KfW 18-K Annual report (foreign governments)

Exhibit (d)

This description of KfW and the Federal Republic of Germany is dated May 11, 2018 and appears as Exhibit (d) to the Annual Report on Form 18-K of KfW for the fiscal year ended December 31, 2017.

TABLE OF CONTENTS

	Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION		1
EXCHANGE RATE INFORMATION		1
RECENT DEVELOPMENTS		3
KfW		3
KfW’s Results for the Three Months Ended March 31, 2018		3
The Federal Republic of Germany		7
Overview of Key Economic Figures		7
KFW		10
General		10
Overview		10
Ownership		11
Legal Status		11
Relationship with the Federal Republic		11
Supervision and Regulation		12
Corporate Background		15
Financial Statements and Auditors		16
Business		17
Introduction		17
Domestic Promotional Business		18
Mittelstandsbank (SME Bank)		20
Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions)		22
Export and Project Finance (KfW IPEX-Bank)		24
Promotion of Developing Countries and Emerging Economies		27
Financial Markets		30
Strategic Shareholdings		36
Capitalization		37
Management and Employees		37
Executive Board		37
Board of Supervisory Directors		40
Employees		42
THE FEDERAL REPUBLIC OF GERMANY		G-1
General		G-1
Area, Location and Population		G-1
Government		G-2
Political Parties		G-3
International Organizations		G-3
The European Union and European Integration		G-4
Statistical Standards		G-10
The Economy		G-11
Overview		G-11
Key Economic Figures		G-11
Economic Outlook		G-12
Economic Policy		G-12
Gross Domestic Product		G-15
Sectors of the Economy		G-16
Employment and Labor		G-17
Social Security, Social Protection, and Social Policy		G-19

	Page
International Economic Relations		G-20
Monetary and Financial System		G-26
The ESCB and the Eurosystem		G-26
Monetary Policy Instruments of the ESCB		G-26
Monetary Policy Strategy and Prices		G-26
Official Foreign Exchange Reserves		G-27
External Positions of Banks		G-28
Foreign Exchange Rates and Controls		G-28
Financial System		G-28
Securities Market		G-33
Public Finance		G-34
Receipts and Expenditures		G-34
Germany’s General Government Deficit/Surplus and General Government Gross Debt		G-35
Fiscal Outlook		G-36
Tax Structure		G-37
Government Participations		G-38
Direct Debt of the Federal Government		G-38
Tables and Supplementary Information		G-40
I. Direct Debt of the Federal Government		G-40
II. Guarantees by the Federal Government		G-46
III. Liabilities to International Financial Organizations		G-47

ii

THIS DOCUMENT (OTHERWISE THAN AS PART OF A PROSPECTUS CONTAINED IN A REGISTRATION STATEMENT FILED UNDER THE U.S. SECURITIES ACT OF 1933) DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF KFW. THE DELIVERY OF THIS DOCUMENT AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this description, references to “€”, “euro” or “EUR” are to the single European currency of the member states of the European Union participating in the euro and references to “U.S. dollars”, “$” or “USD” are to United States dollars. See “Exchange Rate Information” below for information regarding the rates of conversion of the euro into United States dollars and “The Federal Republic of Germany—General—The European Union and European Integration” for a discussion of the introduction of the euro.

Unless explicitly stated otherwise, financial information relating to KfW Group presented herein has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”).

Amounts in tables may not add up due to rounding differences.

On May 9, 2018, the euro foreign exchange reference rate as published by the European Central Bank was EUR 1.00 = U.S. dollar 1.1879 (EUR 0.8418 per U.S. dollar).

In this document, references to the “Federal Republic” and “Germany” are to the Federal Republic of Germany and references to the “Federal Government” are to the government of the Federal Republic of Germany. The terms “KfW Group” and “group” refer to KfW and its consolidated subsidiaries.

EXCHANGE RATE INFORMATION

We file reports with the Securities and Exchange Commission giving financial and economic data expressed in euro.

The following table shows noon buying rates for euro, expressed as U.S. dollars per EUR 1.00, for the periods and dates indicated, as reported on a weekly basis by the Federal Reserve Bank of New York.

Year ended December 31,	Period End		Average (1)		High		Low
2013		1.3779		1.3303		1.3816		1.2774
2014		1.2101		1.3210		1.3927		1.2101
2015		1.0859		1.1032		1.2015		1.0525
2016		1.0552		1.1072		1.1516		1.0375
2017		1.2022		1.1396		1.2041		1.0416
Quarter ended March 31, 2018		1.2320		1.2289		1.2488		1.1922

(1) The average of the noon buying rates on the last business day of each month during the relevant period.

1

The following table shows the high and low noon buying rates for euro, expressed as U.S. dollars per EUR 1.00, for each month indicated and for the period from May 1, 2017 through May 4, 2018 as published on a weekly basis by the Federal Reserve Bank of New York.

	High		Low
2017
November 2017		1.1936		1.1577
December 2017		1.2022		1.1725
2018
January 2016		1.2488		1.1922
February 2016		1.2482		1.2211
March 2016		1.2440		1.2216
April 2016		1.2384		1.2074
May 2018 (through May 4, 2018)		1.2000		1.1946

No representation is made that the euro or U.S. dollar amounts referred to herein or referred to in the documents which incorporate this information by reference could have been or could be converted into U.S. dollars or euro, as the case may be, at any particular rate.

There are, except in limited embargo circumstances, no legal restrictions in the Federal Republic of Germany on international capital movements and foreign exchange transactions. However, for statistical purposes only, every individual or corporation residing in the Federal Republic of Germany must report to the Deutsche Bundesbank, the German Central Bank, subject to a number of exceptions, any payment received from or made to an individual or a corporation resident outside of the Federal Republic of Germany if such payment exceeds EUR 12,500 (or the equivalent in a foreign currency).

2

RECENT DEVELOPMENTS

KFW

KfW’s Results for the Three Months Ended March 31, 2018

KfW is not required by law to prepare and publish interim financial statements in conformity with International Financial Reporting Standards as adopted by the European Union (“IFRS”) applicable to interim financial reporting. Accordingly, KfW only prepares selected interim financial information rather than a full set of interim financial statements. The following information is based on this selected unaudited interim financial information prepared by KfW on the basis of the recognition and measurement principles of IFRS applicable to interim financial reporting. This information is not necessarily indicative of the figures of KfW Group for the full year ending December 31, 2018.

With effect from January 1, 2018, KfW adopted IFRS 9 in line with mandatory requirements for annual periods beginning on or after January 1, 2018. IFRS 9 stipulates new valuation rules with respect to financial instruments. Comparative information is not required to be restated. Due to the retrospective application of these new valuation rules under IFRS 9, KfW’s equity decreased by EUR 218 million to EUR 28.5 billion as of January 1, 2018.

The group’s total assets increased by 0.4 %, or EUR 2.1 billion, from EUR 472.3 billion as of December 31, 2017 to EUR 474.5 billion as of March 31, 2018.

The group’s operating result before valuation and promotional activities amounted to EUR 374 million for the three months ended March 31, 2018, compared with EUR 500 million for the corresponding period in 2017. The main driver for the group’s operating result before valuation and promotional activities during the three months ended March 31, 2018 was net interest income. The group’s operating result before valuation and promotional activities is before (i) risk provisions for the lending business, (ii) net gains/losses from securities and investments, (iii) net gains/losses from hedge accounting and other financial instruments at fair value through profit or loss, and (iv) expenses relating to promotional activities. These valuation effects consisted mainly of the following:

• There was no income or expense from risk provisions for the three months ended March 31, 2018, compared with expenses in an amount of EUR 2 million for the corresponding period in 2017;

• Negative effects of EUR 11 million as market values of securities and equity investments decreased in the three months ended March 31, 2018, compared with positive effects of EUR 19 million¹ for the corresponding period in 2017;

• Net expenses in an amount of EUR 11 million for the three months ended March 31, 2018, due to fair value changes of derivatives used exclusively for hedging purposes in closed risk positions, compared with net expenses in an amount of EUR 14 million for the corresponding period in 2017²; and

• Expenses relating to promotional activities in an amount of EUR 84 million for the three months ended March 31, 2018, compared with expenses in an amount of EUR 63 million for the corresponding period in 2017.

The group’s consolidated result for the three months ended March 31, 2018, amounted to EUR 228 million compared with EUR 421 million for the corresponding period in 2017.

¹  With effect from June 30, 2017, figures disclosed under securities and equity investments include gains from investments accounted for using the equity method. Comparative figures for prior periods have been restated accordingly. Therefore, figures for the period ended March 31, 2017 and March 31, 2018 are not comparable with figures disclosed under securities and equity investments prior to June 30, 2017.

²  KfW generally enters into derivative transactions to economically hedge interest and currency risks in connection with its financing and funding activities. Some economic hedging relationships entered into do not qualify for hedge accounting or the fair value option under IFRS. In these cases, only the fair value changes in the hedging instrument are recognized in the consolidated income statement as net gains/losses from other financial instruments at fair value through profit or loss, whereas fair value changes in the hedged instrument are not. As a result, the economic risk-mitigating effect of such hedging relationships is not reflected in the consolidated income statement.

3

Promotional Business Volume

The following table sets forth a breakdown of commitments by business sector for the three months ended March 31, 2018 as compared with the corresponding period in 2017.

PROMOTIONAL BUSINESS VOLUMEBY BUSINESS SECTOR

	Three months ended March 31,				Year-to-Year
	2018		2017		% change
	(EUR in millions)				(in %)
SME Bank & Private Clients (Mittelstandsbank & Private Kunden) (1)		12,657		12,195		4
Customized Finance & Public Clients (Individualfinanzierung & Öffentliche Kunden) (1)		2,229		2,405		-7
Equity Financing (1)		17		2		750
Export and project finance (KfW IPEX-Bank)		3,305		2,102		57
Promotion of developing countries and emerging economies (2)		468		1,247		-62
of which KfW Entwicklungsbank		414		1,092		-62
of which DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH		54		155		-65
Financial markets		185		269		-31
Total promotional business volume (2) (3)		18,861		18,220		4

(1) With effect from April 1, 2018, KfW reorganized its domestic promotional business, which it had previously conducted through its business sectors Mittelstandsbank (SME Bank) and Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions) based on a distinction between customer groups, into three business sectors, which are characterized by different operating models. These business sectors include SME Bank & Private Clients (Mittelstandsbank & Private Kunden), Customized Finance & Public Clients (Individualfinanzierung & Öffentliche Kunden) and Equity Financing. For a description of the new business sectors’ activities, see “KfW—General—Overview.”

(2) No adjustments to the promotional business volume for the three months ended March 31, 2018 were made by KfW IPEX-Bank relating to export and project finance that was refinanced under certain of SME Bank & Private Clients’ promotional programs, compared to adjustments of EUR 61 million for the corresponding period in 2017.

(3) Commitments represent the volume of funds committed for loans and other business transactions (with the exception of program-based global loans to Landesförderinstitute) in the relevant period, including amounts to be disbursed in future periods, and do not include amounts disbursed in the relevant period pursuant to commitments made in prior periods. In the case of program-based global loans to the Landesförderinstitute, commitments represent the actual volume of funds disbursed in the relevant period.

KfW’s total promotional business volume increased to EUR 18.9 billion for the three months ended March 31, 2018 from EUR 18.2 billion for the corresponding period in 2017. This increase was largely driven by increased commitments in KfW’s business sector Export and project finance as well as in its domestic business sector SME Bank & Private Clients.

Commitments in the SME Bank and Private Clients business sector amounted to EUR 12.7 billion for the three months ended March 31, 2018 compared to EUR 12.2 billion for the corresponding period in 2017. This increase was mainly attributable to increased commitments under KfW’s innovation financing programs, especially due to a strong demand for the ERP-Digitalization and Innovation Program.

Commitments in the business sector Customized Finance and Public Clients decreased to EUR 2.2 billion for the three months ended March 31, 2018 from EUR 2.4 billion for the corresponding period in 2017. This decrease was primarily driven by a decrease in commitments for municipal and social infrastructure (EUR 0.4 billion) and in the refinancing of Landesförderinstitute (EUR 0.3 billion) which was partially offset by an increase in global loans to selected financial institutions (EUR 0.5 billion) and an increase under the program for the refinancing of export loans covered by federal guarantees (EUR 0.1 billion).

Commitments in the business sector Equity Financing increased to EUR 17 million for the three months ended March 31, 2018 from EUR 2 million for the corresponding period in 2017. KfW invested this amount via the ERP Venture Capital Fund.

Commitments in KfW’s Export and project finance business sector for the three months ended March 31, 2018, amounted to EUR 3.3 billion compared to EUR 2.1 billion for the corresponding period in 2017. This increase is attributable to KfW IPEX-Bank’s increased commitments in various sectors during the three months ended March 31, 2018 as compared to the corresponding period in 2017.

4

Commitments related to KfW’s Promotion of developing countries and emerging economies decreased to EUR 0.5 billion for the three months ended March 31, 2018 from EUR 1.2 billion for the corresponding period in 2017. This development was primarily driven by decreased commitments of KfW Entwicklungsbank, in particular with respect to Financial Cooperation Development Loans (FZ-Entwicklungskredite), as well as lower commitments of DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH.

Commitments in KfW’s Financial markets business sector for the three months ended March 31, 2018 decreased to EUR 185 million compared to EUR 269 million for the corresponding period in 2017. Both commitments in the ABS and ABCP portfolio as well as in the green bond portfolio decreased in the three months ended March 31, 2018, compared to the corresponding period in 2017.

Sources of Funds

The volume of funding raised in the capital markets for the four months ended April 30, 2018 totaled EUR 31.9 billion, of which 52.8% was raised in euro, 34.7% in U.S. dollar and the remainder in eight other currencies.

Capitalization and Indebtedness of KfW Group as of March 31, 2018

	(EUR in millions)
Borrowings
Short-term funds		36,348
Bonds and other fixed-income securities		372,107
Other borrowings		14,015
Total borrowings		422,470
Equity
Paid-in subscribed capital (1)		3,300
Capital reserve (2)		8,447
Reserve from the ERP Special Fund		1,191
Retained earnings		15,963
Fund for general banking risks		600
Revaluation reserve		-650
Total equity		28,851
Total capitalization		451,321

(1) KfW’s equity capital, 80% of which is held by the Federal Government and the remaining 20% by the Länder, amounted to EUR 3,750 million as of March 31, 2018, of which EUR 3,300 million has been paid in pro rata by the Federal Government and the Länder.

(2) Includes equity capital in the form of a promotional reserve (Förderrücklage) from the ERP Special Fund of EUR 7,150 million.

The capitalization of KfW Group as of March 31, 2018 is not necessarily indicative of its capitalization to be recorded as of December 31, 2018.

Total equity increased by EUR 109 million from EUR 28,742 million as of December 31, 2017 to EUR 28,851 million as of March 31, 2018. This increase mainly reflected (i) KfW Group’s consolidated result of EUR 228 million for the three months ended March 31, 2018 and (ii) an increase of EUR 99 million in revaluation reserves due to valuation profits being recognized directly in equity relating to pensions and own credit risk. Furthermore, this increase was due to significant effects resulting from the adoption of the transition provisions of IFRS 9 which resulted in (i) an increase of EUR 236 million to opening retained earnings and (ii) a decrease of EUR 454 million to opening revaluation reserves, in each case as of January 1, 2018.

In connection with the phase-in of the analogous application of banking supervisory law to KfW, the provisions of the EU Capital Requirements Regulation (Regulation EU No 575/2013, “CRR”), the German Banking Act (Kreditwesengesetz) and the German Solvency Regulation (Solvabilitätsverordnung), which require banks to have adequate own funds (Eigenmittel) for the conduct of their business, have become applicable to KfW by analogy with effect from January 1, 2016. In June 2017, KfW received the approval from the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”) to calculate its regulatory capital requirements following the advanced internal ratings-based approach (“IRBA”) for the vast majority of its portfolio as of June 30, 2017. In line with regulatory requirements, KfW intends to obtain additional approval for other sub-portfolio segments by 2022.

5

Based on the results for the three months ended March 31, 2018, KfW’s total capital ratio and its Tier 1 capital ratio according to Article 92 of the CRR each amounted to 20.8% as of March 31, 2018 (not taking into account the interim profit of the first three months of 2018 according to Article 26(2) of the CRR). As of December 31, 2017, the total capital ratio and the Tier 1 capital ratio amounted to 20.8% and 20.6%, respectively. The increase in the Tier 1 capital ratio from 20.6% as of December 31, 2017 to 20.8% as of March 31, 2018 was mainly due to the recognition of the interim profit for the last three months of 2017 following receipt of the independent auditors’ report in the first three months of 2018.

6

THE FEDERAL REPUBLIC OF GERMANY

Overview of Key Economic Figures

The following economic information regarding the Federal Republic is derived from the public official documents cited below. Certain of the information is preliminary.

Gross Domestic Product (GDP)

GROSS DOMESTIC PRODUCT

(adjusted for price, seasonal and calendar effects) (1)

Reference period	Percentage change on previous quarter	Percentage change on the same quarter in previous year
4th quarter 2016	0.4	1.8
1st quarter 2017	0.9	2.1
2nd quarter 2017	0.6	2.3
3rd quarter 2017	0.7	2.7
4th quarter 2017	0.6	2.9

(1) Adjustment for seasonal and calendar effects according to the Census X-12-ARIMA method.

Germany’s gross domestic product (“GDP”) continued to grow, increasing by 0.6% after price, seasonal and calendar adjustments in the fourth quarter of 2017 compared to the third quarter of 2017. Compared to the previous quarter, positive contributions to growth came mainly from foreign demand. According to provisional calculations, exports increased by 2.7% and contributed markedly to economic growth in the fourth quarter of 2017. Imports increased by 2.0% during the same period. As regards domestic demand, there were mixed signals. While household final consumption expenditure remained rather stable at the previous quarter’s level, government final consumption expenditure increased by 0.5%. Gross fixed capital formation in machinery and equipment increased by 0.7% compared to the third quarter of 2017. Gross fixed capital formation in construction decreased by 0.4% compared to the third quarter of 2017.

In a year-on-year comparison, in price and calendar-adjusted terms, the German economy grew by 2.9% in the fourth quarter of 2017, following increases of 2.7% in the third quarter of 2017 and 2.3% in the second quarter of 2017, in each case compared to the corresponding periods in 2016.

Source: Statistisches Bundesamt, Detailed gross domestic product results for the 4th quarter of 2017, press release of February 23, 2018 (https://www.destatis.de/EN/PressServices/Press/pr/2018/02/PE18_058_811.html).

7

Inflation Rate

INFLATION RATE

(based on overall consumer price index)

Reference period	Percentage change on previous month		Percentage change on the same month in previous year
March 2017		0.2		1.6
April 2017		0.0		2.0
May 2017		-0.2		1.5
June 2017		0.2		1.6
July 2017		0.4		1.7
August 2017		0.1		1.8
September 2017		0.1		1.8
October 2017		0.0		1.6
November 2017		0.3		1.8
December 2017		0.6		1.7
January 2018		-0.7		1.6
February 2018		0.5		1.4
March 2018		0.4		1.6

In March 2018, consumer prices in Germany rose by 1.6% compared to March 2017. The inflation rate thus increased slightly. In the three preceding months the rate of inflation had declined gradually. Compared to March 2017, the prices of energy products increased by 0.5% in March 2018. Compared to March 2017, in March 2018 price rises were recorded especially for heating oil (+5.4%), electricity (+1.5%) and central and district heating (+0.8%). In contrast, price decreases were recorded for solid fuels (–1.6%), gas (–1.4%) and motor fuels (–0.7%). Excluding energy prices, the inflation rate in March 2018 would have been 1.6% as well.

Compared to March 2017, food prices rose 2.9% in March 2018. The prices of goods overall were up 1.4% in March 2018 compared with March 2017, while prices of services overall rose by 1.8%. A major factor contributing to the increase in service prices was an increase in net rents exclusive of heating expenses (+1.6%).

Compared to February 2018, the consumer price index rose by 0.4% in March 2018. In a month-on-month comparison, seasonal price rises were observed especially for clothing (+5.8%) and footwear (+4.4%), in particular due to the changeover to the spring and summer collection. Marked month-on-month price increases were also recorded for package holidays (+2.0%) and air tickets (+1.5%), one reason being the early date of Easter. Food prices rose by 0.2% in March 2018 compared to February 2018, while energy prices declined by 0.6% and thus had a dampening effect on the month-on-month price increase in March 2018.

Source: Statistisches Bundesamt, Consumer prices in March 2018: +1.6% on March 2017, press release of April 13, 2018 (https://www.destatis.de/EN/PressServices/Press/pr/2018/04/PE18_135_611.html).

8

Unemployment Rate

UNEMPLOYMENT RATE

(percent of unemployed persons in the total labor force according to the

International Labour Organization (ILO) definition) (1)

Reference period	Original percentages	Adjusted percentages (2)
March 2017	4.0	3.9
April 2017	4.1	3.9
May 2017	3.6	3.8
June 2017	3.6	3.8
July 2017	3.6	3.7
August 2017	3.8	3.7
September 2017	3.5	3.7
October 2017	3.7	3.6
November 2017	3.4	3.6
December 2017	3.5	3.5
January 2018	3.6	3.5
February 2018	3.8	3.5
March 2018	3.5	3.4

(1) The time series on unemployment are based on the German Labour Force Survey.

(2) Adjusted for seasonal and irregular effects (trend cycle component) using the X-12-ARIMA method.

The number of employed persons increased by approximately 601,000 persons, or 1.4%, from March 2017 to March 2018. Compared to February 2018, the number of employed persons in March 2018 increased by approximately 32,000, or 0.1%, after adjustment for seasonal fluctuations.

In March 2018, the number of unemployed persons decreased by approximately 192,000, or 11.2%, compared to March 2017. Adjusted for seasonal and irregular effects (trend cycle component), the number of unemployed persons in March 2018 stood at 1.48 million, which was a decrease of roughly 16,000 compared to February 2018.

Sources: Statistisches Bundesamt, 44.4 million persons in employment in March 2018, press release of April 27, 2018 (https://www.destatis.de/EN/PressServices/Press/pr/2018/04/PE18_151_132.html); Statistisches Bundesamt, Genesis-Online Datenbank, Result 13231-0001, Unemployed persons, persons in employment, economically active population, unemployment rate: Germany, months, original and adjusted data (https://www-genesis.destatis.de/genesis/online/logon?sequenz=tabelleErgebnis&selectionname=13231-0001&zeitscheiben=2&leerzeilen=false).

Current Account and Foreign Trade

CURRENT ACCOUNT AND FOREIGN TRADE

	(balance in EUR billion) (1)
Item	January to March 2018		January to March 2017
Trade in goods, including supplementary trade items		66.1		66.0
Services		-0.7		-2.5
Primary income		19.9		21.3
Secondary income		-14.2		-16.8
Current account		71.1		68.0

(1) Figures may not add up due to rounding.

Source: Statistisches Bundesamt, German exports in March 2018: -1.8% on March 2017, press release of May 8, 2018 (https://www.destatis.de/EN/PressServices/Press/pr/2018/05/PE18_161_51.html).

9

KFW

GENERAL

Overview

KfW is a public law institution (Anstalt des öffentlichen Rechts) serving domestic and international public policy objectives of the Federal Government (“Federal Government”) of the Federal Republic of Germany (“Federal Republic”). KfW promotes its financing activities under the umbrella brand name KfW Bankengruppe (“KfW Group”).

With total assets of EUR 472.3 billion as of December 31, 2017, KfW is Germany’s flagship promotional bank and ranks among Germany’s largest financial institutions. KfW’s promotional business volume amounted to EUR 76.5 billion in 2017. For more information on KfW’s promotional business volume, see the table “Promotional Business Volume by Business Sector” in “Business—Introduction.”

Until March 31, 2018, KfW conducted its business in the following business sectors:

• Mittelstandsbank (SME Bank), which promoted small and medium-sized enterprises (“SMEs”), business founders, start-ups and self-employed professionals;

• Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions), which provided housing-related loans and grants as well as financing for education to private individuals, offered financing for infrastructure projects, primarily for municipalities, and granted global funding instruments to promotional institutes of the German federal states (“Landesförderinstitute”) and other financial institutions;

• Export and project finance: KfW IPEX-Bank GmbH (“KfW IPEX-Bank”) offers customized financing for exports and project and corporate financing worldwide. KfW IPEX-Bank is a legally independent entity wholly owned by KfW;

• Promotion of developing countries and emerging economies: KfW Entwicklungsbank (KfW Development Bank) is responsible for KfW’s public sector development cooperation activities, and DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH (German Investment and Development Company, “DEG”) finances private-sector investments in developing countries. DEG is a legally independent entity wholly owned by KfW; and

• Financial markets, which comprises KfW’s treasury, funding, asset management and other capital markets-related activities.

With effect from April 1, 2018, KfW reorganized its domestic promotional business, which it had previously conducted through its business sectors Mittelstandsbank (SME Bank) and Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions) based on a distinction between customer groups, into the following three business sectors, which are characterized by different operating models:

• SME Bank & Private Clients (Mittelstandsbank & Private Kunden) offers highly standardized products for SMEs, business founders, start-ups, self-employed professionals as well as private individuals;

• Customized Finance & Public Clients (Individualfinanzierung & Öffentliche Kunden) provides individual financing solutions for municipal and social infrastructure, offers corporate loans and project finance, as well as customized financing for financial institutions and Landesförderinstitute; and

• Equity Financing will be conducted through a new wholly owned subsidiary, which is expected to commence its operations in the course of 2018.

10

All products of the former business sectors Mittelstandsbank (SME Bank) and Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions) continue to exist in one of the three new business sectors SME Bank & Private Clients, Customized Finance & Public Clients or Equity Financing. The business sectors Export and project finance, Promotion of developing countries and emerging economies and Financial markets remain unchanged.

Because it primarily covers the fiscal year ended December 31, 2017, the following description of KfW’s business activities is based on the organizational structure in place until March 31, 2018.

KfW’s offices are located at Palmengartenstraße 5-9, 60325 Frankfurt am Main, Germany. KfW’s telephone number is 011-49-69-74310. KfW also maintains branch offices in Berlin and Bonn, Germany, as well as a liaison office to the European Union (“EU”) in Brussels, Belgium.

Ownership

The Federal Republic holds 80% of KfW’s subscribed capital, and the German federal states (each, a “Land” and together, the “Länder”) hold the remaining 20%. The Law Concerning KfW (Gesetz über die Kreditanstalt für Wiederaufbau, or the “KfW Law”) does not provide for shareholders’ meetings; instead, the Board of Supervisory Directors assumes the responsibilities of a shareholders’ meeting. For more information on the Board of Supervisory Directors, see “Management and Employees—Board of Supervisory Directors.”

Shares in KfW’s capital may not be pledged; they may not be transferred to entities other than the Federal Republic or the Länder. Capital contributions have been, and are expected to continue to be, made to KfW in such proportions as to maintain the relative shares of capital held by the Federal Republic and the Länder.

Legal Status

KfW is organized under the KfW Law as a public law institution with unlimited duration. As a public law institution serving public policy objectives of the Federal Government, KfW itself is not subject to corporate taxes (although certain of its subsidiaries are), and as a promotional bank, KfW does not seek to maximize profits. KfW does, however, seek to maintain an overall level of profitability that allows it to strengthen its equity base in order to support its promotional activities. KfW is prohibited under the KfW Law from distributing profits, which are instead allocated to statutory reserves and to separately reportable reserves. KfW is generally also prohibited under the KfW Law from taking deposits or engaging in the financial commission business.

Relationship with the Federal Republic

Guarantee of the Federal Republic

The KfW Law expressly provides that the Federal Republic guarantees all existing and future obligations of KfW in respect of money borrowed, bonds and notes issued and derivative transactions entered into by KfW, as well as obligations of third parties that are expressly guaranteed by KfW (KfW Law, Article 1a). Under this statutory guarantee (the “Guarantee of the Federal Republic”), if KfW fails to make any payment of principal or interest or any other amount required to be paid with respect to securities issued by KfW, or if KfW fails to make any payment required to be made under KfW’s guarantee when that payment is due and payable, the Federal Republic will be liable at all times for that payment as and when it becomes due and payable. The Federal Republic’s obligation under the Guarantee of the Federal Republic ranks equally, without any preference, with all of its other present and future unsecured and unsubordinated indebtedness. Holders of securities issued by KfW or issued under KfW’s guarantee may enforce this obligation directly against the Federal Republic without first having to take legal action against KfW. The Guarantee of the Federal Republic is strictly a matter of statutory law and is not evidenced by any contract or instrument. It may be subject to defenses available to KfW with respect to the obligations covered.

Institutional Liability (Anstaltslast)

KfW is a public law institution (Anstalt des öffentlichen Rechts). Accordingly, under the German administrative law principle of Anstaltslast, the Federal Republic, as the constituting body of KfW, has an obligation to safeguard KfW’s economic basis. Under Anstaltslast, the Federal Republic must keep KfW in a position to pursue its operations and enable it, in the event of financial difficulties, through the allocation of funds or in some other appropriate manner, to meet its obligations when due. Anstaltslast

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is not a formal guarantee of KfW’s obligations by the Federal Republic, and creditors of KfW do not have a direct claim against the Federal Republic. Nevertheless, the effect of this legal principle is that KfW’s obligations, including the obligations to the holders of securities issued by it or issued under KfW’s guarantee, are fully backed by the credit of the Federal Republic. The obligation of the Federal Republic under Anstaltslast would constitute a charge on public funds that, as a legally established obligation, would be payable without the need for any appropriation or any other action by the German Parliament.

Understanding with the European Commission

In order to clarify that the Federal Republic’s responsibility for KfW’s obligations was and is compatible with EU law prohibitions against state aid, the German Federal Ministry of Finance and the European Commissioner for Competition held discussions which were formalized in an understanding reached on March 1, 2002. In the understanding with the European Commission, it was agreed that, in respect of the promotional activities for which KfW is responsible, KfW will continue to benefit from Anstaltslast and the Guarantee of the Federal Republic. The understanding acknowledged that KfW’s role in providing financing for, in particular, SMEs, risk capital, environmental protection, technology/innovation, infrastructure and housing, as well as its cooperation with developing countries, is promotional and thus compatible with EU rules.

In the business sector of Export and project finance, the understanding with the European Commission required KfW to transfer to a legally independent subsidiary that portion of export finance and domestic and international project finance activities which the European Commission deemed to fall outside the scope of the promotional activities of KfW. The transfer of such activities was to be effected by December 31, 2007, and as from that date KfW has not been permitted to fund the subsidiary at other than market rates of interest or to extend to the subsidiary any benefits of Anstaltslast or the Guarantee of the Federal Republic.

KfW continues to be permitted, however, to engage directly in the following promotional export and project finance activities:

• implementation of international promotional programs, such as the interest-rate subsidized CIRR (Commercial Interest Reference Rate) and ASU (Aircraft Sector Understanding) schemes, which are recognized as promotional activities in accordance with the Organization for Economic Cooperation and Development (“OECD”) consensus;

• participation in syndicated financing activities outside the EU, the European Economic Area and countries holding the status of official candidate for EU membership, subject to certain conditions, and sole financing activities in countries in which sufficient sources of financing do not exist; and

• participation in projects in the interest of the EU that are co-financed by the European Investment Bank or similar European financing institutions.

The European Commission transformed the understanding into a decision, which the Federal Republic formally accepted. In August 2003, a part of the Promotional Bank Restructuring Act (Förderbankenneustrukturierungsgesetz) implemented the understanding with the European Commission and amended the KfW Law accordingly.

On January 1, 2008, KfW IPEX-Bank, a limited liability corporation (Gesellschaft mit beschränkter Haftung) formed as a wholly owned subsidiary of KfW, commenced operations as a legally independent entity, thus satisfying the requirements set forth in the understanding with the European Commission. KfW IPEX-Bank conducts those export and project finance activities which the European Commission deemed to fall outside the scope of KfW’s promotional activities directly and on its own behalf. For more information on KfW IPEX-Bank, see “Business—Export and Project Finance (KfW IPEX-Bank).”

Supervision and Regulation

Supervision

The Federal Ministry of Finance, acting in consultation with the Federal Ministry for Economic Affairs and Energy, exercises legal supervision (Rechtsaufsicht) over KfW, i.e., it supervises KfW’s compliance with applicable laws and may adopt all necessary measures to ensure such compliance. Legal supervision primarily

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comprises supervision of compliance with the KfW Law and KfW’s Bylaws, but also with all other applicable laws and regulations except for certain provisions of bank regulatory law referenced in the following paragraph and described in “Regulation.” The relevant Federal Ministers are represented on KfW’s Board of Supervisory Directors, which supervises KfW’s overall activities. See below “Management and Employees—Board of Supervisory Directors.”

In addition to being subject to legal supervision by the Federal Ministries, in October 2013, KfW became subject to banking-specific supervision exercised by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”). This supervision was established by a ministerial regulation (KfW-Verordnung, or “KfW Regulation”), which implements an amendment to the KfW Law that became effective in July 2013. The KfW Regulation, while maintaining KfW’s general exemption from bank regulatory law, specifies those provisions of bank regulatory law which are to apply to KfW by analogy and assigns the supervision of compliance with these provisions to BaFin. In exercising its supervision, BaFin cooperates with the German Central Bank (“Deutsche Bundesbank”) in accordance with normal bank supervisory procedures. For further details, see “Regulation.”

In addition to compliance with the financial reporting and auditing standards generally applicable to banks in Germany, KfW, under the KfW Law, is subject to special auditing standards for government-owned entities set forth in the Budgeting and Accounting Act (Haushaltsgrundsätzegesetz). These special auditing standards require that KfW’s annual audit, above and beyond its normal scope, cover the proper conduct of KfW’s business by its management. The resulting auditor’s report is to enable the Board of Supervisory Directors, the responsible Federal Ministries, and the Federal Court of Auditors (Bundesrechnungshof) to form their own opinion and to take action if required.

Finally, as a government-owned entity, KfW is subject to audits by the Federal Court of Auditors with regard to its economical use of funds pursuant to the Budgeting and Accounting Act.

Regulation

Overview of KfW’s Regulatory Status. KfW is generally exempt from bank regulatory laws and regulations, as it neither qualifies as a “credit institution” or “financial services institution” within the meaning of the German Banking Act (Gesetz über das Kreditwesen, or “KWG”) nor as a “credit institution” within the meaning of relevant EU directives and regulations, including in particular the EU Capital Requirements Directive IV (“CRD IV”) and the EU Capital Requirements Regulation (“CRR”). However, by operation of the KfW Regulation, considerable portions of the KWG and the CRR, including relevant implementing rules and regulations, apply by analogy to KfW. The analogous application of banking supervisory law to KfW has been phased in gradually, with the majority of the rules, regulations and enforcement powers described above having become applicable as of January 1, 2016. The KfW Regulation takes into account KfW’s special status as an entity not generally engaged in deposit taking, characterized by a low-risk profile in its lending business and benefiting from the Guarantee of the Federal Republic. It therefore provides for certain modifications and exceptions in connection with the analogous application of the relevant rules and regulations.

The analogous application of EU and national bank regulatory law imposed by the KfW Regulation is without prejudice to KfW’s status as a “public sector entity” within the meaning of Article 4 para. 1 no. 8 of the CRR. This status confers certain advantages to KfW’s refinancing activities given the fact that exposures to public sector entities held by banks are privileged as to capital requirements, large exposures limitations and liquidity measurement under EU and national bank regulatory law. Securities issued by KfW, such as bonds and notes, are in principle eligible in the EU as level 1 assets pursuant to Article 10 para. 1 lit. (c) (v) of the Commission Delegated Regulation (EU) 2015/61 of October 10, 2014.

Bank Regulatory Rules and Regulations Applied by Analogy. By operation of the KfW Regulation, bank regulatory requirements for corporate governance set forth in Sections 25c through 25d of the KWG apply to KfW by analogy. To comply with these requirements, certain adjustments were made to the committee structure of KfW’s Board of Supervisory Directors in 2014. For more information on the committee structure of KfW’s Board of Supervisory Directors, see “Management and Employees—Board of Supervisory Directors.”

As of January 1, 2018, the bank regulatory requirements for remuneration policies set forth in Section 25a of the KWG and further specified in the German Remuneration Regulation for Credit Institutions (Institutsvergütungsverordnung, or “IVV”) fully apply to KfW. Previously, BaFin had granted KfW a transitional period from January 1, 2016 until January 1, 2018 to prepare for the full application of the IVV.

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The capital adequacy regime set forth in part 2 titles I through III and part 3 titles I through VI of the CRR has become applicable by analogy virtually in its entirety to KfW with effect from January 1, 2016, including the calculation of regulatory own funds and own funds requirements on a consolidated basis. KfW is also subject to the new capital buffers regime introduced by CRD IV and transposed into national law in Sections 10c through 10i of the KWG. In June 2017, KfW received approval from BaFin to calculate its regulatory capital requirements in accordance with the advanced internal ratings-based approach (“IRBA”) for the vast majority of its portfolio as of June 30, 2017. In line with regulatory requirements, KfW intends to obtain additional approval for other sub-portfolio segments by 2022. KfW’s total capital ratio as well as its Tier 1 capital ratio according to article 92 of the CRR amounted to 20.6% as of December 31, 2017 (including the interim profit as of September 30, 2017¹). The decrease of the total capital ratio as well as of the Tier 1 capital ratio compared to the figures as of December 31, 2016, which both had been calculated for internal purposes based on the voluntary application of all material IRBA rules and each amounted to 22.3%, was mainly due to the effects of the IRBA approval process. Until KfW receives full approval as an advanced IRBA institution, sub-portfolios that have not yet been approved continue to be valued following the generally more capital-intensive standardized approach for credit risks due to the above-mentioned gradual implementation of the IRBA. As part of the IRBA approval process, adjustments to the methods of collateral valuation for final-borrower assignments in the domestic promotional business were necessary, which resulted in an increase of risk-weighted assets. For more information on KfW’s other key indicators, including the capital ratios based on the analogous application of the advanced IRBA, see “Group management report—Risk report—Overview of key indicators” included in Exhibit (e).

In connection with the application of the appropriate requirements of the capital adequacy regime, the overall capital requirement for KfW Group’s total capital ratio as of December 31, 2017 was 14.3%, consisting of a total supervisory review and evaluation process capital requirement (“TSCR”) of 13.0% plus a Capital Conservation Buffer and a Countercyclical Capital Buffer. The TSCR for KfW Group includes a three percentage points supervisory review and evaluation process (“SREP”) surcharge and an additional, IT-related surcharge of two percentage points, both imposed by BaFin in 2017. A SREP surcharge is generally meant to reflect the specific risk situation of each bank. In connection with standard audits of KfW conducted by Deutsche Bundesbank and BaFin in 2016, the banking supervisory authorities reported findings related to KfW’s IT. As a consequence, BaFin has imposed the IT-related additional temporary capital requirements until the issues underlying the findings have been resolved. The need for modernization of KfW’s IT architecture had already been identified before the standard audits were conducted and major projects to address the need for IT–related updates and improvements have been underway at KfW for some time.

In connection with further standard audits of KfW conducted by Deutsche Bundesbank and BaFin in 2017, the banking supervisory authorities conducted audits related to KfW’s outsourcing management and internal auditing. In April 2018, BaFin notified KfW that it will impose additional temporary capital requirements as a result of findings from these audits until the issues underlying these findings have been resolved. These additional temporary capital requirements are expected to amount to 0.75%, resulting in a total surcharge of 2.75% for IT-, internal-auditing- and operational-risk-management-related findings. Furthermore, BaFin notified KfW that it will require KfW to maintain a capital buffer of 1% for Other Systemically Important Institutions (O-SIIs) in Germany. The buffer is expected to be phased-in over a period of three years starting in 2019.

As of January 1, 2016, KfW is also, by analogy, subject to the large-exposures regime of part IV of the CRR as supplemented by the KWG and relevant implementing rules and regulations. Under this regime, exposures to any one client or group of connected clients are limited to 25% of eligible own funds and exposures exceeding 10% of eligible own funds are subject to special internal monitoring requirements and a reporting obligation to the German bank supervisory authorities.

In addition, KfW applies the provisions concerning leverage ratio with effect from January 1, 2016 by analogy. Under this regime, the ratio of KfW’s Tier 1 capital to the carrying value of assets and off-balance sheet exposures is calculated on a consolidated basis. The leverage ratio is monitored internally and expected to become part of the prudential requirements starting in 2020.

According to a decision made by the supervisory authority BaFin in December 2015, certain provisions of the CRR such as own funds requirements, large exposures and leverage need only be considered at the group level (consolidated basis) and not at the entity level.

Although it was already subject to the German Anti-Money Laundering Act (Geldwäschegesetz), on January 1, 2016 KfW also became subject to the provisions of the KWG concerning money laundering, terrorist financing and other criminal offences at the group and entity levels.

¹  According to Article 26(2) CRR.

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Finally, the bank regulatory requirements for risk management systems set forth in the KWG and in the German Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement, or “MaRisk”) have become applicable to KfW by analogy with effect from January 1, 2016, and provide for sound systems for risk strategy planning, the implementation of risk management and financial and operational controls as well as requirements for credit decision-making processes.

Certain exemptions are granted in this context for KfW’s assigned business (Zuweisungsgeschäft) in accordance with Article 2 para. 4 of the KfW Law, i.e., those activities which KfW carries out as directed by the Federal Government, usually at the Federal Republic’s economic risk.

The KfW Regulation does not encompass the application of the liquidity regime set forth in the CRR and the KWG. On the same grounds, KfW is generally exempt from EU and national disclosure requirements and from the EU Bank Recovery and Resolution Directive.

Supervisory Structure and Enforcement Powers. The supervision of KfW’s compliance with bank regulatory laws and regulations is assigned to BaFin in cooperation with Deutsche Bundesbank in accordance with BaFin’s general risk-oriented supervisory review and evaluation process. In this context, Deutsche Bundesbank undertakes the ongoing audit and analysis of banks with regard to both their financial stability and the adequacy of their internal governance and risk-management systems. Deutsche Bundesbank receives and preprocesses relevant data, while final decision-making and the exercise of enforcement powers are reserved for BaFin.

For purposes of supervision, the KfW Regulation subjects KfW by analogy to the reporting and information requirements generally applicable to banks in Germany, with the exception of the automated access to client account details, with effect from January 1, 2016. Until KfW has implemented a system to comply with these reporting and information requirements, KfW will provide the supervisory authorities with relevant reports and information, the form of which has been agreed with the supervisory authorities. As agreed with the supervisory authorities, KfW will implement a fully-fledged regulatory reporting system by 2020.

In addition, the KfW Regulation subjects KfW by analogy to certain enforcement powers of BaFin, which comprise, among other matters, the right to demand, under certain circumstances, increases of regulatory own funds and/or a reduction of regulatory risk, or to demand changes in the senior management of KfW.

Since KfW does not qualify as a regulated entity under national or EU bank regulatory law, KfW did not become subject to the changes in the national and EU bank supervisory structure that have taken effect in recent years. In particular, KfW is not subject to supervision by the European Central Bank (“ECB”) pursuant to Council Regulation (EU) No. 1024/2013 establishing the European Single Supervisory Mechanism (“SSM”). KfW IPEX-Bank was included in the ECB’s comprehensive assessment of large banks conducted in 2014 in cooperation with national supervisory authorities of member states participating in the SSM. According to a decision taken by the ECB in September 2014, KfW IPEX-Bank did not qualify as a significant credit institution and to date it has not been qualified as such in connection with subsequent annual reviews of large German financial institutions conducted by the ECB. Accordingly, KfW IPEX-Bank is not supervised directly by the ECB, but currently continues to be supervised by BaFin in cooperation with Deutsche Bundesbank. For more information on KfW IPEX-Bank, see “Business—Export and Project Finance (KfW IPEX-Bank).” For more information on the SSM, see “Federal Republic of Germany—Monetary and Financial System—Financial System—European Financial System—European System of Financial Supervision and European Banking Union.”

Regulatory Costs. As KfW had already applied significant parts of bank regulatory law on a voluntary basis to most of its activities, its previous voluntary compliance facilitated its compliance with the rules and regulations becoming mandatory by operation of the KfW Regulation. Nonetheless, compliance is expected to continue to entail special organizational efforts and related costs currently estimated to amount to approximately EUR 120 million annually until 2020.

Corporate Background

KfW was established in 1948 by the Administration of the Combined Economic Area, the immediate predecessor of the Federal Republic. Originally, KfW’s purpose was to distribute and lend funds of the European Recovery Program (the “ERP”), which is also known as the Marshall Plan. Even today, several of KfW’s programs to promote the German and European economies are supported using funds for subsidizing interest rates from the so-called “ERP Special Fund.” KfW has expanded and internationalized its operations over the past decades. In 1994, following the reunification of the Federal Republic and the former German Democratic

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Republic (“GDR”), KfW assumed the operations of the former central bank of the GDR (Staatsbank), which was located in Berlin, Germany.

In September 2001, KfW acquired DEG from the Federal Republic. DEG is a limited liability company that acts as the German development finance institution for the promotion of private enterprises in developing countries and emerging economies. For more information on DEG, see “Business—Promotion of Developing and Transition Countries—DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH.”

In 2003, Deutsche Ausgleichsbank (“DtA”), which was based in Bonn, Germany, merged into KfW. DtA was formed in 1950 as a public law institution and promotional bank, particularly active in the area of lending to SMEs and start-up businesses. The merger was accomplished through the Promotional Bank Restructuring Act and was designed to restructure and simplify promotional banking in the Federal Republic and harmonize it with the understanding reached with the European Commission.

Financial Statements and Auditors

The consolidated financial statements of KfW included in Exhibit (e) to this annual report have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”) and the additional requirements of German commercial law pursuant to § 315a (1) of the German Commercial Code (Handelsgesetzbuch) and supplementary provisions of the KfW Law. IFRS differs in certain significant respects from accounting principles generally accepted and financial reporting practices followed in the United States (“U.S. GAAP”), and, as a result, KfW’s consolidated financial statements included in Exhibit (e) to this annual report may differ substantially from financial statements prepared in accordance with U.S. GAAP.

Pursuant to the KfW Law, the annual financial statements of KfW are examined by a Wirtschaftsprüfer (Certified Public Accountant) who is appointed by the Federal Minister of Finance at the proposal of the Board of Supervisory Directors in consultation with the Federal Court of Auditors (Bundesrechnungshof). KfW’s external auditor for the fiscal year ended December 31, 2017 is Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (“EY”).

The annual audit is conducted in accordance with German Generally Accepted Auditing Standards.

The auditor’s report of EY for the fiscal year ended December 31, 2017, dated February 27, 2018, refers to a group management report (Konzernlagebericht). The examination of, and the auditor’s report upon, this group management report are required under German generally accepted accounting principles. This examination was not made in accordance with U.S. generally accepted auditing standards (“U.S. GAAS”) or U.S. attestation standards. Therefore, EY does not provide any opinion on such examination, on the group management report or on the financial statements included in Exhibit (e) to this annual report in accordance with U.S. GAAS or U.S. attestation standards. A reprint of the auditor’s report can be found on page 168 of Exhibit (e).

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BUSINESS

Introduction

Until March 31, 2018, KfW conducted its business in the following business sectors:

• Mittelstandsbank (SME Bank), which focused on SMEs and other commercial clients;

• Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions), which focused on private clients and public clients, such as municipalities and Landesförderinstitute;

• Export and project finance (KfW IPEX-Bank);

• Promotion of developing countries and emerging economies (KfW Entwicklungsbank and DEG); and

• Financial markets, which comprises KfW’s treasury, funding, asset management and other capital markets-related activities.

With effect from April 1, 2018 KfW reorganized its domestic promotional business, which it had previously conducted through its business sectors Mittelstandsbank (SME Bank) and Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions) based on a distinction between customer groups, into the following three business sectors, which are characterized by different operating models:

• SME Bank & Private Clients (Mittelstandsbank & Private Kunden);

• Customized Finance & Public Clients (Individualfinanzierung & Öffentliche Kunden); and

• Equity Financing.

For a description of the new business sectors’ activities, see “General—Overview.”

All products of the former business sectors Mittelstandsbank (SME Bank) and Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions) continue to exist in one of the three new business sectors SME Bank & Private Clients, Customized Finance & Public Clients or Equity Financing. The business sectors Exports and project finance, Promotion of developing countries and emerging economies and Financial markets remain unchanged.

Because it primarily covers the fiscal year ended December 31, 2017, the following description of KfW’s business activities is based on the organizational structure in place until March 31, 2018.

The following table sets forth the relative size of each of the business sectors in terms of commitments for each of the years indicated.

PROMOTIONAL BUSINESS VOLUMEBY BUSINESS SECTOR

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)				(in %)
Mittelstandsbank (SME Bank)		21,899		21,388		2
Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions)		29,913		33,698		-11
Export and project finance (KfW IPEX-Bank)		13,751		16,072		-14
Promotion of developing countries and emerging economies		9,749		8,844		10
of which KfW Entwicklungsbank		8,197		7,290		12
of which DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH		1,551		1,553		0
Financial markets		1,541		1,274		21
Total promotional business volume (1) (2)		76,481		81,002		-6

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(1) Total promotional business volume for 2017 has been adjusted for commitments of EUR 372 million, compared to EUR 273 million for 2016, made by KfW IPEX-Bank relating to Export and project finance and refinanced under certain of Mittelstandsbank’s promotional programs.

(2) Commitments represent the volume of funds committed for loans and other business transactions (with the exception of program-based global loans to Landesförderinstitute and the BAföG (Bundesausbildungsförderungsgesetz, i.e. the German Federal Training Assistance Act) government loan program) in the relevant period, including amounts to be disbursed in future periods, and do not include amounts disbursed in the relevant period pursuant to commitments made in prior periods. In the case of program-based global loans to the Landesförderinstitute and the BAföG government loan program, commitments represent the actual volume of funds disbursed in the relevant period.

The following table shows the relative size of each of the five business sectors in terms of percentage of commitments outstanding and economic capital required at year-end 2017. In general, a lower percentage in economic capital required compared to the percentage of commitments outstanding illustrates a below average risk associated therewith. The percentage of economic capital required of the business sector Financial markets also includes the economic capital required for treasury activities.

RELATIVE SIZEOF EACH BUSINESS SECTOR

	As of December 31, 2017
	Commitments outstanding			Economic capital required (1)
Mittelstandsbank		24	%	20	%
Kommunal- und Privatkundenbank/Kreditinstitute		42	%	29	%
Export and project finance (KfW IPEX-Bank)		15	%	7	%
Promotion of developing countries and emerging economies (KfW Entwicklungsbank and DEG)		7	%	11	%
Financial markets		12	%	6	%
Total (in EUR billions)		505.6		18.2

(1) The balance of economic capital required relates to group functions. The economic capital required has been calculated on a solvency level of 99.99%. For more information concerning economic capital required of KfW Group, see “Group management report—Risk report—Risk management approach of KfW Group—Internal capital adequacy assessment process—Economic risk-bearing capacity” and note 39 to the financial statements, both included in Exhibit (e) to this annual report.

Domestic Promotional Business

General

To support the economic and policy objectives of the Federal Government, KfW offers a broad range of financing programs in Germany and, to a limited extent, elsewhere in Europe, as well as grants funded from the federal budget for domestic promotional purposes. Until March 31, 2018, KfW’s predominant domestic finance activities were conducted by the business sectors Mittelstandsbank and Kommunal- und Privatkundenbank/Kreditinstitute. Further promotional activities targeting the domestic market are reported under the Financial markets business sector. For a description of the reorganization of KfW’s domestic promotional business activities with effect from March 31, 2018, see “General—Overview” and “—Introduction” above. Because it primarily covers the fiscal year ended December 31, 2017, the following description of KfW’s domestic promotional business is based on the organizational structure in place until March 31, 2018.

Under the KfW Law, KfW must generally involve banks or other financing institutions when granting financing. Therefore, KfW involves commercial banks in the handling of its loans by extending loans to commercial banks, which, in turn, on-lend the funds to the ultimate borrowers. To a limited extent, however, KfW is allowed to grant financing directly to the ultimate borrower (e.g., for financing of municipalities). By lending to commercial banks, KfW, in principle, insulates itself from credit exposure to the ultimate borrower and gains the benefit of the commercial banks’ knowledge of their customers as well as their administrative and servicing

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expertise. KfW monitors its exposures to, and the credit standing of, each banking institution to which it lends. In its domestic business sectors, KfW currently lends to approximately 200 banks. In 2017, 61% (2016: 58%) of KfW’s total interbank exposure (exposure at default) was attributable to KfW’s ten largest banking group counterparties. Most of this exposure relates to KfW’s on-lending business, while the portion deriving from other business transactions, e.g., derivatives, securities, money market and global loan transactions, is much more limited.

KfW offers two different models for processing KfW loans to commercial banks. KfW’s traditional and most important model for handling its lending business is based on individual loan applications by each borrower within the framework of specified loan, mezzanine capital or equity participation instruments. Under the other model, KfW extends global funding facilities and program-based global loans to Landesförderinstitute, as well as non-program-based global loans to selected Landesförderinstitute with existing agreements, and to selected financial institutions in Germany and Europe.

Individual Loans. KfW defines detailed formal eligibility requirements for each loan that it extends to a commercial bank as well as for each loan the commercial bank on-lends to the ultimate borrower under each of its lending programs. Borrowers in general do not apply directly to KfW, however, and may only apply for a KfW loan through a bank of their choice. The intermediate bank appraises the financial and business situation of the applicant, takes collateral for the loan and assumes liability for repayment to KfW. KfW loans on-lent by commercial banks are normally collateralized by liens on real property, other assets, or are guaranteed by the Federal Republic or by one of the Länder. The processing of individual loans within KfW’s lending programs is characterized by two formally separate loan approvals – first by the intermediate bank and then by KfW – for each borrower. KfW’s loan approval, however, in most cases depends solely on a review of the individual loan application, based on compliance with the requirements defined for the particular lending program.

In recent years, KfW has modernized its application and approval process for loans with the aim of obtaining a more efficient, automated and accelerated process. For this purpose, KfW developed a digital online platform for its highly standardized loan programs. The online platform, which was launched in 2014 as a tool for the intermediate banks, provides immediate feedback as to KfW’s approval of the loan in the form of an electronic confirmation from KfW. Most of the commercial banks KfW works with have already joined the platform. Since the end of 2015, all loan applications under the housing investment programs can be handled through this platform. In 2017, the platform was expanded to support promotional programs for commercial enterprises (including programs for SMEs and environmental investment programs). KfW aims to offer most of the domestic promotional programs via this platform by the end of 2018.

KfW applies different pricing models for granting loans: a fixed-rate pricing model; and a risk-adjusted pricing model. Under the fixed-rate pricing model, the commercial banks to which KfW lends are permitted to on-lend these funds at fixed spreads over the applicable interest rate payable to KfW. This fixed-rate pricing model is applied to housing investment and some lending programs for start-up financing. Moreover, it is also applied to education lending programs. Under the risk-adjusted pricing model, KfW establishes pricing categories based on a combination of the borrower’s creditworthiness and the collateral securing the loan. Under each lending program, KfW sets maximum interest rates for each pricing category. The on-lending banks assess the risk profile of the borrower and the collateral securing the loan to determine the applicable pricing category for each loan and the applicable maximum interest rate for the pricing category. KfW’s role in the pricing process is limited to verifying that banks derive the appropriate maximum interest rate from the ultimate borrower’s creditworthiness and the collateral provided.

In the traditional SME lending programs offered by KfW, the on-lending banks are liable to KfW and bear the risk of customer default as described above. In recent years, KfW has constantly been reworking and renewing its SME financing programs to increase its support for SMEs. Under some of those lending programs, to which the risk-adjusted pricing model applies, KfW offers the option of a partial exemption from liability to on-lending banks. If the on-lending bank applies for an exemption from liability, KfW bears the risk not retained by the bank and the risk margin is shared pro rata between KfW and the bank. The risk-adjusted pricing model applies amongst others to Mittelstandsbank’s largest and most important lending program, the KfW Unternehmerkredit (Entrepreneurial Loan program). In addition, mezzanine capital and equity participations offered by Mittelstandsbank and its special programs for investments by micro-enterprises are designed so that KfW assumes direct exposure to the credit risk of the ultimate borrower, which is covered or compensated in different ways: by means of risk premiums included in the interest rate charged to the ultimate borrower; or by means of guarantees from the Federal Government or the European Investment Fund.

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Global Loans and Global Funding Facilities. Global loans and global funding facilities differ from KfW’s individual loans primarily in terms of simplified processing, the lack of a requirement for formal loan approval by KfW with respect to each individual ultimate borrower and, in general, a higher degree of flexibility for the on-lending Landesförderinstitute and selected financial institutions. KfW expects the recipient Landesförderinstitute and selected recipient financial institutions to on-lend these funds within a reasonable period of time. In contrast to KfW’s individual loans, these instruments offer greater loan structure flexibility. As a result, global loans and global funding facilities entail lower administrative costs for both KfW and the on-lending Landesförderinstitute and selected financial institutions compared with KfW’s traditional lending programs. Accordingly, the final borrowers generally benefit from favorable interest rates.

KfW offers different kinds of global loans and global funding facilities: program-based global loans and global funding facilities to Landesförderinstitute; and non-program-based global loans to selected Landesförderinstitute and selected financial institutions in Germany and Europe. Most of the Landesförderinstitute are independent public law institutions and benefit from explicit statutory guarantees by the respective German federal state (Land). Each Landesförderinstitut is responsible for promotional matters within its Land. KfW cooperates with 16 Landesförderinstitute.

Landesförderinstitute use KfW’s program-based global loans to finance specified investments relating to SMEs, housing projects and municipal infrastructure projects in their respective Land within the framework of cooperative loan programs of the respective Landesförderinstitut and KfW. The conditions of each cooperative loan program must comply with the conditions of the relevant KfW program. The funds to Landesförderinstitute are generally extended in the form of lump sums, which are then broken down and granted to the final borrower as individual loans.

Moreover, KfW extends global funding facilities exclusively to Landesförderinstitute for their own promotional funding purposes, thus offering Landesförderinstitute flexibility with respect to the use of funds extended in their promotional business without a direct link to any of KfW’s lending programs.

KfW extends non program-based global loans to selected Landesförderinstitute and selected financial institutions in Germany and elsewhere in Europe, which they on-lend as individual loans and leases to finance SMEs, housing projects, municipal infrastructure projects and, increasingly, energy efficiency projects. In the case of Landesförderinstitute, non-program-based global loans are no longer offered as new business, but only in connection with existing agreements.

Mittelstandsbank (SME Bank)

KfW’s Mittelstandsbank business sector supports SMEs, large-scale enterprises, business founders, start-ups and self-employed professionals; it offers financing for various purposes to companies in different stages of development.

According to a representative KfW survey in the German SME sector, known as KfW SME Panel 2017, Germany had an estimated 3.71 million SMEs (defined for the purposes of the survey as corporations with an annual group turnover of up to EUR 500 million) in 2016. During the same period, SMEs accounted for 46% of gross investment by the German corporate sector, employed 70.4% of the workforce and trained approximately 90% of the apprentices.

Mittelstandsbank provides financing in the areas of start-up financing and general investments, innovation and environmental investments, primarily by means of loan programs (2017: EUR 21.3 billion, 2016: EUR 20.7 billion), mezzanine programs (2017: EUR 0.4 billion, 2016: EUR 0.6 billion) and equity investments (2017: EUR 0.1 billion, 2016: EUR 0.1 billion).

Mittelstandsbank primarily offers loan programs. Under some loan programs Mittelstandsbank offers the on-lending banks a partial exemption from liability. If the on-lending bank applies for an exemption from liability, KfW bears the risk not retained by the bank and the risk margin is shared pro rata between KfW and the bank. For instance, this is the case for KfW Unternehmerkredit, which is the most important SME loan program and offers financing for a broad range of investments, such as construction and purchases of machinery, in the start-up financing and general investment area.

Mittelstandsbank also extends mezzanine capital in the form of unsecured subordinated loans, which contain equity-like elements combining characteristics of debt and equity capital. In these financings, the on-lending bank is not liable to Mittelstandsbank for the subordinated loan. The interest rate of these loans takes

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into account the prevailing rates in the capital markets as well as the borrower’s credit standing and collateral securing the loan. The borrower’s creditworthiness is first assessed by the on-lending bank. However, as KfW assumes the credit risk of the loan, it reserves the right to review and, if necessary, to revise the on-lending bank’s assessment by applying KfW’s own rating standards.

Finally, Mittelstandsbank provides equity financing for innovative SMEs mainly through various equity funds.

The following table shows Mittelstandsbank’s commitments by area for each of the years indicated:

MITTELSTANDSBANK COMMITMENTS

	Year ended December 31,					Year-to-Year
	2017			2016		% change
	(EUR in millions)					(in %)
Start-up financing and general investment		9,742	(1)		10,052		-3
Innovation		1,961			608		+223
Environmental investment		10,196			10,727		-5
Total commitments		21,899			21,388		+2

(1) Thereof, an amount of €150 million related to the bridge loan granted to Air Berlin which was based on a special mandate given by the Federal Government to KfW in accordance with article 2 paragraph 4 of the KfW Law, a so-called Zuweisungsgeschäft. KfW’s risks under such loan were fully secured by a guarantee from the Federal Government. The loan was categorized as default and the Federal Republic fully compensated KfW under the guarantee in January 2018.

To support the German economy, Mittelstandsbank committed financing in the amount of EUR 21.9 billion in 2017 (2016: EUR 21.4 billion). This increase was mainly attributable to increased commitments in the field of innovation financing, particularly under the new ERP-Digitalization and Innovation Program. During the period from the start of the program in July 2017 to December 31, 2017, EUR 1.5 billion were committed. From the start of the program in July 2017 to the end of 2017, its credit volume reached EUR 1.5 billion. Among KfW’s environmental investment programs the Energieeffizienzprogramm (“Energy Efficiency Program”) surpassed previous year’s level considerably as commitments increased from EUR 5.2 billion in 2016 to EUR 5.7 billion in 2017.

Start-up Financing and General Investment Programs

Mittelstandsbank provides start-up financing and financial support for general investments for a wide range of purposes, such as investments in property and buildings, in plants, machinery and equipment, or in acquisitions. In 2017, commitments in this area amounted to EUR 9.7 billion and declined slightly compared to the previous year (2016: EUR 10.1 billion). While commitments in the area of general investment declined from EUR 6.4 billion in 2016 to EUR 6.0 billion in 2017, Mittelstandsbank’s start-up financings increased slightly (2017: EUR 3.8 billion, 2016: EUR 3.6 billion).

Innovation Programs

Mittelstandsbank provides financing for innovations by extending funds for research and development activities either by means of loans, mezzanine capital or direct equity investments. Commitments in the field of innovation financing increased significantly to EUR 2.0 billion in 2017 (2016: EUR 0.6 billion) due to a successful launch of the new ERP-Digitalization and Innovation Program.

In 2017, KfW took the first step to realign its venture capital financing by extending the ERP-Venture Capital Fund Investments program to venture debt financings as well as by signing a further investment in the High-Tech Start-up Fund (HTGF III). Commitments in the area of equity financing increased to EUR 0.13 billion in 2017 and exceeded the previous year’s level by EUR 36 million.

In June 2017, KfW’s Board of Supervisory Directors approved the incorporation of a new KfW subsidiary for its venture capital financing activities. The new subsidiary will be established in 2018 as a financial institution with KfW being the sole shareholder (100%). It will be subject to oversight by a supervisory board consisting of representatives from KfW, the Federal Ministry of Finance, the Federal Ministry of Economic Affairs and Energy and external equity experts. The new subsidiary will bundle and expand KfW’s current activities in venture capital financing. This includes KfW’s investments in the High-Tech Start-up Fund, the public venture capital co-investment fund named coparion, and all activities under the program ERP Venture

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Capital Fund Investments. The targeted annual investment volume of the new subsidiary is EUR 200 million. The new subsidiary will invest in venture capital and debt funds, which in turn will invest equity in young, growth-oriented technology firms or provide venture debt to young, growth-oriented corporations. The new subsidiary is expected to start its operational business in the course of 2018. The initiative is being supported by the Federal Ministry of Finance and the Federal Ministry of Economic Affairs and Energy.

Environmental Investment Programs

Mittelstandsbank finances environmental protection projects, in particular for measures aiming to increase energy efficiency, reduce greenhouse gas emissions and promote the use of sources of renewable energy. Commitments for environmental investment programs declined from EUR 10.7 billion in 2016 to EUR 10.2 billion in 2017, particularly due to fewer commitments under KfW’s Renewable Energies Program. Starting from an exceptional high level in 2016 (EUR 4.7 billion), commitments under KfW’s Renewable Energies Program decreased moderately to EUR 3.9 billion in 2017. Disbursements under this program, which promotes investments in projects for the use of wind energy, solar energy, biogas/biomass systems and hydropower, among others, are linked to KfW’s green bond issuances (see “Financial Markets – Funding”). Commitments under the KfW’s Energy Efficiency Program increased from EUR 5.2 billion in 2016 to EUR 5.7 billion in 2017. Last year, the program was expanded to further include the assignment of grants for the prevention or use of waste heat.

Kommunal- und Privatkundenbank/Kreditinstitute (Municipal and Private Client Bank/Credit Institutions)

KfW’s Kommunal- und Privatkundenbank/Kreditinstitute business sector extends housing-related loans and grants as well as financing for education to private individuals, provides financing for infrastructure projects, primarily for municipalities, grants global funding instruments to the Landesförderinstitute and other financial institutions and offers long-term refinancing of export loans to commercial banks.

The following table shows Kommunal- und Privatkundenbank/Kreditinstitute’s commitments by area for each of the years indicated.

KOMMUNAL-UND PRIVATKUNDENBANK/KREDITINSTITUTE COMMITMENTS

	Year ended December 31,					Year-to-Year
	2017			2016		% change
		(EUR in millions)					(in %)
Housing investment programs			18,928		20,825		-9
Education programs			2,216		2,319		-4
Municipal infrastructure programs			3,924		4,074		-4
Global funding facilities to Landesförderinstitute			3,921		4,366		-10
Program for the refinancing of export loans			275		764		-64
Global loans to selected financial institutions			650		1,350		-52
Total commitments (1)			29,913		33,698		-11

(1) Commitments represent the volume of funds committed for loans and other business transactions (with the exception of program-based global loans to Landesförderinstitute) in the relevant year, including amounts to be disbursed in future years, and do not include amounts disbursed in the relevant year pursuant to commitments made in prior years. In the case of program-based global loans to the Landesförderinstitute, commitments represent the actual volume of funds disbursed in the relevant year.

In 2017, Kommunal- und Privatkundenbank/Kreditinstitute’s commitments amounted to EUR 29.9 billion (2016: EUR 33.7 billion). The decline compared to 2016 was mainly attributable to a decrease in housing investment programs, particularly for energy-efficient construction and the promotion of home ownership, and to a decrease of global loans to other financial institutions.

Housing Investment Programs

Kommunal- und Privatkundenbank/Kreditinstitute’s housing investment programs provide funds for the promotion of home ownership, for energy-efficient construction and refurbishment measures, and for the improvement of the security of and accessibility to or within existing homes. Some of these programs are subsidized through interest rate reductions paid for by federal funds. Commitments in 2017 amounted to EUR 18.9 billion (2016: EUR 20.8 billion), of which EUR 14.2 billion (2016: EUR 15.5 billion) were granted for energy-efficient construction and refurbishment measures and EUR 4.2 billion (2016: EUR 4.9 billion) for home ownership promotion programs.

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Education Programs

Kommunal- und Privatkundenbank/Kreditinstitute supports students and employees in higher education and advanced occupational training with direct loans. Some of these programs are covered by a credit guarantee of the Federal Government and the Länder. In 2017, commitments amounted to EUR 2.2 billion (2016: EUR 2.3 billion).

Municipal Infrastructure Programs

Kommunal- und Privatkundenbank/Kreditinstitute provides financing for investments in municipal and social infrastructure, either as direct loans to municipalities (i.e., local and municipal authorities and municipal special-purpose associations) or through KfW’s ordinary on-lending scheme involving commercial banks. The latter is used for infrastructure investments by private companies that are majority-owned by municipal authorities and social investments made by non-profit organizations. Some of the municipal infrastructure programs are subsidized by federal funds. In total, commitments for municipal infrastructure programs decreased to EUR 3.9 billion in 2017 from the previous year’s level of EUR 4.1 billion due to slightly lower credit demand from municipalities.

Global Loans and Global Funding Facilities

The following table shows Kommunal- und Privatkundenbank/Kreditinstitute’s commitments designated to global loans and global funding facilities.

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)					(in %)
Global funding facilities to Landesförderinstitute		3,921		4,366		-10
Program-based global loans to Landesförderinstitute		1,267		1,954		-35
Non program-based global loans to Landesförderinstitute		30		20		50
Non program-based global loans to selected financial institutions in Germany and Europe		650		1,350		-52
Total commitments (1)		5,868		7,690		-24

(1) Commitments represent the volume of funds committed for loans and other business transactions (with the exception of program-based global loans to Landesförderinstitute and the BAföG government loan program) in the relevant year, including amounts to be disbursed in future years, and do not include amounts disbursed in the relevant year pursuant to commitments made in prior years. In the case of program-based global loans to the Landesförderinstitute and the BAföG government loan program, commitments represent the actual volume of funds disbursed in the relevant year.

In 2017, Kommunal- und Privatkundenbank/Kreditinstitute granted global funding facilities and program-based global loans to Landesförderinstitute as well as non-program-based global loans to selected Landesförderinstitute. The latter were granted only in connection with existing agreements. In 2017, global funding facilities to Landesförderinstitute amounted to EUR 3.9 billion (2016: EUR 4.4 billion) and program-based global loans to Landesförderinstitute amounted to EUR 1.3 billion (2016: EUR 2.0 billion). Non program-based global loans to selected Landesförderinstitute were granted in the amount of EUR 30 million in 2017 (2016: EUR 20 million). The decrease in the refinancing of Landesförderinstitute was mainly driven by decreased demand.

Besides its commitments to Landesförderinstitute, Kommunal- und Privatkundenbank/Kreditinstitute grants global loans to selected financial institutions in Germany to refinance leasing contracts to SMEs and to selected financial institutions in Europe to refinance energy efficiency and renewable energy projects or to cooperate in the field of SME financing in Europe. The financial institutions in turn break down the global loans and extend individual loans and leases to SMEs. In 2017, global loans to selected financial institutions in Germany and Europe amounted to EUR 0.7 billion (2016: EUR 1.4 billion), of which EUR 0.7 billion were attributable to the refinancing of leasing contracts (2016: EUR 1.2 billion). In 2017, there was no refinancing of European financial institutions (2016: EUR 0.2 billion) due to prevailing market conditions. The demand for refinancing of leasing contracts in Germany also decreased significantly in 2017.

Program for the Refinancing of Export Loans

Kommunal- und Privatkundenbank/Kreditinstitute offers commercial banks long-term refinancing of export loans covered by an official export credit guarantee of the Federal Government referred to as “Hermes

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Cover.” These guarantees are managed by Euler Hermes Aktiengesellschaft and PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (together “HERMES”) on behalf and for account of the Federal Government. For more information on HERMES, see “Business—Export and Project Finance (KfW IPEX-Bank)—Business.” In 2017, KfW made commitments of EUR 0.3 billion (2016: EUR 0.8 billion) under this program.

Export and Project Finance (KfW IPEX-Bank)

Corporate Background

KfW IPEX-Bank conducts export and project finance activities which the European Commission deemed to fall outside the scope of KfW’s promotional activities directly and on its own behalf, while it conducts the promotional export and project finance activities in its own name on behalf of KfW on a trust basis. KfW provides funding for KfW IPEX-Bank at market rates based on the ratings assigned to KfW IPEX-Bank by international rating agencies. As of January 1, 2008, and in accordance with the understanding reached between the European Commission and the Federal Republic, KfW IPEX-Bank commenced operations as a legally independent entity wholly owned by KfW. For more information, see “General—Relationship with the Federal Republic—Understanding with the European Commission.”

Total assets of KfW IPEX-Bank (IFRS, before consolidation) as of December 31, 2017 amounted to EUR 26.4 billion (December 31, 2016: EUR 30.6 billion). Total outstanding loans and guarantees (including promotional activities) for KfW’s business sector Export and project finance amounted to EUR 51.3 billion as of December 31, 2017 (year-end 2016: EUR 56.2 billion). KfW IPEX-Bank is headquartered in Frankfurt am Main, Germany, and maintains a branch office in London, United Kingdom and representative offices in nine locations outside Germany. As of December 31, 2017, KfW IPEX-Bank employed 679 persons, excluding managing directors but including temporary personnel (December 31, 2016: 669).

In accordance with the understanding with the European Commission, KfW IPEX-Bank has obtained a banking license and is subject to the KWG and the corporate tax regime. KfW IPEX-Bank is approved as an IRBA (internal ratings-based approach) bank under the Basel II rules by the relevant German supervisory authorities – BaFin and the Deutsche Bundesbank. With respect to the SSM, KfW IPEX-Bank currently does not qualify as a significant credit institution and is therefore not directly supervised by the ECB, but rather continues to be supervised by BaFin in cooperation with Deutsche Bundesbank. For additional information on KfW IPEX-Bank and the SSM, see “KfW—General—Supervision and Regulation—Regulation—Supervisory Structure and Enforcement Powers.” For more information on the SSM, see “Federal Republic of Germany—Monetary and Financial System—Financial System—European Financial System—European System of Financial Supervision and European Banking Union.”

KfW IPEX-Bank (controlled company) signed a profit transfer agreement with KfW Beteiligungsholding GmbH (controlling company) in order to form a corporate income tax (“CIT”) fiscal unity. Under this profit transfer agreement, KfW IPEX-Bank is required to transfer its entire annual profit under applicable German commercial law to KfW Beteiligungsholding GmbH effective from the end of the fiscal year ended December 31, 2016.

Business

KfW IPEX-Bank focuses on supporting the internationalization and the competitiveness of internationally active German and European companies and offers project, export and trade financing. It provides medium and long-term investment and export financing in the form of amortizing loans, guarantees or leasing financing as well as project, object and acquisition financing. KfW IPEX-Bank also offers derivative instruments to allow its clients to hedge interest and currency risk and instruments for short-term trade financing, such as participations in letters of credit.

With the consent of the Federal Government, KfW delegated the mandate of the management of the Shipping CIRR Program and the ERP (European Recovery Program) Export Financing Program to KfW IPEX-Bank. Both programs are executed by KfW IPEX-Bank, applying strict “Chinese Walls”. The programs offer fixed interest rate loans to buyers based on the CIRR (Commercial Interest Reference Rate), which is a minimum interest rate prescribed by the OECD for officially supported financings in order to ensure competitive neutrality. The Shipping CIRR Program is open to banks financing ships built in German shipyards and offers a refinancing option through KfW. The ERP Export Financing Program supports lending for German exports to emerging and developing countries combined with fixed refinancing through KfW. These loans are supported through the

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ERP. In the past, lending of CIRR based loans in the ERP Program was provided through KfW IPEX-Bank and via AKA Ausfuhrkredit-Gesellschaft mit beschränkter Haftung, both as lenders of record. Since January 2017, all banks eligible for buyer credit cover (Hermes cover) may directly apply to the ERP-CIRR Export Financing Program.

KfW IPEX-Bank’s principal customers are German and European corporations (and their customers) with international operations and larger medium-sized companies in basic and manufacturing industries, as well as in the retail, health, telecommunications, power/renewables, water, shipping, aviation, rail, transport and social infrastructure sectors.

Traditionally, the bulk of loans extended by KfW IPEX-Bank has been used for export and project financing to buyers of German or European exports. In recent years, KfW IPEX-Bank has increasingly extended loans to finance direct investments by German enterprises and other corporate purposes linked to the internationalization of German companies. In addition, KfW IPEX-Bank co-finances large-scale infrastructure projects and means of transport (e.g., airplanes and vessels) in the German and European transport sector. KfW IPEX-Bank also provides, as part of its core business, financing for environment and climate protection projects. Finally, KfW IPEX-Bank’s loans are also used to secure sources of raw materials for the German and European industry.

KfW IPEX-Bank’s loans are generally extended directly to the ultimate borrower, and KfW IPEX-Bank grants a significant portion of these loans at its own risk. KfW IPEX-Bank regularly cooperates with other financial institutions by way of consortia and syndications. In some cases, KfW IPEX-Bank may arrange for commercial banks to assume the risk on portions of loans made by KfW IPEX-Bank through risk-participations, for which KfW IPEX-Bank pays a fee to the bank assuming the risk. KfW IPEX-Bank is eligible to act as on-lending bank under certain of KfW’s promotional programs. In 2017, KfW IPEX-Bank refinanced loan commitments for export and project finance under KfW’s promotional programs in the amount of EUR 372 million (2016: EUR 273 million).

From time to time, KfW IPEX-Bank also enters into framework loan agreements with non-German banks, which enable such banks to extend loans to their customers for the purpose of importing equipment from German or other European exporters. Because the amounts of individual loans are usually small, the related transaction costs are relatively high. The framework agreements help to reduce these transaction costs.

Loans extended by KfW IPEX-Bank are usually secured by collateral and often benefit from a payment guarantee or other security arrangement. Loans extended to finance direct investments may benefit from an investment guarantee against political risk by the Federal Republic if the host country risk is assessed to be substantial.

A portion of export finance loans extended by KfW IPEX-Bank is guaranteed by the Federal Republic through HERMES, the official German export credit insurer. HERMES insurance covers up to 95% – in some instances even up to 100% – of KfW’s Export and project finance business sector’s risk, so that the risk of the portion covered is the equivalent of German government risk. HERMES also provides coverage for related deliveries from other, mainly European, countries provided that they do not exceed a certain portion of the total delivery for which an export finance loan was extended. Furthermore, KfW IPEX-Bank’s financing frequently benefits from a guarantee by a foreign export credit agency or a government instrumentality in the buyer’s country.

For borrowers in other European and OECD countries where the country risk is not considered high, KfW IPEX-Bank has been increasingly extending loans on the basis of ordinary banking collateral (e.g., mortgages on aircraft or ships) without seeking the benefit of HERMES or similar coverage. In addition, even when HERMES coverage is sought, KfW IPEX-Bank often extends loans on which the insured portion is less than 95%. As of December 31, 2017, outstanding loans and guarantees (including promotional activities) outside Germany for KfW’s business sector Export and project finance amounted to EUR 41 billion, of which EUR 10 billion, or 23%, were export finance loans which are fully or partly guaranteed by HERMES.

Commitments

In 2017, total commitments of the Export and project finance business sector decreased to EUR 13.8 billion including commitments under the CIRR scheme for the refinancing of banks , which is supported by the federal budget (2016: EUR 16.1 billion). The following table shows commitments in KfW’s business sector Export and project finance in 2017 and 2016.

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	Year ended December 31,								Year-to-Year
	2017				2016				% change
	(EUR in millions)		(in % of total)		(EUR in millions)		(in % of total)		(in %)
Commercial business		8,275		60		8,588		53		-4
Promotional business (conducted on behalf of KfW)		5,476		40		7,484		47		-27
Total commitments (1)		13,751		100		16,072		100		-14

(1) Commitments represent the volume of funds committed for loans and other business transactions in the relevant year, including amounts to be disbursed in future years, and do not include amounts disbursed in the relevant year pursuant to commitments made in prior years.

New commitments in 2017 amounted to EUR 13.8 billion compared to EUR 16.1 billion in 2016. This decrease is primarily due to a demanding and increasingly competitive market environment with very low interest rates and high liquidity in which a balanced risk-to-return-ratio remained key for KfW IPEX-Bank resulting in the lower commitment volumes for 2017.

Commitments by Sector. The following table shows KfW IPEX-Bank’s commitments by sectors in 2017 and 2016:

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)				(in %)
Power, renewables and water		2,629		3,081		-15
Industries and services		2,057		1,986		4
Basic industries		2,014		1,646		22
Maritime industries		1,623		2,358		-31
Financial institutions, trade and commodity finance		1,473		2,065		-29
Aviation and rail		1,273		1,790		-29
Transport and social infrastructure		998		1,444		-31
CIRR scheme for bank refinancing (ship + ERP finance) (1)		1,685		1,701		-1
Total commitments		13,751		16,072		-14

(1) Starting in 2017 the CIRR scheme for bank refinancing includes commitments under the new “ERP Export Financing Program” (ERP-CIRR) amounting to EUR 0.03 bn.

In 2017, commitments of EUR 1.7 billion were provided under the CIRR scheme for bank refinancing (2016: EUR 1.7 billion) as the demand from potential borrowers remained relatively stable compared to the prior year. The highest commitments were achieved in the power, renewables and water sector with EUR 2.6 billion (2016: EUR 3.1 billion) including financing for large onshore and offshore wind farms, followed by the industries and services sector with stable commitments of EUR 2.1 billion (2016: EUR 2.0 billion) and the basic industries sector with commitments of EUR 2.0 billion (2016: EUR 1.6 billion).

Commitments by Geographic Area. KfW IPEX-Bank’s commitments are reported for the following three regions in 2017: Germany; Europe (excluding Germany, but including Russia and Turkey); and the rest of the world. In 2017, KfW IPEX-Bank’s commitments for project and export financing (excluding the CIRR scheme for bank refinancing) within Germany decreased to EUR 2.8 billion (2016: EUR 3.4 billion). In 2017, commitments in Europe (excluding Germany, but including Russia and Turkey) amounted to EUR 4.5 billion (2016: EUR 5.5 billion). KfW IPEX-Bank’s commitments in the rest of the world amounted to EUR 4.8 billion in 2017 (2016: EUR 5.5 billion). Commitments under the CIRR scheme (2017: EUR 1.7 billion; 2016: EUR 1.7 billion) are transregional.

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Commitments by Product. The following table shows KfW IPEX-Bank’s commitments by product in 2017 and 2016:

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)				(in %)
Corporate transactions (for German or European export companies)		9,252		10,420		-11
Thereof
Loans (term loans and bullet)		5,848		6,892		-15
Trade finance		1,078		1,466		-26
Revolving credit facilities for cash drawings		1,383		1,514		-9
Guarantees		685		547		25
Debt instruments		113		0		100
Project finance (1)		2,550		3,199		-20
Asset finance (1)		67		603		-89
Acquisition finance (1)		168		149		13
Commodity Trade Finance (2)		30		—		100
CIRR scheme for bank refinancing (ship+ERP)		1,685		1,701		-1
Total commitments		13,751		16,072		-14

(1) The product categories project finance, asset finance and acquisition finance may also include loans, guarantees, lease finance or revolving credit facilities that are not attributed to any sub-category under the corporate transactions product category.

(2) New product category in 2017. (“Rohstoffhandelsfinanzierung”).

Funding

The funds for KfW IPEX-Bank’s commitments are mainly provided by KfW through borrowings in the capital markets. KfW provides funding to KfW IPEX-Bank’s international project and export finance business at market rates based on the ratings assigned to KfW IPEX-Bank by international rating agencies. For those areas of export finance which the European Commission has deemed to fall within the scope of the promotional activities of KfW, funds from the ERP Special Fund may also be used for subsidizing interest rates. In 2017, EUR 184 million of loan disbursements were supported by the ERP Special Fund (2016: EUR 365 million).

The terms of export and project finance loans funded in the capital markets are based on the cost of funds to KfW, plus a margin intended to cover the administrative cost of the loan, the credit risk and a return on capital. Because the Federal Republic is a member of the OECD, loans financed with funds from the ERP Special Fund or under the CIRR scheme for the shipping industry must comply with OECD regulations, which provide for minimum interest rates and maximum credit periods. Margins on these loans are also generally intended to cover all the risks of such loans as well as administrative costs and a return on capital. In addition, KfW IPEX-Bank charges customary banking fees for reserving and providing financing and for processing. Loans denominated in currencies other than euros are hedged through matched funding or other mechanisms.

Promotion of Developing Countries and Emerging Economies

In the Promotion of developing countries and emerging economies business sector, KfW, on behalf of the Federal Republic, provides financial assistance to developing countries and emerging economies, either through KfW Entwicklungsbank (KfW Development Bank), which promotes mainly public sector development cooperation activities, or through DEG, which promotes private sector investments in developing countries.

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The following table sets forth KfW’s commitments for the Promotion of developing countries and emerging economies business sector in 2017 and 2016:

PROMOTIONOF DEVELOPING COUNTRIESAND EMERGING ECONOMIES COMMITMENTS

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)				(in %)
KfW Entwicklungsbank		8,197		7,290		12
DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH		1,551		1,553		-0.1
Total commitments		9,748		8,844		10

KfW Entwicklungsbank (KfW Development Bank)

Under the brand name KfW Entwicklungsbank, KfW acts as the Federal Republic’s international development bank, extending loans and disbursing grants mainly to foreign public sector borrowers and recipients. In 2017, approximately 35% of these loans and grants were refinanced from federal budget funds provided to KfW. All of KfW’s international development activities are made according to instructions from the Federal Government or in the case of mandates, i.e., grants funded by governmental or supranational entities and distributed using KfW’s expertise and channels (“Mandates”), from the respective donor. Mandates and all funds from the Federal Government involved in loan commitments and grants do not, by their nature, appear on KfW’s consolidated statement of financial position.

KfW extends financial cooperation (Finanzielle Zusammenarbeit – “FZ”) loans in three ways:

• Traditional Financial Cooperation Loans (FZ-Standardkredite) that are extended for the account of the Federal Republic;

• Financial Cooperation Development Loans (FZ-Entwicklungskredite), in which KfW offers its own funds as an additional source of financing. For these loans, federal budget funds at low interest rates or grant funds are combined with funds from KfW that are refinanced in the capital markets. As of December 31, 2017, approximately 87% of outstanding commitments refinanced with KfW funds were guaranteed either by a special guarantee facility of the Federal Republic or by export credit agencies. Interest rates and related terms of Financial Cooperation Development Loans are significantly more favorable to the borrower than market terms and, therefore, meet the requirements for recognition as official development assistance (“ODA”); and

• Financial Cooperation Promotional Loans (FZ-Förderkredite), which are funded solely through funds raised by KfW in the capital markets. Since 2012, FZ-Förderkredite have been eligible for guarantees by a special guarantee facility of the Federal Republic. They may also meet the requirements for recognition as ODA as they offer more favorable terms to the borrower than market terms. As of December 31, 2017, approximately 71% of outstanding Financial Cooperation Promotional Loans were guaranteed by a special guarantee facility of the Federal Republic.

Generally, interested foreign governments submit applications for financial cooperation to the Federal Government, which then asks KfW to appraise the proposed projects. In the case of Financial Cooperation Promotional Loans, project sponsors may submit their proposals directly to KfW. KfW maintains a staff of economists, engineers and other specialists to assist in the appraisal and development of projects. KfW receives fees from the Federal Republic for loans and grants extended for the account of the Federal Government and Financial Cooperation Development Loans, calculated as a percentage of outstanding loans and grants, as far as they are financed out of the federal budget. Based on KfW’s appraisal and its recommendation, the Federal Republic decides whether it funds a particular project. Upon a favorable decision and upon determination of the terms and conditions of financing, KfW enters into a loan or grant agreement with the recipient country or, if applicable, the individual agency responsible for the project, in which case the obligations under that agreement would then usually be fully guaranteed by the respective recipient country.

Financial cooperation loans and grants are disbursed according to the progress of the relevant project, and KfW monitors the utilization of funds in order to verify compliance with the provisions of the loan or grant agreement.

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The following table shows KfW Entwicklungsbank’s commitments in 2017 and 2016:

KFW ENTWICKLUNGSBANK COMMITMENTS

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)				(in %)
Loan commitments (1)		4,975		5,234		-5
of which federal funds		113		122		-7
of which KfW’s funds refinanced in the capital markets		4,862		5,112		-5
Grant commitments		2,756		1,817		52
Mandates		466		239		95
Total commitments		8,197		7,290		12

(1) Includes also equity investments (2017: EUR 119 million, 2016: EUR 55 million)

Total commitments of KfW Entwicklungsbank increased by 12% to EUR 8,197 million in 2017 (2016: EUR 7,290 million) due to increased grant commitments especially for multi-sectoral projects, emergency assistance and social infrastructure projects. The relative share of loan commitments that were refinanced in the capital markets increased slightly to 98% in 2017 (2016: 97%).

In 2017, Asia accounted for 29% of KfW Entwicklungsbank’s commitments (2016: 38%); Sub-Saharan Africa accounted for 21% (2016:18%); Middle East/North Africa accounted for 17% (2016: 13%); Europe/Caucasus accounted for 14% (2016: 12%); Latin America accounted for 15% (2016: 16%); and trans-regional commitments accounted for 4% (2016: 3%).

The following table shows KfW Entwicklungsbank’s commitments by sector in 2017:

	Year ended December 31,								Year-to-Year
	2017				2016				% change
	(EUR in millions)		(in % of total)		(EUR in millions)		(in % of total)		(in %)
Economic infrastructure		2,437		30		2,516		35		-3
Social infrastructure		2,938		36		1,769		24		66
Financial sector		928		11		692		9		34
Production sector		381		5		209		3		82
Others (1)		1,513		18		2,104		29		-28
Total commitments		8,197		100		7,290		100		12
			��

(1) Consists mainly of commitments made for environmental and multi-sector projects and emergency assistance in crisis situations.

DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH

DEG, a German limited liability corporation, is a legally independent entity founded in 1962. DEG is based in Cologne, Germany. In 2001, KfW acquired DEG from the Federal Republic. Since then, DEG has been fully consolidated in KfW’s consolidated financial statements. As of December 31, 2017, DEG maintained 13 representative offices in developing countries or emerging economies. In 2017, DEG employed an average of 569 persons (2016: 515). At year-end 2017, DEG’s total assets (IFRS, before consolidation) amounted to EUR 5.7 billion (2016: EUR 6.3 billion).

DEG’s activities extend to various countries in Africa, Asia, Latin America, and Central and Eastern Europe. DEG aims to establish and expand private enterprise structures in these countries as a contribution to sustainable growth and lasting improvement in the living conditions of the local population. To this end, DEG provides long-term financing for private enterprises investing in developing countries. In addition, DEG offers customized consultancy services on a project-by-project basis.

DEG pursues four key aims in its private sector development activities:

• promoting direct investment, including through DEG’s own risk capital activity;

• providing long-term debt financing to investment projects;

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• providing financing to companies in International Development Association (“IDA”) countries and (post-) conflict countries; and

• strengthening local capital markets through financial sector development.

DEG conducts its activities in accordance with the principles of subsidiarity, thus in cooperation with commercial banks rather than in competition with them. It does not provide subsidized financing, but instead offers financing solely on commercial terms and conditions. DEG also seeks to mobilize other partners in order to raise additional capital for its clients’ investments.

As an instrumentality serving public policy objectives of the Federal Government, DEG has been granted a favorable tax status under which only part of DEG’s activities are subject to CIT. DEG does not distribute profits but instead re-channels them into new investments.

DEG’s obligations do not benefit from the Guarantee of the Federal Republic or from Anstaltslast, and while DEG’s indebtedness is reflected in KfW’s consolidated statement of financial position, its debt represents obligations of DEG and not of KfW. KfW and DEG have a refinancing agreement in place, pursuant to which KfW acts as sole issuer in the capital markets and provides DEG with mid- and long-term capital market funds according to DEG’s capital needs. In addition, internal agreements have been reached concerning the respective fields of business activities, the mutual use of offices abroad, joint public relations activities and joint information technology management.

The following table shows DEG’s commitments in 2017 and 2016:

DEG COMMITMENTS

	Year ended December 31,				Year-to-Year
	2017		2016		% change
	(EUR in millions)				(in %)
Loans		988		1,083		-9
Equity participations		475		438		8
Mezzanine financing		88		32		175
Total commitments		1,551		1,553		-0.1

Financial Markets

KfW’s Financial markets business sector comprises the group’s treasury activities, including its funding activities and its financial asset management. Furthermore, this business sector manages KfW’s asset-backed securities (“ABS”) and asset-backed commercial paper (“ABCP”) portfolio as well as KfW’s green bond portfolio, which are all part of KfW’s promotional activities, as well as other capital markets-related activities currently consisting of privatization initiatives relating to Deutsche Telekom AG (“Deutsche Telekom”) and Deutsche Post AG (“Deutsche Post”).

Funding

KfW’s principal sources of funds are the international financial markets and public funds, with the majority of lending in its business sectors being financed from funds raised by KfW in the international financial markets. The group’s consolidated balance sheet total assets at year-end 2017 were EUR 472.4 billion. EUR 422.2 billion, or 89.4% of this amount, was financed through borrowings (i.e., from financial market funds or public funds). In addition, at year-end 2017, KfW had EUR 16.2 billion in liabilities held in trust (i.e., for which the Federal Government provides the funding and assumes all risks), which do not appear on KfW’s consolidated statement of financial position. In line with the focus on mid-term and long-term loans within its loan portfolio resulting from its promotional business, 73% of KfW Group’s total borrowings outstanding at the end of 2017 had remaining maturities of one year or more.

Financial-Market Funds. KfW raises short-term and long-term funds in the international financial markets through the issuance of bonds and notes (including commercial paper) and by incurring loans against debt certificates (Schuldscheindarlehen or “promissory note loans”). Long-term funding with initial maturities of more than one year (referred to as “capital-market funding” below) represents the most important source of funding. Short-term borrowings with initial maturities of less than one year in the form of commercial paper (referred to as “money-market funding” below) are primarily used for purposes of KfW’s liquidity management.

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The percentage of capital-market funding outstanding out of total financial-market funds outstanding was 90% at the end of 2017.

All amounts stated in connection with KfW’s capital-market and money-market funding transactions or funding volume are, unless stated otherwise, based on net proceeds to KfW, which are calculated as principal amount less discount and underwriting commissions, if any.

Capital-Market Funding. KfW’s capital-market funding policy pursues a dual objective: to achieve the most favorable terms possible for funds raised in the capital markets; and to minimize, to the extent practicable, the effects of changes in interest rates and foreign exchange rates mainly through interest rate and currency risk hedging instruments and, to a more limited extent, by matching funding liabilities with loan assets. In order to achieve favorable terms for funds raised, KfW maintains an active presence in all major capital markets and utilizes a broad range of funding instruments in various currencies, covering a wide range of maturities.

KfW’s capital-market funding is based on three pillars: its “benchmark” bond programs (in euro and U.S. dollar); publicly-placed bonds outside the benchmark programs; and “private placements,” which is a term KfW uses in the commercial sense to refer to sales to a specific investor or a limited number of investors.

In 2017, benchmark bonds accounted for a funding volume of EUR 55.4 billion, or 71%, of KfW’s total capital-market funding. Publicly-placed bonds outside the benchmark programs and private placements accounted for EUR 19.2 billion, or 24%, and EUR 3.6 billion, or 5%, respectively. Total capital-market funding in 2017 amounted to EUR 78.2 billion (2016: EUR 72.8 billion). KfW expects its volume of long-term funding to be raised in the capital markets in 2018 to be approximately EUR 70-75 billion.

In 2017, KfW conducted six new bond issues and one re-opening of a 2013 bond issue, one re-opening of a 2014 bond issue and two re-openings of 2015 bond issues (ten transactions in total in 2017) in an aggregate principal amount of EUR 31.5 billion under its euro benchmark program and six bond issues in an aggregate principal amount of USD 25.0 billion under its U.S. dollar benchmark program. In addition to the benchmark issues, three additional series of global notes and one green bond denominated in U.S. dollar were issued by KfW in 2017.

KFW’S BENCHMARK BOND ISSUESIN 2017

	Aggregate principal amount in billions		Maturity at issuance (in years)		Interest rate in % per annum
U.S. $-Benchmark I/2017		USD 5.0		5		2.125
U.S. $-Benchmark II/2017		USD 4.0		3		1.750
U.S. $-Benchmark III/2017		USD 4.0		5		2.125
U.S. $-Benchmark IV/2017		USD 5.0		3		1.625
U.S. $-Benchmark V/2017		USD 4.0		2		1.500
U.S. $-Benchmark VI/2017		USD 3.0		3		1.875
Euro-Benchmark I/2017		EUR 5.0		7		0.125
Euro-Benchmark II/2017		EUR 5.0		10		0.625
Euro-Benchmark III/2017		EUR 5.0		5		0.000
Euro-Benchmark IV/2017		EUR 5.0		7		0.125
Euro-Benchmark V/2017		EUR 5.0		10		0.500
Euro-Benchmark VI/2017		EUR 3.0		5		0.000
Euro-Benchmark IV/2013 (re-opening)		EUR 1.0		6		2.125
Euro-Benchmark III/2014 (re-opening)		EUR 1.0		7		1.500
Euro-Benchmark II/2015 (re-opening)		EUR 0.5		5		0.625
Euro-Benchmark I/2015 (re-opening)		EUR 1.0		8		0.625

In 2017, KfW’s total new capital-market funding was raised in 10 different currencies and 145 separate capital market transactions. KfW’s core currencies are the euro and the U.S. dollar, which together accounted for 88% of KfW’s total new capital-market funding in 2017 (2016: 83%). The percentage of new funds raised in euros increased from 36% in 2016 to 53% in 2017, making it the most significant funding currency, whereas the percentage of new funds raised in U.S. dollars decreased from 47% to 34% over the same period. The percentage of new funds raised in pounds sterling decreased from 9% to 7%, making it KfW’s third most significant funding

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currency in 2017. The percentage of Australian dollar funding remained stable at 3% (2016: 3%) and Japanese yen remained stable at 2% (2016: 2%).

KFW’S TOTAL NEW CAPITAL-MARKET FUNDING VOLUME 2017BY CURRENCIES

	EUR in billions		In % of total
Euro (EUR)		41.7		53
U.S. dollar (USD)		26.9		34
Pound sterling (GBP)		5.4		7
Australian dollar (AUD)		2.0		3
Japanese yen (JPY)		1.8		2
Other currencies (e.g., CAD, NZD and CNY)		0.5		1
Total		78.2		100

As part of its funding program, KfW links the proceeds of certain of its bonds, referred to by KfW as “green bonds,” to its environmental investment program, Erneuerbare Energien– Standard (Renewable Energies –Standard). Through its green bond issuances, KfW aims to broaden its investor base by addressing socially responsible investors and to enhance capital markets’ infrastructure to finance environmental projects. While net proceeds from the sale of its green bonds are used by KfW in its general business, upon closing of the transactions KfW simultaneously allocates an amount equal to the net proceeds of the green bonds (which proceeds may be converted into euros) to an internal account used to track the allocation of funds from its green bond issuances. Amounts matching requests for disbursements under KfW’s Renewable Energies – Standard program will be deducted from the balance of this internal account on an ongoing basis, starting with the beginning of the calendar year and continuing until the balance has been completely reduced. The Renewable Energies – Standard program aims to promote the development of electricity from renewable resources. Measures financed through this program may include but are not limited to the following: photovoltaic equipment; onshore wind power plants and repowering measures; hydro-electric power stations; and equipment for the generation and use of biogas. The common objective of all projects financed under this program is the reduction of greenhouse gas emissions. Equipment for the use of fossil fuels or nuclear power is not financed under the program. KfW provides investors with information regarding the use of proceeds in terms of disbursements under the Renewable Energies – Standard program on a regular basis on its website. Unless otherwise indicated, information available on or accessible through KfW’s website is not incorporated herein by reference.

KFW’S GREEN BOND ISSUES 2017

	Aggregate principal amount in billions	Maturity at issuance (in years)	Interest rate in % per annum
KfW EUR Green Bond	EUR 2.00	8	0.250
KfW AUD Green Bond (re-opening)	AUD 0.20	3	2.400
KfW USD Green Bond (1)	USD 0.15	3	1.660
KfW USD Green Bond (1)	USD 0.20	3	1.790
KfW USD Green Bond (2)	USD 1.00	5	2.000
KfW AUD Green Bond (re-opening)	AUD 0.20	3	2.400

(1) Under the US medium-term note program.

(2) Issued as global notes.

The most important sources of capital-market funding for KfW are bond and note issues followed by promissory note loans. At year-end 2017, the amount of outstanding bonds and notes issued by KfW totaled EUR 366.1 billion, representing a EUR 9.4 billion decrease from EUR 375.5 billion outstanding at year-end 2016.

Of outstanding borrowings, promissory note loans continue to be KfW’s second most important capital-market funding instrument, with EUR 7.1 billion outstanding at year-end 2017. Of this amount, EUR 1.9 billion was included on KfW’s consolidated statement of financial position in liabilities to banks and EUR 5.2 billion in liabilities to customers. Promissory note loans are a special instrument of the German capital market, under which the lending entity (generally a bank, insurance company or public pension fund) receives a certificate evidencing its loan to the borrower and the terms of such loan. Maturities on promissory note loans range from

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one to 30 years, thereby providing a high degree of flexibility to both the borrower and the lender. Transferable only by way of assignment, promissory note loans have only limited liquidity in the interbank secondary market.

The following table sets forth summary information concerning KfW’s outstanding bonds and notes as well as promissory note loans with an initial maturity of more than one year and issued in the capital markets.

INFORMATIONON ISSUESOF FUNDED DEBTOF KFW GROUP

(ASOF DECEMBER 31, 2017)

Currency	Number of   transactions		Interest type	Average interest rate in %   per annum   (1) (2)	Years of issue	Maturities		Average years to maturity (2)		Aggregate principal amount outstanding in applicable currency		Aggregate principal amount outstanding in EUR (3)
AUD		16	FIXED	4.54	2009-2017		2019-2028		3.60		21,641,010,000.00		14,102,052,652.17
AUD		1	FLOATING	2.03	2014		2019		1.12		200,000,000.00		130,327,121.07
BRL		7	FIXED	10.17	2010-2016		2019-2021		1.76		605,070,000.00		15,299,327.95
CAD		6	FIXED	2.78	2005-2015		2019-2037		4.47		3,977,200,000.00		2,644,590,730.76
CHF		5	FIXED	2.44	2005-2010		2019-2037		7.76		1,785,000,000.00		1,525,380,276.87
CNY		5	FIXED	3.90	2016-2017		2019-2020		1.75		1,218,000,000.00		156,065,809.04
DEM		1	FIXED	7.00	1993		2023		5.25		105,985,000.00		54,189,270.03
EUR		274	FIXED	1.38	1999-2017		2019-2047		5.66		152,016,432,425.12		152,016,432,425.12
EUR		49	FLOATING	0.61	1999-2017		2019-2052		3.55		5,059,173,270.87		5,059,173,270.87
GBP		19	FIXED	2.93	2000-2017		2019-2037		5.47		17,176,703,000.00		19,359,921,328.20
GBP		1	FLOATING	0.31	1999		2019		1.46		38,000,000.00		42,829,931.36
HKD		2	FIXED	1.03	2016		2019		1.78		3,875,000,000.00		413,465,642.34
JPY		19	FIXED	2.19	1999-2017		2019-2038		9.25		206,105,000,000.00		1,526,590,622.91
JPY		274	FLOATING	1.85	1999-2017		2019-2046		14.81		196,372,000,000.00		1,454,499,667.17
MXN		2	FIXED	6.17	2016-2017		2019-2023		3.24		3,000,000,000.00		126,789,850.05
NOK		17	FIXED	3.61	2002-2017		2019-2036		4.85		16,900,000,000.00		1,717,427,314.20
NOK		2	FLOATING	2.10	2016		2019		1.52		4,250,000,000.00		431,897,401.50
NZD		4	FIXED	3.82	2014-2016		2019-2021		2.47		1,600,000,000.00		949,554,896.14
PLN		1	FIXED	4.50	2006		2025		7.11		81,142,652.30		19,426,059.92
SEK		9	FIXED	3.43	2006-2017		2019-2031		4.04		19,500,000,000.00		1,980,942,319.02
SEK		1	FLOATING	0.00	2010		2020		2.63		1,000,000,000.00		101,586,785.59
TRY		5	FIXED	9.50	2014-2016		2019-2021		2.11		831,670,000.00		182,929,350.69
USD		77	FIXED	2.17	2002-2017		2019-2047		4.15		112,861,078,601.15		94,105,793,880.65
USD		6	FLOATING	1.72	2007-2016		2019-2023		3.95		210,833,332.05		175,796,991.61
ZAR		3	FIXED	7.52	2014-2017		2019-2022		2.18		1,500,000,000.00		101,314,385.29
Total		806							5.05				298,531,277,310.52

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(1) Interest rate of floating rate note means the applicable interest rate as of December 31, 2017. For floating rate notes with interest rates that are fixed in arrears, the latest fixed interest rate was used. Zero coupon bonds are included in the calculation with their average effective interest rates.

(2) Averages have been calculated on a capital-weighted basis taking into account the aggregate principal amount outstanding in euro.

(3) Conversion into euro at the spot rate using the European Central Bank reference rates on December 31, 2017.

Money-Market Funding. KfW issues commercial paper under two commercial paper programs: the EUR 60 billion multicurrency commercial paper program and the USD 10 billion commercial paper program. The multicurrency commercial paper program represents the most important source of short-term liquidity for KfW. As of December 31, 2017, KfW Group’s commercial paper outstanding totaled EUR 40.2 billion (year-end 2016: EUR 47.1 billion).

Public Funds. The proportion of public funds in the group’s borrowings was 1% at the end of 2017. The most important source of public funds for KfW is the budget of the Federal Republic. Total long-term and short-term borrowings from funds provided by the federal budget (excluding loans on a trust basis) amounted to EUR 3.5 billion as of December 31, 2017 (December 31, 2016: EUR 3.2 billion). The group’s long-term and short-term borrowings from the ERP Special Fund amounted to EUR 633 million as of December 31, 2017 (December 31, 2016: EUR 480 million). Public funds are made available to the group for use in special categories of KfW’s domestic activities and certain export and project finance transactions with developing countries.

Public funds are particularly important in the area of financial cooperation, where KfW Entwicklungsbank extends loans and disburses grants to foreign public sector borrowers and recipients in developing countries and emerging economies. Federal budget funds constituted approximately 35% of the sources of funding for KfW Entwicklungsbank’s commitments in 2017. Funds from the Federal Government involved in loan commitments and grants of KfW Entwicklungsbank do not, by their nature, appear on KfW’s consolidated statement of financial position. For more information see “Promotion of Developing Countries and Emerging Economies—KfW Entwicklungsbank (KfW Development Bank).”

Derivatives

KfW generally enters into derivatives transactions for hedging purposes in connection with its financing and funding activities. Accordingly, the substantial majority of its derivatives are interest- or currency-related derivatives. KfW Group does not enter into derivatives for trading purposes and does not facilitate the purchase of derivatives on behalf of any entities outside the group through brokerage or similar agency activities.

The following tables provide detailed information on the group’s derivatives exposures:

KFW GROUP’S DERIVATIVES EXPOSURE

	Notional value				Fair value				Fair value
	As of December 31,				As of December 31, 2017				As of December 31, 2016
	2017		2016		Positive		Negative		Positive		Negative
	(EUR in millions)				(EUR in millions)				(EUR in millions)
Interest-related derivatives		423,508		412,338		8,149		7,263		13,692		17,277
Currency-related derivatives (1)		201,670		224,014		5,978		10,108		20,993		4,161
Credit derivatives as protection buyer		9		10		0		0		1		0
Miscellaneous		0		0		0		0		0		0
Total derivatives (2) (3)		625,187		636,363		14,127		17,371		34,685		21,438
Embedded derivatives accounted for separately		—		—		92		18		123		20
Total balance sheet items “derivatives designated for hedge accounting” and “other derivatives”		625,187		636,363		14,219		17,389		34,808		21,458

(1) Includes cross-currency swaps.

(2) Includes derivative financial instruments which are offered by KfW’s wholly-owned subsidiary KfW IPEX-Bank to its customers as hedging instruments in connection with, and related to, financing in the context of its export and project financing activities. In order to hedge the risk arising from these derivative transactions, KfW IPEX-Bank enters into hedging transactions with KfW. In the

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context of centralizing and aggregating market-facing hedging activities within the group at the parent level, KfW, in turn, hedges itself with corresponding offsetting transactions in the market to the extent necessary. These risk-mitigating hedging transactions entered into by KfW are also disclosed.

(3) Includes derivative contracts in closed risk positions entered into pursuant to special mandates by the Federal Government in accordance with article 2 paragraph 4 of the KfW Law.

	As of December 31,
	2017		2016
	(EUR in millions)
Total positive fair value before netting		14,127		34,685
Total positive fair value after netting (1)		3,996		16,638
Collateral received		3,139		15,481
of which cash collateral		3,139		15,481
Total positive fair value after netting and collaterals		857		1,157

(1) Presents the effects of netting agreements that do not fulfill the offsetting criteria under IFRS. Due to the strict criteria for offsetting financial instruments under IAS 32, KfW Group’s consolidated statement of financial position does not reflect any netting effects with respect to its derivatives.

KfW Group’s derivatives activities are reflected in its consolidated statement of financial position in the line items “derivatives designated for hedge accounting” and “other derivatives.” For additional information on KfW Group’s derivatives exposure, see notes 10, 11, 12, 46, 47, 58, 59 and 74 to the financial statements included in Exhibit (e) to this annual report. For more information on interest and currency risks related to derivatives as well as counterparty default risks, see “Group management report—Risk report—Types of risk—Market price risk” and “—Counterparty default risk,” respectively, included in Exhibit (e) to this annual report.

Asset Management

As of December 31, 2017, KfW Group held financial assets in an amount of EUR 33.6 billion (year-end 2016: EUR 32.7 billion). See “Group management report—Economic report—Development of net assets” included in Exhibit (e) to this annual report for more information concerning financial assets. EUR 25.8 billion, or 77%, of all financial assets were held in the form of fixed income securities for liquidity purposes. The remaining financial assets were securities held as surrogate for loans or as equity investments in the context of KfW Group’s promotional business (e.g., KfW’s ABS and ABCP portfolio or DEG’s direct investments). Finally, equity participations held, directly or indirectly, by KfW made up only a very limited amount of the group’s financial assets.

Liquidity Portfolio. KfW pursues a conservative liquidity management strategy. For this purpose, KfW holds financial assets in its liquidity portfolio. The bulk of securities held in this portfolio is denominated in euro. KfW purchases medium-term securities issued by banks, primarily covered bonds (Pfandbriefe), bonds of public sector issuers and supranational institutions or agencies as well as ABS. The bulk of euro-denominated bonds included in KfW’s liquidity portfolio is eligible as collateral with the European Central Bank and enables KfW to enter into repurchase agreements in refinancing operations within the European System of Central Banks via the Deutsche Bundesbank. At the end of 2017, KfW held securities in the aggregate amount of EUR 25.8 billion in its liquidity portfolio (year-end 2016: EUR 25.0 billion). For financial reporting purposes, securities denominated in U.S. dollar were converted into euro at the currency exchange rate as of December 31, 2017. In addition to these securities, as of December 31, 2017, KfW held money-market assets (overnight and term loans as well as reverse repurchase transactions) for liquidity management purposes in the amount of EUR 16.5 billion (year-end 2016: EUR 31.2 billion).

ABS and ABCP Portfolio. In 2017, KfW provided EUR 1,195 million (2016: EUR 975 million) as part of its promotional activities for financing SMEs by investing in securitized assets (e.g., SME lease and loan portfolios) as well as ABCP in order to enable SMEs to benefit from sustainable and stable refinancing. As of December 31, 2017, the overall ABS and ABCP portfolio volume amounted to EUR 2.5 billion (year-end 2016: EUR 2.4 billion).

Green Bond Portfolio. Under its green bond portfolio, KfW invests in green bonds of public sector issuers, supranational institutions and agencies, banks and corporations as well as in covered bonds and ABS. In 2017, KfW provided EUR 346 million (2016: EUR 299 million) as part of its promotional activities for financing climate and environmental protection measures by investing in green bonds. The portfolio was launched in 2015 and the targeted volume for the portfolio in the coming years was doubled from EUR 1.0 billion to EUR 2.0 billion in May 2017. At the end of 2017, the volume of KfW’s green bond portfolio amounted to EUR 0.9 billion.

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Privatization Initiatives

KfW has been mandated by the Federal Government to take measures with respect to the privatization of Deutsche Telekom and Deutsche Post. Pursuant to a special mandate by the Federal Government and in accordance with article 2 paragraph 4 of the KfW Law (Zuweisungsgeschäft), KfW has acquired and sold shares of both Deutsche Telekom and Deutsche Post in various transactions since 1997. In furtherance of the privatization initiatives of the Federal Government, KfW sold those shares through German and international public offerings, private placements, block trades, exchangeable bonds and other transactions. Pursuant to an arms-length agreement with the Federal Government, KfW is protected against the market risk of these transactions. The agreement provides that KfW will receive a percentage of any market value increase in the shares acquired and sold, plus a fee for its services.

In the case of Deutsche Telekom, on May 31, 2017, the shareholders’ meeting resolved to pay out a dividend of EUR 0.60 per share for 2016. As was also the case in recent years, shareholders were given the choice to receive dividends in cash or in shares. KfW received new shares from the scrip dividend and increased its total ownership interest in Deutsche Telekom to approximately 829.2 million ordinary registered shares compared to its total ownership interest of 819 million ordinary registered shares as of December 31, 2016. After distribution of the scrip dividend, KfW’s stake in Deutsche Telekom amounted to approximately 17.4% as of July 4, 2017, which also represents the stake at year-end 2017 (December 31, 2016: 17.5%). To KfW’s knowledge, the stake of the Federal Republic of Germany amounted to approximately 14.5% as of December 31, 2017.

At year-end 2017, KfW’s total ownership interest in Deutsche Post remained unchanged compared to year-end 2016 with approximately 253.9 million ordinary shares. This represented a stake of approximately 20.7% in Deutsche Post (December 31, 2016: 20.5%). To KfW’s knowledge, the Federal Republic does not hold any shares directly in Deutsche Post.

Given the agreement with the Federal Government described above, KfW’s holdings in shares of Deutsche Post and Deutsche Telekom are not included in financial assets, but are presented on KfW’s consolidated statement of financial position as loans and advances to customers.

The Federal Government may sell further stakes in Deutsche Telekom to KfW in the future. KfW expects its holdings in Deutsche Telekom and Deutsche Post shares to be reduced in the medium term.

Loan Facility to Greece Mandated by the Federal Government

KfW supports the Federal Republic in conducting EU-wide financial support measures for Greece. In 2010, the Federal Government mandated KfW in accordance with article 2 paragraph 4 of the KfW Law (Zuweisungsgeschäft) to participate in a loan facility to Greece on behalf of the Federal Republic. All risks resulting from this loan facility are covered by a guarantee of the Federal Republic. As of December 31, 2017, the total amount outstanding of this loan to Greece amounted to EUR 15.2 billion.

Strategic Shareholdings

KfW’s most important strategic shareholdings are DEG (100%), which is held directly by KfW, and KfW IPEX-Bank GmbH (100%), which is held indirectly via KfW Beteiligungsholding GmbH. The stakes in Finanzierungs- und Beratungsgesellschaft mbH (100%), tbg Technologie-Beteiligungs-Gesellschaft mbH (100%), Deutsche Energieagentur GmbH (26%) and Berliner Energieagentur GmbH (25%) are held directly by KfW.

Airbus SE

In 2007, KfW, together with 14 other investors, agreed to jointly acquire from DaimlerChrysler group (now Daimler group) a stake of, at that time, 7.5% in European Aeronautic Defence and Space Company N.V. (“EADS”), of which the economic interest was held through the special purpose vehicle Dedalus GmbH & Co. KGaA (“Dedalus”). In connection with a further reduction by the Daimler group of its stake in EADS in December 2012, the Federal Government, which regards the ownership structure of EADS as a matter of strategic national interest, agreed on a revised government shareholding agreement with EADS, France and Spain, which allows the Federal Government to directly or indirectly own an equity stake of up to 12% in EADS. In this context, the Federal Government mandated KfW to directly or indirectly acquire and hold an equity stake of up to 12% in EADS on behalf of the Federal Republic.

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At the beginning of April 2013, France, Germany and Spain entered into a supplemental shareholders’ agreement, which provided for the dissolution of the Dedalus consortium and for KfW and the remaining investors to hold their respective equity stakes in EADS directly and indirectly through Gesellschaft zur Beteiligungsverwaltung GZBV mbH & Co. KG (“GZBV”). At the end of 2013, GZBV increased its equity stake in EADS by buying approximately 1.87 million shares. In 2015, EADS transformed its legal form into a European company (Societas Europaea) and changed its legal name to Airbus Group SE. In April 2017, following approval by the annual general meeting, the legal name was changed into Airbus SE. At year-end 2017, KfW held, through GZBV, an equity stake of approximately 9.33% in Airbus SE. Together with the other investors’ interests in GZBV, this equaled a total equity stake of 11.07% in Airbus SE.

KfW’s investments in Airbus SE were made pursuant to a special mandate of the Federal Government in accordance with article 2 paragraph 4 of the KfW Law, which authorizes the Federal Government to direct KfW to take measures in connection with matters in which the Federal Republic has an interest (Zuweisungsgeschäft). KfW is fully protected by the Federal Republic against any economic risks resulting from its total investment in Airbus SE.

CAPITALIZATION

CAPITALIZATIONOF KFW GROUPASOF DECEMBER 31, 2017

	(EUR in millions)
Borrowings
Short-term funds		40,497
Bonds and other fixed-income securities		366,105
Other borrowings (1)		15,563
Total borrowings		422,164
Equity
Paid-in subscribed capital (2)		3,300
Capital reserve (3)		8,447
Reserve from the ERP Special Fund		1,191
Retained earnings		15,500
Fund for general banking risks		600
Revaluation reserve		-295
Total equity		28,742
Total capitalization		450,906

(1) Includes long-term and short-term borrowings from the ERP Special Fund of EUR 633 million.

(2) KfW’s equity capital, 80% of which is held by the Federal Republic and the remaining 20% by the Länder, amounted to EUR 3,750 million in 2016, of which EUR 3,300 million has been paid in pro rata by the Federal Republic and the Länder.

(3) Includes equity capital in form of promotional reserves (Förderrücklage) from the ERP Special Fund of EUR 7,150 million.

MANAGEMENT AND EMPLOYEES

The bodies of KfW are the Executive Board (Vorstand) and the Board of Supervisory Directors (Verwaltungsrat).

Executive Board

The Executive Board is responsible for the day-to-day conduct of KfW’s business and the administration of its assets. Typically, members of the Executive Board are initially appointed for a maximum of three years by the Board of Supervisory Directors. After the first term each member may be repeatedly reappointed for, or his or her term of office may be repeatedly extended by, up to five years by the Board of Supervisory Directors. Each member of the Executive Board is responsible for certain aspects of KfW’s activities but shares the responsibility for actions taken by the Executive Board.

In December 2017, KfW’s Chief Executive Officer, Dr Ulrich Schröder, duly resigned from office, with effect as of December 31, 2017. Dr Schröder’s resignation was based on health reasons. Subsequently, KfW’s

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Board of Supervisory Directors (Verwaltungsrat) appointed KfW’s Deputy Chief Executive Officer, Dr Günther Bräunig, as KfW’s new Chief Executive Officer with effect as of January 1, 2018.

On June 29, 2017, the Board of Supervisory Directors (Verwaltungsrat) appointed Prof Dr Joachim Nagel as new member of the Executive Board of KfW with effect as of November 1, 2017. Prof Nagel succeeded Dr Norbert Kloppenburg, whose tenure ended on October 31, 2017. Furthermore, the Board of Supervisory Directors extended Dr Ingrid Hengster’s tenure until March 31, 2023.

The following biographical information on the current members of the Executive Board includes their ages as of April 13, 2018, the year in which they were appointed, their terms of office, their current positions and areas of responsibility.

Dr Günther Bräunig

Age: 62

Dr Günther Bräunig became a member of KfW’s Executive Board in October 2006. Dr Bräunig was appointed as Chief Executive Officer with effect as of January 1, 2018. Dr Bräunig’s current tenure will end in June 2021. He is in charge of the General Secretariat, Internal Auditing, and Group Development and Economics, as well as Financial Markets, Human Resources, and Legal Affairs.

Dr Bräunig joined KfW Group in September 1989 to head the International Capital Markets department. He subsequently held management positions in the Credit Affairs department and the Management Affairs department. In 1996, he became Senior Vice President and Head of Management Affairs. In May 2000, he was appointed Executive Vice President of KfW. In September 2017, he was named Deputy CEO of KfW. Between August 2007 and October 2008 he served as Chief Executive Officer of IKB Deutsche Industriebank AG, Düsseldorf, Germany, while this bank was bailed out and subsequently sold by KfW, which at that time was IKB’s major shareholder. During the period of this latter appointment, Dr Bräunig temporarily ceased to perform his functions as member of the Executive Board of KfW.

Dr Bräunig studied law at the Universities of Mainz, Germany, and Dijon, France, and obtained a doctorate in law at the University of Mainz, Germany. His professional career began in 1984 with COMMERZBANK Aktiengesellschaft, Frankfurt am Main, Germany, in the Investment Banking department. Between 1986 and 1989, he worked for Airbus Industrie S.A.S. as Sales Finance Director in Toulouse, France and Washington, D.C., USA.

Dr Bräunig serves as chairman of the supervisory board of pbb Deutsche Pfandbriefbank AG, Munich, Germany. In addition, he is a member of the supervisory boards of Deutsche Post AG, Bonn, Germany and of Deutsche Telekom AG, Bonn, Germany.

Dr Ingrid Hengster

Age: 57

Dr Ingrid Hengster became a member of KfW’s Executive Board in April 2014. She is responsible for Domestic Promotional Business, Sales, New Business Credit Service, Digital Development and Central Services. In June 2017, KfW’s Board of Supervisory Directors extended Dr Hengster’s tenure until March 31, 2023.

Dr Hengster holds a Ph.D. in law from the University of Salzburg, Austria. Dr Hengster started her career as project manager at Oesterreichische Kontrollbank AG, Austria, in 1984. In 1986, she joined COMMERZBANK Aktiengesellschaft, Frankfurt am Main, Germany, where she became Vice President in the privatization and project finance group. From 1995 to 1998, Dr Hengster served as Head of Acquisition Financing and Structured Financing in the German practice of UBS Deutschland AG. Subsequently, she worked as Managing Director of the investment banking arm of Credit Suisse First Boston. In 2005, she joined ABN AMRO Bank (Deutschland) AG as CEO and Country Executive & Head of Global Clients Germany and Austria. From 2008 to 2014, Dr Hengster was Country Executive Germany, Austria & Switzerland of The Royal Bank of Scotland and CEO of the management board of The Royal Bank of Scotland (Deutschland) AG. Dr Hengster is a member of the supervisory boards of ThyssenKrupp AG, Essen, Germany, and Deutsche Bahn AG, Berlin, Germany.

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Bernd Loewen

Age: 52

Bernd Loewen joined KfW Group as a member of KfW’s Executive Board in July 2009. He is in charge of Finance, Organization and Consulting as well as Information Technology. Mr. Loewen acts as Chief Financial Officer of KfW after initially running both the risk and finance department at KfW up to the separation of the CRO and CFO function as of January 1, 2016. Bernd Loewen’s current tenure will end in 2019.

After graduating with a Business Administration degree from the University of Muenster, Germany, he started his professional career at an auditing firm where he also successfully completed the tax consultant exam. Subsequently, Mr. Loewen joined the Corporate Development department at COMMERZBANK Aktiengesellschaft, Frankfurt am Main, Germany, before moving on to Equity Derivatives Trading. From 2002 onwards, Bernd Loewen worked as Co-Managing Director at Commerz Capital Markets Corporation, a subsidiary of COMMERZBANK Aktiengesellschaft, in New York, USA. In 2005, he was appointed Member of the Management Board of mBank (formerly BRE Bank SA), a Polish subsidiary of COMMERZBANK Aktiengesellschaft, which involved relocating from New York to Warsaw, Poland.

Mr. Loewen is a member of the supervisory boards of The Currency Exchange Fund (TCX), Amsterdam, Netherlands and of DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, Cologne, Germany .

Prof Dr Joachim Nagel

Age: 51

Prof Dr Joachim Nagel became a member of KfW’s Executive Board in November 2017. He is in charge of Promotion of developing countries and emerging economies (KfW Entwicklungsbank and DEG) and Export and project finance (KfW IPEX-BANK). Prof Nagel joined KfW as General Manager already on November 1, 2016. Previously, he had been a member of the Executive Board of Deutsche Bundesbank, the German central bank, in Frankfurt, Germany, since 2010. The current tenure of Prof Dr Nagel will end in 2020.

Prof Dr Nagel holds both a Master degree and a PhD in Economics from the University of Karlsruhe. He started his career in the banking sector started in 1999 at Deutsche Bundesbank, where he served as Head of the President’s Office at the former Land Central Bank of Bremen, Lower Saxony and Saxony-Anhalt until 2003. Afterwards, he was appointed Head of the Market Analysis and Reporting Section in 2003, Head of the Market Analysis and Portfolios Division in 2004 and Head of the Markets Department at Deutsche Bundesbank in 2008.

Prof Dr Nagel serves as chairman of the supervisory board of KfW IPEX-Bank, Frankfurt am Main, Germany. In addition, he is a member of the supervisory board of DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, Cologne, Germany.

Dr Stefan Peiß

Age: 48

Dr Stefan Peiß became a member of KfW’s Executive Board in January 2016. He is in charge of Credit Risk Management, Risk Controlling, Transaction Management, Portfolio Credit Service and Compliance, and acts as Chief Risk Officer of KfW. The current tenure of Dr Peiß will end in 2019.

Dr Peiß studied business administration at the Ludwig-Maximilians-Universität in Munich, Germany, where he also obtained a doctorate in political science (Dr oec. publ.) from the university’s Institute for Risk Management and Insurance. In 1995, he started his career in the Real Estate Department of Bayerische Landesbank, Germany. He then transferred to the Risk Management Department, where he held management positions as Head of Team (client portfolio and strategic controlling) and Head of Department (portfolio controlling and controlling systematics, risk controlling trading activities). In 2007, Dr Peiß became Head of the Risk Operations Division, and in 2008, he was promoted to Head of Group Risk Control Division. Dr Peiß joined KfW in 2009 as Senior Vice President and Head of Risk Management and Controlling.

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Dr Peiß is a member of the supervisory board of KfW IPEX-Bank, Frankfurt am Main, Germany.

For information on the remuneration of the Executive Board, see note 82 to the financial statements included in Exhibit (e) to this annual report.

Board of Supervisory Directors

The Board of Supervisory Directors generally has 37 members and consists of the Federal Minister of Finance; the Federal Minister for Economic Affairs and Energy; the Federal Minister for Foreign Affairs; the Federal Minister of Food and Agriculture; the Federal Minister of Transport and Digital Infrastructure; the Federal Minister for Economic Cooperation and Development; the Federal Minister for the Environment, Nature Conservation and Nuclear Safety; seven members appointed by the Bundesrat; seven members appointed by the Bundestag; five representatives of commercial banks; two representatives of industry; one representative each of the local municipalities, agricultural, skilled crafts, trade and housing sectors; and four representatives of the trade unions. The representatives of the commercial banks, industry, the local municipalities, agricultural, skilled crafts, trade and housing sectors, and the trade unions are appointed by the Federal Government after consultation with their constituencies.

The Federal Minister of Finance and the Federal Minister for Economic Affairs and Energy serve as Chairman and Deputy Chairman of the Board of Supervisory Directors on a year-by-year rotating basis, with the former serving as Chairman for the year 2017. The term of office of all Federal Ministers on KfW’s Board of Supervisory Directors corresponds to their term of office as Federal Minister, while the other members of the Board of Supervisory Directors are personally appointed for a term of three years.

The Board of Supervisory Directors supervises the overall conduct of KfW’s business and the administration of its assets. It may give the Executive Board general directives. In particular, the Board of Supervisory Directors (via its Risk and Credit Committee) generally must approve, inter alia, loans to members of management bodies (Organkredite), short-term financing, loan commitments to a single borrower exceeding EUR 50 million for non-investment grade or unrated borrowers, certain unsecured loans, and loan commitments exceeding EUR 100 million to investment grade borrowers. The Board of Supervisory Directors may reserve the right to approve other transactions or types of transactions. However, it is not authorized to represent KfW or to commit funds on KfW’s behalf.

KfW’s Board of Supervisory Directors’ committee structure comprises a Presidial and Nomination Committee (Präsidial- und Nominierungsausschuss), a Remuneration Committee (Vergütungskontrollausschuss), a Risk and Credit Committee (Risiko- und Kreditausschuss) and an Audit Committee (Prüfungsausschuss). The Presidial and Nomination Committee is responsible for dealing with legal and administrative matters as well as fundamental business and corporate policy issues. It may take decisions on the Board of Supervisory Director’s behalf in urgent matters (Eilentscheidung). Additionally, it regularly assesses the Executive Board and the Board of Supervisory Directors, provides recommendations for suitable candidates to the Executive Board and may assist the responsible federal agencies in appointing members to the Board of Supervisory Directors. The Remuneration Committee is responsible for dealing with the systems of remuneration for the Executive Board and KfW employees and their consequences for KfW’s risk, capital and liquidity management and advises the Presidial and Nomination Committee with respect to the remuneration paid to the members of the Executive Board. The Risk and Credit Committee advises the Board of Supervisory Directors regarding, in particular, the current and future overall risk tolerance and strategy of KfW. It is responsible for approving loans and equity investments at the operational level that exceed certain thresholds as set forth in KfW’s Bylaws, as well as for authorizing the issuance of debt securities, borrowings in foreign currencies and swap transactions. The Audit Committee monitors in particular the accounting process and the effectiveness of the risk management system, especially the internal control system and the internal audit system. It monitors the performance of the audits of the annual financial statements and the timely correction of any errors identified by the auditor. Furthermore, the Audit Committee provides recommendations to the Board of Supervisory Directors regarding the approval of the annual unconsolidated financial statements and the adoption of the annual consolidated financial statements. The Presidial and Nomination Committee and the Remuneration Committee will, as a general rule, be chaired by the Chairperson of the Board of Supervisory Directors. The Risk and Credit Committee and the Audit Committee, as a general rule, will be chaired by a representative of the banking sector.

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As of April 13, 2018, the members of the Board of Supervisory Directors were:

Name	Position
Peter Altmaier	Federal Minister for Economic Affairs and Energy; Chairman in 2018
Dr Holger Bingmann	President of the Bundesverband Großhandel, Außenhandel, Dienstleistungen e.V. (BGA); representative of the wholesale and foreign trade sector
Volker Bouffier	Minister President of the State of Hesse; appointed by the Bundesrat
Dr Uwe Brandl	President of the Bavarian Gemeindetag; representative of the local municipalities
Frank Bsirske	Chairman of ver.di – Vereinigte Dienstleistungsgewerkschaft; representative of the trade unions
Robert Feiger	Chairman of the IG Bauen-Agrar-Umwelt (construction, agriculture and environment); representative of the trade unions
Klaus-Peter Flosbach	Appointed by the Bundestag
Christian Görke	Minister of Finance and Deputy Minister President of the State of Brandenburg; appointed by the Bundesrat
Dr Louis Hagen	President of the Association of German Pfandbrief Banks (vdp); representative of the mortgage banks
Dr Matthias Haß	Minister of Finance of the State of Saxony; appointed by the Bundesrat
Monika Heinold	Minister of Finance of the State of Schleswig-Holstein; appointed by the Bundesrat
Reinhold Hilbers	Minister of Finance of the State of Lower Saxony; appointed by the Bundesrat
Reiner Hoffmann	Chairman of the Deutscher Gewerkschaftsbund; representative of the trade unions
Gerhard Hofmann	Member of the Board of Managing Directors of Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.V. (BVR); representative of the cooperative banks
Dr Bruno Hollnagel	Member of Parliament; appointed by the Bundestag
Andreas Ibel	President of the Bundesverband Freier Immobilien- und Wohnungsunternehmen; representative of the housing sector
Bartholomäus Kalb	Appointed by the Bundestag
Julia Klöckner	Federal Minister of Food and Agriculture
Stefan Körzell	Member of the Federal Executive Committee of Deutscher Gewerkschaftsbund (DGB); representative of the trade unions
Dr Joachim Lang	Executive Director of the Bundesverband der Deutschen Industrie e.V. (BDI); representative of the industry
Lutz Lienenkämper Heiko Maas	Minister of Finance of the State of North Rhine-Westphalia; appointed by the Bundesrat Federal Minister for Foreign Affairs
Dr Gerd Müller	Federal Minister for Economic Cooperation and Development
Dr. Hans-Walter Peters	President of the Bundesverband Deutscher Banken e.V. (BdB); representative of the commercial banks
Eckhardt Rehberg	Member of Parliament; appointed by the Bundestag
Dr Johannes-Jörg Riegler	President of the Bundesverband Öffentlicher Banken Deutschlands e.V. (VÖB); representative of credit institutions prominent in the field of industrial credit
Joachim Rukwied	President of the Deutscher Bauernverband e.V. (DBV); representative of the agricultural sector
Andreas Scheuer	Federal Minister of Transport and Digital Infrastructure
Helmut Schleweis	President of the Deutscher Sparkassen- und Giroverband (DSGV); representative of the savings banks
Carsten Schneider	Member of Parliament; appointed by the Bundestag
Olaf Scholz	Federal Minister of Finance; Deputy Chairman in 2018
Svenja Schulze	Federal Minister for the Environment, Nature Conservation and Nuclear Safety
Holger Schwannecke	Secretary General of the Zentralverband des Deutschen Handwerks (ZDH); representative of the skilled crafts sector
Edith Sitzmann	Minister of Finance and Economic Affairs of the State of Baden-Württemberg; appointed by the Bundesrat
Dr Florian Toncar	Member of Parliament; appointed by the Bundestag

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Name	Position
Dr Martin Wansleben	Chief Executive of the Deutscher Industrie- und Handelskammertag e.V. (DIHK); representative of the industry

For information concerning the remuneration of the Board of Supervisory Directors, see note 82 to the financial statements included in Exhibit (e) to this annual report.

Employees

In 2017, KfW Group employed an average of 6,113 persons (excluding members of the Executive Board and trainees, but including temporary personnel) (2016: 5,944 persons). Approximately 30% of KfW’s staff is covered by collective bargaining agreements. KfW provides employee benefits such as pensions to its employees.

Of KfW Group’s staff, approximately 21% is engaged in KfW’s domestic business activities, 23% in promotion of developing and transition countries, 11% in export and project finance, and the balance in KfW’s accounting, disbursements, collateral, funding and lending support departments and in general administrative and staff functions.

For more information concerning KfW Group’s employees, see note 81 to the financial statements included in Exhibit (e) to this annual report.

42

THE FEDERAL REPUBLIC OF GERMANY

The following information regarding the Federal Republic is derived from the public official documents cited below. Certain of the information is preliminary.

GENERAL

Area, Location and Population

The Federal Republic is situated in central Europe and comprises an area of approximately 357,000 square kilometers (about 138,000 square miles). Its total population is estimated to have increased to at least 82.8 million at the end of 2017 compared to 82.5 million people at the end of 2016. The projected increase is again due to Germany’s expected immigration surplus, which is thought to have more than offset the birth deficit (i.e., the negative difference between births and deaths). Based on provisional results, the Federal Statistical Office estimates that net immigration of foreigners amounted to 450,000 persons in 2017, considerably below the record high of 2015. In 2015, approximately 16.6% of the total population was concentrated in metropolitan areas with more than 500,000 inhabitants; the largest of these areas were (in descending order) Berlin, Hamburg, Munich, Cologne and Frankfurt am Main.

Sources: Statistisches Bundesamt, Statistisches Jahrbuch 2017, Tables 1.2, 2.1.9 (https://www.destatis.de/DE/Publikationen/StatistischesJahrbuch/StatistischesJahrbuch2017.pdf?__blob=publicationFile); Statistisches Bundesamt,Germany’s population stood at 82.5 million at the end of 2016, press release of January 16, 2018 (https://www.destatis.de/EN/PressServices/Press/pr/2018/01/PE18_019_12411.html; German version: https://www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2018/01/PD18_019_12411.html).

G-1

The following table shows selected key demographic figures for the Federal Republic for the years stated.

POPULATION

	2016(1)		2015		2014		2013		2012
	(number of persons)
Total population		82,521,653		82,175,684		81,197,537		80,767,463		80,523,746
Age distribution	(percent of total population)
Under 20		18.4		18.3		18.2		18.2		18.3
20-40		24.5		24.5		24.1		24.0		23.9
40-60		29.4		29.8		30.3		30.7		30.9
60-80		21.6		21.6		21.8		21.8		21.6
80 and more		6.0		5.8		5.6		5.4		5.4
Growth rate	(percent change on the previous year)
Total population		0.4		1.2		0.5		0.3		0.2
Under 20		1.0		2.2		0.5		-0.3		-0.5
20-40		0.6		2.6		1.1		0.9		0.4
40-60		-0.9		-0.4		-0.6		-0.5		-0.3
60-80		0.4		0.4		0.7		1.2		1.2
80 and more		4.5		4.1		4.1		0.9		1.3

(1) The development of the population in the reporting year 2016 is only comparable to the previous year’s figures to a limited extent due to methodological changes in the underlying population flow statistics. Limitations in the accuracy of the results may be due to increased immigration and the resulting problems in connection with the registration of persons seeking protection as required by German reporting laws.

Sources: Statistisches Bundesamt, Population, Current Population, Population by age groups, Germany, Value (https://www.destatis.de/EN/FactsFigures/SocietyState/Population/CurrentPopulation/Tables_/lrbev01.html?cms_gtp=150344_list%253D1&https=1); Statistisches Bundesamt, Population, Current Population, Population by age groups, Germany, Change on the previous year (https://www.destatis.de/EN/FactsFigures/SocietyState/Population/CurrentPopulation/Tables_/lrbev01.html?cms_gtp=150344_list%253D2&https=1).

Notwithstanding the population increase in recent years due to net immigration, the German population is poised for a decline due to the gradual aging of its population. These developments are expected to continue and intensify over the next several decades and may result in a downward pressure on Germany’s growth potential in the long term. According to estimates of the Federal Statistical Office, higher net immigration is expected to have only limited effects on long-term population trends and cannot reverse the trend towards increased population aging.

Sources: Statistisches Bundesamt, New projection of Germany’s population by 2060, press release of April 28, 2015 (https://www.destatis.de/EN/PressServices/Press/pr/2015/04/PE15_153_12421.html); Statistisches Bundesamt, Currently high immigration cannot reverse population ageing, press release of January 20, 2016 (https://www.destatis.de/EN/PressServices/Press/pr/2016/01/PE16_021_12421.html).

Government

The Federal Republic is a federated republic whose constitution is codified in the Grundgesetz of 1949. The capital of the Federal Republic is Berlin. The Federal Republic consists of 16 federal states (Länder). The Länder have legislative sovereignty over matters not expressly reserved to the legislative, executive and judicial bodies of the Federal Republic.

The Grundgesetz provides for a Federal President (Bundespräsident), two Houses of Parliament (the Bundestag and the Bundesrat, which consists of representatives of the 16 Länder governments), a Chancellor (Bundeskanzler) and a Federal Constitutional Court (Bundesverfassungsgericht). The Chancellor heads the Federal Government (Bundesregierung), consisting of the Chancellor and the Federal Ministers. The Bundespräsident acts as head of state.

General elections for the Bundestag are generally held every four years on the basis of an electoral system of proportional representation. The last general election was held on September 24, 2017.

A political party is not entitled to party representation in the Bundestag unless it receives at least 5% of the votes cast or three direct mandates, awarded to the candidate with the most votes in a given electoral district, in a general election. The Chancellor is elected by and is responsible to the Bundestag.

G-2

Political Parties

The political parties currently represented in the Bundestag are the Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), the Social Democratic Party (SPD), the Alternative for Germany (AfD), the Free Democratic Party (FDP), the Left-Wing Party (Die Linke, founded in 2007 by the merger of the Left-Wing Party of Democratic Socialism (Linkspartei.PDS) and the party Labor and Social Justice – The Election Alternative (WASG)) and the Greens (Bündnis 90/Die Grünen).

Since 1949, the Federal Republic has been governed by eight Chancellors over 19 electoral periods. After prolonged negotiations, the most recent general election, held in September 2017, resulted in a coalition between the Christian Democrats (CDU/CSU) and the Social Democratic Party (SPD). On March 14, 2018, the Bundestag re-elected Dr. Angela Merkel (CDU) Chancellor for the fourth time. Dr. Merkel has been serving as Chancellor since 2005.

Sources: The Federal Returning Officer, Official final result of the 2017 Bundestag Election, press release of October 12, 2018 (https://www.bundeswahlleiter.de/en/info/presse/mitteilungen/bundestagswahl-2017/34_17_endgueltiges_ergebnis.html); Koalitionsvertrag zwischen CDU, CSU und SPD Ein neuer Aufbruch für Europa. Eine neue Dynamik für Deutschland. Ein neuer Zusammenhalt für unser Land, March 12, 2018 (https://www.bundeskanzlerin.de/Content/DE/_Anlagen/2018/03/2018-03-14-koalitionsvertrag.pdf?__blob=publicationFile&v=1). The Federal Chancellor, Angela Merkel re-elected Chancellor, news of March 14, 2018 (https://www.bundeskanzlerin.de/Content/EN/Artikel/2018/03_en/2018-03-14-wahl-im-bundestag_en.html).

The following table shows the results of the five most recent general elections for the Bundestag.

ELECTION RESULTSTOTHE GERMAN BUNDESTAG

	2017 Elections				2013 Elections				2009 Elections				2005 Elections				2002 Elections
	% of   Votes		Seats		% of   Votes		Seats		% of   Votes		Seats		% of   Votes		Seats		% of   Votes		Seats
CDU/CSU		33.0		246		41.5		311		33.8		239		35.2		226		38.5		248
SPD		20.5		153		25.7		193		23.0		146		34.2		222		38.5		251
AfD		12.6		94		4.7		—		—		—		—		—		—		—
FDP		10.7		80		4.8		—		14.6		93		9.8		61		7.4		47
Die Linke. (1)		9.2		69		8.6		64		11.9		76		8.7		54		4.0		2
Bündnis 90/Die Grünen		8.9		67		8.4		63		10.7		68		8.1		51		8.6		55
Others		5.0		—		6.2		—		6.0		—		3.9		—		3.0		—
Total				709				631				622				614				603

(1) Results for the Party of Democratic Socialism (PDS) for all elections prior to 2005.

Sources: Der Bundeswahlleiter 2018 (https://www.bundeswahlleiter.de/bundestagswahlen/2017/ergebnisse/bund-99.html), Statistisches Bundesamt, Statistisches Jahrbuch 2016, Tables 10.1.1 and 10.1.2; Statistisches Bundesamt, Statistisches Jahrbuch 2011, Tables 4.3.1, 4.3.2 and 4.6.

International Organizations

In addition to the European Union (“EU”), the Federal Republic is a member of various major multilateral institutions, including the United Nations, the International Monetary Fund (“IMF”), the International Bank for Reconstruction and Development and the International Development Association, the Council of Europe, the Organization for Economic Cooperation and Development and the North Atlantic Treaty Organization. Furthermore, the Federal Republic is a signatory to the General Agreement on Tariffs and Trade and a member of the World Trade Organization (“WTO”). It is also a shareholder of, among others, the European Investment Bank, the European Bank for Reconstruction and Development, the Asian Infrastructure Investment Bank and the European Atomic Energy Community.

G-3

The European Union and European Integration

The Federal Republic was a founding member of the European Coal and Steel Community in 1951, which later developed into the European Union. Today, the Federal Republic is one of 28 member states of the EU, which include Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom (“UK”) (together, the “Member States”). According to provisional data, the aggregate population of the Member States was approximately 512 million as of January 1, 2017. The EU is still in the process of change. Formal membership negotiations are currently being conducted with Turkey, Montenegro and Serbia. The former Yugoslav Republic of Macedonia and Albania have been granted candidate status. Bosnia and Herzegovina and Kosovo are potential candidates. See “Political Integration” below for more information on the UK’s decision to withdraw from the EU.

Sources: European Union, The history of the European Union (http://europa.eu/about-eu/eu-history/index_en.htm); European Union, The history of the European Union: 2000-2009 (http://europa.eu/about-eu/eu-history/2000-2009/index_en.htm); European Union, The history of the European Union: 2010-today (http://europa.eu/european-union/about-eu/history/2010-today_en); Statistical Office of the European Communities, Total population (http://epp.eurostat.ec.europa.eu/tgm/table.do? tab=table&language=en&pcode=tps00001&tableSelection=1&footnotes=yes&labeling=labels&plugin=1); European Commission, Enlargement, Countries, Check current status (http://ec.europa.eu/enlargement/countries/check-current-status/index_en.htm).

Political Integration

The EU’s three main institutions are the Council (representing the governments of the Member States), the Parliament (elected by and representing the citizens of the Member States) and the European Commission (the executive body of the EU). After several years of negotiations about institutional issues among the Member States in an intergovernmental conference, in which the European Commission and the Parliament were also involved, the Treaty of Lisbon entered into force on December 1, 2009. It amends and supplements the existing treaties underlying the EU and aims to provide the EU with the legal framework and tools necessary to meet future challenges and to respond to citizens’ demands. Among other matters, the treaty aims to make the EU more democratic and transparent by strengthening the role of the European Parliament and national parliaments, by offering more opportunities to citizens to provide input for policy proposals, by clearly categorizing competences between Member States and the EU and by explicitly recognizing the possibility for a Member State to withdraw from the EU. To reflect the EU’s enlargement and improve the effectiveness and efficiency of its decision-making, the treaty also streamlined and modernized EU institutions and simplified their working methods and voting rules.

Sources: European Commission, Europe in 12 lessons by Pascal Fontaine, How does the EU work? (http://bookshop.europa.eu/en/europe-in-12-lessons-pbNA3110652/downloads/NA-31-10-652-EN-C/NA3110652ENC_002.pdf?FileName=NA3110652ENC_002.pdf&SKU=NA3110652ENC_PDF&

CatalogueNumber=NA-31-10-652-EN-C); Europa.eu, EU treaties: Treaty of Lisbon (http://europa.eu/european-union/law/treaties_en).

On June 23, 2016, the citizens of the UK voted to leave the EU, and on March 29, 2017, the UK notified the European Council accordingly. The EU treaties cease to apply to a withdrawing Member State from the date of entry into force of the agreement setting out the arrangements for the Member State’s withdrawal, or within two years of the notification of the withdrawal. On March 23, 2018, the European Council, meeting in an EU27 format, adopted the guidelines on the framework for a future relationship of the EU with the UK after the UK’s withdrawal from the EU. The EU intends to maintain the closest possible partnership with the UK, which would cover trade and economic cooperation, security and defense, among other areas. Previously, the negotiators from the EU and the UK had reached an agreement regarding parts of the legal text of the withdrawal agreement covering citizens’ rights, the financial settlement, a number of other withdrawal issues and the transition period. If the final withdrawal agreement is not completed by March 29, 2019, i.e.within two years after the UK’s notification of the withdrawal, the European Council may unanimously decide to extend the period for negotiations.

Sources: UK Government, Topic, EU referendum (https://www.gov.uk/government/topical-events/eu-referendum); Council of the EU, Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union, Article 50, page 59-60 (http://data.consilium.europa.eu/doc/document/ST-6655-2008-REV-8/en/pdf); European Commission, Statement by the European Council (Art. 50) on the UK notification, press release, March 29, 2017 (http://www.consilium.europa.eu/en/press/press-releases/2017/03/29-euco-50-statement-uk-notification/); Council of the EU, Brexit, last reviewed on March 26, 2018 (http://www.consilium.europa.eu/en/policies/eu-uk-after-referendum/).

G-4

Economic Integration

From its inception, the EU has had the fundamental objective, in line with its predecessors, of economic integration of its Member States. Culminating a long process, a single market that provides for the free movement of goods and services, persons and capital among the Member States was established as of January 1, 1993. The integration of the Member States’ economies and the completion of a single market are also promoted by a European competition policy, which aims at creating a level playing field for Member States’ companies, thereby promoting economic efficiency, and by a European consumer policy. In addition, various liberalization and harmonization measures are being implemented, for example in the telecommunication and energy sectors. In the financial sector, the single market has been fostered by providing for the free movement of capital and the freedom to perform banking services throughout the EU under the “single passport,” which enables financial institutions to provide financial services throughout the EU based on a single license obtained in one Member State. The EU promotes economic integration with regional aid, which is designed to focus development efforts on certain disadvantaged regions and sections of population of the EU. Another important policy area for the EU has been agriculture and fisheries.

The regulation laying down the multiannual financial framework (“MFF”) of the EU was formally adopted in December 2013. The MFF determines maximum amounts for commitment appropriations for the period from 2014 until 2020, which cover commitments made to spend funds over one or more years in certain expenditure categories. Additionally, the MFF defines annual maximum amounts for payment appropriations, which cover payments made to honor the legal commitments entered into during the current financial year and/or earlier financial years. The 2018 EU budget, which was adopted by the European Parliament in November 2017 and published in February 2018, amounts to EUR 160.1 billion in commitment appropriations and EUR 144.7 billion in payment appropriations. The entire EU budget represents approximately 1% of the EU gross national income.

The EU is responsible for trade matters with non-EU Member States. In the area of trade in goods, the EU even has exclusive power. Furthermore, the EU’s responsibilities also cover trade in services, the commercial aspects of intellectual property (such as patents), public procurement and foreign direct investment. In particular, the EU is responsible for negotiating and concluding international trade agreements as well as identifying trade barriers and unfair trade practices by trading partners and adopting appropriate countermeasures. Trade agreements are negotiated by the European Commission upon authorization of the Council. Once the European Commission completes negotiations, the Council and the European Parliament examine the final negotiated agreement and decide upon its approval. Trade agreements regulating areas of mixed responsibility between the EU and its Member States can only be fully concluded after ratification by all EU Member States.

Sources: European Commission, Europe in 12 lessons by Pascal Fontaine (http://bookshop.europa.eu/en/europe-in-12-lessons-pbNA3110652/downloads/NA-31-10-652-EN-C/NA3110652ENC_002.pdf?FileName=NA3110652ENC_002.pdf&SKU=NA3110652ENC_PDF&CatalogueNumber=NA-31-10-652-EN-C); European Banking Authority, Topics, Passporting and supervision of branches (http://www.eba.europa.eu/regulation-and-policy/passporting-and-supervision-of-branches); European Council, Council adopts the multiannual financial framework 2014-2020, Press Release, December 2, 2013 (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/139831.pdf); European Commission, Budget, Library, Documents: Annual Budget, 2018 (http://ec.europa.eu/budget/biblio/documents/2018/2018_en.cfm); EUR-Lex, Budget 2018, General budget, Total revenue (http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2018:057:FULL&from=EN); European Commission, Business, Economy, Euro, Trade with non-EU countries, EU trade policy-making (http://ec.europa.eu/trade/policy/policy-making); Federal Ministry for Economic Affairs and Energy, Topics, Trade Policy, European Trade Policy (http://www.bmwi.de/Redaktion/EN/Dossier/trade-policy.html).

Monetary Integration

The Federal Republic is a signatory to and has ratified the Treaty on European Union of February 1992 (also known as the “Maastricht Treaty”). The Maastricht Treaty was the basis for the establishment of the European Economic and Monetary Union (“EMU”). The EMU led, in turn, to the adoption of irrevocable conversion rates between the euro and the national currencies of the initial participating Member States on December 31, 1998 and the introduction of the euro as the single European currency in the “euro area” on January 1, 1999. On January 1, 2002, banknotes and coins denominated in euro were introduced as legal tender to replace the national currencies in the twelve Member States forming the euro area at that time (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain). Slovenia, Malta, Cyprus, Slovakia, Estonia and Latvia subsequently joined the euro area. The most recent addition was Lithuania, which joined the euro area on January 1, 2015.

The European Central Bank (“ECB”) was established on June 1, 1998, as part of the European System of Central Banks (“ESCB”). According to the Maastricht Treaty, the primary objective of the ESCB is to maintain price stability. Without prejudice to the objective of price stability, the ESCB supports the general economic policies of the EU. See “Monetary and Financial System” for more information on the ECB and ESCB as well as on the European financial system. The Eurosystem, consisting of the ECB and the national central banks of those Member States whose currency is the euro (“Euro Area Member States”), assumed sole responsibility for the monetary policy in the euro area on January 1, 1999.

Sources: Council of the EU, Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union (http://data.consilium.europa.eu/doc/document/ST-6655-2008-REV-8/en/pdf); European Central Bank, Economic and Monetary Union (EMU) (http://www.ecb.int/ecb/history/emu/html/index.en.html); European Central Bank, Lithuania joins the euro area, press release of January 1, 2015 (http://www.ecb.europa.eu/press/pr/date/2015/html/pr150101.en.html); European Central Bank, Monthly Bulletin, 10th Anniversary of the ECB (https://www.ecb.europa.eu/pub/pdf/other/10thanniversaryoftheecbmb200806en.pdf).

G-5

EU Economic Governance

The EU economic governance framework aims to detect, prevent and correct problematic economic trends such as excessive government deficits or public debt levels, which can stunt growth and put economies at risk. The framework consists of the following main components.

Stability and Growth Pact. To strengthen the monitoring and coordination of national fiscal and economic policies, the Member States established the Stability and Growth Pact (“SGP”) in 1997. The preventive arm of the SGP binds Member States to their commitments towards sound fiscal policies and coordination by setting country-specific, medium-term budgetary targets. These budget deficit (or surplus) targets are defined in structural terms by taking into consideration business cycle swings and filtering out the effect of one-off and temporary measures. The corrective arm of the SGP consists of the excessive deficit procedure (“EDP”). The EDP ensures the correction of excessive budget deficits (defined as a deficit in excess of 3% of gross domestic product (“GDP”)) or excessive public debt levels (defined as a debt ratio greater than 60% of GDP without an adequate diminishing trend). Countries that fail to respect the SGP’s preventive or corrective rules may ultimately face sanctions. For Euro Area Member States, these could take the form of warnings and financial sanctions including fines of up to 0.2% of GDP (if they fail to abide by either the preventive or the corrective rules). In addition, all Member States (except the United Kingdom) could face a suspension of commitments or payments from the EU’s structural and investment funds if they fail to abide by the corrective rules. Every April, Member States are required to lay out their fiscal plans for the next three years based on economic governance rules set forth in the SGP. In addition, to ensure the coordination of fiscal policies among Euro Area Member States, governments are required by European economic governance rules to submit their draft budgetary plans for the following year to the European Commission by October 15 of each year.

Sources: European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU economic governance (http://ec.europa.eu/economy_finance /economic_governance/index_en.htm); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU economic governance, Stability and Growth Pact (http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU economic governance, Stability and Growth Pact, Stability and convergence programmes (https://ec.europa. eu/ info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact/stability-and-convergence- programmes_en); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU economic governance, Stability and Growth Pact, Annual draft budgetary plans (DBPs) of euro area countries (https://ec.europa.eu/info/ business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact/annual-draft-budgetary-plans-dbps-euro-area-countries_en).

Macroeconomic Imbalance Procedure. Established in 2011, the macroeconomic imbalance procedure (“MIP”) is a surveillance mechanism that aims to identify potential economic risks early on, prevent the emergence of harmful macroeconomic imbalances and correct any existing excessive imbalances. The preventive arm of the procedure relies on an early warning system that uses a scoreboard of indicators and in-depth country reviews. This preventive arm allows the European Commission and the Council to make preventive recommendations to the affected Member State at an early stage. In cases of a Member State with excessive macroeconomic imbalances, the corrective arm may open an excessive imbalance procedure, under which the Member State concerned will have to submit a corrective action plan and regular progress reports. The enforcement regime of the MIP consists of financial sanctions against Euro Area Member States, including fines of up to 0.1% of GDP if a Euro Area Member State repeatedly does not comply with its obligations. In the most recent surveillance cycle, twelve Member States, including Germany, were subject to an in-depth review in the context of the MIP. Of these, eleven were found to be experiencing macroeconomic imbalances of various natures and magnitudes. According to the Commission’s assessment, Germany is experiencing macroeconomic imbalances, but these are not excessive. See “The Economy—International Economic Relations—Germany’s Current Account Surplus and the Macroeconomic Imbalance Procedure.”

Sources: European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU economic governance, Macroeconomic imbalance procedure (http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/index_en.htm); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU economic governance, Macroeconomic imbalance procedure, MIP surveillance in 2018 (https: //ec.europa.eu/info /business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic- governance-monitoring-prevention-correction/macroeconomic-imbalance-procedure /mip-surveillance-2018_en); European Commission, European Semester, Country Report Communication (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-communication_en.pdf).

Treaty on Stability, Coordination and Governance in the EMU. The Treaty on Stability, Coordination and Governance in the EMU (“TSCG”), which was signed in March 2012 and entered into force on January 1, 2013, is intended to promote budgetary discipline in the participating Member States through a fiscal pact. The fiscal pact’s provisions are binding for Euro Area Member States, while the other participating Member States will only be bound if they adopt the euro, unless they declare their intention to be bound by certain provisions of the treaty at an earlier date. The TSCG was signed by all Member States, except the UK, the Czech Republic and Croatia. The TSCG requires the participating parties to ensure convergence towards the country-specific, medium-term budgetary objectives as defined in the SGP, with a lower limit of a structural deficit of 0.5% of GDP (or of 1% of GDP, if their debt-to-GDP ratio is well below 60%). In the event of a deviation from this requirement, an automatic correction mechanism will be triggered with escape clauses for exceptional circumstances. These budget rules were to be transposed into national law through provisions of “binding force and permanent character, preferably constitutional” one year after the entry into force of the treaty, i.e., by January 1, 2014 at the latest.

G-6

Sources: European Council, Fiscal compact signed: Strengthened fiscal discipline and convergence in the euro area, press release of March 2, 2012 (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/128454.pdf); Deutsche Bundesbank, Glossary: Treaty on Stability, Coordination and Governance in the EMU (TSCG) (https://www.bundesbank.de/Redaktion/EN/Glossareintraege/T/treaty_on_stability_coordination_and_governance_in_the_emu.html); European Commission, The EU’s economic governance explained, press release of November 26, 2015 (http://europa.eu/rapid/press-release_MEMO-15-6071_en.htm).

Response to the European Sovereign Debt Crisis

Temporary Financial Stability Mechanism. In May 2010, the European Union and Euro Area Member States established a temporary stability mechanism to safeguard the financial stability amid severe tensions in euro area sovereign debt markets, consisting of the European Financial Stabilisation Mechanism (“EFSM”) and the European Financial Stability Facility (“EFSF”). Through the EFSM, which was replaced by the European Stability Mechanism (“ESM”) in 2013, the European Commission was allowed to borrow up to a total of EUR 60 billion on behalf of the EU under an implicit EU budget guarantee. For more information on the ESM, see “—European Stability Mechanism” below. The EFSF, which was created as a temporary institution and since July 1, 2013 no longer engages in new financing programs, had a lending capacity of EUR 440 billion backed by effective guarantees extended by the Euro Area Member States totaling EUR 724 billion. The Federal Republic has committed guarantees of approximately EUR 211 billion to the EFSF in accordance with its share in the paid-up capital of the ECB, which amounts to approximately 29% of the total effective guarantees. The EFSF will be dissolved and liquidated when all financial assistance provided to Euro Area Member States and all funding instruments issued by the EFSF have been repaid in full. As of March 2018, the EFSF had outstanding loans to Ireland, Portugal and Greece of approximately EUR 175 billion.

Sources: European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU financial assistance, Loan programmes (https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/loan-programmes_en); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU financial assistance, How is financial assistance given to EU countries? (http://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/how-financial-assistance-given-eu-countries_en); European Stability Mechanism, Frequently Asked Questions on the ESM (https://www.esm.europa.eu/sites/default/files/faqontheesm.pdf); European Financial Stability Facility, Publications, Investor Presentation (https://www.esm.europa.eu/sites/default/files/efsfesmnewinvestorpresentationmarch2018.pdf).

European Stability Mechanism. Since October 2012, the ESM, which was established as an intergovernmental organization under public international law by the Euro Area Member States, has been assisting in preserving the financial stability of the EMU. As of July 1, 2013, it assumed the tasks fulfilled by the EFSF and the EFSM and is currently the primary support mechanism for Euro Area Member States experiencing or threatened by severe financing problems, if such assistance is deemed essential to safeguard financial stability in the euro area as a whole. The ESM issues bonds or other debt instruments on the financial markets to raise capital to provide assistance to Euro Area Member States. Unlike the EFSF, which is based upon guarantees by Euro Area Member States, the ESM has total subscribed capital of EUR 705 billion provided by Euro Area Member States, which provides it with a lending capacity of EUR 500 billion. EUR 81 billion of the ESM’s subscribed capital is in the form of paid-in capital with the balance of EUR 624 billion being callable capital. The contribution of each Euro Area Member State is based on the paid-in capital for the ECB. On this basis, the Federal Republic’s contribution amounts to approximately 27% of the aggregate contributions to the ESM. The Federal Republic contributed approximately EUR 22 billion of paid-in capital to the ESM.

Financial assistance from the ESM is activated upon a request from a Member State to the chairperson of the ESM’s board of governors and is provided subject to conditions appropriate to the instrument chosen. The initial instruments available to the ESM have been modeled upon those available to the EFSF and include the extension of loans to a Euro Area Member State in financial difficulties, interventions in the primary and secondary debt markets, action based on a precautionary program, and the extension of loans to governments, or since December 2014 directly to affected financial institutions, for the purposes of recapitalizing financial institutions. Each instrument is to be linked to a memorandum of understanding which sets forth the conditions for financial support that the Member State has negotiated with the European Commission in liaison with the ECB, as well as the monitoring and surveillance procedures established to ensure the Member State is progressing towards financial stability. In principle, decisions under the ESM are taken by mutual agreement. However, in the event that the European Commission and the ECB conclude that an urgent decision related to financial assistance is needed because the financial and economic sustainability of the euro area is threatened, the mutual agreement rule is replaced by a qualified majority of 85%. Given its voting rights of approximately 27%, the Federal Republic may veto any decision even under the emergency voting rule. As of April 2018, the ESM had loans outstanding to Spain, Cyprus and Greece of approximately EUR 80 billion.

Sources: European Stability Mechanism, History (https://www.esm.europa.eu/about-us/history); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU financial assistance, How is financial assistance given to EU countries? (http://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/how-financial-assistance-given-eu-countries_en); European Commission, Business, Economy, Euro, Economic and fiscal policy coordination, EU financial assistance, Loan programmes, ESM (http://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/loan-programmes/european-stability-mechanism-esm_en); European Stability Mechanism, Financial Assistance, Lending toolkit (https://www.esm.europa.eu/assistance/lending-toolkit); European Stability Mechanism, Frequently Asked Questions on the ESM (https://www.esm.europa.eu/sites/default/files/faqontheesm.pdf); European Stability Mechanism, Publications, Investor Presentation April 2018 (https://www.esm.europa.eu/sites/default/files/efsfesmnewinvestorpresentationapril2018.pdf).

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Financial Assistance to Euro Area Member States

Greece. Since May 2010, Greece has been receiving financial support from Euro Area Member States and the IMF to cope with its financial difficulties and economic challenges. This support comes in the form of economic adjustment programs, which include measures to support the Greek government’s efforts to address economic imbalances, tackle social challenges, and pave the way for sustainable economic growth and job creation. Under the first economic adjustment program, the Euro Area Member States agreed in May 2010 to provide Greece with stability support in the form of pooled bilateral loans of up to EUR 80 billion to be disbursed over the period May 2010 through June 2013, parallel to a loan facility provided by the IMF of up to EUR 30 billion. The Federal Republic committed to contribute up to approximately EUR 22.3 billion, which was to be extended by KfW on behalf of the Federal Republic. As of December 2011, a total amount of EUR 73 billion had been disbursed under the Greek Loan Facility, of which approximately EUR 53 billion were provided by Euro Area Member States and EUR 20 billion by the IMF.

Under the second economic adjustment program, which was approved by the Euro Area Member States in March 2012, the EFSF and the IMF committed the undisbursed amounts of the first program plus an additional EUR 130 billion in financial assistance for the years 2012 to 2014. Disbursements of financial assistance under the program were conditioned upon the observance of certain quantitative performance criteria and a positive evaluation of progress made on policy criteria. Following an extension by four months, the second program expired at the end of June 2015. The outstanding EFSF loan to Greece under the second program amounts to approximately EUR 130.9 billion.

In July 2015, the Greek government submitted a request to the ESM’s board of governors for further stability support. Following approval by the ESM’s board of governors, the European Commission signed a memorandum of understanding with Greece for a third economic adjustment program. Under this program, the ESM is able to disburse up to EUR 86 billion in financial assistance to Greece over a three-year period ending in August 2018. Disbursements are contingent upon the Greek government’s progress in delivering on certain policy conditions set forth in the memorandum of understanding which aim to enable the Greek economy to return to a sustainable growth path based on sound public finances, enhanced competitiveness, high employment and financial stability. As of the end of March 2018, the total disbursements of ESM financial assistance to Greece amounted to approximately EUR 45.9 billion. The outstanding ESM loan as of the end of March 2018 amounted to EUR 43.9 billion following a repayment in February 2017. After the end of the program in August 2018, the Greek government is not expected to request a precautionary credit line from the ESM. Greece will then become subject to post-program surveillance by the EU.

Sources: European Commission, Policies, Information and Services, Financial assistance to Greece (https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-greece_en); European Stability Mechanism, Financial Assistance, Greece (ongoing) (https://www.esm.europa.eu/assistance/greece); European Stability Mechanism, Greece: after the third programme, speech by Klaus Regling of March 4, 2018 (https://www.esm.europa.eu/speeches-and-presentations/%E2%80%9Cgreece-after-third-programme%E2%80%9D-speech-klaus-regling).

Ireland. The first Euro Area Member State to receive support by the EFSM and EFSF was Ireland. The financial assistance, agreed upon in December 2010 and provided subject to compliance with an economic adjustment program, consisted of financial support in a total amount of EUR 85 billion, including EUR 22.5 billion financed through the EFSM, EUR 17.7 billion through the EFSF and EUR 22.5 billion through the IMF. The financial assistance program for Ireland expired as planned in December 2013. Ireland remains subject to post-program surveillance until at least 75% of EU’s financial assistance received has been repaid; this is not expected to occur until 2031. Ireland has already repaid the loans financed through the IMF in full.

Sources: European Commission, Policies, Information and Services, Financial Assistance in EU Member States, Ireland (http://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-ireland_en); European Financial Stability Facility, EFSF financial assistance for Ireland ends with successful Irish exit, press release of December 8, 2013 (https://www.esm.europa.eu/press-releases/efsf-financial-assistance-ireland-ends-successful-irish-exit); International Monetary Fund, Ireland: Transactions with the Fund from May 01, 1984 to March 31, 2018 (http://www.imf.org/external/np/fin/tad/extrans1.aspx?memberKey1=470&endDate=2099%2D12%2D31&finposition_flag=YES).

Portugal. Following the Portuguese Republic’s application for support in early April 2011, euro area, EU and IMF financial assistance was provided for the 2011 to mid-2014 period on the basis of an economic adjustment program agreed between the Portuguese authorities and officials from the European Commission, the IMF and the ECB in May 2011. The total financial package amounted to EUR 78 billion, with EFSM, EFSF and IMF each contributing EUR 26 billion. The Portuguese government decided to exit its macroeconomic adjustment program without successor arrangement in June 2014. Portugal remains subject to post-program surveillance until at least 75% of the financial assistance received has been repaid; this is not expected to occur until 2026. As of the end of March 2018, Portugal had already repaid SDR 19.1 billion of loans to the IMF.

Sources: European Commission, Policies, Information and Services, Financial Assistance in EU Member States, Portugal (https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-portugal_en); International Monetary Fund, Portugal: Transactions with the Fund from May 01, 1984 to March 31, 2018 (http://www.imf.org/external/np/fin/tad/extrans1.aspx?memberKey1=810&endDate=2099%2D12%2D31&finposition_flag=YES).

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Spain. In June 2012, the Spanish government requested financial assistance from the Euro Area Member States for the recapitalization of certain of its financial institutions. In July 2012, the finance ministers of the Euro Area Member States agreed to grant such financial assistance of up to EUR 100 billion, designed to cover the estimated shortfall in capital requirements along with an additional safety margin. The financial assistance was accompanied by policy conditionality focused on the banking sector. The assistance was initially financed by the EFSF and then transferred to the ESM (without applying seniority status). On December 31, 2013, the financial assistance program expired. The ESM disbursed a total of EUR 41.3 billion to the Spanish government for the recapitalization of the country’s banking sector. Spain remains subject to post-program surveillance until at least 75% of the financial assistance received has been repaid. As of the end of March 2018, Spain has already repaid EUR 11.6 billion, in part voluntarily. Barring further early repayments, Spain is expected to be able to exit post-program surveillance in 2025.

Sources: European Commission, Policies, Information and Services, Financial Assistance in EU Member States, Spain (https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-spain_en); ESM, Financial Assistance, Spain (https://www.esm.europa.eu/assistance/spain); European Stability Mechanism, Spain successfully exits ESM financial assistance programme, press release of December 31, 2013 (https://www.esm.europa.eu/press-releases/spain-successfully-exits-esm-financial-assistance-programme).

Cyprus. The economic adjustment program for Cyprus was formally agreed in May 2013. The financial package was designed to cover financing needs of up to EUR 10 billion, with the ESM providing up to EUR 9 billion and the IMF contributing around EUR 1 billion. The program addressed Cyprus’s financial sector imbalances including an appropriate downsizing of the country’s financial sector, fiscal consolidation, structural reforms and privatization. The financial assistance program expired in March 2016 as planned. Approximately EUR 2.7 billion of the ESM financing package remained unutilized. Cyprus remains subject to post-program surveillance until at least 75% of the financial assistance received has been repaid, which is not expected before 2029.

Sources: European Commission, Policies, Information and Services, Financial Assistance in EU Member States, Cyprus (https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-cyprus_en); ESM, Financial Assistance, Cyprus (https://www.esm.europa.eu/assistance/cyprus); Eurogroup, Eurogroup Statement on Cyprus, press release of March 7, 2016 (http://www.consilium.europa.eu/de/press/press-releases/2016/03/07-eurogroup-statement-cyprus/).

Response to Migratory Pressure

EU Migration Policy. The growing instability in the EU’s southern neighboring countries has increased the number of people trying to reach the EU. The EU and the Member States have been intensifying efforts to establish an effective, humanitarian and safe European migration policy. In the Federal Government’s opinion, because a solution cannot be found by individual Member States alone but only by all Member States together, solving the problem requires a comprehensive approach covering all relevant areas. The EU policy response comprises the following activities: working with countries of origin and transit, strengthening the EU’s external borders, managing migration flows and curbing migrant smuggling activities, reforming the common European asylum system and providing legal migration pathways, as well as fostering the integration of third-country nationals. According to Frontex, the European Border and Coast Guard Agency, the total number of detected illegal border crossings in 2017 decreased for the second year in a row. The detections fell to 205,000, representing a decline by 60% compared to 2016 and by 89% compared to 2015, when the migratory crisis culminated.

Sources: European Council, Finding solutions to migratory pressures (http://www.consilium.europa.eu/en/policies/migratory-pressures/); Frontex, Publication, Risk Analysis for 2018 (https://frontex.europa.eu/publications/risk-analysis-for-2018-aJ5nJu).

Reintroduction of Internal Border Controls. Effective management of the EU’s external borders is fundamental for the well-functioning of free movement within the EU. Within the Schengen area, which encompasses most Member States, except Bulgaria, Croatia, Cyprus, Ireland, Romania and the UK, any person, irrespective of nationality, may cross internal borders without being subjected to border checks. In case of a serious threat to public policy or internal security, a Schengen country may exceptionally temporarily reintroduce border controls at its internal borders. In the context of the migrant crisis and terrorist threats, several Schengen countries, including Germany, have temporarily reintroduced internal border controls. In September 2017 the European Commission introduced a proposal to update the Schengen Borders Code to adapt the rules for the reintroduction of temporary internal border controls to the current needs. The Schengen Borders Code governs the crossing of the external borders of the Schengen Area.

Sources: European Commission, Migration and Home Affairs, Schengen Area (https://ec.europa.eu/home-affairs/what-we-do/policies/borders-and-visas/schengen_en); European Commission, Migration and Home Affairs, Temporary Reintroduction of Border Control (https://ec.europa.eu/home-affairs/what-we-do/policies/borders-and-visas/schengen/reintroduction-border-control_en); European Commission, State of the Union 2017 – Preserving and strengthening Schengen to improve security and safeguard Europe’s freedoms, press release of September 27, 2017 (http://europa.eu/rapid/press-release_IP-17-3407_en.htm).

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Legal Framework. Since 1999, the EU has been working to create a Common European Asylum System (“CEAS”), which is based on a number of EU directives and regulations, to guarantee high standards of protection for refugees as well as fair and effective procedures throughout the EU. The Dublin Regulation establishes which Member State is responsible for the examination of an asylum application based on a number of criteria, including, in order of importance, family considerations, recent possession of visa or residence permit in a Member State and through which Member State the applicant has entered the EU. Migratory pressure has exposed weaknesses of the current CEAS rules. Despite the efforts to harmonize standards, asylum seekers are not treated uniformly and recognition rates among the EU Member States vary. In May and June 2016, the European Commission presented two packages of proposals to reform the CEAS. The legislative proposals are being discussed by the Council and Parliament.

Sources: European Commission, Migration and Home Affairs, Common European Asylum System (https://ec.europa.eu/home-affairs/what-we-do/policies/asylum_en); European Commission, Migration and Home Affairs, Common European Asylum System, Country responsible for asylum application (Dublin) (https://ec.europa.eu/home-affairs/what-we-do/policies/asylum/examination-of-applicants_en); Regulation (EU) No 604/2013 of the European Parliament and of the Council of June 26, 2013 (http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0604&from=EN); European Council, Reforming the common European asylum system (http://www.consilium.europa.eu/en/policies/migratory-pressures/ceas-reform/).

Statistical Standards

Statistical Standard for the National Accounts

Since August 2014, the Federal Statistical Office calculates the German national accounts in accordance with the European System of National and Regional Accounts 2010 (“ESA 2010”) which, in turn, is based on the System of National Accounts (SNA 2008) of the United Nations. Recalculations have been conducted for all time series since 1991.

Source: Federal Statistical Office, Major revision of national accounts 2014: results and background (https://www.destatis.de/EN/Methods/NationalAccountRevision/Revision2014_BackgroundPaper.pdf?__blob=publicationFile).

Statistical Standard for the Balance of Payments

Since July 2014, the methodological concept of the German balance of payments statistics follows the sixth edition of the Balance of Payments and International Investment Position Manual (“BPM6”), the revised standard of the IMF. The application of BPM6 is binding for Member States by virtue of a regulation adopted by the European Commission. Balance of payments data since 1991 have been recalculated in accordance with BPM6.

Source: Bundesbank, Changes in the methodology and classifications of the balance of payments and the international investment position, Monthly Report, June 2014 (https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report_Articles/2014/2014_06_methodology_balance_of_payments.pdf?__blob=publicationFile).

Statistical Disclosure Standards of the International Monetary Fund

Since February 2015, the Federal Republic meets the Special Data Dissemination Standard Plus (“SDDS Plus”) of the IMF relating to coverage, periodicity and timeliness of economic data. The SDDS Plus was created in 2012 as an extension of the existing Special Data Dissemination Standard (“SDDS”). By providing comparable economic and financial data, it is designed to improve the transparency of the financial sector and its international interdependencies, and thus contributes to the identification of risks at an early stage. Although adherence by member countries to the SDDS Plus is voluntary, it carries a commitment requiring members to observe the standard and to provide certain information to the IMF about their practices in disseminating economic and financial data.

Source: Bundesministerium der Finanzen, Deutschland stellt ab heute Indikatoren nach dem „speziellen Datenverbreitungsstandard Plus“ (SDDS Plus) des IWF bereit, press release of February 18, 2015 (http://www.bundesfinanzministerium.de/Content/DE/Pressemitteilungen/Finanzpolitik/2015/02/2015-02-18-PM07.html?source=stdNewsletter).

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THE ECONOMY

Overview

Since 1945, the Federal Republic’s economic system has developed into a social market economy, combining the free initiative of the individual with progressive social principles. The Grundgesetz guarantees freedom of private enterprise and private property, provided that these basic rights are not exercised against the public good. The state mainly has a regulatory function in the market economy, setting the general framework of conditions within which market processes take place. State intervention in price setting is limited to a very small number of industries.

Key Economic Figures

The German economy is one of the world’s largest economies. In 2017, the GDP of Germany expressed at current prices was EUR 3,263.4 billion, compared to EUR 3,144.1 billion in 2016, which represents an increase of 3.8%. GDP adjusted for price effects rose by 2.2% compared to 2016, and exceeded the 1991 level by 43.2%. 1991 represents the first full year after German reunification on October 3, 1990. The growth in GDP since 1991 has been largely driven by productivity gains, as price-adjusted GDP per employee has risen by 25.4% since 1991. In calculating price-adjusted GDP, the Federal Statistical Office (Statistisches Bundesamt) uses a chain index based on the previous year’s prices. In 2017, GDP per capita at current prices was EUR 39,454, while GDP per employee at current prices was EUR 73,680.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Tables 2.1.1 and 2.1.4.

As in many advanced economies, the services sector of the Federal Republic has become the largest contributor to GDP (in terms of gross value added). In 2017, services accounted for 68.7% of gross value added, measured at current prices, compared to 61.9% in 1991. The two most important subsectors were “trade, transport, accommodation and food services,” accounting for 16.1% in 2017, compared to 16.2% in 1991, and “public services, education, health,” accounting for 18.2% of gross value added in 2017, compared to 15.9% in 1991. The production sector (excluding construction) generated 25.7% of gross value added compared to 30.9% in 1991. Construction contributed 4.9% to gross value added in 2017, compared to 6.0% in 1991, and agriculture, forestry and fishing accounted for 0.7% of gross value added in 2017, compared to 1.2% in 1991.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 2.2.1.

In 2017, private final consumption expenditure totaled 53.2% of GDP in current prices, gross capital formation amounted to 19.7% and government final consumption expenditure equaled 19.6%. Exports and imports of goods and services accounted for 47.3% and 39.6% of GDP at current prices, respectively. The trade balance (according to national accounts) thus showed a surplus equal to 7.6% of GDP in 2017, which is slightly lower than in the previous year (2016: 8.0% of GDP).

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 2.3.1.

In 2017, price-adjusted GDP rose by 2.2% compared to 2016. The GDP adjusted for both price and calendar effects, increased by 2.5% compared to 2016. Net exports had a slightly positive effect on economic growth in 2017 on a price-adjusted basis (growth contribution: 0.2 percentage points). Exports increased by 4.7% (2016: 2.6%), while imports rose by 5.1% (2016: 3.9%), all on a price-adjusted basis. Gross fixed capital formation in machinery and equipment increased in 2017 by 4.0%, compared to a 2.2% increase in 2016, in price-adjusted terms, while gross fixed capital formation in construction increased by 2.7% in price-adjusted terms. Final consumption expenditure of general government rose by 1.6% in 2017 on a price-adjusted basis, and final consumption expenditure of households rose by 1.9% on a price-adjusted basis compared to 2016.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Tables 2.1.1, 2.3.2, 2.3.5 and 2.3.10.

The annual average rate of registered unemployment (as computed under the “national definition” of the Federal Employment Agency (Bundesagentur für Arbeit)) declined from 6.1% in 2016 to 5.7% in 2017. However, based on the internationally comparable method of calculation promulgated by the International Labour Organization (“ILO”), which is referred to as the “ILO definition,” the annual average unemployment rate decreased from 3.9% in 2016 to 3.6% in 2017. For an explanation of the differences between the national definition and the ILO definition, see “—Employment and Labor.” Inflation as measured by the percentage increase in the national consumer price index (“CPI”) increased to 1.8% in 2017, compared to 0.5% in 2016. Excluding energy prices, the index rose by 1.6%. General government gross debt stood at EUR 2,092.6 billion at year-end 2017, compared to EUR 2,145.5 billion at year-end 2016.

Sources: Bundesagentur für Arbeit, Monatsbericht Februar 2018, Table 6.1 (https://statistik.arbeitsagentur.de/Statistikdaten/Detail/201802/arbeitsmarktberichte/monatsbericht-monatsbericht/monatsbericht-d-0-201802-pdf.pdf); Statistisches Bundesamt, Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 2.1.13; Statistisches Bundesamt, Fachserie 17, Reihe 7 (February 2018), Table 1.1 and 1.2; Deutsche Bundesbank, Time series BBK01.BJ9059: General government debt as defined in the Maastricht Treaty—Germany—overall (http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/its_details_value_node.html?tsId=BBK01.BJ9059&listId=www_v27_web001_02a).

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The following table shows selected key economic figures for the Federal Republic for each of the years indicated.

KEY ECONOMIC FIGURES

	2017		2016		2015		2014		2013
	(EUR in billions, unless otherwise indicated)
GDP - at current prices		3,263.4		3,144.1		3,043.7		2,932.5		2,826.2
(change from previous year in %)		3.8		3.3		3.8		3.8		2.5
GDP - price-adjusted, chain-linked index (2010=100), not adjusted for calendar effects		113.1		110.7		108.6		106.7		104.7
(change from previous year in %)		2.2		1.9		1.7		1.9		0.5
GDP - price-adjusted, chain-linked index (2010=100), adjusted for calendar effects		113.3		110.5		108.5		106.9		104.8
(change from previous year in %)		2.5		1.9		1.5		1.9		0.6
Unemployment rate (ILO definition) (in %) (1)		3.6		3.9		4.3		4.7		4.9
Rate of inflation (year-to-year change in consumer price index (CPI) in %)		1.8		0.5		0.3		0.9		1.5
Balance of payments - current account		262.6		268.8		271.4		219.0		190.1
General government gross debt (2)		2,092.6		2,145.5		2,161.8		2,192.0		2,190.5

(1) Unemployed persons, available and seeking work.

(2) Definition according to Maastricht Treaty.

Sources: Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Tables 1.1 and 1.11; Statistisches Bundesamt, Verbraucherpreise, Verbraucherpreisindex für Deutschland, Veränderungsraten zum Vorjahr in % (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Preise/Verbraucherpreisindizes/Tabellen_/VerbraucherpreiseKategorien.html?cms_gtp=145114_list%253D2%2526145110_slot%253D2&https=1); Deutsche Bundesbank, Monatsbericht April 2018, Table XII.2; Deutsche Bundesbank, Time series BBK01.BJ9059: General government debt as defined in the Maastricht Treaty—Germany—overall (http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/its_details_value_node.html?tsId=BBK01.BJ9059&listId=www_v27_web001_02a).

Economic Outlook

In its forecast published in April 2018, the Federal Government projected that GDP in Germany will grow by 2.3% in 2018, with private consumption growing by 1.7% (all growth rates are expressed in price-adjusted terms). Exports and imports are expected to increase by 5.0% and 5.8%, respectively, on a price-adjusted basis compared to 2017. In price-adjusted terms, gross fixed capital formation in machinery and equipment is projected to increase by 5.5% and gross fixed capital formation in construction is forecast to increase by 2.6%. Growth is expected to be steady and broad based. The Federal Government expects that domestic employment will increase by approximately 575,000 persons or 1.3% in 2018 compared to 2017, reaching a record level of 44.9 million persons in 2018. Registered unemployment (Arbeitslose) is expected to decrease by 200,000 persons compared to 2017 to 2.33 million persons in 2018 on average.

Source: Bundesministerium für Wirtschaft und Energie, Frühjahrsprojektion der Bundesregierung: Altmaier: Der Aufschwung geht weiter!, press release of April 25, 2018 (https://www.bmwi.de/Redaktion/DE/Pressemitteilungen/2018/20180425-fruehjahrsprojektion-der-bundesregierung-altmaier-der-aufschwung-geht-weiter.html).

Economic Policy

General

The Federal Government continues the strategy of enhancing economic growth, while maintaining fiscal discipline. At the same time the aim is for the German economy to remain competitive and to strengthen its growth potential by way of increasing public investment and improving conditions for private investment, thus broadening the scope for a sustained boost to the long-term performance of the German economy. Current policy initiatives are outlined below in more detail.

Current Policy Initiatives

The Federal Government has continued the consolidation of public finances, fully adhering both to the requirements stipulated by the constitutional balanced budget rule (known as the “debt brake” (Schuldenbremse)), as well as to the European frameworks such as the SGP and the fiscal compact. For further details on the budget surveillance procedures, see “General—The European Union and European Integration—EU Economic Governance.” In 2017, overall public sector finances were again positive, with net lending of general government at 1.1% of GDP. This means that the public sector achieved a surplus for the fourth year in succession. This trend is expected to continue in the years ahead. According to the

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present federal budget planning, no new borrowing will be required in the period between 2018 and 2021. However, the effects of the coalition agreement have not yet been taken into account. The goal of cutting the debt-to-GDP ratio to less than 70% was attained by the end of 2016. The Federal Government’s projection assumes that the debt ratio will fall below the “Maastricht threshold” of 60% of GDP as early as 2019. For further information on the Federal Republic’s fiscal situation and prospects, see “Public Finance—Germany’s General Government Deficit/Surplus and General Government Gross Debt” and “Public Finance—Fiscal Outlook”.

In late 2016, the Federal Government and the Länder agreed on key points for reforming the financial relations between the Federation and the Länder. The reform is aimed at creating a sustainable and equitable system of revenue sharing, to enable all levels of government to comply with the requirements of the national “debt brake”. The Federation will provide additional funding to the Länder from 2020 onwards, starting at approximately EUR 9.7 billion. This is expected to help the Länder to comply with the national “debt brake” and create room for additional public investment on the Länder and municipal levels. The new rules for revenue sharing, taking effect in 2020, will combine the current horizontal distribution of value added tax (“VAT”) revenue (with supplementary shares for Länder with lower revenues) with the current fiscal equalisation between the Länder. From 2020 onwards, all fiscal equalisation will be achieved through deductions from and supplements to the VAT revenue shares of the Länder. In addition, the reform provides for:

• the creation of a federal infrastructure company for motorways and other federal highways, which will combine responsibilities of different levels of government. The aim is to reap the potential for efficiency gains in the planning, construction, maintenance, operation and financing of highways and thus to permit quicker and cheaper investment over the life cycle of highways;

• the introduction of a single joint IT platform for administrative services of the Federation and the Länder;

• the strengthening of the influence of the Federation on tax administration, in particular in the area of computer-based automation;

• the strengthening of the Stability Council (Stabilitätsrat), a joint body of the Federation and the Länder; and

• the introduction of inspection rights of the Federal Court of Auditors (Bundesrechnungshof) in the area of joint financing at the Länder level.

The Federal Government is focusing particularly on enhancing public sector investment. In total, federal fixed capital expenditure at current prices has risen by approximately 37% over the past legislative term (2013-2017), to EUR 34 billion in the 2017 federal budget (contributions to ESM excluded). Public investment focuses on transport infrastructure, support for broadband expansion, microelectronics, development of electromobility, support for energy efficiency measures for buildings, and the promotion of social housing. The Federal Government is also assisting the Länder and the municipalities by providing fiscal support, thus boosting the scope for municipalities and Länder to invest. For example, financially weak municipalities are projected to benefit from an additional EUR 7 billion provided by the Federal Government through the Municipal Investment Promotion Fund (Kommunalinvestitionsförderungsfonds).

The Federal Government regards digital infrastructure as a key strategic factor for the economy and aims to roll out comprehensive gigabit networks throughout Germany by 2025. Within the currently ongoing broadband program aiming at the nationwide availability of a minimum download speed of 50 Mbit/s, the Federal Government is providing EUR 4.4 billion for investments in the expansion of broadband networks, focusing especially on rural and remote areas. As part of its high-tech strategy, the Federal Government provides incentives for research and development, particlarly in the priority fields of digital economy and society, sustainable economic activity and energy, innovative working environment, healthy living, intelligent mobility, and civil security.

The Federal Government has also improved the framework for private-sector investment, including by promoting venture capital and start-ups through various initiatives. To improve the general business environment, the Federal Government has cut red tape and has decreased compliance costs for companies. In addition, a reform of the public procurement laws and the enactment of a sub-threshold procurement regulation have improved the legal framework for public procurement.

The new Federal Government intends to ensure the German economy continues to grow in the coming years by continuing to improve conditions for growth in productivity, incomes, and employment. The government intends to achieve this by ensuring that private and public investments complement each other, by strengthening businesses’ innovative capacity, and by further increasing efforts in the areas of skilled labor and qualifications. Because approximately 90% of investments in Germany are made by the private sector, the Federal Government aims to continue to improve conditions to boost investments by households and businesses.

The Federal Government continues to develop and adapt tax legislation to align it with the needs of a modern society in a globalized world. In line with the OECD action plan against base erosion and profit shifting by multinational companies, the

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Federal Government aims to ensure that profits generated in Germany are not shifted abroad to low-tax countries. In 2017, it enacted a law against harmful tax practices in connection with the transfer of property rights. Under certain conditions, the new scheme limits the domestic deduction of operating expenses for the transfer of rights. This is to prevent multinational companies from shifting profits through royalty payments to countries with special preferential arrangements, for example patent and license boxes.

In order to ensure that as many workers as possible can benefit from the strong labor market and to secure adequate working conditions, the Federal Government has launched a number of policy measures. Since January 1, 2015, a general statutory gross minimum wage has been in place. Every two years, the minimum wage is assessed and, if appropriate, adjustments are proposed by a commission comprising representatives of the unions and of the employers’ associations in equal shares. In connection with the first assessment, the minimum wage was raised from EUR 8.50 to EUR 8.84 per hour worked. The next assessment is due on January 1, 2019. The Federal Government has taken measures within a comprehensive concept to increase the chances of long-term unemployed persons regaining access to the regular labor market. While recognizing that the use of temporary workers enables many people to participate in working life, the Federal Government has amended legislation to address illegal contract clauses with the aim of restricting the use of temporary workers to times of extraordinary capacity needs.

The Federal Government is developing strategies to counteract the effects of demographic change on the business sector. The aim is to strengthen and activate the potential pool of skilled labor in the domestic economy and to make Germany more attractive for qualified professionals from other countries. Making family and working life more compatible not only contributes to equal opportunity, but also to activating additional skills for companies. Thus, the Federal Government has supported the Länder and local authorities with over EUR 6 billion during the past legislative term. The funds were invested in the expansion, operation and improvement of child day care, and in federal programs for language education. In order to provide greater support to working patterns that fit in with other aspects of life, the legal framework for a more flexible transition from working life to retirement was improved by the Variable Pension Act (Flexirentengesetz).

The number of refugees seeking protection in Germany has decreased from 890,000 in 2015 to about 173,000 in 2017 (January to November). Nevertheless, the integration of immigrants remains an important social and economic challenge. In 2017, the Federal Government took a number of new measures to promote the successful integration of immigrants into society and the labor market. Besides increasing the supply of high-quality language and integration courses, it has enacted regulations allowing for better monitoring of compliance of immigrants with such course measures.

Following the nuclear disaster which affected the Japanese nuclear power plant in Fukushima in March 2011, the Federal Government decided to accelerate the transition to a more sustainable energy set-up (Energiewende). Among other things, this energy concept provides for the shutdown of all nuclear power stations in Germany by 2022 and unites other key energy policy objectives (i.e., energy security, climate protection, energy efficiency, renewable energy) within a single strategy. It sets a long-term target of achieving an 80% to 95% reduction in greenhouse gas emissions by 2050, compared to 1990 levels. To this end, the energy concept is intended to increase the production and use of renewable energy sources, making them the primary source of German energy supply. The overarching principle for the future implementation of the energy reforms is the “energy policy triangle” of a secure, affordable and environmentally compatible energy supply.

The Federal Government’s reform of the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz) has placed the future expansion of renewable energy sources on a cost-efficient basis by providing for public compensation which is technology-specific. The other key projects for the past legislative term were consolidated in a ten-point Energy Agenda. The National Energy Efficiency Action Plan, which was adopted in December 2014, sets out the Federal Government’s efficiency strategy. It aims to raise awareness of the economic viability of efficiency measures on a cross-sectoral basis and to put the conditions in place in order to make full use of the potential for efficiency improvements. As of the end of 2017, most projects on the ten-point Energy Agenda have been implemented. This includes important reforms for the electricity market, the support system for renewable energies and the expansion of the grid and energy efficiency. Renewable energies are now the most important source of electricity in Germany, accounting for around one third of gross electricity generation. In order to achieve the long-term goal of an almost CO2-free energy supply, greater efforts will be required to further reduce the total energy requirement across all sectors and to make the electricity system even more flexible. Sector coupling, i.e., the efficient use of renewable electricity for heating, transport and industry, is expected to make an important contribution to decarbonization.

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For information on recent government measures to stabilize Germany’s financial system, see “Monetary and Financial System—Financial System—German Financial System.” For information on government budgets, see “Public Finance.” For information on the response to the European sovereign debt crisis, see “General—The European Union and European Integration—Response to the European Sovereign Debt Crisis” and “General—The European Union and European Integration—EU Economic Governance.”

Sources: Bundesministerium für Wirtschaft und Energie, Jahreswirtschaftsbericht 2018 (https://www.bmwi.de/Redaktion/DE/Publikationen/Wirtschaft/jahreswirtschaftsbericht-2018.pdf?__blob=publicationFile&v=12); Bundesministerium für Wirtschaft und Energie, “A strengthened economy ready to embrace the future”: Federal Government adopts 2018 Annual Economic Report, press release of January 31, 2018 (http://www.bmwi.de/Redaktion/EN/Pressemitteilungen/2018/20180131-wirtschaftlich-gestaerkt-in-die-zukunft-jahreswirtschaftsbericht-2018.html); Bundesministerium für Wirtschaft und Energie, Jahreswirtschaftsbericht 2017 (https://www.bmwi.de/Redaktion/DE/Publikationen/Wirtschaft/jahreswirtschaftsbericht-2017.pdf?__blob=publicationFile&v=16%5bbmwi.de); Statistisches Bundesamt, General government records surplus of almost 37 billion euros in 2017, press release of February 23, 2018 (https://www.destatis.de/EN/PressServices/Press/pr/2018/02/PE18_059_813.html); Bundesministerium der Finanzen, Bundeshaushalt 2018, press release of June 28, 2017 (http://www.bundesfinanzministerium.de/Content/DE/Pressemitteilungen/Finanzpolitik/2017/06/2017-06-28-PM20-bundeshaushalt-2018.html); Bundesfinanzministerium, Entwicklung der öffentlichen Finanzen, February 2017 (http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Oeffentliche_Finanzen/Entwicklung_Oeffentliche_Finanzen/entwicklung-oeffentliche-finanzen.html); Bundesregierung, Ab 2017 beträgt der Mindestlohn 8,84 Euro (https://www.bundesregierung.de/Content/DE/Artikel/2016/10/2016-10-26-neuer-mindestlohn2017.html); Bundesministerium für Arbeit und Soziales, Klare Regeln für Leiharbeit und Werkverträge,press release of June 1, 2016 (http://www.bmas.de/DE/Presse/Pressemitteilungen/2016/pk-leiharbeit-werkvertraege.html); Climate Action Plan 2050, Executive Summary (www.bmub.bund.de/ N53483/); Bundesministerium für Wirtschaft und Energie, Nationales Reformprogramm 2018 (https://www.bmwi.de/Redaktion/DE/Publikationen/Europa/nationales-reformprogramm-2018.pdf?__blob=publicationFile&v=4).

Gross Domestic Product

The following tables show the structure of the Federal Republic’s GDP at current prices by use and origin for each of the years indicated along with changes over the respective preceding period.

STRUCTUREOF GDP—USE

	2017		2016		2015		2014		2013		2017		2016		2015		2014
	(EUR in billions)										(change in %)
Domestic uses		3,015.0		2,893.4		2,800.3		2,729.5		2,657.8		4.2		3.3		2.6		2.7
Final private consumption		1,735.0		1,674.4		1,630.5		1,593.2		1,563.5		3.6		2.7		2.3		1.9
Final government consumption		638.7		615.4		587.1		563.9		542.9		3.8		4.8		4.1		3.9
Gross fixed capital formation		662.7		630.0		604.3		586.6		556.8		5.2		4.3		3.0		5.4
Machinery and equipment		214.6		205.8		200.8		191.7		180.0		4.3		2.5		4.7		6.5
Construction		322.7		304.5		291.0		289.7		277.2		6.0		4.6		0.4		4.5
Other products		125.4		119.7		112.5		105.1		99.5		4.8		6.4		7.0		5.6
Changes in inventories (1)		-21.3		-26.4		-21.5		-14.2		-5.3		—		—		—		—
Net exports (1)		248.3		250.6		243.3		203.0		168.4		—		—		—		—
Exports		1,542.1		1,450.0		1,426.7		1,340.3		1,283.1		6.3		1.6		6.4		4.5
Imports		1,293.7		1,199.4		1,183.4		1,137.3		1,114.6		7.9		1.4		4.1		2.0
Gross domestic product		3,263.4		3,144.1		3,043.7		2,932.5		2,826.2		3.8		3.3		3.8		3.8

(1) Percentage changes are not presented due to the potentially changing signs of these net positions.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Tables 3.1 and 3.9.

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STRUCTUREOF GDP — ORIGIN

	2017		2016		2015		2014		2013		2017		2016		2015		2014
	(EUR in billions)										(change in %)
Gross value added of all economic sectors		2,941.0		2,831.9		2,740.2		2,639.8		2,542.7		3.9		3.3		3.8		3.8
Agriculture, forestry and fishing		20.8		17.4		16.9		20.2		24.8		19.8		2.9		-16.4		-18.6
Production sector (excluding construction)		755.0		728.6		711.7		684.5		652.5		3.6		2.4		4.0		4.9
Construction		145.2		134.9		124.9		119.1		113.0		7.6		8.0		4.9		5.4
Trade, transport, accommodation and food services		474.2		454.0		440.5		418.6		395.4		4.4		3.1		5.2		5.9
Information and communication		138.5		134.3		129.1		124.9		119.9		3.1		4.0		3.4		4.1
Financial and insurance services		110.9		111.5		111.5		109.4		108.5		-0.5		-0.0		2.0		0.8
Real estate activities		317.5		308.9		299.5		290.6		289.9		2.8		3.1		3.1		0.2
Business services		323.9		312.6		301.3		289.0		275.9		3.6		3.8		4.3		4.8
Public services, education, health		536.5		514.6		493.4		476.3		458.4		4.3		4.3		3.6		3.9
Other services		118.6		115.1		111.5		107.2		104.2		3.0		3.3		3.9		2.9
Taxes on products offset against subsidies on products		322.3		312.1		303.4		292.7		283.6		3.3		2.9		3.7		3.2
Gross domestic product		3,263.4		3,144.1		3,043.7		2,932.5		2,826.2		3.8		3.3		3.8		3.8

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Tables 1.14 and 2.1.

Sectors of the Economy

Production Sector

Following German reunification in 1990, industry in the eastern Länder (i.e., the former German Democratic Republic), has undergone a restructuring process. Today, the German production sector is characterized by a balanced mix of small, medium and large enterprises, and is almost entirely privately owned. Measured by its share in value added, approximately 59% of the production sector is geographically concentrated in the western Länder of Bavaria, Baden-Württemberg and North Rhine-Westphalia. The main segments of the production sector relate to the manufacturing of motor vehicles, machinery and equipment, electrical and optical equipment, basic metals and fabricated metal products, as well as chemicals and chemical products. In 2017, the production sector’s aggregate contribution to gross value added at current prices was 25.7% (excluding construction) and 30.6% (including construction), respectively. Its price-adjusted gross value added (excluding construction) increased by 2.7% year-on-year in 2017, after increasing by 1.9% in 2016.

Sources: Volkswirtschaftliche Gesamtrechnungen der Länder, Reihe 1, Länderergebnisse Band 1 (March 2018), Table 2.3; Statistisches Bundesamt, Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (February 2018), Tables 2.2.1 and 2.2.2.

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OUTPUTINTHE PRODUCTION SECTOR (1)

(2015 = 100)

	2017		2016		2015		2014
Production sector, total		104.9		101.6		99.8		98.8
Industry (2)		104.8		101.2		99.7		99.3
of which:
Intermediate goods (3)		104.9		100.9		99.8		99.9
Capital goods (4)		105.0		101.3		99.7		98.8
Durable goods (5)		107.0		102.7		99.7		97.5
Nondurable goods (6)		103.2		101.0		99.8		100.1
Energy (7)		98.8		98.7		100.1		95.2
Construction (8)		108.7		105.3		99.7		101.9

(1) Adjusted for working-day variations.

(2) Manufacturing sector, unless assigned to the main grouping energy, plus mining and quarrying.

(3) Including mining and quarrying except energy-producing goods.

(4) Including manufacture of motor vehicles and components.

(5) Consumption goods that have a long-term use, such as furniture.

(6) Consumption goods that have a short-term use, such as food. Including printing and service activities related to printing.

(7) Electricity, gas, steam and hot water supply, mining and quarrying of energy-producing materials, and especially manufacture of refined petroleum products.

(8) Comprises the economic classifications “Site preparation” and “Building of complete constructions or parts thereof; civil engineering.”

Source: Deutsche Bundesbank, Monatsbericht März 2018, Table XI.2.

Services Sector

As in most other industrialized countries, the services sector, which comprises “trade, transport, accommodation and food services,” “information and communication,” “financial and insurance services,” “real estate activities,” “business services,” “public services, education, health” as well as “other services,” has expanded rapidly in recent years and is currently the largest contributor to gross value added. In 2017, the services sector’s aggregate contribution to gross value added at current prices was 68.7%, nearly matching the previous year’s level of 68.9%, compared to only 61.9% in 1991. Within the services sector, “public services, education, health” represented the largest subsector in terms of contribution to total gross value added at current prices, contributing 18.2% in 2016 and 2017.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 2.2.1.

Employment and Labor

As solid economic growth continued in 2017, labor market conditions improved further. In 2017, the average unemployment rate according to the national definition was 5.7%, compared to 6.1% in 2016. Under the ILO definition, the average unemployment rate was 3.6% in 2017 compared to 3.9% in 2016, having declined to the lowest level of unemployment since 1991. The number of persons resident in Germany who were either employed or self-employed in 2017 was 44.2 million, an increase of 1.5% compared to 2016.

Sources: Bundesagentur für Arbeit, Der Arbeits- und Ausbildungsmarkt in Deutschland: Monatsbericht Februar 2018, Table 6.1 (https://statistik.arbeitsagentur.de/Statistikdaten/Detail/201802/arbeitsmarktberichte/monatsbericht-monatsbericht/monatsbericht-d-0-201802-pdf.pdf); Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Tables 2.1.13.

The following table presents data with respect to employment and unemployment for each of the years indicated. Persons who are participating in programs such as vocational training, job creation plans or early retirement, which are designed to reduce unemployment, are not included in the unemployment rates shown below, as they are not treated as unemployed.

EMPLOYMENTAND UNEMPLOYMENT

		2017		2016		2015		2014		2013
Employed (in thousands)–ILO definition	��		44,189		43,544		42,990		42,608		42,257
Unemployed (in thousands)–ILO definition (1)			1,633		1,774		1,950		2,090		2,182
Unemployment rate (in %)–ILO definition			3.6		3.9		4.3		4.7		4.9
Unemployed (in thousands)–national definition (2)			2,533		2,691		2,795		2,898		2,950
Unemployment rate (in %)–national definition (3)			5.7		6.1		6.4		6.7		6.9

(1) Unemployed persons, available and seeking work.

(2) Registered unemployed persons, available and seeking work (but including persons working up to 15 hours per week).

(3) As a percentage of the total work force (excluding armed forces).

Sources: Bundesagentur für Arbeit, Der Arbeits- und Ausbildungsmarkt in Deutschland: Dezember und das Jahr 2017, Table 10.1; Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Table 1.11.

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The following table presents data with respect to the employment rate broken down by gender and age for 2016 and 2006.

EMPLOYMENT RATE—BREAKDOWNBY GENDERAND AGE

	Total				Men				Women
(Age in years)	2016		2006		2016		2006		2016		2006
	(Employed persons as a percentage of total population of same gender and age)
15 to 19		26.4		26.5		28.2		29.1		24.4		23.8
20 to 24		63.3		61.3		63.9		63.4		62.8		59.1
25 to 29		77.9		71.7		80.1		75.7		75.4		67.6
30 to 34		81.9		77.9		87.7		85.7		75.8		70.0
35 to 39		83.5		80.5		89.5		88.1		77.4		72.6
40 to 44		86.0		82.4		89.9		88.0		82.0		76.6
45 to 49		87.4		80.9		90.6		85.8		84.3		76.0
50 to 54		84.6		76.1		88.3		81.8		80.9		70.4
55 to 59		79.0		64.2		83.7		71.9		74.4		56.6
60 to 64		55.7		29.6		61.1		37.6		50.6		21.8
65 and older		6.3		3.3		9.1		4.9		4.2		2.2
Total (15 and older)		57.8		52.5		63.1		59.3		52.8		46.1

Source: Statistisches Bundesamt, Erwerbsbeteiligung, Erwerbstätige und Erwerbstätigenquote nach Geschlecht und Alter 2006 und 2016, Ergebnis des Mikrozensus (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Arbeitsmarkt/Erwerbstaetigkeit/TabellenArbeitskraefteerhebung/ET_ETQ.html).

The following table presents data with respect to the structure of employment by economic sector for 2017 and 2007.

STRUCTUREOF EMPLOYMENT—ECONOMIC SECTORS

	2017		2007
	(Percent of total)
Agriculture, forestry and fishing		1.4		1.7
Production sector (excluding construction)		18.4		19.4
of which: manufacturing		17.1		18.0
Construction		5.6		5.7
Trade, transport, accommodation and food services		22.8		23.3
Information and communication		2.9		2.9
Financial and insurance services		2.6		3.1
Real estate activities		1.1		1.2
Business services		13.7		12.1
Public services, education, health		24.7		23.4
Other services		6.8		7.3
Total (1)		100.0		100.0

(1) Figures may not add up due to rounding.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 2.2.9.

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The following table shows changes in the annual wage level per employee and unit labor costs per hour worked for each of the years indicated.

WAGE TRENDSAND LABOR COSTS

	2017		2016		2015		2014		2013
Gross wages and salaries per employee in EUR		34,213		33,304		32,511		31,631		30,771
Change from previous year in %		2.7		2.4		2.8		2.8		2.1
Unit labor costs per hour worked
Index (2010=100)		112.1		110.3		108.6		106.8		105.3
Change from previous year in %		1.6		1.6		1.8		1.4		1.7

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Tables 2.17 and 2.20.

About one-sixth of the German work force consists of members of unions. The German Trade Union Federation (Deutscher Gewerkschaftsbund) serves as an umbrella organization for eight such unions. In 2017, approximately 6 million persons were members of a union under the umbrella of the Deutscher Gewerkschaftsbund, roughly unchanged since 2013, but considerably less compared to the 11.8 million members in 1991, the first full year after German reunification. One major reason contributing to the strong decline since 1991 is the significant fall in manufacturing employment in the eastern Länder after reunification.

Each member union typically covers employees of an entire industry, regardless of the precise type of work done by those employees (the “one union, one industry” principle). As a result, employers usually deal with only one negotiating partner on the labor side in each specific industry. The unions and employers of each specific industry enter into collective labor agreements (Tarifverträge) without government intervention. The collective labor agreements often apply to all employees of a given industry, regardless of whether or not a particular employee is a member of a union, so long as the employer is a member of the relevant association of employers, which is often the case. Despite their binding character, collective labor agreements in many cases contain opt-out clauses (Öffnungsklauseln) allowing for company-specific adjustments to be negotiated between the employer and the works council at the specific company. Moreover, there is a range of additional possibilities to deviate from these agreements. Many employers in the eastern Länder are not members of employers’ associations, which means that wages are individually negotiated, often resulting in wage levels that are lower than those provided for by the collective labor agreements.

Sources: Deutscher Gewerkschaftsbund, DGB-Mitgliederzahlen ab 2010 (http://www.dgb.de/uber-uns/dgb-heute/mitgliederzahlen/2010); Deutscher Gewerkschaftsbund, Mitgliederzahlen 1950-1993 (http://www.dgb.de/uber-uns/dgb-heute/mitgliederzahlen/1950-1993); European Trade Union Institute, National Industrial Relations, Countries, Germany, Trade Unions (http://www.worker-participation.eu/National-Industrial-Relations/Countries/Germany); Bundeszentrale für politische Bildung, Tarifautonomie (http://www.bpb.de/nachschlagen/lexika/handwoerterbuch-politisches-system/202193/tarifautonomie).

Social Security, Social Protection, and Social Policy

The comprehensive system of social security and protection in effect in the Federal Republic includes in particular health insurance, long-term care insurance, retirement and disability pensions, participation benefits and benefits for medical rehabilitation, protection against the effects of occupational accidents and diseases by means of the mandatory occupational accident insurance, unemployment benefits, family benefits, benefits and rehabilitation for persons with disabilities, allowances to orphans and to single persons with dependents, and the provision of general public assistance to persons in need. The majority of the German population is covered by mandatory statutory retirement pensions and health insurance. Hospitals and institutions caring for children and handicapped persons are operated by municipalities, churches, charitable institutions, and private providers.

Most of these social services are mainly funded through social security contributions from employers and employees, and a smaller part is funded through direct contributions by the Federal Republic, the Länder, municipalities and other public institutions, depending notably upon whether the respective social service is provided by an insurance-based system funded through contributions or a social-assistance-like program funded through taxes.

The Federal Republic’s statutory retirement insurance system operates on a pay-as-you-go basis, with contributions from current employers and employees funding payments to current retired persons. Generally, all employed and some self-employed and other persons are subject to mandatory insurance in the statutory retirement system. Certain persons, including employed members of particular professions (including some freelance professions) may apply for exemption, while others, as in the case of civil servants, are automatically exempted from mandatory participation in the statutory retirement pension insurance system. Instead, exempted persons have to contribute to professional or public pension schemes or, in the case of civil servants and similar groups, they will benefit from special pension schemes for civil servants. Furthermore, the Retirement Funds Act (Altersvermögensgesetz) aims to ensure the long-term viability of the statutory retirement pension insurance system by encouraging insured persons to also sign up for designated privately funded or corporate-funded pension schemes, for which certain bonus payments and tax incentives are provided, with a view to offsetting the expected decline of payments from the statutory retirement pension insurance.

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Statutory health insurance coverage must be made available to all persons fulfilling the applicable eligibility criteria. Within the statutory health insurance system, insured persons may choose among a large number of statutory health insurance funds that have developed historically. Persons whose gross income exceeds certain thresholds as well as civil servants, self-employed persons and members of certain professions may opt out of the statutory system and choose private health insurance coverage, which, in case of opting-out, is obligatory as well. Contributions to the statutory health insurance system are based solely on the insured person’s income situation and are independent of the insured person’s gender, age and medical risk. By contrast, contributions towards private health insurance coverage are mainly calculated based on age, medical risk and the desired level of coverage.

In 2017, social security revenue, as shown in the national accounts, amounted to EUR 635.4 billion, and expenditure was EUR 624.8 billion. The social security budget thus incurred a surplus of EUR 10.5 billion in 2017, after a surplus of EUR 8.2 billion in 2016.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.7.

In light of a changing population structure, the Federal Government has already implemented structural reforms of the statutory pension system in order to safeguard the sustainability of the social security system in the long term. In addition, Germany has implemented reforms of the statutory pension insurance which gradually raise the regular retirement age by two years to the age of 67 between 2012 and 2029.

To increase the sustainability of the health care system, Germany has implemented several structural reform measures to strengthen competition among providers in order to improve the efficiency and quality of health care services.

Source: Bundesministerium der Gesundheit, Gesundheitsfonds (http://www.bmg.bund.de/themen/krankenversicherung/finanzierung/gesundheitsfonds.html); Bundesministerium für Arbeit und Soziales, Pensions from age 67 (http://www.bmas.de/EN/Our-Topics/Pensions/pensions-from-age-67.html).

International Economic Relations

International economic relations are of major importance to the German economy. In 2017, exports and imports of goods and services amounted to 47.3% and 39.6% of GDP at current prices, respectively. The Federal Republic supports the European Union in pursuing a liberal foreign trade policy aimed at dismantling tariffs and other barriers to trade. The responsibility for trade matters (particularly negotiating free trade agreements) in the EU rests with the European Commission. For further information on the EU’s responsibility for trade matters, see “General—The European Union and European Integration— Economic Integration”.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 2.3.1.

Because the Federal Republic’s economy depends on exports, it is particularly vulnerable to trade barriers, such as protective tariffs. The Federal Government thus supports efforts to reduce trade barriers, such as the current negotiations within the framework of the WTO under the Doha Development Agenda. The Federal Government also supports the Comprehensive Economic and Trade Agreement (CETA), a trade agreement between the EU and Canada. This agreement was approved by the European Parliament in February 2017. On September 21, 2017, CETA entered into force provisionally, i.e. most of the agreement, with the exception of investment protection, investment market access for portfolio investment and the Investment Court System, is already in force. CETA will take full effect after ratification by all EU Member States. In December 2017, the EU finalized a free trade agreement with Japan (Economic Partnership Agreement), which is intended to remove the majority of duties and regulatory barriers.

Sources: Bundesministerium für Wirtschaft und Energie, WTO-Welthandelsrunde “Doha Development Agenda” (https://www.bmwi.de/Redaktion/DE/Artikel/Aussenwirtschaft/wto-doha.html); Bundesministerium für Wirtschaft und Energie, CETA – Das europäisch- kanadische Wirtschafts- und Handelsabkommen (http://www.bmwi.de/Redaktion/DE/Dossier/ceta.html); Bundesministerium für Wirtschaft und Energie, Europäisches Parlament stimmt CETA zu, press release of February 15, 2017 (http://www.bmwi.de/Redaktion/DE/Pressemitteilungen/2017/20170215-europaeisches-parlament-stimmt-ceta-zu.html); European Commission, CETA explained (http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-explained/); European Commission, EU and Japan finalise Economic Partnership Agreement, press release of December 8, 2017 (http://trade.ec.europa.eu/doclib/press/index.cfm?id=1767&title=EU-and-Japan-finalise-Economic-Partnership-Agreement).

Balance of Payments

The Federal Republic typically achieves a surplus in the trading of goods. Traditionally, this surplus has been partially offset by deficits in other fields, such as services and secondary income. In 2017, the current account surplus totaled EUR 262.6 billion, compared to EUR 268.8 billion in 2016, a decrease of EUR 6.2 billion. Thus the current account surplus declined to 8.0% of nominal GDP.

Source: Deutsche Bundesbank, Monatsbericht April 2018, Table XII.2.

According to data prepared by the Deutsche Bundesbank, applying the annual averages of a broad monthly indicator of Germany’s price competitiveness compared to 56 trading partners based on consumer price indices, Germany’s price competitiveness has been relatively stable since 1999, fluctuating within a range of approximately 10% of the average indicator value in the period from 1999 to 2018. In 2017, price competitiveness deteriorated by 0.9% compared to 2016, mainly due to the

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appreciation of the euro relative to several currencies, including the U.S. dollar, pound sterling, the Swiss franc, the Chinese yuan, the Japanese yen, the Swedish krona, and the Norwegian krona. However, the influence of variations in the exchange rates should be viewed in light of the fact that the Euro Area Member States account for a major part of German exports (36.9% in 2017).

Since the introduction of the euro, the exchange rate against the U.S. dollar has shown high volatility. After appreciating by approximately 85% against the U.S. dollar between June 2001 and July 2008, the euro depreciated considerably relative to the U.S. dollar by approximately 23% between July 2008 and June 2010. After a number of fluctuations the euro started a prolonged depreciation in mid-2014. Over the course of the years 2015 and 2016, the euro remained relatively stable at an average level of USD 1.1 per euro. In 2017, the euro appreciated by 2.1% compared to its 2016 average. Due to its steep appreciation since the first quarter of 2017, the average value of the euro against the U.S. dollar in February 2018 was 9.3% higher than the 2017 average.

Sources: Deutsche Bundesbank, Monatsbericht März 2018, Tables XII.3, XII.10 and XII.12 (https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentlichungen/Monatsberichte/2018/2018_03_monatsbericht.pdf?__blob=publicationFile).

The following table shows the Federal Republic’s balance of payments for each of the years indicated.

BALANCEOF PAYMENTS (BALANCES)

	2017		2016		2015		2014		2013
	(EUR in millions)
Current account
Trade in goods (1)		265,442		267,999		261,135		228,185		212,662
Services (2)		-16,123		-19,948		-16,918		-24,491		-41,376
Primary income		67,357		60,639		67,222		56,549		62,444
Secondary income		-54,120		-39,879		-40,044		-41,283		-43,639
Total current account		262,556		268,811		271,394		218,959		190,092
Capital account (3)		-254		3,468		534		2,936		-563
Financial account
Net German investment abroad (increase: +)		358,805		397,043		270,235		308,445		62,651
Net foreign investment in Germany (increase: +)		83,057		139,350		30,817		68,329		-162,709
Net financial account (net lending: + / net borrowing: -)		275,748		257,693		239,418		240,116		225,360
Net errors and omissions (4)		13,446		-14,586		-32,511		18,221		35,831

(1) Including supplementary trade items.

(2) Including the freight and insurance costs of foreign trade.

(3) Including net acquisition/disposal of non-produced non-financial assets.

(4) Statistical errors and omissions, resulting from the difference between the balance on the financial account and the balances on the current account and the capital account.

Sources: Deutsche Bundesbank, Zahlungsbilanzstatistik, Table I.1. Wichtige Posten der Zahlungsbilanz (https://www.bundesbank.de/Redaktion/DE/Downloads/Statistiken/Aussenwirtschaft/Zahlungsbilanz/b30607.pdf?__blob=publicationFile); Deutsche Bundesbank, Zahlungsbilanzstatistik, Table I.9.a) Kapitalbilanz insgesamt (https://www.bundesbank.de/Redaktion/DE/Downloads/Statistiken/Aussenwirtschaft/Zahlungsbilanz/b33637.pdf?__blob=publicationFile).

Balance of Trade

The following tables show information relating to foreign trade of the Federal Republic for each of the years indicated.

TRADEIN GOODS (1)

	2017		2016		2015		2014		2013
	(EUR in millions)
Exports of goods		1,270,122		1,192,058		1,179,139		1,115,345		1,080,212
Imports of goods		1,004,680		924,059		918,004		887,161		867,550
Trade balance		265,442		267,999		261,135		228,185		212,662

(1) Including supplementary trade items.

Source: Deutsche Bundesbank, Zahlungsbilanzstatistik, Table I.1. Wichtige Posten der Zahlungsbilanz (https://www.bundesbank.de/Redaktion/DE/Downloads/Statistiken/Aussenwirtschaft/Zahlungsbilanz/b30607.pdf?__blob=publicationFile).

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The Federal Republic’s principal export goods are motor vehicles, machinery of all kinds, and chemical products. The principal import goods are motor vehicles, computer, electronic and optical products, and machinery of all kinds. The Federal Republic has relatively few resources of industrial raw materials. As a result, it largely depends on imports to satisfy its demand for raw materials. This dependence on foreign supplies is particularly significant in the case of metals such as copper, tungsten, niobium, rare earth, rock phosphate, lithium carbonate, bauxite, manganese, titanium, and tin. The Federal Republic currently imports about 70% of its energy requirements, including virtually all of its oil and a significant portion of its natural gas requirements as well as all enriched uranium needed for nuclear energy.

Sources: Statistisches Bundesamt, Fachserie 7 Reihe 1 – 2017 (March 2018), page 65 and Tables 1.11.1 and 1.11.2; Bundesanstalt für Geowissenschaften und Rohstoffe, Deutschland – Rohstoffsituation 2016, pages 20 et seq (https://www.bgr.bund.de/DE/Themen/Min_rohstoffe/Downloads/rohsit-2016.pdf?__blob=publicationFile&v=4); Bundesministerium für Wirtschaft und Energie, Zahlen und Fakten Energiedaten, Tabelle 3 (http://www.bmwi.de/Redaktion/DE/Artikel/Energie/energiedaten-gesamtausgabe.html).

Germany’s Current Account Surplus and the Macroeconomic Imbalance Procedure

Within the framework of the MIP established in 2011, on November 22, 2017, the European Commission published the Alert Mechanism Report 2018, which, similar to the previous year’s report, inter alia noted the current account surplus observed in Germany. An in-depth review was conducted on Germany to scrutinize its external position and analyze internal developments, and to assess whether it is experiencing macroeconomic imbalances. According to the results of this review, Germany continues to experience macroeconomic imbalances that are not excessive. The Commission points out that subdued private and public investment has contributed to the high and persistent current account surplus. The Federal Government supports the European Commission in the resolute implementation of the MIP. Together with the European partners, the Federal Government aims to reduce economic imbalances while complying with the rules of the reformed SGP. However, it points out that the competitiveness and the exporting strength of German companies are an important pillar of the entire European economy. The Federal Government is taking a comprehensive approach to strengthen both public and private sector investments and has already taken numerous measures in the last legislative term to give a further boost to investment dynamics. Based on record-high employment, rising salaries, increasing private investment and targeted fiscal expansion especially in public investment, domestic demand continues to be the main driver of robust growth in Germany. As the European Commission notes in its in-depth review, the surplus has already edged down from its peak value reached in 2015 and is expected to gradually decline further in the coming years. Furthermore, it should be noted that Germany’s current account surplus to a large extent may be explained by temporary factors, e.g., the development of exchange rates and fluctuations in the price of oil, as well as by fundamentals, e.g., demographic change. These factors usually remain unaffected by economic and financial policy measures.

Sources: European Commission, Report from the Commission to the European Parliament, the Council, the European Central Bank and the European Economic and Social Committee, Alert Mechanism Report 2018, dated November 22, 2017 (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017DC0771&from=EN); European Commission, Commission Staff Working Document, Country Report Germany 2018, Including an In-Depth Review on the prevention and correction of macroeconomic imbalances (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-germany-en.pdf); European Commission, Communication from the Commission to the European Parliament, the Council, the European Central Bank and the Eurogroup, 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under regulation (EU) No 1176/2011 (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0120&from=EN); European Commission, Economic and Financial Affairs, EU Economic governance: monitoring, prevention, correction , Macroeconomic imbalance procedure (http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/mip_reports/index_en.htm); Bundesministerium für Wirtschaft und Energie, Nationales Reformprogramm 2018 (https://www.bmwi.de/Redaktion/DE/Publikationen/Europa/nationales-reformprogramm-2018.html); Bundesministerium der Finanzen, Monatsbericht des BMF März 2017, Analysen und Berichte, Der deutsche Leistungsbilanzsaldo – Entwicklung und wirtschaftspolitische Implikationen (http://www.bundesfinanzministerium.de/Monatsberichte/2017/03/Inhalte/Kapitel-3-Analysen/3-2-Der-deutsche-Leistungsbilanzsaldo.html).

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COMPOSITIONOF EXPORTEDAND IMPORTED GOODS

	2017 (1)
	Imports		Exports
	(Percent of total)
Products of agriculture and hunting		3.0		0.8
Products of forestry		0.1		0.0
Fish and products of fishing		0.1		0.0
Coal and lignite		0.5		0.0
Crude petroleum and natural gas		5.4		0.5
Metal ores		0.7		0.0
Other mining and quarrying products		0.1		0.1
Food products		4.5		4.2
Beverages		0.6		0.4
Tobacco products		0.1		0.3
Textiles		1.1		0.9
Wearing apparel		3.2		1.4
Leather and related products		1.4		0.7
Wood and of products of wood and cork, except furniture; articles of straw and plaiting materials		0.6		0.6
Paper and paper products		1.4		1.5
Coke and refined petroleum products		2.0		1.0
Chemicals and chemical products		7.6		9.0
Basic pharmaceutical products and pharmaceutical preparations		5.2		5.9
Rubber and plastic products		2.9		3.6
Other non-metallic mineral products		1.1		1.2
Basic metals		5.7		4.2
Fabricated metal products, except machinery and equipment		2.8		3.4
Computer, electronic and optical products		10.9		8.6
Electrical equipment		5.8		6.5
Machinery and equipment not elsewhere classified		7.8		14.4
Motor vehicles, trailers and semi-trailers		11.1		18.3
Other transport equipment		3.2		4.5
Furniture		1.2		0.8
Energy		0.1		0.2
Other goods		10.1		6.9
Total		100.0		100.0

(1) Preliminary data.

Source: Statistisches Bundesamt, Fachserie 7, Reihe 1 – 2017 (March 2018), Tables 1.11.1 and 1.11.2; calculation of percentages by KfW based on import and export values in EUR thousands, respectively; figures may not add up to total due to rounding.

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FOREIGN TRADE (SPECIAL TRADE)BY GROUPSOF COUNTRIESAND COUNTRIES (1)

	2017		2016		2015
	(EUR in millions)
Exports to:
Total		1,279,047		1,203,833		1,193,555
of which:
United States		111,528		106,822		113,733
France		105,208		101,106		102,762
China (2)		86,195		76,046		71,284
The Netherlands		85,886		78,433		79,191
United Kingdom		84,365		85,939		89,018
Italy		65,558		61,265		57,987
Austria		62,830		59,778		58,217
Switzerland		54,006		50,161		49,070
New industrial countries and emerging markets of Asia (3)		53,453		51,921		51,510
Belgium/Luxembourg		50,042		46,931		46,196
Spain		43,043		40,497		38,715
Japan		19,532		18,307		16,968
Imports from:
Total		1,034,409		954,917		949,245
of which:
China (2)		100,452		94,172		91,930
The Netherlands		91,374		83,142		87,889
France		64,168		65,651		66,819
United States		61,067		57,968		60,217
Italy		55,803		51,737		49,038
New industrial countries and emerging markets of Asia (3)		50,807		42,966		42,478
Switzerland		45,709		43,896		42,089
Belgium/Luxembourg		44,154		40,960		40,116
Austria		41,236		38,543		37,250
United Kingdom		37,140		35,654		38,414
Spain		31,671		27,870		26,442
Japan		22,901		21,922		20,180

(1) Exports (f.o.b.) by country of destination, imports (c.i.f.) by country of origin. Special trade consists mainly of goods that are imported into the Federal Republic for use, consumption, adaptation or processing, as well as goods that are produced, manufactured, adapted or processed in the Federal Republic and subsequently exported.

(2) Excludes Hong Kong.

(3) Includes Brunei Darussalam, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.

Source: Deutsche Bundesbank, Monatsbericht März 2018, Table XII.3.

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Foreign Direct Investment

The following table presents data with respect to foreign direct investment stocks at year-end 2015.

FOREIGN DIRECT INVESTMENT STOCKSAT YEAR-END 2015

	Outward (1)		Inward (2)
	(EUR in billions)
Total (3)		1,034.1		465.9
Selected countries and regions
European Union		429.8		356.0
of which: European Monetary Union		193.9		296.2
of which: United Kingdom		121.3		38.7
Switzerland		34.1		34.7
Russia		15.8		3.5
United States		290.4		28.1
Canada		14.8		1.0
Central America		20.4		4.0
South America		28.5		0.2
Asia		144.6		29.2
of which: China		69.6		2.2
of which: Japan		11.6		18.6
Australia		18.7		1.2
Africa		8.6		0.0
Selected economic sectors of investment object
Manufacturing		365.1		114.7
of which: Chemicals and chemical products		82.7		14.0
of which: Machinery and equipment		34.8		17.7
of which: Motor vehicles, trailers and semi-trailers		92.9		-0.2
Electricity, gas, steam and air conditioning supply		41.3		16.5
Wholesale and retail trade; repair of motor vehicles and motor cycles		166.5		53.6
Information and communication		58.1		49.0
Financial and insurance activities		286.8		163.3
Real estate activities		30.8		30.9
Professional, scientific and technical activities		17.0		13.1

(1) German foreign direct investment abroad.

(2) Foreign direct investment in Germany.

(3) Primary and secondary direct investment (consolidated).

Source: Deutsche Bundesbank, Bestandserhebung über Direktinvestitionen, Statistische Sonderveröffentlichung 10 (April 2017), Tables 1.2.a, I.2. c, II.2.a, II.2.b.

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MONETARY AND FINANCIAL SYSTEM

The ESCB and the Eurosystem

The ESCB comprises the ECB and the national central banks of the Member States, while the Eurosystem consists of the ECB and the national central banks of the Euro Area Member States.

The Eurosystem is responsible for the single monetary policy for the euro area. Its decision-making bodies are the Governing Council and the Executive Board of the ECB. The national central banks of the Member States that are not part of the Eurosystem are represented in the General Council of the ECB, but have no voting right in the decision-making process, particularly with respect to monetary policy. The ESCB’s primary objective is to maintain price stability. Without prejudice to this objective, the ESCB supports the general economic policies of the EU.

The Deutsche Bundesbank – Germany’s national central bank within the ESCB – has the responsibility of implementing the single monetary policy in Germany and continues to perform various other tasks, including operating cashless payment systems, cash management and playing an important role in banking and financial market supervision, as further described below under the caption “—Financial System.”

Sources: European Central Bank, Annual Report 2016, pages 101-107 (http://www.ecb.europa.eu/pub/pdf/annrep/ar2016en.pdf); European Central Bank, About, Organisation: ECB, ESCB and the Eurosystem (https://www.ecb.europa.eu/ecb/orga/escb/html/index.en.html); Deutsche Bundesbank, Tasks (http://www.bundesbank.de/Navigation/EN/Tasks/tasks.html).

Monetary Policy Instruments of the ESCB

To achieve its operational goals, the ESCB conducts open market operations, offers standing facilities and requires credit institutions to maintain minimum reserves in accounts with the ESCB. Open market operations play an important role in the ESCB’s monetary policy for the purposes of steering interest rates and managing the liquidity situation in the market. Available open market operations are reverse transactions, outright transactions, the issuance of debt certificates or foreign exchange swaps, and the collection of fixed-term deposits. Standing facilities are designed to provide or absorb overnight liquidity, and the imposition of minimum reserve requirements allows the ESCB to stabilize money market interest rates, create (or enlarge) a structural liquidity shortage and possibly contribute to the control of monetary expansion. The ESCB has employed a variety of non-standard policy instruments in response to the global economic and financial crisis and the European sovereign debt crisis. For further information, see “—Financial System—European Financial System—Recent Policy Responses to the Global Financial and Economic Crisis.”

Source: European Central Bank, Monetary Policy: The Eurosystem’s Instruments (https://www.ecb.europa.eu/mopo/implement/html/index.en.html).

Monetary Policy Strategy and Prices

The ECB’s primary goal is to maintain medium-term price stability, which is defined as a year-on-year increase in the harmonized index of consumer prices for the euro area of less than 2%. However, the ECB has clarified that, within this definition, it aims at an inflation rate close to 2%. This goal indicates the commitment to provide an adequate margin to avoid the risk of deflation. The stability-oriented monetary policy strategy of the Eurosystem used by the ECB to achieve this goal is based on two pillars: (1) analysis and assessment of short- to medium-term risks to price stability (economic analysis); and (2) assessment of medium- to long-term monetary developments (monetary analysis).

Source: European Central Bank, Monetary Policy: Strategy (https://www.ecb.europa.eu/mopo/strategy/html/index.en.html).

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The following table shows price trends in Germany for the periods indicated.

PRICE TRENDS

	2017		2016		2015		2014		2013
	(change from previous year in %)
Harmonized index of consumer prices (HICP)		1.7		0.4		0.1		0.8		1.6
Consumer price index (CPI)		1.8		0.5		0.3		0.9		1.5
Index of producer prices of industrial products sold on the domestic market (1)		2.6		-1.7		-1.8		-1.0		-0.1

(1) Excluding value-added tax.

Sources: Statistisches Bundesamt, Verbraucherpreise, Harmonisierter Verbraucherpreisindex, Veränderungsraten zum Vorjahr in % (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Preise/Verbraucherpreisindizes/Tabellen_/HarmonisierterVerbraucherpreisindex.html?cms_gtp=146602_list%253D2%2526146598_slot%253D2&https=1); Statistisches Bundesamt, Verbraucherpreisindizes, Harmonisierter Verbraucherpreisindex für Deutschland, Veränderungsraten zum Vorjahr in % (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Preise/Verbraucherpreisindizes/Tabellen_/VerbraucherpreiseKategorien.html?cms_gtp=145114_list%253D2%2526145110_slot%253D2&https=1); Deutsche Bundesbank, Monatsbericht Februar 2018, Table XI.7.

Official Foreign Exchange Reserves

The following table shows the breakdown of the Federal Republic’s official foreign exchange reserves as of the end of the years indicated.

OFFICIAL FOREIGN EXCHANGE RESERVESOFTHE FEDERAL REPUBLIC (1)

	As of December 31
	2017		2016		2015		2014		2013
	(EUR in millions)
Gold		117,347		119,253		105,792		107,475		94,876
Cash, deposits and securities investments		31,215		34,993		33,423		30,646		28,080
Special drawing rights		13,987		14,938		15,185		14,261		12,837
Reserve position in the IMF		4,294		6,581		5,132		6,364		7,961
Total		166,842		175,765		159,532		158,745		143,753

(1) External position of the Deutsche Bundesbank in the EMU. Assets and liabilities vis-à-vis all EMU member countries and non-EMU member countries.

Source: Deutsche Bundesbank, Monatsbericht Februar 2018, Table XII.8.

The Federal Republic’s foreign reserve assets are managed by the Deutsche Bundesbank. The Euro Area Member States have transferred foreign reserve assets to the ECB in an aggregate amount equivalent to approximately EUR 40.8 billion, consisting of foreign currency reserves and gold. The ECB manages the foreign reserve assets transferred to it. The foreign reserve assets not transferred to the ECB continue to be held and managed by the national central banks of the Euro Area Member States. In order to ensure consistency within the single monetary and foreign exchange policies of the EMU, the ECB monitors and coordinates market transactions conducted with those assets.

Sources: European Central Bank, Annual Report 1998, page 74 (http://www.ecb.int/pub/pdf/annrep/ar1998en.pdf); European Central Bank, Annual Accounts 2016, page 20 (https://www.ecb.europa.eu/pub/pdf/annrep/ar2016annualaccounts_en.pdf).

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External Positions of Banks

The following table shows the external assets and liabilities of the Deutsche Bundesbank and the banks (monetary financial institutions) of the Federal Republic as of the end of each of the years indicated.

EXTERNAL FINANCIAL ASSETSAND LIABILITIESBY SECTOR

	2017		2016		2015		2014		2013
	(EUR in billions)
Deutsche Bundesbank
Assets		1,142.8		990.5		800.7		678.8		721.7
of which: clearing accounts within ESCB (1)		906.9		754.3		584.2		460.8		510.2
Liabilities (2)		675.3		592.7		481.8		396.3		401.5
Net position		467.6		397.7		318.9		282.5		320.2
Banks
Loans to foreign banks		963.8		1,055.9		1,066.9		1,125.2		1,019.7
Loans to foreign non-banks		723.9		756.2		751.5		735.1		701.0
Deposits and loans from foreign banks		659.0		696.1		611.9		609.2		515.7
Deposits and loans from foreign non-banks		241.2		206.2		201.1		221.0		257.8

(1) Consists mainly of net claims from the interbank payment system for the real-time processing of cross-border transfers throughout the EMU (TARGET2).

(2) Including estimates of currency in circulation abroad.

Source: Deutsche Bundesbank, Monatsbericht März 2018, Tables IV.4 and XII.8.

Foreign Exchange Rates and Controls

The euro is a freely convertible currency. Since its introduction in 1999, the euro has become the second most widely used currency internationally. Currency transactions do not require licenses or other permissions. Capital market transactions are not subject to any license or similar requirements. Gold may be imported and exported freely, subject only to the levy of VAT on some transactions.

Sources: International Monetary Fund, Selected Decisions and Selected Documents of the IMF, Thirty-Ninth Issue—Freely Usable Currencies, Prepared by the Legal Department of the IMF, As updated as of March 31, 2017 (https://www.imf.org/external/pubs/ft/sd/index.asp?decision=11857-(98/130)); Bank for International Settlements, Triennial Central Bank Survey, Foreign exchange turnover in April 2016, September 2016, Annex tables revised on 11 December 2016 (http://www.bis.org/publ/rpfx16fx.pdf).

The following table shows the annual average exchange rates for selected currencies in relation to the euro for the years indicated.

ANNUAL AVERAGE EXCHANGE RATESOFTHE EURO (1)

	2017		2016		2015		2014		2013
U.S. dollars per euro		1.1297		1.1069		1.1095		1.3285		1.3281
Pound sterling per euro		0.87667		0.81948		0.72584		0.80612		0.84926
Japanese yen per euro		126.71		120.20		134.31		140.31		129.66
Swiss franc per euro		1.1117		1.0902		1.0679		1.2146		1.2311
Chinese yuan per euro		7.6290		7.3522		6.9733		8.1857		8.1646

(1) Calculated from daily values.

Source: Deutsche Bundesbank, Monatsbericht Februar 2018, Table XII.10.

Financial System

German Financial System

Overview. As of January 31, 2018, 1,627 monetary financial institutions in Germany reported an aggregate balance sheet total of EUR 7,861.8 billion to the Deutsche Bundesbank. According to the Deutsche Bundesbank’s classification, these institutions included:

• 264 commercial banks, with an aggregate balance sheet total of EUR 3,203.5 billion;

• 386 savings banks, with an aggregate balance sheet total of EUR 1,196.4 billion;

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• the eight regional institutions of those savings banks, including DekaBank Deutsche Girozentrale (the central asset managing institution of the German savings banks) and seven Landesbanken (German public law financial institutions traditionally focusing on the banking business for and in the Land in which they operate), with an aggregate balance sheet total of EUR 893.6 billion;

• 19 special-purpose credit institutions, including KfW, KfW IPEX-Bank, promotional banks of the federal states (Landesförderinstitute), and, since July 2016, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank), the only remaining central institution of German credit cooperatives, with an aggregate balance sheet total of EUR 1,223.0 billion;

• 917 credit cooperatives, with an aggregate balance sheet total of EUR 889.1 billion;

• 13 mortgage banks, with an aggregate balance sheet total of EUR 225.9 billion;

• 20 building and loan associations, with an aggregate balance sheet total of EUR 230.2 billion; and

• 142 subsidiaries and branches of foreign banks located in the Federal Republic with an aggregate balance sheet total of EUR 1,149.0 billion. These institutions, which are majority-owned by foreign banks, are also included in the totals of the other categories of banks listed above.

Source: Deutsche Bundesbank, Monatsbericht März 2018, Table IV.2.

The German Banking Act (Kreditwesengesetz, or “KWG”) currently regulates all banks except for the Deutsche Bundesbank and KfW (although it does regulate KfW IPEX-Bank). Many important provisions of the KWG have become applicable by analogy to KfW with effect from January 1, 2016. For more information on the application of the KWG to KfW, see “KfW—General—Supervision and Regulation—Regulation.” German commercial banking institutions operate as “universal” banks and are not restricted by law or otherwise from offering a complete range of diverse financial services.

Supervision. The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”) is responsible for the integrated supervision of financial services. Its primary objective is to ensure the proper functioning, stability and integrity of Germany as a financial center in the context of European integration and international cooperation, as well as to strengthen collective consumer protection through its regulatory actions. The BaFin, which is subject to the legal and technical oversight of the Federal Ministry of Finance, operates exclusively in the public interest. It helps to ensure the ability of banks, financial services institutions and insurance companies to meet their payment obligations (solvency supervision), and it also enforces standards of professional conduct aimed at preserving investors’ trust in the financial markets (market supervision). In addition, the BaFin has an investor protection role in that it seeks to prevent unauthorized financial business from being carried out.

The Deutsche Bundesbank is closely involved in the ongoing supervision of credit institutions by the BaFin and has been assigned a substantial number of the ongoing operational tasks in banking supervision. Furthermore, the German Federal Agency for Financial Market Stabilization (Bundesanstalt für Finanzmarktstabilisierung, or “FMSA”) supervises two wind-up institutions, Erste Abwicklungsanstalt and FMS Wertmanagement, as well as Portigon AG (the legal successor of former Landesbank West LB which is in the process of being wound-up), all of which were founded under its auspices in order to stabilize the financial market (see “—Wind-up Institutions”).

In November 2014, the Single Supervisory Mechanism (“SSM”) – as one of the pillars of the European banking union – became operational. Under the SSM, the ECB is the central prudential supervisor of financial institutions in the euro area as well as in non-euro EU countries that choose to join the SSM. The ECB directly supervises the largest banks, while the national supervisors continue to monitor the remaining banks. The ECB and the national supervisors work closely together to ensure the banks’ compliance with EU banking regulations and to be able to address issues early on.

In order to facilitate the timely identification of risks to financial stability, the Financial Stability Commission (Ausschuss für Finanzstabilität), which consists of representatives of the Federal Ministry of Finance, the Deutsche Bundesbank, and BaFin, was established in March 2013. Due to its macroeconomic and financial market expertise, the Deutsche Bundesbank is responsible for contributing towards safeguarding financial stability and tasked with analyzing all relevant factors in order to identify threats to financial stability. Warnings or recommendations for corrective measures are submitted to the Financial Stability Commission, which may pass resolutions with respect thereto. In addition, the Financial Stability Commission is tasked with defining concerted reactions to emerging threats to financial stability by issuing warnings and recommendations and publishing them if appropriate. The recipients of such warnings or recommendations are obliged to report on the implementation of corrective measures.

Sources: Bundesministerium der Justiz, Gesetz über das Kreditwesen (http://www.gesetze-im-internet.de/kredwg/index.html); Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin, Functions & history (https://www.bafin.de/EN/DieBaFin/AufgabenGeschichte/aufgabengeschichte_node_en.html); Deutsche Bundesbank and Bundesanstalt für Finanzdienstleistungsaufsicht, Joint press release of November 4, 2002 (http://www.bundesbank.de/Redaktion/EN/Downloads/Press/Pressenotizen/2002/2002_11_04_banking_supervision.pdf?    blob=publicationFile); Bundesanstalt für Finanzdienstleistungsaufsicht, Aufsichtsrichtlinie—Richtlinie zur Durchführung und Qualitätssicherung der laufenden Überwachung der Kredit- und Finanzdienstleistungsinstitute durch die Deutsche Bundesbank (Aufsichtsrichtlinie), May 21, 2013, altered on December 19, 2016

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(https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Aufsichtsrecht/Richtlinie/rl_130521_aufsichtsrichtlinie.html); BaFin, Act on the Strengthening of German Financial Supervision, January 18, 2013 (https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2013/fa_bj_2013_01_finstabg_en.html); Bundesanstalt für Finanzmarktstabilisierung (FMSA): Federal Agency for Financial Market Stabilisation (https://www.fmsa.de/en/); Portigon AG: Unternehmensinformationen (http://www.portigon-ag.de/acm/cm/content/portigon/i/de/portigon-ag/unternehmensinformationen.html); Bundesbank, German macroprudential oversight strengthened, press release of March 18, 2013 (http://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2013/2013_03_18_macropudential_oversight.html); European Commission: Single supervisory mechanism (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/single-supervisory-mechanism_en#documents).

Bank Recovery and Resolution. Between January 1, 2015, and December 31, 2017, the FMSA (see “—Supervision”) acted as the German national resolution authority for banks. The FMSA was thus responsible for the recovery and resolution of all banks in Germany under the European Bank Recovery and Resolution Directive (“BRRD”) which were not directly supervised by the ECB within the framework of the Single Supervisory Mechanism (“SSM”, see “—European Financial System—European System of Financial Supervision and European Banking Union”). The BRRD was adopted in May 2014 to provide authorities with comprehensive and effective arrangements to deal with failing banks at the national level and with cooperation arrangements to tackle cross-border banking failures. The BRRD includes rules to set up national resolution funds, which must be established by each EU Member State, and it requires banks to prepare recovery plans to overcome financial distress.

On January 1, 2018, FMSA’s duties deriving from its role as the national resolution authority were integrated into the Federal Financial Supervisory Authority (BaFin) as a new and independently operating division. At the same time, FMSA’s responsibilities of administering and managing the Financial Market Stabilisation Fund (“Sondervermögen Finanzmarktstabilisierungsfonds”, or “FMS”) were incorporated into the Federal Republic of Germany – Finance Agency (Bundesrepublik Deutschland – Finanzagentur GmbH). The FMS was originally created during the financial crisis on October 17, 2008. Until the Single Resolution Mechanism (“SRM”) became fully operational on January 1, 2016, and functionally replaced the FMS, the latter was responsible for stabilizing German banks by extending guarantees covering the banks’ securities and by granting loans. The stabilization measures provided by the FMS amounted to EUR 14.6 billion in capital injections, while loss compensation payments made to FMS Wertmanagement totaled EUR 9.3 billion.

For more information on the SRM, see “—European Financial System—European System of Financial Supervision and European Banking Union.”

Sources: Deutsche Bundesbank, Glossary: Restructuring Act (https://www.bundesbank.de/Navigation/EN/Service/Glossary/Functions/glossary.html?lv2=129546&lv3=145952#145952.de); European Commission: Bank recovery and resolution (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/managing-risks-banks-and-financial-institutions/bank-recovery-and-resolution_en); Bundesministerium der Finanzen, Wirtschaft und Verwaltung, Was macht die Bundesanstalt für Finanzmarktstabilisierung? Neue Aufgaben der FMSA zur Stabilisierung des Finanzsektors, September 20, 2010 (http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Internationales_Finanzmarkt/Finanzmarktpolitik/Bankenabgabe/2010-09-17-FMSA.html); Bundesministerium der Finanzen, German government moves forward with package of measures for European banking union, press release of July 9, 2014 (http://www.bundesfinanzministerium.de/Content/EN/Pressemitteilungen/2014/2014-07-09-package-of-measures-for-european-banking-union.html); Bundesministerium der Finanzen, Verordnung über die Erhebung der Beiträge zum Restrukturierungsfonds für Kreditinstitute (Restrukturierungsfonds-Verordnung—RStruktFV) (http://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Verordnungen/2015-07-22-RStruktFV.html); Gesetz zur Neuordnung der Aufgaben der Bundesanstalt für Finanzmarktstabilisierung (FMSA-Neuordnungsgesetz—FMSANeuOG) (http://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Verordnungen/2016-12-28-FMSANeuOG.html); Federal Agency for Financial Market Stabilisation: History (https://www.fmsa.de/en/history/);Bundesrepublik Deutschland – Finanzagentur GmbH, Financial Market Stabilisation, Financial Market Stabilisation Fund (FSM) (https://www.deutsche-finanzagentur.de/en/financialmarketstabilisation/);Federal Financial Supervisory Authority (BaFin): Recovery and resolution (https://www.bafin.de/EN/Aufsicht/BankenFinanzdienstleister/Massnahmen/SanierungAbwicklung/sanierung_abwicklung_node_en.html).

Wind-up Institutions. In the wake of the global financial crisis, two wind-up institutions (Abwicklungsanstalten) for troubled German banks were established. The first wind-up institution, Erste Abwicklungsanstalt, was established in December 2009 to liquidate a portfolio of EUR 77.5 billion assumed from WestLB. It assumed a second portfolio consisting of an asset portfolio worth EUR 72.3 billion and a trading portfolio with a market value of around EUR 52.1 billion following the restructuring of WestLB. As of December 31, 2017, the combined asset portfolios had been reduced to approximately EUR 40 billion.

The second wind-up institution, FMS Wertmanagement, assumed a portfolio of EUR 175.7 billion from Hypo Real Estate Group in October 2010 to support restructuring efforts. In December 2014, FMS Wertmanagement acquired DEPFA Bank plc, which, as of December 31, 2013, had consolidated total assets amounting to EUR 49.1 billion from Hypo Real Estate Holding AG. DEPFA will have to be wound down in accordance with an EU state aid decision of July 18, 2011. As of December 31, 2017, FMS Wertmanagement’s portfolio had been reduced to EUR 76.8 billion.

Sources: Bundesministerium der Justiz, Gesetz über das Kreditwesen (http://www.gesetze-im-internet.de/kredwg/index.html); Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin, Functions & history (https://www.bafin.de/EN/DieBaFin/AufgabenGeschichte/aufgabengeschichte_node_en.html); Deutsche Bundesbank and Bundesanstalt für Finanzdienstleistungsaufsicht, Joint press release of November 4, 2002 (http://www.bundesbank.de/Redaktion/EN/Downloads/Press/Pressenotizen/2002/2002_11_04_banking_supervision.pdf? blob=publicationFile); Bundesanstalt für Finanzdienstleistungsaufsicht, Aufsichtsrichtlinie—Richtlinie zur Durchführung und Qualitätssicherung der laufenden Überwachung der Kredit- und Finanzdienstleistungsinstitute durch die Deutsche Bundesbank (Aufsichtsrichtlinie), May 21, 2013, altered on December 19, 2016 (https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Aufsichtsrecht/Richtlinie/rl_130521_aufsichtsrichtlinie.html); BaFin, Act on the Strengthening of German Financial Supervision, January 18, 2013 (https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2013/fa_bj_2013_01_finstabg_en.html); Bundesanstalt für Finanzmarktstabilisierung (FMSA): Federal Agency for Financial Market Stabilisation (https://www.fmsa.de/en/); Portigon AG: Unternehmensinformationen (http://www.portigon-ag.de/acm/cm/content/portigon/i/de/portigon-ag/unternehmensinformationen.html); Bundesbank, German macroprudential oversight strengthened, press release of March 18, 2013

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(http://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2013/2013_03_18_macropudential_oversight.html); European Commission: Single supervisory mechanism (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/single-supervisory-mechanism_en#documents); Erste Abwicklungsanstalt, Annual Report 2017 (https://www.aa1.de/index.php?eID=tx_nawsecuredl&u=0&g=0&t=1525891899&hash=2949a8dec8010dbe5b8d8bb13ba039ecfaa1be12&file=/fileadmin/content/downloads/2_Finanzen/GB-2017_en.pdf); FMS Wertmanagement AöR, FMS Wertmanagement achieves a further reduction in the portfolio and an increase in profit, press release of April 10, 2018 (https://www.fms-wm.de/en/press/333-fms-wertmanagement-achieves-a-further-reduction-in-the-portfolio-and-an-increase-in-profit).

European Financial System

European System of Financial Supervision and European Banking Union. The European system of financial supervisors became operational on January 1, 2011. At the macro-financial level, a European Systemic Risk Board (“ESRB”) was established, which provides macro-prudential oversight of the financial system. The ESRB’s role is to monitor and assess potential risks to the stability of the financial system. If necessary, it will issue risk warnings and recommendations for remedial action and will monitor their implementation. The ESRB is currently chaired by the President of the ECB.

At the micro-financial level, three supervisory authorities were established:

• the European Banking Authority (“EBA”);

• the European Insurance and Occupational Pensions Authority; and

• the European Securities and Markets Authority.

The three European Supervisory Authorities (“ESAs”) cooperate with the supervisory authorities of the Member States. National authorities are responsible for the day-to-day supervision of individual financial institutions, whereas the ESAs are responsible for ensuring that a single set of harmonized rules and consistent supervisory practices are applied by supervisory authorities of the Member States. The ESAs have, for example, the power to settle disputes among national financial supervisors by imposing legally binding mediation and to impose temporary bans on risky financial products or activities.

One of the key elements of Europe’s banking union, which was established in the wake of the European sovereign debt crisis, is the SSM composed of the ECB and the national supervisory authorities of participating Member States. The SSM’s main aims are to contribute to the safety and soundness of credit institutions and the stability of the European financial system and to ensure consistent supervision. The SSM became operational in November 2014. In its role within the SSM, the ECB directly supervises 118 significant banks and banking groups, which represent almost 82% of the total assets on the aggregated balance sheets of all credit institutions under its supervision. For the remaining banks, the ECB is responsible for setting and monitoring the supervisory standards and for working closely with the national competent authorities in the supervision of these banks.

Another key element of Europe’s banking union is the SRM which was established by a regulation adopted in July 2014 and has become fully operational starting January 1, 2016 with the purpose of ensuring the orderly resolution of failing banks. The SRM consists of a single resolution board (“SRB”), which has broad powers in cases of bank resolution, and the Single Resolution Fund (“SRF”). The SRB is responsible for the planning and resolution phases of cross-border banks and those directly supervised by the ECB, while since January 1, 2015 national resolution authorities are responsible for all other banks under the BRRD. However, the SRB will always be responsible if the resolution of a bank requires access to the SRF. The SRF is being built up over a period of eight years from 2016 to 2023 to reach a target level of at least 1% of the amount of covered deposits of all credit institutions authorized in all the participating Member States (estimated in 2014 to be approximately EUR 55 billion by the end of 2023). Banks will have to make annual contributions to the SRF calculated on the basis of their liabilities, excluding own funds and covered deposits, and adjusted for risk. Companies defined in article 2 paragraph 5 of the EU Capital Requirements Directive IV (“CRD IV”), including KfW, are not required to contribute to the fund. In the aggregate, the European Commission estimates that the German banking sector is required to contribute just under EUR 15.5 billion to the SRF by 2023. During the transitional period each participating Member State is providing an individual national credit line to the SRB to back its banks’ contributions to the SRF in the event of possible funding shortfalls following resolution cases of its banks. By now all 19 participating Member States have signed the Loan Facility Agreements with the SRB which are the basis for the bridge financing in the form of national credit lines to the SRB. The maximum aggregate amount of the credit lines of the participating Member States will amount to around EUR 55 billion. The repartition key among Member States corresponds to the contributions to the SRF, which will be made by banks in each Member State by 2023.

In November 2015, the European Commission proposed a European Deposit Insurance Scheme (“EDIS”) as an additional element of the European banking union. Since then, work on a technical level has continued. Negotiations on a political level will start as soon as sufficient further progress has been made on the measures on risk reduction, as mentioned in the Roadmap, adopted by the Council on June 17, 2016. In a communication of October 11, 2017 regarding the completion of the Banking Union, the European Commission suggested discussing the introduction of EDIS more gradually than originally proposed in November 2015 to give new impetus to the negotiations on EDIS. To date, the EU has agreed on common rules to harmonize the national deposit insurance schemes.

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In response to the global economic and financial crisis, regulatory authorities and central banks launched a comprehensive regulatory reform program. As a result, in December 2010, the Basel Committee on Banking Supervision launched a package of new standards on bank capital adequacy and liquidity to enhance the banking regulatory framework. The capital and liquidity reform package, typically referred to as Basel III, will be phased in by 2019. In order to transpose the Basel III agreement into EU law, previous EU capital requirement directives were replaced by the Capital Requirements Regulation (CRR), a regulation establishing prudential requirements, and CRD IV, a directive governing access to deposit-taking activities, both of which entered into force on January 1, 2014 and have since been gradually implemented in the Member States.

In November 2016, the European Commission published proposals which aim to further strengthen the resilience of banks, ensure an efficient and orderly resolution process and enhance financial stability in the EU. They also aim to align the EU’s banking union rules with a number of elements agreed at the international level, in particular, the standards agreed within the Basel Committee on Banking Supervision and by the Financial Stability Board. The amendments are designed to update the capital requirements for banks and make these rules less complex and burdensome for smaller banks, as well as to improve the capacity of credit institutions to support the economy. In December 2016 the Council of the European Union started working on these proposals, and in June 2017 it agreed on a negotiating position regarding them. Negotiations with the European Parliament will follow once the Parliament has agreed its own negotiating stance.

Sources: European Commission, European system of financial supervision (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/european-system-financial-supervision_en); European Commission, Banking Union (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union_en); Council of the European Union, Banking Union (http://www.consilium.europa.eu/en/policies/banking-union/); Deutsche Bundesbank, Service, Schule und Bildung, Schülerbuch Geld und Geldpolitik digital, Das Banken und Finanzsystem: Sicherung der Stabilität des Finanzsystems (https://www.bundesbank.de/Redaktion/DE/Dossier/Service/schule_und_bildung_kapitel_4.html?notFirst=true&docId=147562#chap); European Central Bank, ECB assumes responsibility for euro area banking supervision, press release of November 4, 2014 (http://www.ecb.europa.eu/press/pr/date/2014/html/pr141104.en.html); European Central Bank, Banking Supervision, Single Supervisory Mechanism (https://www.bankingsupervision.europa.eu/about/thessm/html/index.en.html); European Commission, Single Resolution Mechanism to come into effect for the Banking Union, press release of December 31, 2015 (http://europa.eu/rapid/press-release_IP-15-6397_en.htm); Deutsche Bundesbank, Compromise reached over resolution fund, article dated December 22, 2014 (https://www.bundesbank.de/Redaktion/EN/Topics/2014/2014_12_22_compromise_reached_resolution_fund.html); Single Resolution Board, Single Resolution Fund: What is the Single Resolution Fund? (https://srb.europa.eu/en/content/single-resolution-fund); Banking Union – Single Resolution Board completes signature of Loan Facility Agreements with all 19 participating Member States, February 8, 2016 (https://srb.europa.eu/en/node/196); European Banking Authority, Implementing Basel III in Europe: CRD IV Package (http://www.eba.europa.eu/regulation-and-policy/implementing-basel-iii-europe); Council of the European Union, Banking Union, Amendments to the banking union rules (http://www.consilium.europa.eu/en/policies/banking-union/2016-amendments); European Commission, Communication from the Commission: Completing the banking union, first published on October 11, 2017 (https://ec.europa.eu/info/publications/171011-communication-banking-union_en).

Recent Policy Responses to the Global Financial and Economic Crisis. In response to the tensions in the financial markets and the loss of confidence in the financial sector in the wake of the global financial and economic crisis, a number of measures were taken at the EU level in recent years to restore confidence in the financial sector and prevent market disruptions. These measures were, or continue to be, mainly directed at preserving adequate capitalization of financial institutions, at enhancing credit support measures to improve bank lending and liquidity in the euro area money market, at safeguarding the flow of credit from financial institutions to the real economy and, most recently, at addressing the risk of a prolonged period of low inflation. A central role was, and continues to be, played by the ECB, which introduced a number of non-standard monetary policy measures, including, among others, asset purchase programs, long-term refinancing operations and measures aimed at increasing collateral availability. These measures are unprecedented in nature, scope and magnitude and aim to safeguard the primary objective of price stability and ensure an appropriate monetary policy transmission mechanism.

In September 2012, the ECB announced Outright Monetary Transactions in secondary markets for euro-denominated sovereign bonds in the euro area aimed at enabling the ECB to address severe distortions in government bond markets. In June 2014, the ECB announced several measures designed to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. In particular, the ECB decided to conduct a series of eight targeted longer-term refinancing operations (“TLTROs”) between September 2014 and June 2016. These TLTROs were aimed at improving bank lending to the euro-area non-financial private sector (defined as euro-area households and non-financial corporations), excluding loans to households for house purchases. The last operation of this series of TLTROs was successfully conducted and settled in June 2016. All these TLTROs will mature in September 2018.

In addition, the ECB seeks to provide monetary stimulus to the economy through its asset purchase program which was launched in October 2014 and significantly expanded in March 2015. This program is being conducted to further ease monetary and financial conditions in a context where key ECB interest rates are at their lower bound. Since mid-2016, it has consisted of four elements: a covered bond purchase program, an asset-backed securities purchase program, a public sector purchase program (including, among others, debt securities of KfW) and a corporate sector purchase program. Monthly purchases of public and private sector securities are currently intended to amount to EUR 30 billion. The ECB has repeatedly announced that it intends to carry out these purchases at least until September 2018 and, in any case, until it sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to 2% over the medium term.

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Furthermore, the ECB conducted four additional TLTROs with four-year maturities (“TLTROs II”) on a quarterly basis from June 2016 to March 2017. Counterparties exceeding an ECB-defined lending benchmark until January 2018 may borrow at an interest rate that can be as low as the interest rate on the deposit facility prevailing at the time of allotment. Since the interest rate on the deposit facility stood below zero at the time of the allotments of all TLTROs II, this means that counterparties would, in fact, be paid for their lending efforts if they exceeded their benchmarks. Like the previous TLTROs, the TLTROs II intend to promote bank lending to the euro-area non-financial private sector and again exclude mortgage loans. Banks were able to borrow larger amounts through TLTROs II compared to the previous TLTROs. The last operation of the TLTRO II series was successfully conducted and settled in March 2017, and will mature in March 2021.

Sources: European Central Bank, The Eurosystem’s instruments (https://www.ecb.europa.eu/mopo/implement/html/index.en.html); European Central Bank, Monetary policy decisions: Non-standard measures (https://www.ecb.europa.eu/mopo/decisions/html/index.en.html); European Central Bank, Technical features of Outright Monetary Transactions, press release of September 6, 2012 (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html); European Central Bank, ECB announces further details of the targeted long-term refinancing operations, press release of July 3, 2014 (https://www.ecb.europa.eu/press/pr/date/2014/html/pr140703_2.en.html); European Central Bank, ECB announces new series of targeted longer-term refinancing operations (TLTRO II), press release of March 10, 2016 (http://www.ecb.europa.eu/press/pr/date/2016/html/pr160310_1.en.html); European Central Bank, Consolidated financial statement of the Eurosystem as at 1 July 2016 (https://www.ecb.europa.eu/press/pr/wfs/2016/html/fs160706.en.html); Bundesbank, Gezielte längerfristige Refinanzierungsgeschäfte I (https://www.bundesbank.de/Redaktion/DE/Standardartikel/Aufgaben/Geldpolitik/glrg_1_ausstehende_glrg.html); European Central Bank, Consolidated financial statement of the Eurosystem as at 31 March 2017 (https://www.ecb.europa.eu/press/pr/wfs/2017/html/fs170405.en.html); Bundesbank, Gezielte längerfristige Refinanzierungsgeschäfte II (https://www.bundesbank.de/Redaktion/DE/Standardartikel/Aufgaben/Geldpolitik/glrg_2_ausstehende_glrg.html); European Central Bank, Asset purchase programmes (https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html); European Central Bank, Introductory Statement to the press conference (with Q&A), Mario Draghi, President of the ECB, Frankfurt am Main, January 22, 2015 (https://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html); European Central Bank, ECB announces expanded asset purchase programme, press release of January 22, 2015 (https://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html); European Central Bank, ECB adds corporate sector purchase programme (CSPP) to the asset purchase programme (APP) and announces changes to APP, press release of March 10, 2016 (http://www.ecb.europa.eu/press/pr/date/2016/html/pr160310_2.en.html); European Central Bank, Monetary policy decisions, press release of March 8, 2017 (https://www.ecb.europa.eu/press/pressconf/2018/html/ecb.is180308.en.html).

Securities Market

The Federal Republic’s securities market is among Europe’s largest. Trading in listed securities is not legally or otherwise confined to the stock exchanges. It is estimated, however, that most transactions in equity securities are executed through stock exchanges. By contrast, debt securities, although typically listed, are predominantly traded over-the-counter.

Highly developed secondary markets, combined with the distribution capabilities of an extensive network of financial institutions, provide the basis for the Federal Republic’s position in the world’s capital markets. Equity and debt issues are generally underwritten and distributed through banking syndicates, which typically include commercial banks as well as certain regional and specialized institutions. The regulated securities markets in Berlin, Dusseldorf, Frankfurt am Main, Hamburg, Hanover, Munich and Stuttgart and the European Energy Exchange are recognized as regulated markets of the EU according to Article 56 of Directive 2014/65/EU on Markets in Financial Instruments and comply with globally accepted regulatory standards.

Based on total turnover on German securities exchanges, the Frankfurt Stock Exchange, operated by Deutsche Börse AG, is by far the most important stock exchange in the Federal Republic.

In January 2013, the Heads of State or Government of the European Union adopted a decision authorizing eleven Member States to proceed with the introduction of a financial transaction tax (“FTT”) through “enhanced cooperation.”

In February 2013, the European Commission presented its “Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax.” The proposal involves a harmonized minimum 0.1% tax rate for transactions in all types of financial instruments except derivatives (0.01% rate). The proposal is still subject to discussion.

Sources: Council of the European Union, Financial transaction tax: Council agrees to enhanced cooperation, press release of January 22, 2013 (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/134949.pdf); Bundesministerium der Finanzen, Finanztransaktionsteuer in verstärkter Zusammenarbeit, topical information originating from press release of January 27, 2015 (http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Weitere_Steuerthemen/Finanztransaktionsteuer/2014-01-27-ftt-statement.html).

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PUBLIC FINANCE

Receipts and Expenditures

The Federal Government, each of the Länder governments and each of the municipalities (Gemeinden) have separate budgets. The federal budget is the largest single public budget.

The fiscal year of the Federal Republic is the calendar year. The annual federal budget is passed by an act of Parliament. On the basis of a proposal prepared by the Ministry of Finance, the Federal Government introduces the federal budget bill to the Parliament, generally in the summer of each year. The proposal has to pass through three Bundestag sessions, the budget committee of the Bundestag, and the Bundesrat, which deliberates on the proposal twice. The final vote on the proposal is taken by the Bundestag in its third session.

In addition to the federal, Länder and municipal budgets, there are separate budgets for the social security funds and various special funds (Sondervermögen) of the federal administration and the Länder, as well as other off-budgetary entities at all levels of government that are created for specific public purposes. General government, as defined in the national accounts, comprises all these different levels of government activity.

In 2017, total consolidated general government revenue, as presented in the national accounts, amounted to EUR 1,474.6 billion, with tax revenue of EUR 767.2 billion and net social contributions of EUR 548.1 billion.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.2.

In 2017, VAT and the taxes on income and wealth, as presented in the national accounts, amounted to EUR 226.6 billion and EUR 422.6 billion, respectively. These joint taxes are distributed among the Federal Government, the Länder governments and municipal authorities, according to predetermined formulae. In addition to joint taxes, the Federal Government, the Länder governments and the municipal authorities each levied special taxes, for example, on tobacco and beer.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.16.

Consolidated general government expenditure in 2017, as presented in the national accounts, amounted to a total of EUR 1,438.0 billion. The most significant consolidated general government expenditures were monetary social benefits (EUR 505.5 billion), social benefits in kind (EUR 277.9 billion) and employee compensation (EUR 246.5 billion). Other significant consolidated general government expenditures included intermediate consumption (EUR 155.3 billion), interest on public debt (EUR 38.9 billion) and gross capital formation (EUR 70.3 billion).

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.2.

GENERAL GOVERNMENT ACCOUNTS (1)

	2017		2016		2015		2014		2013
	(EUR in billions)
Federal Government, Länder governments and municipalities
Revenue		955.4		918.7		880.0		853.5		820.8
of which: Taxes (2)		767.2		732.0		698.0		668.7		646.3
Expenditure		929.3		901.3		863.3		847.1		830.2
Balance		26.1		17.4		16.7		6.4		-9.4
Social security funds
Revenue		635.4		606.9		579.9		557.7		540.1
Expenditure		624.8		598.6		577.2		554.6		534.7
Balance		10.5		8.2		2.7		3.2		5.4
General government
Revenue		1,474.6		1,414.2		1,354.3		1,308.3		1,259.0
Expenditure		1,438.0		1,388.6		1,334.9		1,298.8		1,263.0
Balance		36.6		25.7		19.4		9.5		-4.0

(1) Definition according to the national accounts.

(2) Excluding capital taxes and taxes of domestic sectors paid to EU.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Tables 3.4.3.2, 3.4.3.3 and 3.4.3.7.

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FEDERAL GOVERNMENT ACCOUNTS (1)

	2017		2016		2015		2014		2013
	(EUR in billions)
Revenue		415.0		401.1		392.0		385.5		370.0
of which: Taxes (2)		369.2		353.5		346.0		336.7		326.4
Expenditure		413.9		393.7		382.3		376.8		377.4
Balance		1.1		7.4		9.7		8.7		-7.4

(1) Definition according to the national accounts.

(2) Excluding taxes of domestic sectors paid to EU.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.4.

GENERAL GOVERNMENT EXPENDITURE: BREAKDOWNBY FUNCTIONS (1)

	2017		2016		2015		2014		2013
	(EUR in billions)
General public services		189.1		183.4		179.8		188.3		184.8
Defense		35.3		32.6		30.1		29.8		30.5
Public order and safety		50.5		49.9		47.1		46.1		44.8
Economic affairs		98.2		96.7		93.7		91.0		91.7
Environmental protection		20.4		19.2		18.0		17.7		17.4
Housing and community amenities		12.4		11.9		11.6		11.5		11.7
Health		233.3		225.3		217.5		209.7		198.9
Recreation, culture and religion		32.8		31.7		30.6		30.4		29.0
Education		134.7		132.3		127.6		124.3		120.7
Social protection		631.3		605.5		578.9		549.9		533.6
Total expenditure		1,438.0		1,388.6		1,334.9		1,298.8		1,263.0

(1) Definition according to the national accounts.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.11.

Germany’s General Government Deficit/Surplus and General Government Gross Debt

For purposes of the Member States’ reports to the European Commission under the EDP, the general government or “Maastricht” deficit/surplus refers to the difference between consolidated public sector revenue and consolidated public sector expenditure and is the balancing item “net borrowing/net lending” of the general government (central government, state government, local government and social security funds) as defined in ESA 2010. In 2017, Germany’s general government surplus amounted to EUR 36.6 billion, or 1.1% of nominal GDP. The German general government gross debt-to-GDP ratio decreased from 68.2% in 2016 to 64.1% in 2017, which is above the EU’s 60% reference value.

Sources: Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Table 1.10; Council of the European Union, Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union and the Charter of Fundamental Rights of the European Union (http://data.consilium.europa.eu/doc/document/ST-6655-2008-REV-8/en/pdf); Deutsche Bundesbank, German general government debt down in 2017 by €53 billion to €2.09 trillion – debt ratio down from 68.2 % to 64.1 %, press release of March 29, 2018 (https://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2018/2018_03_29_general_government_debt.html?https=1).

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The following table shows historical information on the Federal Republic’s general government deficit/surplus and debt as a percentage of GDP.

THE FEDERAL REPUBLIC’S FISCAL MAASTRICHT CRITERIA

	2017		2016		2015		2014		2013
	(% of GDP)
General government deficit (-) / surplus (+)		1.1		0.8		0.6		0.3		-0.1
General government gross debt		64.1		68.2		71.0		74.7		77.5

Sources: Statistisches Bundesamt, Fachserie 18, Reihe 1.2 – 4. Vierteljahr 2017 (February 2018), Table 1.10; Deutsche Bundesbank, German general government debt down in 2017 by €53 billion to €2.09 trillion – debt ratio down from 68.2 % to 64.1 %, press release of March 29, 2018 (https://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2018/2018_03_29_general_government_debt.html?https=1).

Fiscal Outlook

The April 2018 update of the German stability program forecasts the general government budget to remain in surplus until 2021, the end of the forecasting period. The medium-term objective of a structural deficit not exceeding 0.5% of GDP is expected to be met with a safety margin during the entire forecasting period (2018 to 2021).

According to the April 2018 update of the German stability program, Germany’s general government gross debt-to-GDP ratio is projected to be 61 % in 2018 and to decrease further to around 53% by 2021, the end of the forecast horizon. The reference values for the upper limit of the debt ratio according to the 1/20th-rule of the enhanced SGP are expected to be undershot significantly in all years of the forecasting period. The debt ratio is expected to fall below the EU’s reference value of 60% of nominal GDP in 2019. One reason for the decrease is expected to be the liquidation of parts of the wind-up institutions’ portfolios, which is expected to continue over the coming years. In addition to the liquidation effect, the consolidation efforts in the federal, Länder and municipal authorities’ budgets are expected to contribute to the decline in the debt-to-GDP ratio during the forecasting period.

Source: Bundesministerium der Finanzen, Deutsches Stabilitätsprogramm 2018 (https://www.bundesfinanzministerium.de/Content/DE/Downloads/Abt_2/Stabilitaetsprogramm-2018.pdf?__blob=publicationFile&v=4), Tables 14 and 17.

GENERAL GOVERNMENT BUDGETARY PROSPECTS (1)

	2021		2020		2019		2018		2017
Revenue		44  3⁄4		44  3⁄4		44  3⁄4		44  3⁄4		45.2
Total taxes		23  3⁄4		23  1⁄2		23  1⁄2		23  1⁄2		23.5
Social contributions		16  3⁄4		16  3⁄4		16  3⁄4		16  3⁄4		16.8
Property income		1⁄2		1⁄2		1⁄2		1⁄2		0.5
Other		4		4		4		4  1⁄4		4.4
Expenditure (2)		43  1⁄4		43  1⁄2		43  1⁄2		44		44.1
Compensation of employees and intermediate consumption		11  3⁄4		12		12		12  1⁄4		12.3
Social payments		24		24		23  3⁄4		23  3⁄4		24.0
Interest expenditure		1		1		1		1		1.2
Subsidies		1		1		1		1		0.8
Gross fixed capital formation		2  1⁄4		2  1⁄4		2  1⁄4		2  1⁄4		2.2
Capital transfers		1		1		1		1  1⁄4		1.3
Other		3  1⁄4		3  1⁄4		3  1⁄2		3  1⁄2		3.5
General government deficit (–) / surplus (+)		1  1⁄2		1  1⁄2		1  1⁄4		1		1.1
Federal Government		1⁄2		1⁄4		1⁄4		0		0.0
Länder governments		3⁄4		3⁄4		3⁄4		1⁄4		0.5
Municipalities		1⁄4		1⁄4		1⁄4		1⁄2		0.3
Social security funds		0		1⁄4		1⁄4		1⁄4		0.3
General government gross debt		53		55  3⁄4		58  1⁄4		61		64.1

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(1) Forecast figures are rounded to one-quarter of a percent of GDP.

(2) Adjusted by the net amount of payments in connection with swaps.

Source: Bundesministerium der Finanzen, Deutsches Stabilitätsprogramm 2018 (https://www.bundesfinanzministerium.de/Content/DE/Downloads/Abt_2/Stabilitaetsprogramm-2018.pdf?__blob=publicationFile&v=4), Tables 14 and 17.

Tax Structure

Income Tax

Significant sources of revenue for the general government are the various types of income taxes. Income taxation for employees and self-employed persons is based on a progressive tax scale ranging from 14% to 45% subject to the amount of taxable income. Employees pay taxes on their income from employment in the form of wage taxes. Self-employed persons typically pay estimated taxes during the year before filing their annual income tax return. Income generated by partnerships (Personengesellschaften) is not subject to tax at the partnership level, but at the level of the partners. The partners pay tax on this income according to their individual income tax brackets.

Income generated by corporations is subject to corporate income tax (Körperschaftsteuer) at a flat rate of 15%.

Capital income received by domestic taxpayers (all types of income from capital as well as private shareholders’ net gains from sales of shares in corporations) is subject to a final uniform tax rate of 25% (Abgeltungssteuer), taking into consideration an allowance (Sparerpauschbetrag) of EUR 801 (EUR 1,602 for married couples).

In addition to the various types of income tax, a solidarity surcharge of 5.5% is imposed on the applicable income tax liability.

Sources: Bundesministerium der Justiz und für Verbraucherschutz, Einkommensteuergesetz (http://www.gesetze-im-internet.de/estg/index.html); Bundesministerium der Justiz und für Verbraucherschutz, Solidaritätszuschlaggesetz 1995, § 4 Zuschlagssatz (http://www.gesetze-im-internet.de/solzg_1995/__4.html); Bundesministerium der Justiz und für Verbraucherschutz, Körperschaftsteuergesetz (http://www.gesetze-im-internet.de/kstg_1977/index.html).

VAT and Consumption Taxes

VAT serves as a significant source of revenue. VAT is a general consumption tax that is imposed on the value of most goods and services. The standard rate applicable to most goods and services is 19%. Certain items that are classified as basic necessities, such as food (except food and beverages in restaurants) and books, are subject to a reduced rate of 7%.

In addition to the VAT, there are specific consumption taxes. The most significant specific consumption taxes relate to energy and tobacco.

Sources: Bundesministerium der Justiz und für Verbraucherschutz, Umsatzsteuergesetz (http://www.gesetze-im-internet.de/ustg_1980/index.html); Bundesministerium der Justiz und für Verbraucherschutz, Umsatzsteuergesetz, § 12 Steuersätze (http://www.gesetze-im-internet.de/ustg_1980/__12.html); Bundesministerium der Justiz und für Verbraucherschutz, Energiesteuergesetz (http://www.gesetze-im-internet.de/energiestg/); Bundesministerium der Justiz und für Verbraucherschutz, Tabaksteuergesetz (http://www.gesetze-im-internet.de/tabstg_2009/index.html).

Environmental Tax

The environmental tax regime aims to encourage energy conservation and to allocate the burden of taxes and contributions more equally among labor, capital and natural resources. Key points of the environmental tax regime are an electricity tax imposed on the consumption of electricity and an energy tax on mineral oil and coal. The electricity tax rate is EUR 20.50 per megawatt-hour. The rates of the energy tax are assessed in accordance with certain environmental criteria.

Sources: Bundesministerium der Justiz und für Verbraucherschutz, Stromsteuergesetz (http://www.gesetze-im-internet.de/stromstg/index.html); Bundesministerium der Justiz und für Verbraucherschutz, Stromsteuergesetz, § 3 Steuertarif (http://www.gesetze-im-internet.de/stromstg/__3.html).

Trade Tax

Trade tax (Gewerbesteuer) is levied at the municipal level and is imposed on businesses and their objective earning power. The trade tax rate varies and depends on the municipality that levies the tax. Basis of assessment are the profits of a business enterprise as determined under income tax law or corporation tax law, increased or decreased by certain adjustments. The result is multiplied by the basic federal rate (Gewerbesteuermesszahl) to achieve the base amount for the trade tax (Steuermessbetrag), which is then multiplied by the municipal multiplier (Hebesatz). Beyond a required minimum level of 200%, municipalities have discretion to fix the municipal tax collection rate.

Source: Bundesministerium der Justiz und für Verbraucherschutz, Gewerbesteuergesetz (http://www.gesetze-im-internet.de/gewstg/index.html).

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The following table provides an overview of the annual tax revenues of the general government divided by categories for each of the years indicated, as presented in the national accounts.

TAXES (1)

	2017		2016		2015		2014		2013
	(EUR in billions)
Current taxes		767.2		732.0		698.0		668.7		646.3
Taxes on production and imports		344.7		334.7		325.7		314.9		305.8
of which: VAT		226.6		218.8		211.6		203.1		197.0
Current taxes on income and wealth		422.6		397.2		372.3		353.8		340.5
of which: Wage tax		235.0		223.0		215.0		203.9		194.2
Assessed income tax		58.0		52.1		46.9		43.9		41.0
Non-assessed taxes on earnings		29.8		26.6		27.5		25.6		27.0
Corporate tax		31.6		29.3		21.6		21.6		21.1
Capital taxes		6.1		7.0		6.3		5.5		4.6
Tax revenue of general government		773.3		739.0		704.3		674.1		651.0
Taxes of domestic sectors to EU		5.2		5.2		5.5		4.6		4.3
Taxes		778.6		744.1		709.8		678.7		655.3

(1) Definition according to the national accounts.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2017 (March 2018), Table 3.4.3.16.

Government Participations

The Federal Republic and its various special funds held direct participations in 106 public and private enterprises as of December 31, 2016.

Source: Bundesministerium der Finanzen, Die Beteiligungen des Bundes – Beteiligungsbericht 2017 (http://www.bundesfinanzministerium.de/Content/DE/

Standardartikel/Themen/Bundesvermoegen/Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/Beteiligungsbericht-2017.html), Chapter A.

The following table shows information on the Federal Republic’s significant direct participations (including those held through special funds) as of December 31, 2016.

PARTICIPATIONSOF THE FEDERAL REPUBLIC

Enterprises	Total nominal capital of enterprise		Participation of the Federal Republic
	(EUR in millions)		(%)
Significant majority participations:
Deutsche Bahn AG		2,150		100.0
KfW		3,750		80.0
Hypo Real Estate Holding GmbH (1)		909		100.0
Significant minority participations exceeding 25%:
Flughafen München GmbH		307		26.0

(1) Participations held by a special fund.

Source: Bundesministerium der Finanzen, Die Beteiligungen des Bundes – Beteiligungsbericht 2017 (http://www.bundesfinanzministerium.de/Content/DE/

Standardartikel/Themen/Bundesvermoegen/Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/Beteiligungsbericht-2017.html), Chapters B, E and O paragraph II.

Direct Debt of the Federal Government

As of December 31, 2017, the Federal Government’s direct debt totaled EUR 1,086.3 billion, compared to EUR 1,089.2 billion as of December 31, 2016.

Source: Bundesrepublik Deutschland Finanzagentur GmbH, Übersicht über den Stand der Schuld der Bundesrepublik Deutschland (http://www.deutsche-finanzagentur.de/fileadmin/user_upload/finanzagentur/pdf/schuldenstand_jahresarchiv.pdf).

The Federal Government raises funds primarily through the issuance of bonds and notes. Euro-denominated bonds and notes issued by the Federal Republic are evidenced by book entry and no certificates are issued.

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In addition to its own direct debt obligations, the Federal Government and its special funds had outstanding guarantees in an aggregate amount of EUR 477.5 billion as of December 31, 2016. Of this amount, EUR 128.6 billion were outstanding in the form of export credit insurance, which is handled by Euler Hermes on behalf of and for the account of the Federal Government. Furthermore, EUR 22.4 billion of the aggregate amount were outstanding in the form of a guarantee for a loan to Greece according to the German Financial Stability Act, and EUR 85.9 billion of the aggregate amount were outstanding in the form of a guarantee for the European Financial Stability Facility.

Source: Bundesministerium der Finanzen, Finanzbericht 2018 (http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Oeffentliche_Finanzen/Wirtschafts_und_Finanzdaten/Finanzberichte/Finanzbericht-2018.html), Overview 4, page 343.

For more detailed information regarding the Federal Government’s debt and guarantees, see “Tables and Supplementary Information.”

For information on the Federal Government’s liability as of December 31, 2017 for capital subscriptions to various international financial organizations, see the table entitled “Tables and Supplementary Information—III. Liabilities to International Financial Organizations.”

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TABLES AND SUPPLEMENTARY INFORMATION

I. DIRECT DEBT OF THE FEDERAL GOVERNMENT

SUMMARY

	Aggregate principal amount outstanding as of December 31, 2017
	(EUR in millions)
Federal Bonds (Bundesanleihen)		731,500
Bonds of the Federal Republic and the Länder (Bund-Länder-Anleihe)		405
Inflation-linked Securities (inflationsindexierte Bundeswertpapiere)		75,000
Federal Notes (Bundesobligationen)		213,000
Federal Treasury Notes (Bundesschatzanweisungen)		100,000
Federal Savings Notes (Bundesschatzbriefe)		289
Treasury Discount Paper (Unverzinsliche Schatzanweisungen)		10,037
German Government Day-Bonds (Tagesanleihe des Bundes)		966
Borrowers’ note loans (Schuldscheindarlehen)		9,091
of which:
– From residents		9,053
– From non-residents		38
Other debt (1)		4,475
– Equalization claims		4,155
Repurchased debt		-58,451
Total		1,086,311

(1) Mainly equalization and covering claims of the Deutsche Bundesbank, other banks and insurance companies in connection with the currency reform of 1948.

Source: Bundesministerium der Finanzen, Übersicht über den Stand der Schuld der Bundesrepublik Deutschland zum 30. Juni 2017 und 31. Dezember 2017 in Euro, Bundesanzeiger of February 2, 2018.

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DEBT TABLES

1. FEDERAL BONDS (1)

Title	Interest rate		Year of issue		Maturity		Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)						(EUR in millions)
6.25% Bonds of the Federal Republic of 1994		6.25		1994		2024		10,250
6.5% Bonds of the Federal Republic of 1997		6.5		1997		2027		11,250
5.625% Bonds of the Federal Republic of 1998		5.625		1998		2028		14,500
4.75% Bonds of the Federal Republic of 1998 (II)		4.75		1998		2028		11,250
6.25% Bonds of the Federal Republic of 2000		6.25		2000		2030		9,250
5.5% Bonds of the Federal Republic of 2000		5.5		2000		2031		17,000
4.75% Bonds of the Federal Republic of 2003		4.75		2003		2034		20,000
4% Bonds of the Federal Republic of 2005		4		2005		2037		23,000
4.25% Bonds of the Federal Republic of 2007 (I)		4.25		2007		2039		14,000
4% Bonds of the Federal Republic of 2007		4		2007		2018		20,000
4.25% Bonds of the Federal Republic of 2008		4.25		2008		2018		21,000
3.75% Bonds of the Federal Republic of 2008		3.75		2008		2019		24,000
4.75% Bonds of the Federal Republic of 2008		4.75		2008		2040		16,000
3.5% Bonds of the Federal Republic of 2009		3.5		2009		2019		24,000
3.25% Bonds of the Federal Republic of 2009		3.25		2009		2020		22,000
3.25% Bonds of the Federal Republic of 2010		3.25		2010		2042		15,000
3% Bonds of the Federal Republic of 2010		3		2010		2020		22,000
2.25% Bonds of the Federal Republic of 2010		2.25		2010		2020		16,000
2.5% Bonds of the Federal Republic of 2010		2.5		2010		2021		19,000
3.25% Bonds of the Federal Republic of 2011		3.25		2011		2021		19,000
2.25% Bonds of the Federal Republic of 2011		2.25		2011		2021		16,000
2% Bonds of the Federal Republic of 2011		2		2011		2022		20,000
1.75% Bonds of the Federal Republic of 2012		1.75		2012		2022		24,000
1.5% Bonds of the Federal Republic of 2012		1.50		2012		2022		18,000
2.5% Bonds of the Federal Republic of 2012		2.50		2012		2044		22,000

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Title	Interest rate		Year of issue		Maturity		Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)						(EUR in millions)
1.5% Bonds of the Federal Republic of 2013		1.50		2013		2023		18,000
1.5% Bonds of the Federal Republic of 2013 (II)		1.50		2013		2023		18,000
2% Bonds of the Federal Republic of 2013		2		2013		2023		18,000
1.5% Bonds of the Federal Republic and the Länder of 2013		1.50		2013		2020		405
1.75% Bonds of the Federal Republic of 2014		1.75		2014		2024		18,000
2.5% Bonds of the Federal Republic of 2014		2.50		2014		2046		23,000
1.5% Bonds of the Federal Republic of 2014		1.50		2014		2024		18,000
1% Bonds of the Federal Republic of 2014		1		2014		2024		18,000
0.5% Bonds of the Federal Republic of 2015		0.5		2015		2025		23,000
1% Bonds of the Federal Republic of 2015		1		2015		2025		23,000
0.5% Bonds of the Federal Republic of 2016		0.5		2016		2026		26,000
0% Bonds of the Federal Republic of 2016		0		2016		2026		25,000
0.25% Bonds of the Federal Republic of 2017		0.25		2017		2027		26,000
0.5% Bonds of the Federal Republic of 2017		0.5		2017		2027		25,000
1.25% Bonds of the Federal Republic of 2017		1.25		2017		2048		4,000
Total Federal Bonds								731,905

(1) Federal Bonds (Bundesanleihen) are evidenced by book entry, and no certificates are issued. Maturities are 10 to 30 years. No redemption prior to maturity; including principal strips.

2. INFLATION-LINKED SECURITIES (1)

Title	Interest rate		Year of issue		Maturity		Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)						(EUR in millions)
1.75% Inflation-linked Bonds of the Federal Republic of 2009		1.75		2009		2020		16,000
0.75% Inflation-linked Notes of the Federal Republic of 2011		0.75		2011		2018		15,000
0.10% Inflation-linked Bonds of the Federal Republic of 2012		0.10		2012		2023		16,000
0.50% Inflation-linked Bonds of the Federal Republic of 2014		0.50		2014		2030		9,500
0.10% Inflation-linked Bonds of the Federal Republic of 2015		0.10		2015		2026		12,000
0.10% Inflation-linked Bonds of the Federal Republic of 2015		0.10		2015		2046		6,500
Total Inflation-linked Securities								75,000

(1) Inflation-linked Securities (Inflationsindexierte Bundeswertpapiere) are evidenced by book entry, and no certificates are issued. Maturities are five to ten years. No redemption prior to maturity.

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3. FEDERAL NOTES (1)

Title	Interest rate		Year of issue		Maturity		Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)						(EUR in millions)
0.50% Bonds of 2013-Series 165		0.50		2013		2018		17,000
0.25% Bonds of 2013-Series 166		0.25		2013		2018		17,000
1.00% Bonds of 2013-Series 167		1.0		2013		2018		17,000
1.00% Bonds of 2014-Series 168		1.0		2014		2019		16,000
0.50% Bonds of 2014-Series 169		0.50		2014		2019		16,000
0.25% Bonds of 2014-Series 170		0.25		2014		2019		16,000
0.00% Bonds of 2015-Series 171		0.00		2015		2020		20,000
0.25% Bonds of 2015-Series 172		0.25		2015		2020		19,000
0.00% Bonds of 2016-Series 173		0.00		2016		2021		21,000
0.00% Bonds of 2016-Series 174		0.00		2016		2021		19,000
0.00% Bonds of 2017-Series 175		0.00		2017		2022		18,000
0.00% Bonds of 2017-Series 176		0.00		2017		2022		17,000
Total Five-Year Federal Notes								213,000

(1) Five-Year Federal Notes (Bundesobligationen) are evidenced by book entry, and no certificates are issued. Maturities are approximately five years. No redemption prior to maturity.

4 FEDERAL TREASURY NOTES (1)

Title	Interest Rate		Year of Issue		Maturity		Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)						(EUR in millions)
0.00% Notes of 2016		0.00		2016		2018		13,000
0.00% Notes of 2016 (II)		0.00		2016		2018		14,000
0.00% Notes of 2016 (III)		0.00		2016		2018		13,000
0.00% Notes of 2016 (IV)		0.00		2016		2018		13,000
0.00% Notes of 2017		0.00		2016		2019		13,000
0.00% Notes of 2017 (II)		0.00		2016		2019		13,000
0.00% Notes of 2017 (III)		0.00		2016		2019		13,000
0.00% Notes of 2017 (IV)		0.00		2016		2019		8,000
Total Federal Treasury Notes								100,000

(1) Federal Treasury Notes (Bundesschatzanweisungen) are evidenced by book-entry, and no certificates are issued. Maturities are two years. No redemption prior to maturity.

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5. FEDERAL SAVINGS NOTES (1)

	Interest Rate		Year of Issue	Maturity	Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)				(EUR in millions)
Federal Savings Notes		0.0001% to 4.5%	2011 to 2012	2018 to 2019		289
6. TREASURY DISCOUNT PAPER (2)
	Interest Rate(3)		Year of Issue	Maturity	Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)				(EUR in millions)
Treasury Discount Paper		-0.77 to -0.69	2017	2018		10,000
7. GERMAN GOVERNMENT DAY-BONDS
	Interest Rate		Year of Issue	Maturity	Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)				(EUR in millions)
German Government Day-Bonds		variable, tied to EONIA	2008	unlimited		966
8. BORROWERS’NOTELOANS (4)
	Interest Rate		Year of Issue	Maturity	Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)				(EUR in millions)
Borrowers’ note loans
(Schuldscheindarlehen)		0.12% to 6.75%	1954 to 2014	2018 to 2037		9,091

(1) Federal Savings Notes (Bundesschatzbriefe) are evidenced by book entry and no certificates are issued. Maturities are six or seven years. The terms of the Federal Savings Notes provide for interest rates that increase during the term of the bonds. In addition, the seven-year Federal Savings Notes provide for payment of compounded interest at maturity or upon redemption prior to maturity. No redemption is permitted prior to maturity. Since January 1, 2013 the Federal Republic of Germany stopped offering new Federal savings notes and Federal Treasury financing papers.

(2) Treasury Discount Papers (Unverzinsliche Schatzanweisungen) are issued at a discount and repaid at par value on the maturity date. No interest payments are made during the term of the paper. The papers are auctioned and intended for institutional investors. Maturities range from six months to twelve months. No redemption is permitted prior to maturity.

(3) Reflects annual interest rate paid to the holder by way of the initial issue discount. No redemption is permitted prior to maturity.

(4) Borrowers’ note loans (Schuldscheindarlehen) are an instrument of the German capital market where the lending entity, generally an institutional investor, receives a certificate evidencing its loan to the borrower and the term of such loans. The certificate generally authorizes at least three assignments. No redemption is permitted prior to maturity.

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9. OTHER LIABILITIES

Title	Interest Rate		Year of incurrence		Maturity		Aggregate principal amount outstanding as of December 31, 2017
	(% per annum)						(EUR in millions)
Other debt (1)		0% to 3%		Various		Various		4,475
– Other debt (2)		Various		Various		Various		40

(1) Includes mainly equalization and covering claims of the Deutsche Bundesbank, other banks and insurance companies in connection with the currency reform of 1948.

(2) Includes liabilities of the Federal Government to repay amounts received from the Investitionshilfeabgabe, a special duty levied on income, the proceeds of which were to be used to promote investments.

Source: Bundesrepublik Deutschland Finanzagentur GmbH, Übersicht über den Stand der Schuld der Bundesrepublik Deutschland, published on January 9, 2018 (http://www.deutsche-finanzagentur.de/fileadmin/user_upload/finanzagentur/pdf/schuldenstand_jahresarchiv.pdf).

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II. GUARANTEES BY THE FEDERAL GOVERNMENT (1)

	Aggregate principal amount outstanding as of December 31,
Purpose of Guarantees	2016		2015
	(EUR in millions)
Export finance loans (including rescheduled loans) (2)		128,630		132,778
Untied loans; direct foreign investments by German companies; Loans of the European Investment Bank to non-EU borrowers		44,918		45,075
Loans in connection with EU agricultural policy measures		0		0
Loans to domestic corporations and for projects in areas of agriculture, fishing and housing construction		96,961		106,027
Contributions to international financing institutions		60,067		56,848
Co-financing of bilateral projects of German financial co-operation		17,556		13,285
Successor agencies to Treuhandanstalt		1,009		1,009
Interest compensation guarantees		10,000		8,000
Total guarantees pursuant to the 2010 German Budget Act		359,142		363,023
Guarantee for a loan to Greece according to the German Financial Stability Act		22,400		22,400
Loan guarantees under the Act on Guarantees pertaining to the European Financial Stability Facility		85,932		84,700
Total guarantees		467,474		470,123

(1) Does not include guarantees under the KfW Law with respect to money borrowed, bonds issued and derivative transactions entered into by KfW. For information relating to KfW’s borrowings, see “KfW—Business—Financial Markets—Funding.”

(2) Includes export finance loans extended by KfW IPEX-Bank guaranteed by the Federal Republic through Euler Hermes Aktiengesellschaft (“HERMES”), the official German export credit insurer. For information relating to loans extended by KfW IPEX-Bank benefiting from HERMES coverage, see “KfW—Business—Export and Project Finance (KfW IPEX-Bank)—Business.”

Source: Bundesministerium der Finanzen, Finanzbericht 2018 (https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Oeffentliche_

Finanzen/Wirtschafts_und_Finanzdaten/Finanzberichte/Finanzbericht-2018-anl.pdf?__blob=publicationFile&v=1), Overview 4, page 343.

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III. LIABILITIES TO INTERNATIONAL FINANCIAL ORGANIZATIONS

The Federal Republic is obligated to contribute to the capital subscriptions and, in some cases, to additional financing, according to the requirements of each respective membership. Such contributions were in many cases stated initially in 1944 with one U.S. dollar being an equivalent to 0.888671 grams of gold, and later – with the creation of the Special Drawing Right (“SDR”) – being an equivalent to the SDR at the same value. The SDR was established by an amendment to the Articles of Agreement of the IMF in July 1969. From July 1, 1974 to June 1978, the exchange rate between world currencies and the SDR was determined on the basis of a basket of 18 currencies, including the U.S. dollar, which accounted for approximately one-third of the value of the basket. From July 1978 to December 31, 1980, the exchange rate was determined on the basis of a basket of 15 currencies. From 1981 to 2000, the basket was further reduced to the five key currencies, including the U.S. dollar. The value of the SDR, the possible inclusion of new currencies in the basket, the weight of each of these currencies in the basket, and the financial instruments used in determining the interest rate on the SDR are reviewed every five years. During the last review in November 2015, it was decided that from October 2016 onwards, the Chinese currency renminbi will be a part of the SDR basket. With effect from October 1, 2016, the SDR basket consists of five currencies with the following weights: U.S. dollar (42%), euro (31%), Chinese renminbi (11%), Japanese yen (8%) and pound sterling (8%).

SUBSCRIPTIONS OR COMMITMENTS BY THE FEDERAL REPUBLIC

TO INTERNATIONAL FINANCIAL ORGANIZATIONS

AS OF END OF DECEMBER, 2017

Name of organization	Subscription or commitment by the Federal Republic (1)		Amount paid in
	(USD in millions)
IMF (2)		37,930.8		37,930.8
International Bank for Reconstruction and Development (IBRD) (3)		11,650.2		717.9
International Development Association (IDA) (3)(4)		25,585.8		23,187.0
International Finance Corporation (IFC) (3)(4)		128.9		128.9
European Investment Bank (EIB) (5)		41,315.5		3,685
African Development Bank (AfDB) (3)		3,835.0		245.2
African Development Fund (AfDF) (3)		4,420.2		4,032.3
Asian Development Bank (AsDB) (3)		6,539.7		327.1
Asian Development Fund (AsDF) (3)		1,933.0		1,752.0
Inter-American Development Bank (IDB) (3)		3,368.7		242.3
Inter-American Investment Corporation (IIC) (3)		13.3		13.3
Fund for Special Operations (FSO) (3)		—		—
International Fund for Agricultural Development (IFAD) (3)		522.0		500.0
Caribbean Development Bank (CDB) (3)		106.6		23.5
Special Development Fund of the Caribbean Development Bank (SDF) (3)		110.3		100.1
European Bank for Reconstruction and Development (EBRD) (5)		3,066.0		639.5
Council of Europe Development Bank (CEB) (5)		1,098.3		121.9
Asia Infrastructure Investment Bank (AIIB) (3)		4,484.2		538.1

(1) Subscriptions are in part committed in USD, SDR or EUR. SDR or EUR commitments are converted to USD at year-end exchange rates, except that certain SDR commitments are converted at the fixed conversion rate of SDR 1 = USD 1.4241.

(2) Source: computation provided by the Ministry of Finance based on data provided by the IMF; the subscription (quota) is fully paid in by the Deutsche Bundesbank. The foreign currency part of the quota (25% of the subscription) and the Deutsche Bundesbank’s further contributions to Fund’s financing are part of the foreign currency reserves of the Deutsche Bundesbank. The government does not provide any guarantees or provisions for risks of IMF loans.

(3) Source: computation provided by the Ministry of Finance and the Ministry for Economic Cooperation and Development.

(4) Source: IFC and IDA: World Bank Corporate Secretariat, April 2018.

(5) Source: computation provided by the Ministry of Finance based on euro exchange rate of the European Central Bank at year-end 2017 of EUR 1 per USD 1.1993.

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