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Ensuring economic sustainability is key to achieving the IMF’s surveillance mandate of maintaining present and prospective balance of payments and domestic stability, assuring orderly exchange arrangements, and promoting a stable system of exchange rates. A good understanding of issues related to economic sustainability is thus essential for the IMF to provide effective surveillance and policy advice, while it requires a broad perspective and a long time horizon. With respect to the IMF’s surveillance mandate, the principle of macro-criticality, which guides the IMF’s engagement with its members, is sufficiently flexible and broad, allowing the IMF to cover issues related to economic sustainability. At the same time, given the wide range of issues that are related to economic sustainability, IMF surveillance needs to be selective and focused, with the choice of issues made on a case-by-case basis, considering country circumstances. It also needs to leverage the expertise of other institutions when necessary. The IMF and other institutions have advanced work to enhance analytical frameworks and indicators related to economic sustainability, and this should continue.

Germany

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Advanced economies made available more than 5 trillion USD through government-supported credit guarantee and direct loan programs to provide lifelines to firms in the face of the COVID-19 pandemic. Notwithstanding the unprecedented scale of credit made available, an in-depth analysis of the fiscal consequences is missing, and the costs of these programs are not recognized in a transparent way. In this paper, we fill in an important aspect of the fiscal picture by estimating the subsidies that were provided by the largest credit guarantee programs introduced in 2020 in seven advanced economies. We estimate the subsidies on a fair value basis that provides a consistent and comprehensive upfront measure of cost. We explain the logic behind applying a fair value framework in a government context and compare it to alternative approaches. For the programs that we examine, total credit extended totaled 1.7 trillion USD. The subsidy element (cash-equivalent subsidy) is estimated to be 67 percent of loan principal on average (37 percent, excluding the US PPP), with a wide range across programs, from 12 to 100 percent. The variation is explained by differences across programs including eligibility criteria, loan terms, compensation to lenders, and other program design choices.

Germany

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This paper reviews Germany’s Financial System Stability Assessment report. The financial sector has weathered the impact of the pandemic and the war in Ukraine relatively well so far, but risks remain elevated. The Financial System Assessment Program (FSAP) solvency stress tests show that the significant institutions and less significant institutions are overall resilient to an adverse scenario. The main risks to financial stability relate to a global resurgence of coronavirus disease 2019 with extended supply chain disruptions, a scarcity of gas and oil, and de-anchoring of inflation expectations in the United States and advanced Europe. Consistent with the authorities’ findings, the FSAP found small vulnerabilities from climate transition risks to the banking system. Macroprudential policy is being tightened but rising cyclical vulnerabilities will require additional action. Good progress had been made in strengthening the microprudential frameworks for banking and insurance since the 2016 FSAP. The system of Deposit Guarantee Schemes/Institutional Protection Schemes needs reform, which should be informed by a review of the distortions resulting from depositors’ high level of protection guaranteed under the current regime.

Germany

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We investigate the effect of R&D subsidies on firms’ innovation by ownership, industry, and firm size using German firm-level data. The impact of R&D subsidies is heterogeneous across industries for multinational corporations (MNCs) and domestic firms while it does not differ substantially by firm size. Domestic firms have a larger response in R&D spending in low-tech manufacturing, knowledge-intensive services, and technological services while the response of domestic and foreign MNCs is broadly similar and is greater in medium-tech and high-tech manufacturing. Foreign MNC subsidiaries’ response in terms of patents is greater than that of domestic MNCs in most industries.

Germany

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The COVID-19 pandemic had posed a dramatic impact on labor markets across Europe. Forceful fiscal responses have prevented an otherwise sharper contraction. Many countries introduced or expanded job-retention schemes to preserve jobs and support households. This paper uses a microsimulation approach (EUROMOD) and household data to assess the effectiveness of those schemes in stabilizing household income during the pandemic across European countries. Empirical evidence shows that job-retention schemes were effective in stabilizing income and, along with other measures, absorbed nearly 80 percent of market income shocks—almost doubling the extent of the automatic stabilization of the pre-pandemic tax and benefit systems. The large effects are related to the widespread use and scaling up of those schemes and a deep but short-lived disruption to labor markets during the pandemic. Along with other fiscal support measures, job-retention schemes helped mitigate the rise in the unemployment rate, by about 3 percentage points, and income inequality during the pandemic. Our results show that job-retention schemes were largely targeted, in which households more vulnerable to income losses, such as lower-income families, youth, and low-skilled workers, are able to stabilize their income.

Germany