INCRA Germany Rating Report 2015

Rating: 8.1 (AAA)

Germany

stable outlook

• Export powerhouse

Transparency and Accountability

Public Sector Fiscal Policy

9.3

8.1 8.4

7.2

Monetary Policy

Social Cohesion 9.3

Capital Markets and Financial Risk

10

8 6

• Low interest-to-revenue ratio

8.1

2

9.1

• Proven track record of swift decision-making and effective execution of fiscal policy, supported by an efficient and competent bureaucracy • Broad and deep revenue base

7.3

4

• World’s fourth-largest economy • Diversified, wealthy and highly productive economy

Rule of Law

Economic Fundamentals

Strengths:

2

4

6 7.5

8 10

Future Resources

• Strong tradition of rule of law • Highly developed social safety net

6.9 9.7

External Sector 7.7

7.2

Crisis Management

7.4

Strategic Capacity

Implementation Adaptability

8.9 Macroeconomic Indicators

Forward-Looking Indicators 7.6

Summary Germany is the world’s fourth-largest economy, and the largest economy in Europe. Germany is one of the world’s most competitive, diversified, wealthy and productive nations. Its recovery from the Great Recession was initially one of the strongest among the world’s advanced countries. Such good performance was all the more exceptional, given the sovereign debt crisis, which loomed large across Europe from 2008 to 2012. However, Germany was not immune from the overall effects of the worldwide Great Recession. Growth slowed significantly in 2012 and 2013. Growth picked up in 2014, and is expected to continue in 2015.

Weaknesses: • Debt-to-gross domestic product (GDP) and debt-torevenue ratios higher than the historical norm • Significant contingent liabilities emanating from Eurozone bailout programs • Significant contingent liabilities emanating from the financial system • Stagnating (sometimes declining) population growth • Aging population

1

Despite the suddenness of the reunification of East and West Germany in the early 1990s, the peaceful nature of the integration process clearly demonstrated the country’s capacity to deal effectively with demanding and unexpected socio-economic and financial problems. Although some have criticized a number of the policies adopted during the reunification process, despite some missteps, the country and the democratic traditions characteristic of West Germany not only survived, but flourished.

Germany has a mature and highly developed welfare state, which guarantees a relatively high subsistence level to all citizens. While income and wealth inequality is rising, the rate of poverty is relatively low even by Western European standards. In the medium term, although Germany will have to deal with a demographic transition deeper than that of many other advanced industrial countries, the country’s willingness to accept immigrants and the attractiveness of the economy to potential immigrants may slow the demographic transition more than for countries that are less attractive or welcoming to new immigrants.

The two major near-term problems facing the German government today are the eurozone and the deteriorating geopolitical situation regarding the Ukraine and Russia.

risk-adjusted returns on capital than that of other regions or countries. As such, resources tend to flow to the more efficient areas within a monetary union.

On the other hand, regions or countries that lose as a result of a monetary union are usually marked by lower productivity and lower risk-adjusted returns on capital than other economic areas within the union. As such, resources tend to flow from these less productive areas to the more productive ones. To solve this problem, mechanisms have usually been put in place to transfer some of the gains of the monetary union from the winners to the losers. This implies the need for a transfer union. The problem Germany faces is that since its export sector is so much more efficient and productive and so much larger than that of the vast bulk of eurozone countries, the size of the transfers required may be so large that they become politically unacceptable to the German electorate. For instance, contingent liabilities emanating from

Germany’s required share of eurozone bailouts of either national governments or eurozone-wide banks (once a European banking union is in place) represent the single greatest downward pressure on the German government’s AAA rating. Given the ongoing weakness seen in a number of eurozone economies, the concern is that what are today contingent liabilities may become actual liabilities in the future.

The Economy The German economy’s initial recovery from the Great Recession was one of the soundest among major Western economies, with the possible exception of Canada, which was spared significant negative impact. Germany recorded real GDP growth of 4.1 percent in 2010, followed by 3.6 percent in 2011. However, by late 2011, growing eurozone financial market instability and slowing demand for German exports resulted in a broad-based retrenchment in most sectors, causing a significant slowdown in growth in 2012

Real GDP Growth (%) 6 4 2 0 2008

2009

2010

2011

2012

2013

2014

2015

-2

Monetary unions usually have winners and losers. Winners are regions, or in the case of the eurozone, countries, that benefit from the monetary union via lower risk premiums on their debt. Such beneficiaries are usually marked by an unnaturally higher degree of productivity, with greater

-4 -6 -8

Germany | 2

and 2013, when GDP grew by a mere 0.4 percent and 0.1 percent respectively.

Growth accelerated in 2014 to 1.6 percent.

Growth is expected to accelerate further in 2015 boosted by lower oil prices and the significant depreciation of the euro against most other major world currencies, in particular against the US dollar.

However, in the first quarter, reflecting a similar situation as in France, the external sector actually acted as a slight drag on Germany’s growth rate in the first quarter of 2015. GDP grew only by 0.3 percent in the first quarter over the fourth quarter of 2014. However, all growth was generated by an increase in domestic demand. The external demand contributed -0.2 percent to growth. Imports in the first quarter of 2015 grew twice as fast as exports.

Nonetheless, the external sector is still expected to be an important contributor to growth in 2015 as a whole.

Inflation/Deflation Germany’s inflation according to the OECD remained relatively low in 2010 and 2011, with consumer prices rising by

1.2 percent and 2.5 percent respectively.

However, the inflation rate has fallen steadily since 2011, with the CPI rising by 2.1 percent in 2012, 1.6 percent in 2013 and 0.8 percent in 2014. The problem is worse than the 2014 annual number seems to indicate because there was a sharp drop in inflation starting in August 2014. Since then, monthly inflation rates have ranged from 0.9 percent to -0.3 percent. The latest figure for April 2015 continues this deflationary trend with prices remaining flat compared to March.

The April year-over-year inflation rate was 0.5 percent. This poses a real problem for the ECB because although the overall inflation target for the eurozone is around 2 percent, the ECB and the eurozone, including Germany, are facing the potential for ongoing deflation.

Deflation is rarely if ever beneficial for an economy. When price declines become the norm, consumers and firms usually slow their purchases in order to take advantage of possibly lower prices in the future. With the Japanese experience

Inflation - CPI (%)

Although many are forecasting that inflation will return in 2015, we are not as optimistic. If the US and Japan experiences are guides, it seems likely that QE will not solve the existing problem, and that this is partly due to a faulty transmission mechanism between the ECB and eurozone banks, including German banks. As a result, deflationary pressures will continue to be a problem for Germany in 2015.

3 2.5 2 1.5 1 0.5 0

in mind, the ECB has been attempting to spur money growth in order to boost prices. Only recently it adopted a rather large (â‚Ź1.4 trillion) quantitative easing (QE) program. The problem with simply relying on central bank easing is that in the US and Japan, central bank QE has not proved sufficient to boost prices. In the US case, economic growth was aided by a combination of fiscal and monetary policies, which helped turn the economy around. Also the US shored up its major banks and other systemically important companies such as AIG and General Motors early on. Therefore, US banks were not faced with the problems that continue to plague many European banks.

US banks have also benefitted from the fact that the Federal Reserve has kept short-term interest rates at extremely low levels. This has allowed them to boost their profits to a point where, instead of reducing lending, they started lending at a higher pace than in previous years. This has helped the US economy to return to moderate growth rates. Although not as high as during the latter part of the 1990s, growth is higher than during the last decade.

2008

2009

2010

2011

2012

2013

2014

2015

Unemployment For much of the 1990s and for most of

Germany | 3

the last decade, Germany suffered from a relatively high rate of unemployment.

In fact, the average unemployment rate during the last 20-plus years topped 9 percent. In March 2005, unemployment peaked at 12.1 percent. In order to deal with what had obviously become a structural problem, in 2002, the German government, under the then Social Democratic Party (SPD) leader, Chancellor Gerhard Schröder, created a commission to explore how to reform Germany’s labor markets. The commission proposed numerous reforms. These reforms are generally known as the Hartz reforms named after the head of the commission, Peter Hartz, then the director of human resources at Volkswagen. The proposals were grouped into four main sets of reforms, labeled Hartz I-IV. The Hartz reforms improved training.

Entrepreneurs received subsidies for creating jobs. In general, labor markets were made more flexible. Labor market incentives were changed. For instance,

government unemployment assistance became means tested. Depending on circumstances, the unemployed were required to set employment-related goals in return for assistance.

and train new workers from the periphery countries, especially if they are willing to live and work in smaller towns and cities where the labor shortages are common.

All in all, these reforms have allowed German labor markets to remain resilient during the ongoing eurozone crisis, while most of the rest of the eurozone battles with record unemployment. In 2010, the harmonized rate of unemployment was 7.0 percent. It declined sharply in 2011 to 5.8 percent, and has been slowly declining ever since, with annual unemployment rates for 2012, 2013 and 2014 of 5.4, 5.2 and 5.0 percent, respectively. The unemployment rate for December 2014 was lower than the annual average, declining to 4.8 percent, a rate envied not just across the eurozone, but even better than the latest 5.6 percent unemployment rate in the US. It should also be noted that in some regions, there are actual labor shortages. To solve this issue, there are numerous programs in place to attract

The banking sector suffered large losses from impaired assets and had to be rescued by a hefty government injection of funds. In October 2008, the German government passed a law – in record time – setting up the Special Fund for Financial Market Stabilization (SoFFin).

The fund was authorized to provide €480 billion in support using a combination of loan guarantees and capital injections to support the banks and the overall financial system. Since then, the banking system has been significantly strengthened, but some weaknesses still remain. In order to allay concerns regarding the ongoing sovereign debt crisis and its impact on banks, the German government has passed numerous laws over time to provide better supervision and funding for banks. In 2014, the government passed the Restructuring and Resolution Act. Besides already existing instruments for bank intervention remaining in place, the law created a national resolution authority, which initially will be under the umbrella of the existing Federal Agency for Market Stabilization (FMSA).

It has the authority to bail in bank shareholders and creditors in case a bank resolution is required. Nonetheless, the Financial Supervisory Authority (BaFIN) and the ECB will retain their right to make decisions regarding bank closures.

Over time, FMSA will be integrated into BaFIN. In general, German banks today have more than enough liquidity, and their capitalization is sufficient. Only one small bank failed the European

Unemployment Rate (%) 8 7 6 5 4 3 2 1 0

2008

2009

2010

2011

2012

2013

2014

2015

The Banking Sector

Germany | 4

Banking Authority (EBA) stress test published in October 2014, but based on end-2013 numbers.

One of the biggest banking sector problems policymakers are still faced with over the medium term is the politically sensitive question of how to address the troubled Landesbanken sector.

According to a Bundesbank statement released in December 2014, German bank exposure to Russia is manageable.

Exposure of German banks to Russia totaled â‚Ź16 billion, or just 1 percent of total German bank foreign lending.

The External Sector Germany’s current account surplus has exceeded China’s since 2011. As a percent of GDP, the surplus was 5.9 percent of GDP in 2010, followed by 6.3 percent in 2011, 7.4 percent in 2012, and 7.0 percent in 2013, rising once again to 7.4 percent in 2014. Many forecasters see the surplus rising further in 2015, approaching 8.0 percent of GDP. The trade surplus continues to account for the bulk of the current account surplus. These surpluses represent

the extraordinary competitiveness of German manufacturers. Yet, all figures are measured at gross output values not at value added. As about 40 percent of German exports include imported intermediates and raw materials, the trade surplus measured in terms of value added is much lower than the gross figure.

Public Sector and Fiscal Issues When discussing fiscal policy, it is important to make a distinction between advanced industrial countries and emerging market economies. Advanced industrial countries are able to carry much more public sector debt than emerging market countries. The reason is that wealthy countries usually have deep financial markets at home, or easy access to such markets in other countries. Another important distinction is that high-income countries usually have more diversified income streams as well as more accumulated assets, either at home or abroad, than emerging market countries. This is one reason we compare countries to their income peers.

Current Account Balance to GDP (%)

The German government faced a major challenge caused by a substantial increase of general government debt in 2009 and 2010. Ongoing financial deficits represented one reason for this increase, but more importantly, the debt rose as a result of the financial sector bailout.

The general government debt-to-GDP ratio increased to almost 74.5 percent in 2010 and to 80.3 percent in 2011. The government quickly undertook a major fiscal consolidation program. As a result, a primary deficit of 1.6 percent in 2010 was turned into a primary surplus of 1.7 percent of GDP in 2011. It has remained in surplus since then. In 2012, 2013 and 2014, the surpluses were 2.5, 2.2 and 2.1 percent of GDP, respectively. A return to primary surplus had an obviously beneficial impact on the financial balance. From a deficit of 4.1 percent of GDP in 2010, the deficit was reduced to 0.9 percent in 2011. Surpluses of 0.1 percent were recorded in both 2012 and 2013. The budget was in balance in 2014.

Not surprisingly, the debt-to-GDP ratio declined slightly in 2012 to 77.6 percent.

It rose slightly in 2013 to 79 percent

General Government Debt to GDP (%)

8

90

7

80

6

70 60

5

50

4

40

3

30

2

20

1

10

0

Debt-to-GDP Ratios and General Government Balances

0

2008

2009

2010

2011

2012

2013

2014

2015

2008

2009

2010

2011

2012

2013

2014

2015

Germany | 5

of GDP before falling to 76.4 percent in 2014.

Risks A potential risk for Germany comes from its contingent liabilities, most notably from Greece. A default by Greece on its sovereign debt would be costly for all countries in the eurozone. Existing Eurostat rules dictate that if such debt is written down, it must be carried on the balance sheet of the creditor countries. Such a write-down would strain government finances in countries like France and Italy that are already burdened with excessive debt. For Germany, a simple write-down of Greek debt would be less burdensome because Germany’s fiscal position is far healthier than that of almost all other eurozone governments. The real risk of a Greek default would be the risk of contagion. If a Greek default causes investors to doubt the sustainability of sovereign debt in other periphery countries, the cost of bailouts for those countries might exceed the available funds for such a contingency.

In that case, the existence of the euro might once again be put into question.

Nonetheless, even if the euro became unsustainable, Germany is probably the best placed of all eurozone economies to withstand such a crisis. Growth would be negatively affected in the near-term, but if history is any guide, it would rebound as German exporters and the economy overall adjusted to the new environment.

Excluding event-risk emanating from potential eurozone or bank bailouts resulting from Germany’s membership in the eurozone, or the deteriorating geopolitical situation in the Ukraine, with its effects on Germany’s relations with

Russia, the most significant mediumterm risk facing Germany’s economy, in particular, its fiscal position, is the demographic transition. Despite its willingness to accept immigrants, the country’s population has sometimes declined or grown at a very slow pace in recent years. Social security spending already accounts for about 20 percent of GDP, almost equally divided between pensions and health care.

Pension reforms have strengthened the system going forward by increasing the retirement age. The larger problem relates to ever-rising health costs, an international phenomenon. In addition, the drive to maintain austerity has caused a serious deterioration in the country’s basic infrastructure, including roads, the railway network and in some cases airports, all of which are vital to maintaining a vibrant economy.

Forward-Looking Indicators (FLI) When evaluating forward-looking indicators, Germany’s position among the most highly developed countries means that it performs well compared to other countries, including its peers in the eurozone. Germany is both willing and able to repay its debt, and this will not change in the near future. Overall, the forward-looking indicators appear more positive compared to the 2012 report - with the exception of social security.

Country committee participants agreed that now is the time when Germany must begin the difficult process of reforming its entitlements. This will be challenging because entitlement reform is unpopular and because the need will not be apparent to many, but it is crucial if Germany wishes to continue enjoying success.

Germany performed especially well in the following categories: rule of law, employment and historical record of past crisis management.

There remains room for improvement in the following categories: political communication, policy learning and social inclusion.

Rule of Law Germany is a constitutional state and performs well on all rule of law indicators.

In general all national institutions respect an individual’s freedom and protect civil rights and political liberties. In substantive terms, German citizens and foreigners appreciate the predictability and impartiality of the German legal system, attribute high quality to German provisions regarding contract enforcement and property rights, and put trust in the police force and the courts. Germany’s judicial branch acts independently from influences of members of government, citizens, or companies and Germany’s Supreme Court stands out with great institutional powers in combination with a high degree of independence from political exertion of influence. With regard to the vertical dimension of the separation of power, Germany’s federal structure assures high levels of power dispersion between the federal government, the Länder and local authorities. Germany’s membership in the European Union adds another level and actor to the political system. Recent events very prominently have shown that jurisdictional disputes inevitably emerge in multilevel governance arrangements, but can still be processed by means of horizontal checks and balances. From a horizontal perspective, power is divided according to executive, legislative and

Germany | 6

judiciary functions. Germany does not maintain a strict separation but rather, as a parliamentary system, a complex balance of power between the closely interconnected legislative and executive branches. Although government and parliamentary majority are intertwined, the opposition enjoys special protective rights.

Transparency and Accountability German interest organizations do have a considerable impact on policy formulation and on the political agenda.

However, the importance of civil society actors is distributed very unequally since employers’ associations and unions are still privileged. Intermediary organizations such as interest groups and NGOs play a pivotal role on several levels in the policy cycle. In sum, major economic interest groups are thus very well integrated in the policy-making process.

Public authorities increasingly try to integrate the public in the planning process of new projects, because citizens increasingly want to partake in substantive decisions, particularly at the local level.

Germany enjoys high levels of media independence and low levels of corruption.

In November 2014 Germany ratified the United Nations Convention against Corruption (UNCAC), becoming one of the first countries to sign the Convention.

Germany has a mature and highly developed welfare state, which guarantees a subsistence level to all citizens.

The German social security system is historically biased towards the insurance model, which even extends into social

services, like care for the frail and elderly. It strongly reflects personal circumstances, such as the size of a family or the costs of housing. However the past decade was marked by a general trend to enhance and to some extent replace suspension of earnings benefits with need-oriented minimum levels of income.

The very good employment performance and the reduction of long-term unemployment has also helped to reduce poverty: The share of people receiving minimum income support has been on the decline since 2006 and reached 8.8 percent in 2012.

In order to fight poverty of low income households Germany has recently introduced a minimum wage of 8.50 Euro per hour. In spite of this effort, it is expected that the minimum wage may lead to significant job losses, especially in the eastern part of the county. It will remain to be seen whether the minimum wage will be an effective tool of poverty prevention or whether it will deteriorate the situation by excluding low-qualified workers from the labor market.

Future Resources Germany’s performance in the area of Germany’s performance in the area of research and development remains good. Germany ranks seventh in terms of patent applications per inhabitant.

According to the World Economic Forum, Germany’s capacity for innovation is among the world’s top performers. The German government continues to raise budgets on research and development, and its spending remains above the European average. The German Ministry of Education and Research established

a program for small and medium-sized enterprises in 2008. The government plans to increase spending on research and innovation to 3 percent of GDP by 2015.

Unemployment rates are at the lowest level in 20 years and Germany’s youth unemployment rate is the second lowest in the world, suggesting a high efficiency of the German vocational training system.

Nevertheless, shortcomings remain and it cannot be taken for granted that Germany’s labor market success will continue. For example, unemployment rates have not changed significantly since 2011, signifying that without further reform efforts the lower bound has been reached.

After PISA reviews 10 years ago pointed to inefficiencies and shortcomings, Germany has worked hard to reform and improve its education system. The split education system has also led to lower unemployment by producing young people who are well trained for the workforce, although they may not possess a bachelor’s or masters degree. Educational opportunities are particularly constrained for immigrants and children from low-income families.

In comparison to other highly developed nations, German education structures seem overly federalized and segmented.

The ongoing employment boom relieves all pillars of social insurance because it is creating a buoyant revenue situation for pension, health, unemployment and long-term care insurances. However, the mere focus on the current revenue situation is misleading since the ageing of the population will put the system under stress even with a continuation

Germany | 7

of the good employment situation in the working age cohorts. Thus, lacking sustainability remains an issue with respect to pensions, statutory health and long-term care insurance.

While entitlement reform is necessary, there appears to be reform fatigue for liberalizing service sectors like education, health, and public utilities.

Strategic Capacity and Adaptability In general, the administration acts efficiently and uses assets most carefully.

As mentioned above, the German administration is highly differentiated and vertically structured.

Despite the weaknesses in strategic planning capacity, Germany has demonstrated over the last decade that its governments clearly set long-run priorities and initiated the respective legislation. Over the last decade, German governments have paid heavy attention to long-term problems like structural unemployment, demographic change and public debt sustainability. As a consequence they have been able to implement significant reforms (e.g. Hartz reforms and the new constitutional debt brake). These are important cases in which German governments have worked towards long-run societal objectives even if the measures taken were not popular or even punished by voters (Hartz reform, higher pension age). The success of recent German governments in implementing in far-reaching reforms of labor markets, social security and fiscal institutions shows that top long-run priorities are effectively pursued.

The Grand Coalition should be commended for efficiently identifying and working through established goals.

The current government has already implemented several of the key policy objectives that are part of the coalition agreement. Among these are the introduction of a minimum wage, the reform of the pension system and the introduction of a minimum proportion of women in the supervisory board of big stock corporations.

The coalition enjoys strong support in the Bundestag and upper house, with the exception of the Green Party, and public approval ratings are up. The relationship between government and society is also improving, which is a positive factor, but may lead to a dangerous reluctance to undergo reforms.

In general, institutional reforms to improve the management capacities of the government are extremely rare in Germany. As in other countries, strategic capacities and reform efforts are heavily influenced by the past dependencies resulting from constitutional and public governance structures and traditions.

This system of silo ministries, an inward looking administration and a weak center poses significant problems for responding speedily to new challenges. Not least, Germany’s federal system, which gives the Länder a crucial role in their own areas of competence as well as in the implementation of federal legislation, causes a complex environment with many institutional veto players across different levels. Thus, strategic capacity is low owing to institutional and organizational inertia.

Track Record of Past Crisis Management In general, the political system does not facilitate crisis remediation in a timely manner. The main reason for this is the federal structure of the German political system and the built-in vetopoints and institutional constraints. As a consequence, decision-making is not only a highly complex concern but also highly time consuming. Decision-making in a complex multi-level system requires complicated bargaining processes in which veto players either have to be argued into a consensus or compensated by financial side payments. Unfortunately, the latter is often the case.

However, Germany’s experiences with the financial and debt crises from 2008 to 2012 have demonstrated that decisions can be taken swiftly and with large majorities if the objective need to act is high. The political system is obviously based on the consensus that a particular party or federal interest must step back if there are exceptional challenges.

Germany tends to initiate major reforms only in times of crisis. Since no such crisis seems to be looming on the horizon, it is likely that Germany will not have an impetus to enact major changes or needed reforms. As the strongest country in the eurozone, and a stable economic powerhouse, Germany’s AAA rating is stable.

Germany | 8

Rating Committee Average Scores by Indicator Macroeconomic Indicators

8.9

External Sector

9.7

Economic Fundamentals

8.1

Current Account

9.7

Real GDP Growth %

8.0

External Debt

9.7

GDP per Capita

9.0

Real Exports (% Change)

9.1

Forward Looking Indicators

7.6

Real Imports (% Change)

8.2

Political Economic and Social Stability

7.8

Gross Domestic Investment / GDP (%)

7.8

Rule of Law

9.3

Gross Domestic Savings / GDP (%)

8.8

Legal Certainty

9.0

Inflation-CPI (%)

7.6

Independent Judiciary

9.7

Population Growth (% Change)

6.1

Separation of Powers

9.0

Public Sector / Fiscal Policy

8.4

Property Rights

9.3

General Government Debt / GDP (%)

8.0

Transparency / Accountability

7.2

Nominal GDP Growth (Local Currency %)

8.6

Corruption Prevention

7.2

Independent Media

7.4

Civil Society Participation

6.9

Social Cohesion

7.3

Social Inclusion

7.1

Trust in Institutions

7.2

Societal Mediation

7.6

Conflict Management

7.5

Future Resources

7.5

Education

6.9

Research and Innovation

7.5

Employment

8.2

Social Security

7.3

Environmental Sustainability

7.7

General Government Debt / General Government Revenue (%) General Government Interest / General Government Revenue (%)

8.6 9.0

General Government Primary Balance / GDP (%)

8.5

General Government Fiscal Balance / GDP (%)

8.6

General Government Revenue / GDP (%)

8.4

General Government Expenditure / GDP (%)

7.9

Monetary Policy

9.3

Accommodative Monetary Policy

9.3

Capital Markets and Financial Risks

9.1

Domestic Credit / GDP (%)

9.7

Domestic Credit (% Change)

8.9

Overall Strength of Banking Sector

8.8

Germany | 9

Steering Capability and Reform Capacities

7.3

Adaptability

7.2

Strategic Capacity

6.9

Policy Learning

6.9

Prioritization

6.5

Institutional Learning

7.5

Policy Coordination

7.4

Crisis Management

7.7

Stakeholder Involvement

7.3

Historical Evidence of Crisis Management

8.3

Political Communication

6.5

Crisis Remediation

7.5

Implementation

7.4

Signaling Process

6.6

Government Efficiency

7.7

Timing and Sequencing

7.4

Resource Efficiency

7.0

Precautionary Measures

7.9

Automatic Stabilizers

8.4

macroeconomic indicators I. Economic Fundamentals

2008

2009

2010

2011

2012

2013

2014

2015

Nominal GDP Growth (%)

1.6

-3.9

4.7

4.8

2.1

2.3

3.5

2.9

Real GDP Growth (%)

1.1

-5.6

4.1

3.6

0.4

0.1

1.6

1.8

Unemployment Rate (%)

7.5

7.8

7.0

5.8

5.4

5.2

5.0

4.7

Real Exports, Goods (% Change)

1.8

-18.2

18.2

11.8

3.2

-0.1

3.8

Real Imports, Goods (% Change)

4.5

-17.4

19.6

13.5

0.4

-1.1

2

Nominal GDP (bn. US$)

3,640

3,306

3,310

3,631

3,427

3,635

3,820

3,908

GDP per Capita (US$)

44,397

40,424

40,495

45,207

42,569

44,999

47,200

48,226

GDP per Capita (PPP basis: US$)

38,378

37,082

39,562

42,089

42,730

43,108

44,190

Germany | 10

Inflation - CPI (%)

2.7

0.2

1.2

2.5

2.1

1.6

Population Growth Rate (% Change)

-0.2

-0.3

-0.2

0.0

0.2

0.2

Gross Fixed Capital Formation / GDP (%)

20.3

19.1

19.3

20.1

20.0

19.8

Gross Domestic Savings / GDP (%)

26.8

23.1

24.7

25.4

25.1

24.8

II. Public Sector Policy

2008

2009

2010

2011

2012

2013

2014

2015

General Government (GG) Debt / GDP (%)

66.8

74.6

74.5

80.3

77.6

79

76.4

71.8

GG Revenue / GDP (%)

44.0

45.1

43.7

44.3

44.7

44.7

44.4

44.2

GG Expenditure / GDP (%)

44.0

48.2

47.9

45.1

44.7

44.5

44.2

44.0

GG Financial Balance / GDP (%)

-0.0

-3.0

-4.1

-0.9

0.09

0.1

0.2

-0.0

Primary Balance / GDP (%)

2.3

-0.8

-2.0

1.1

1.9

1.8

1.5

1.5

GG Debt / GG Revenue (%)

151.8

165.1

188.9

180.4

181.0

175.4

169.9

164.2

5.8

5.5

5.2

5.3

4.9

2008

2009

2010

2011

2012

2013

2014

2015

34.5

3

-1.1

-10.6

5.8

GG Interest / GG Revenue (%)

III. Capital Markets & Financial Risk Domestic Credit Growth (YOY)

0.8

0.6

20.0

Domestic Credit / GDP (%)

122.5

128.6

126.9

119.9

118.8

113.5

IV. External Sector

2008

2009

2010

2011

2012

2013

2014

2015

6.0

6.0

5.9

6.3

7.4

7.0

7.4

7.9

Current Account Balance / GDP (%)

Sources: OECD, World Bank, IMF, Author’s Calculations

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About the Bertelsmann Foundation The Bertelsmann Foundation, established in 2008, is the North American arm of the Germany-based Bertelsmann Stiftung. The Foundation is a think tank that spurs debate and discussion on political, economic and social issues and it is committed to promoting the freedom of individuals and societies and international understanding. The Bertelsmann Foundation develops, creates, and implements its own projects and programs. The Bertelsmann Foundation develops “Global Ideas and Transatlantic Action” and we serve as an international window in the US capital, providing a showcase for global best practices and a venue for thought leaders to exchange ideas for confronting society’s greatest challenges.

The INCRA project was launched at the Bertelsmann Foundation’s 2012 Annual Financial Conference, which has developed a reputation for being the go-to event on the sidelines of the International Monetary Fund World Bank Group Spring Meetings. The Bertelsmann Foundation sees INCRA as an important contribution to the debate and discussion on new rules for international financial- and economic-policy governance. Therefore, the Foundation seeks to explore and support all avenues to turn the INCRA concept into reality.

About INCRA The Bertelsmann Foundation developed its INCRA (International Non-profit Credit Rating Agency) proposal following the 2008 financial crisis and the subsequent criticism of the practices of the leading credit rating agencies. The INCRA blueprint presents a new model, both in its institutional setup and its methodology, for developing a credit rating agency to assess sovereign risk in an alternative way. INCRA is based on an operational business model funded by a sustainable endowment.

Since publishing the original model for INCRA the Bertelsmann Foundation has assembled a team of international sovereignratings experts to produce sovereign ratings based on INCRA’s transparent methodology. INCRA has developed a comprehensive new methodology that evaluates a country’s ability and willingness to repay its debt. In its sovereign debt assessments INCRA uses forward-looking indicators in addition to traditional macroeconomic data. These indicators are highly qualitative, mirror a country’s socioeconomic development and include factors like governments’ crisis management and reform capacities as well as investments in education and infrastructure. INCRA defines sovereign ratings as “public goods”, available to all citizens and correspondingly all detailed rating reports are available online for free.

Contact Annette Heuser, Bertelsmann Foundation, (202) 384-1990 annette.heuser@bfna.org Anneliese Humpert, Bertelsmann Foundation, (202) 384-1995 anneliese.humpert@bfna.org Bertelsmann Foundation North America, 1101 New York Ave NW, Suite 901, Washington, DC 20005 www.bfna.org www.incraglobal.org

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