakness in hypothetical adverse scenarios. Insurers have a solvency ratio above the euro-area average and have been relatively profitable during the past year, benefitting from a normalized yield curve and asset valuation gains.
14. However, credit quality has weakened modestly in lagged response to past monetary tightening and weak economic growth. Non-performing loans reached 1.9 percent of all loans during Q2 2025, up from 1.7 percent a year earlier, with the pickup mainly due to commercial real estate (CRE) and nonfinancial corporate loans. Nonetheless, risks from the CRE sector may be stabilizing, as prices for office and retail space have started to recover.
15. Macroprudential policy settings are broadly appropriate. While the credit gap is now slightly negative, weak credit growth mainly reflects weak demand, rather than credit supply constraints due to insufficient bank capital relative to regulatory requirements. However, such constraints could arise if major adverse shocks, such as large drops in global aggregate demand, materialize. In this context, the current positive settings of macroprudential capital buffers (e.g., the countercyclical capital buffer and sectoral systemic risk buffer) remain appropriate, as these settings provide buffers that could be released in conditions of aggregate financial stress, providing a loss-absorbing cushion to the financial system to help it maintain credit supply to the economy. Supervisors should also continue to encourage banks to remain prudent in capital distributions (i.e., bonuses, dividends), including to ensure adequate investment in technology to counter cyberattacks, as the sophistication of such attacks continues to increase globally. Continued efforts to diversify banks’ income sources and reduce their operational costs would further support financial stability—objectives that would be supported by completion of an EU Savings and Investment Union, as this would facilitate more cross-border flow of savings across Europe and reduce barriers to efficiency-enhancing cross-border mergers.
16. The macroprudential toolkit should be further enhanced. Adopting legislation to enable use of prudential limits on debt-to-income and debt-service-to-income ratios on bank lending, as supported by the Bundesbank in its recent Financial Stability Review, would help reduce future macro-financial risks and bring Germany more in line with common practice in the euro area. Such limits could be deployed, along with existing powers to implement loan-to-value limits, once the credit cycle enters a more expansionary phase. The authorities’ plans to transpose the macroprudential measures for insurance companies laid down in the Solvency II Review into national law in 2026 are also welcome.

The mission team thanks the authorities and all our other counterparts for their warm hospitality and the constructive dialogue.

Important Information:

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

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