EUROPEAN COMMISSION Brussels, 22.6.2021 SWD(2021) 163 final COMMISSION STAFF WORKING DOCUMENT Analysis of the recovery and resilience plan of Germany Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION on the approval of the assessment of the recovery and resilience plan for Germany {COM(2021) 341 final}



Table of contents 1. Executive summary 2. Recovery and Resilience challenges: scene setter 2.1 Macroeconomic outlook and developments 2.2 Challenges related to sustainable growth, resilience, and cohesion 2.3 Challenges related to the green and digital transition 2.3.1 Green dimension 2.3.2 Digital dimension 3. Objectives, structure and governance of the plan 3.1. Overall strategy of the plan 3.2. Implementation aspects of the plan 4. Summary of the assessment of the plan 4.1. Comprehensive and adequately balanced response to the economic and social situation 4.2. Link with country-specific recommendations and the European Semester 4.3. Growth potential, job creation, economic, institutional and social resilience, European Pillar of Social Rights, mitigating the impact of the crisis, and social territorial cohesion and convergence 4.4. The principle of ‘do no significant harm’ 4.5. Green transition 4.6. Digital transition

4.7. Lasting impact of the plan 4.8. Milestones, targets, monitoring and implementation 4.9. Costing 4.10. Controls and audit 4.11. Coherence Annex: Climate tracking and digital tagging table References 1.Executive summary Germany’s economy was hit hard by the COVID-19 pandemic and the repeated lockdowns, but sizable policy support mitigated job losses. The economy contracted by 4.8% in 2020. After a renascent economic recovery in the second half of 2020, soaring new infection numbers in autumn brought new lockdown restrictions as of November 2020, which were gradually tightened and extended in the following months. As a result, gross domestic product shrunk by 1.8% in the first quarter of 2021, but a marked recovery is expected from the second half of 2021, as vaccinations progress and the economy reopens. Substantial government support for the economy, in particular the extensive short-time work scheme (Kurzarbeit), protected the labour market throughout the crisis and limited the losses in employment to 1.1% in 2020, while unemployment increased relatively moderately (to 3.8% in 2020 from 3.1% in 2019). The measures to cushion the consequences of the crisis reversed the budget balance into a sizeable deficit. After years of fiscal surpluses, the measures to support the economy during the pandemic caused a budget deficit of 4.2% of GDP in 2020, which is likely to increase even further in 2021. General government debt had fallen below the Maastricht threshold of 60% of GDP in 2019 after a steady downward path in the years before, but it jumped up to 69.8% in 2020 and is expected to peak at 73.1% in 2021, before declining again in 2022. Despite higher deficits and increasing debt, risks to fiscal sustainability are limited so far, thanks to the sound starting position of public finances. Germany can expect up to EUR 25.6 billion in non-repayable support from the Recovery and Resilience Facility. The recovery and resilience plan amounts to EUR 27.9 billion (0.81% of 2019 GDP) and does not include a request for loans. Excluding value-added tax, it corresponds to a net amount of at least EUR 26.5 billion, slightly above the maximum financial contribution of EUR 25.6 billion (0.74% of 2019 GDP) that Germany can expect from to the Recovery and Resilience Facility Regulation. The plan promotes the Union’s economic, social and territorial cohesion and supports the recovery of Germany’s economy and contributes decidedly to a more green, digital, inclusive, and resilient future. The six priorities of the plan center on the green and digital transitions, but also strengthen social resilience. They are: 1 Climate policy and energy transition, 2 Digitalisation of the economy and infrastructure, 3 Digitalisation of education, 4 Strengthening social inclusion, 5 Strengthening a pandemic-resilient healthcare system, and 6 Modern public administration and reducing barriers to investment. The 40 measures included in the plan cover all the seven European flagship areas, with a particular focus on Recharge and Refuel, Modernise, and, for the hydrogen-related elements, Power Up. The plan has a strong cross-border dimension with three planned Important Projects of Common European Interest – on renewable hydrogen, microelectronics, and cloud. The recovery and resilience plan responds to the most relevant structural challenges Germany faces, as identified in the context of the European Semester. Together with the extensive measures from the national stimulus package of June 2020, the plan gives impetus for a short-term economic recovery and provides a long-term strategic response to the most pressing economic policy challenges. These relate mainly to the need to boost public and private investment, in particular for the green and digital transitions, in sustainable transport, in clean, efficient and integrated energy systems, in the digitalisation of the public administration and health services, in education, and in research and innovation. Further challenges addressed to some extent include the need to reduce disincentives to take up work, including the high tax wedge, in particular for low-wage and second earners, and the long-term sustainability and adequacy of the pension system. The reforms and investments included in the plan address a significant subset of the recent country-specific recommendations addressed to Germany by the Council and are also in line with the most recent Draft Council Recommendation on economic policy in the euro area. The plan refers to the six policy pillars in Article 3 of the Regulation establishing the Recovery and Resilience Facility . Germany’s recovery and resilience plan has a strategic focus on the challenges of the green and digital transitions. Investments and reforms address administrative bottlenecks and foster smart, sustainable and inclusive growth, while also benefitting small and medium-sized enterprises. Social cohesion is promoted through measures to support disadvantaged groups, cap social security contributions, and strengthen education and skills, in particular by supporting the digitalisation of education. Efforts to accelerate planning procedures, to help municipalities manage investment subsidies, and digitalise their schools are expected to help areas with infrastructural challenges, thus contributing to territorial cohesion. Cross-border initiatives in the plan are expected to contribute to cohesion and convergence in the EU. Public administration reforms and investments to strengthen the healthcare system are expected to contribute to increased resilience, as do measures to digitalise and modernise public services and to reduce barriers to investment. Various skills-related measures benefit the next generation. The reforms and investments included in the plan have the potential to contribute to the green transition of Germany’s economy and to the protection of the environment. They are expected to support Germany’s decarbonisation and energy objectives and are thus a step towards achieving climate neutrality by 2050 – or even earlier, considering that the target is expected to be advanced to 2045. Measures in the area of climate action and the energy transition include significant efforts for the development of a well-functioning hydrogen economy, measures to promote climate-friendly mobility, and sizeable investment in energy-efficient building renovation. At least 42.4% of the financial contribution is expected to go to measures supporting climate change objectives. All measures in the German plan have passed the ex-ante assessment of the ‘do no significant harm’ principle. The plan is ambitious in its aim to catalyse the digital transition and address the challenges related to it. Six out of the ten components contain measures to support the digital transition. These include investments in key advanced technologies, but also in the digital transformation of the automotive industry, and in the digitalisation of the healthcare sector, of education, and of the public administration. The digital target of 20% is clearly exceeded with at least 52.6% of the expected financial contribution serving digital objectives. The recovery and resilience plan has the potential to make a lasting impact on Germany’s economy and society by inducing structural changes to its administration, institutions, and policies. The most relevant measures in this respect include the support for the digitalisation of the public administration and health services, the assistance to municipalities in their investment projects, the expected improvement of support outflows for public investment, and the acceleration of planning and approval procedures, which should improve the uptake of the significant public and private funds for investment in infrastructure. All these are expected to accelerate the structural changes related to the green and digital transition, which are present across all parts of the plan. Most importantly, removing investment barriers is one of the priorities of the plan. An adequate monitoring of the plan’s implementation is enabled by clear and comprehensive milestones and targets that track the adoption of key legislation, budgetary execution and delivering changes on the ground, such as the creation of childcare places. The overall strategy and the measures contained in the plan are coherent. Within each component, measures support and reinforce each other and reforms and investments across components are well aligned. For example, the investment and research support for the economy’s digital transformation is complemented by reforms on data infrastructure and investments in digital education and skills, which are closely linked to the digitalisation of the public administration and the health sector. The measures’ objectives are also well embedded in European and national initiatives. Germany has provided cost estimates for all investments included in the plan and put in place strong control systems. Based on the costing information provided, the cost estimates and supporting documents broadly comply with the principles that costs must be justified, reasonable, plausible, commensurate, and in line with the principle of cost-efficiency. The cost breakdowns are generally satisfactory, yet they show varying degrees of detail and depth of calculation. Germany has demonstrated that the measures in the plan will be subject to strong governance and control systems and has given assurances that the measures funded under the German recovery and resilience plan will not receive funding from other existing or planned EU financing.

(1)

Balanced Response (2)

CSRs (3)

Growth, jobs… (4)

DNSH (5)

Green target (6)

Digital target (7)

Lasting impact (8)

M & T (9)

Costing (10)

Control Systems (11)

Coherence A A A A A A A A B A A 2.Recovery and Resilience challenges: scene setter 2.1Macroeconomic outlook and developments The pandemic has led to a sharp decline in economic activity. GDP declined by 4.% in 2020, reflecting the global recession and severe limitations on travel, social, and leisure activities. Over the year, there were large swings in economic activity, declining by 2% in the first quarter and by an unprecedented 9.8% in the second. In the third quarter, GDP rebounded by 8.5%, benefiting from the partial lifting of confinement measures and the normalisation of foreign trade. This resulted in a partial resumption of activity in both industry and services. The fourth quarter of 2020 saw infection numbers soar, which required restrictions to be reintroduced on various services, prompting them to curtail activity. A contraction was nevertheless avoided, with GDP increasing by 0.5% as industry posted robust growth, while consumer spending partially switched from services to goods. The economy is expected to recover in 2022. Economic activity declined again in the first quarter of 2021, by 1.8%. With confinement measures in place in Germany and in neighbouring countries, consumer spending and exports are expected to remain depressed in early 2021. However, as more people get vaccinated and infection rates fall, restrictions are set to ease in subsequent quarters. A number of other factors should also favour a resumption of the economic rebound. Strong industrial sentiment suggests that export growth is set to remain robust. Government support for businesses is expected to avert a wave of insolvencies, and employment growth should resume in 2022. In the 2021 Stability Programme, the unemployment rate in 2022 is projected at 3.5%, down from expected 3.9% in 2021 and 4.0% in 2020, although somewhat higher than in 2019. Accumulated savings should spur a recovery in consumer spending, which will also benefit contact-based service sectors. In the meantime, investment is expected to start picking up. Real GDP is forecast to rebound by 3.0% in 2021 and continue to grow by 2.6% in 2022 returning to its pre-crisis level in the course of the year. Inflation is set to increase moderately. HICP inflation fell from 1.4% in 2019 to 0.4% in 2020 (from 1.4% to 0.5% for the national CPI). CPI inflation is expected to rise to 1.5% in 2021 and 2022, according to the Stability Programme. The economy still operates below capacity; however energy prices are expected to drive inflation up, also in light of adjustments in CO2 pricing. So are the reinstatement of the regular VAT rates and the high housing demand in metropolitan areas. The labour market has been cushioned by the government-backed short-time work scheme (Kurzarbeit) but faces structural challenges. The COVID-19 crisis led to a sizeable reduction of hours worked, although most of this was absorbed by expanding the short-time work scheme, used by almost 6 million workers (14% of the labour force in April and May 2020). Support measures have been extended to non-standard workers (those not covered by full-time open-ended contracts) such as temporary agency workers, seasonal workers and apprentices, who tend to be more exposed to labour market shocks. Employment loss was limited to 1.1%. Participation in training and adult learning was incentivised and additional financial resources have been committed to increase the number of apprenticeships. Structural transformation is expected to keep unemployment at a somewhat higher level than in the past, requiring support measures for training and reallocation of resources. Table 1. Comparison of macroeconomic developments and forecast 2019 2020 2021 2022 2023 2024 2025 COM COM RRP COM RRP COM RRP RRP RRP RRP Real GDP (% change) 0.6 -4.9 -4.9 3.4 3.0 4.1 2.6 1.2 1.2 1.2 Employment (% change) 0.9 -1.1 -1.1 -0.2 0.0 0.9 0.6 -¼ -¼ -¼ Unemployment rate (%) 3.1 3.8 4.0 4.1 3.9 3.4 3.5 3¾ 3¾ 3¾ HICP inflation (% change) 1.4 0.4 n.a. 2.4 n.a. 1.4 n.a. n.a. n.a. n.a. General government balance (% of GDP) 1.5 -4.2 -4.2 -7.5 -9.0 -2.5 -3.0 -1½ -½ 0.0 Gross debt ratio (% of GDP) 59.7 69.8 69.8 73.1 74½ 72.2 74.0 73¼ 72.0 69¼ Source: Commission Spring Forecast 2021 (COM), recovery and resilience plan (RRP)Note: end April the national statistical institute revised the GDP decline for 2020 from 4.9% (that was also relayed in the Spring Forecast) to 4.8%. The COVID-19 pandemic is likely to increase social vulnerability. Overall, Germany performs well in the Social Scoreboard, which supports the European Pillar of Social Rights (see also Box 3). There have been improvements in living conditions, poverty, and labour market conditions in recent years. The share of people at risk of poverty or social exclusion declined from its peak of 20.6% in 2014 to 18.7% in 2018 and fell further to 17.4% in 2019. In 2020, the country also took measures to alleviate the social consequences of the crisis beyond the labour market. It made it easier to access minimum income support and supported low-income families through easier access to child allowances. In addition, tenants facing a loss of income were temporarily protected against eviction. Nonetheless, people in vulnerable situations, e.g. without the possibility to work from home or without liquid assets, were exposed to hardship, and the increase in vulnerability may merit monitoring and possibly further action. The government swiftly took far-reaching measures in response to the COVID-19 pandemic, while continuing to maintain a sustainable public debt ratio. The government adopted measures of historic proportions to fight the COVID-19 pandemic and stabilise the economy, estimated to 3½% of GDP in 2020 and 6¼% in 2021. They include financial support for small and medium-sized enterprises (SMEs), easier access to the short-time working scheme, additional health spending, and equity investment in rail and air transport. In addition, some 25% of GDP (around EUR 800 billion) was provided in the form of public guarantees for loans. The budget deficit was reported to be 4.2% of GDP in 2020, and the Stability Programme (BMF, 2021) anticipates a return to positive territory by 2025 as the measures are phased out. For 2021, the Stability Programme expects a deficit of 9%. After an increase in the debt-to-GDP ratio from just below 60% in 2019 to around 70% due to the combined effect of shrinking GDP and support measures in 2020, debt is expected to rise further to 74½% in 2021 before starting to fall to reach 69¼% in 2025. In comparison, DG ECFIN’s Debt Sustainability Monitor of early 2021 (European Commission, 2021a) projects debt to be 70.1% of GDP in 2021 and to decline to 58.7% of GDP in 2030. The current account surplus remains high. Following a gradual decline since 2015, it eased further by 0.5 percentage points to 7% of GDP in 2020. The trade surplus narrowed from 6.3% to 5.7% of GDP in 2020 as exports contracted more than imports. However, the service balance turned from -0.6% to neutral due to travel restrictions. The income balance deteriorated slightly. On the domestic side, the sharp fall in government savings was largely counterbalanced by a surge in private savings, reflecting private consumption constrained by restrictions and suspended contact-intensive services, as well as a strong fiscal support for household incomes. While there was a substantial acceleration of the upward trend in public investment from 3.7% in 2019 to 4.2% in 2020, private investment suffered considerably in the context of the COVID-19 crisis. Overall, gross fixed capital formation declined by 3.1% in 2020. Investment is expected to increase as the country recovers, in part driven by increasing public investment. With consumption possibilities returning after the lifting of containment measures, savings are forecast to return broadly to their pre-crisis level. Compared with the Commission 2021 Spring Forecast, the macroeconomic scenario underpinning the recovery and resilience plan is based on slightly more cautious macroeconomic assumptions. The macroeconomic scenario underpinning the Stability Programme is realistic in 2021 and cautious in 2022. It projects GDP growth of 3.0% in 2021 and 2.6% in 2022, compared to the Commission 2021 Spring Forecast projections of 3.4% and 4.1%, respectively. The German Stability Programme anticipates a quicker recovery in private consumption, but less vigorous export growth in 2021 (BMF, 2021). For 2022, the Commission forecast is driven by a delayed but strong rebound in consumption. Projections in the Stability Programme assume a return to the pre-crisis level of output in the course of 2022, while employment and private consumption are expected to take somewhat longer to recover. Real GDP in 2022 is expected to exceed its 2019 level by 2.3% according to the Commission forecast and by 0.5% according to the Stability Programme. The Commission spring 2021 forecast projects higher HICP inflation of 2.4% in 2021, falling to 1.4% in 2022. 2.2Challenges related to sustainable growth, resilience, and cohesion While the German economy performed strongly in recent years and has cushioned the country relatively well from the economic fallout of the COVID-19 crisis, a number of challenges and structural obstacles have manifested themselves. Germany experienced a decade of economic upswing driven by strong manufacturing and export growth and very favourable developments on the labour market. However, even before the crisis, structural challenges and external headwinds became apparent, some of which have been exacerbated by shifts accelerated by the pandemic. Productivity growth is expected to remain low, and Germany is at risk of falling behind in its innovation capacity. Total factor productivity growth is forecast to be around 0.8% over the next 5 years, with potential growth of just 1.2% by 2025, according to the 2021 Spring Forecast. Labour productivity growth was lagging behind compared to the USA, especially in information and communication services, professional, scientific and technical activities, and in administrative and support services, in both the decade before (1997-2007) and following the Global Financial Crisis (2007-2017). While Germany remains innovative, it risks falling behind in some cutting-edge technologies, and there is room for improving technology diffusion (see Section 3.2.2). The National Productivity Board also sees the need to invest more in digital infrastructure, teach key digital skills, improve the transfer of knowledge and technology, and use procurement to stimulate innovation (GCEE, 2020). Lack of qualified personnel is a major factor hampering investment in innovation and digitalisation, in particular for SMEs and limiting investments by high-growth businesses (Benedetti-Fasil et al., 2021). SMEs remain slow adopters of digital technologies, also compared to other EU Member States. Removing barriers to firm dynamics and making it easier to reallocate resources to more productive businesses could help close the productivity gap in business services with the USA (European Commission, 2021b). Although research and development (R&D) spending is high and on an upward trajectory, private R&D investment is concentrated in large firms and has stagnated in SMEs over the past decade. Total R&D spending has increased in recent years, from 2.5% of GDP in 2007 to 3.2% in 2019 (third highest in the EU) and is expected to increase further to reach the national target of 3.5% by 2025, as outlined in Germany’s high-tech strategy. At the same time, private investment in R&D is increasingly concentrated in large firms, while SMEs continue to invest relatively little. Therefore, measures such as the central innovation programme for SMEs (Zentrales Innovationsprogramm Mittelstand), which gives substantial support to companies to increase their innovation capacity and competitiveness, can strengthen innovation activities and support economic recovery. With the exception of R&D, investment intensities for all other intangible assets in Germany were lagging behind the EU-15 average between 2014-2017 (European Commission, 2021b). Barriers to private and public investment and lack of competition, especially in the service sector, are obstacles to growth. Public investment, especially at municipal level, is hampered by several bottlenecks, including personnel and financing constraints and high regulatory burden, which also affect private investment. These barriers also hamper decarbonisation and the deployment of clean, efficient and integrated energy systems. The digital transformation of the public administration is lagging behind, and reforms to increase transparency and reduce red tape have had limited effect. For start-ups and young businesses, financing is constrained due to underdeveloped venture capital markets, especially for growth and later-stage financing. On liberalising regulated professions, a country-specific recommendation has been issued each year between 2011 and 2019, but hardly any measurable progress has been made.

While the labour market was fairly well shielded during the COVID-19 crisis, taxes on labour remain high, and demographic change and housing affordability continue to pose challenges. Job shedding was limited in 2020, with an employment decline of 1.1%, and unemployment increase only to 3.8%. Taxes on labour remain high, while the potential to raise tax revenue from sources more supportive of inclusive and sustainable growth, such as environmental or wealth-related taxes, remains underused. In the medium term, the retirement of baby boomers (born between 1946 and 1964) will substantially increase age-related spending, while comprehensive measures to improve the pension system are still pending. There is still considerable potential for reducing disincentives that keep second earners from increasing hours worked. Demographic change is affecting rural areas and urban centres very differently – areas with strong population growth face a shortage of affordable housing, while areas with shrinking populations struggle to maintain public services and infrastructure, requiring further action to address regional and territorial disparities and promote cohesion. Although the health system provides high-quality care, it suffers from shortages of skilled personnel and low levels of digitalisation, which hampers coordination in the health system and overall efficiency. The health system provides a high level of service and good access to care, which has also helped the country respond to the COVID-19 pandemic. At the same time, staff shortages are a challenge: in autumn 2019, 76% of hospitals already reported difficulties in filling vacancies for physicians and 78.8% of hospitals had longer-term vacancies for nurses; the crisis has put even more pressure on these professions. Even though eHealth infrastructure is being deployed more rapidly, the use of online health and care services, e-prescriptions and medical data exchange remain well below the EU average. More digitalised health services could reduce the gap between urban and rural areas, improve the integration of care, facilitate coordination between various healthcare providers as well as with public health authorities and improve pandemic preparedness, surveillance and management. The COVID-19 pandemic has aggravated challenges in ensuring equality of opportunity, while structural changes reveal a pronounced need for upskilling. The crisis exacerbated the situation of those who were already disadvantaged, including households with multiple children. The sudden shift to distance learning highlighted the challenges faced by socio-economically disadvantaged pupils, such as lack of access to digital solutions as well as learning space and support at home. The difficulties of adaptation highlighted the importance of further action to digitally transform the education and training systems. Persistent inequalities in basic skills, linked to socio-economic and migrant backgrounds, need to be addressed, also to alleviate existing labour shortages. Further expanding high-quality, full-time early childhood education and care and all-day schools would contribute both to improved student outcomes and improved labour market participation of women. In addition, the most likely uneven recovery across sectors and locations combined with the accelerated digital transition and structural transformation might cause post-pandemic shifts on the labour market, which might ultimately result in net job losses. Higher expenditure on education and skills and more future-oriented reskilling and upskilling would benefit workers directly affected by structural change, be conducive to equal opportunities, strengthen social cohesion and make the future labour force more productive. 2.3 Challenges related to the green and digital transition Germany needs to step up policy action to achieve carbon neutrality in time and to reap the benefits of the digital transition. An overarching objective of the Recovery and Resilience Facility is to support the twin (green and digital) transition, an aspect where Germany has considerable room for improvement. Relying on the Commission’s assessment of Germany’s 2020 National Energy and Climate Plan, the Environmental Implementation Review of 2019 and the 2020 Digital Economy and Society Index (DESI; European Commission, 2020d) as well as recent evidence, this section reviews Germany's progress in achieving targets related to the green and digital transitions. 2.3.1Green dimension All recovery and resilience plans must include a minimum spending share of 37% related to the green dimension. The measures in the plan should contribute to achieving the EU 2050 climate neutrality objective, and the 2030 energy and climate targets entailed in the National Energy and Climate Plans. They should also contribute to meeting environmental targets for waste, water, pollution control, sustainable mobility, biodiversity protection and restoration, marine and water resources, and support the transition to sustainable food systems as well as to a circular economy as appropriate, while ensuring that nobody is left behind. Agriculture, forestry and rural areas are key for sustainable food systems and the provision of eco-system services and their needs and potential will need to be adequately taken into account in the green transition. Germany is stepping up climate protection-related policies and public investment beyond the recovery and resilience plan. The June 2020 stimulus programme allocated EUR 26.2 billion to the Energy and Climate Fund, a special reserve based on revenues from the auctioning of EU Emissions Trading System (EU ETS) allowances for implementing the government’s energy and climate policies. In 2020, the Federal Government issued ‘green’ securities for the first time, reflecting efforts to screen the environmental aspects of budgeting and strengthening the country’s position in sustainable finance. Greenhouse gas emissions The latest policies and measures set out in Germany’s climate action plan and its climate law help close the gap to its binding 2030 target, but it remains to be seen whether this will suffice. Germany’s target for non-EU-ETS greenhouse gas (GHG) emissions is a 38% reduction compared to 2005 (to be reviewed in light of the ‘fit for 55’ action). Germany projects that it will almost close the gap to achieve the 2030 Effort Sharing Regulation target, from 14% gap (based on existing measures) to 3%. To reach the target, it started using carbon pricing in transport and heating, but it is expected that the planned carbon price schedule will have to be increased and be complemented with other measures, including support measures and further incentives to deliver the necessary emission reductions (UBA, 2020a). The exit from coal is planned to be completed by 2038 at the latest, which comes later than similar measures in other countries (Agora Energiewende and Sandbag, 2020). The compatibility of this date with the objective of climate neutrality by 2050 (and 2045 to which the target is expected to be advanced) will also depend on the development of CO2 prices (which may make coal-fired power generation commercially unviable much earlier than 2038). The socio-economic consequences in coal regions can be mitigated with measures supported by the Just Transition Fund. Germany has also set a quantitative target for further emission reductions in the building sector and has announced several measures on the chemical sector's product use and fluorinated gases (‘F-gases’). After the date of submission of its plan and following a constitutional court decision (BVerfG, 2021) that found the current climate law in breach of the principle of intertemporal freedom, Germany’s government proposed a thorough strengthening the climate law, increasing overall GHG reduction by 2030 from currently 55% to 65% and intending to achieve climate neutrality already by 2045. Sustainable mobility Higher and faster investment in sustainable transport infrastructure is needed to make progress on emission reductions. Despite some mitigation measures, and against the general downward trend in GHG emissions, transport emissions in 2019 were higher than in 1990. The same is true for final energy consumption in the transport sector. Germany’s weak track record in reducing transport emissions, also responsible for its continued failure to meet air quality targets (European Commission, 2019a), calls for greater attention and the possibility of further reviewing price signals. This includes areas such as road charging, placing a stronger emphasis on sustainable multimodal urban mobility while also considering the needs of rural areas, and extending public transport for both passengers and freight. Incentives to boost competition and digitalisation in the rail sector regarding both passenger and freight services should also be reviewed. In the longer run, efforts could also target not only cars, vans, and buses, but also support clean heavy-duty vehicles and sustainable aviation fuels, and also focus on disincentives created by the current taxation system. Renewable share Current policies are not ambitious enough to increase the share of renewables to 30% of gross final energy consumption by 2030. Although a set of sectoral targets and policies have been defined, they seem jointly inadequate for reaching targets on renewables, especially on electricity, heating, and cooling: -In the electricity sector, to reach the aim of covering 65% of electricity consumption from renewable energy sources by 2030, further efforts are needed. While the 40.8% country’s share of renewables in electricity consumption is high relative to 34.2% in the EU-28 (2019), progress in deploying renewables has been slow in recent years, with the current trend pointing to a 55% share of renewables by 2030 (Agora Energiewende, Wattsight, 2020). Reaching the 65% target would require efforts in installing further renewable capacities, also in light of the envisaged increase in overall electricity demand due to the expected increased electrification in transport and heating on the one hand and the production of hydrogen from renewable electricity on the other hand. It remains to be seen whether and to what extent recent legislative changes will be sufficient to tackle problems of permitting and repowering onshore wind projects. Grid expansion, which is needed to connect renewable generation sites with regions with high electricity demand, has experienced some delays. Progress is also crucial for the uptake of renewable hydrogen, where Germany plays a key role in the development of planned Important Projects of Common European Interest (IPCEI). Furthermore, the regulatory pricing of electricity is increasingly perceived as hampering decarbonisation. -For heating and cooling, the targeted doubling of the share of renewables from 14.6% in 2019 to 27% by 2030 will require further measures. The key policies and measures in the heating and cooling sector could involve financial incentives: setting a CO2 price, providing support to replace oil boilers, several (financial and advisory) support measures for households and bigger buildings, and support for renewable heat production plants to build new heat networks and transform existing ones. To reach the target, further efforts may be needed, including increasing the number of buildings with heat pumps. -For transport, planned measures appear sufficient to reach the 27% targeted share of renewable energy in 2030. First-generation biofuels are set to rise to 5.3% of energy consumption in transport and advanced biofuels to 3.5% in 2030. On top of the key policies and measures set out in the plan, Germany is putting in place financial incentives (purchase support, tax incentives) to boost the market uptake of electric, gas, plug-in hybrid, and fuel cell vehicles. Overall, these policies and measures are considered sufficient to achieve Germany’s target for renewables in the transport sector. Energy efficiency Further measures are needed to deliver on the German national contribution to the already agreed EU energy efficiency targets for 2030. Germany targets a 30% reduction in national primary energy consumption by 2030, compared to 2008. To achieve this, primary energy consumption must fall by an average of 1.5% per year from 2020 onwards. This would represent considerable progress, as prior to 2020, primary energy consumption decreased only by an annual average of 1.1%. To meet the target, in December 2019, the government launched the ‘Energy Efficiency Strategy 2050’, which includes measures to boost energy efficiency investment across sectors. On buildings, Germany submitted a comprehensive long-term renovation strategy in July 2020. In addition, Germany also developed an ambitious ‘Renovate’ component in its national recovery and resilience plan, focussed on climate-friendly timber construction, increased energy efficiency of buildings and a higher share of renewable energy for heating and cooling in buildings, which can contribute to accelerating energy efficient buildings renovation. It is estimated that following an average annual renovation rate of 2.6% at the cost optimal level, the primary energy saving potential in Germany, by 2050, is 352 TWh. Over the period of 2021-2050 this is expected to generate more than 12.8 million of full time equivalent jobs (Zangheri et al., 2020). Finally, carbon pricing policies can create additional incentives for energy efficiency measures. Circular economy and biodiversity

Biodiversity preservation, waste reduction and the circular economy should also be supported through both regulatory measures and financial incentives. Germany’s waste generation at municipal level has remained stable over the last 5 years and remains above the EU average (European Commission, 2019a). In addition, with a secondary material use rate of 16.6%, circularity only meets a small share of the demand for materials at present. Biodiversity loss could be better prevented by a better integration of biodiversity objectives in other policies and increased funding. Despite local successes, 90% of grassland habitats have a less than favourable conservation status which gives cause for concern. Less than 10% of surface water bodies show good status. Out of 35 features of 11 descriptors, only 2 partly and 2 fully reached the status of good environmental status for marine waters by 2020.



Table 2. Overview of Germany’s climate objectives, targets and contributions National targets and contributions Latest available data 2020 2030 Assessment of 2030 ambition level Binding target for greenhouse gas emissions compared to 2005 under the Effort Sharing Regulation (%) -8 -14 -38 As in ESR National target/contribution for renewable energy: share of energy from renewable sources in gross final consumption of energy (%) 17.4 (2019) 18% 30 Adequate (30% is the result of RES formula) National contribution for energy efficiency: Primary energy consumption (Mtoe) 292.1 (2019) 276.6 216 Sufficient Final energy consumption (Mtoe) 215.5 (2019) 194.3 185 Modest Level of electricity interconnectivity (%) 11.4% 11.4% Not provided N/A Note: Reflecting Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action. Source: Assessment of the final national energy and climate plan of Germany, SWD (2020) 904; Eurostat where latest available data is indicated for specific years. 2.3.2Digital dimension The recovery and resilience plan should include a minimum level of 20% of spending related to the digital dimension. The measures in the plan should, among others, contribute to the digital transformation of the economic and social sector (including public administration, public services, and the justice and health systems). The objective of the measures in the plan should be to not only improve competitiveness, but also resilience, agility, and security of companies and public actors, all while ensuring inclusiveness and preventing the widening of the digital divide across regions and territories. They should also contribute to achieving the Sustainable Development Goals (SDGs), the objectives of which have been integrated into the European Semester since 2020, reinforcing a strong commitment towards sustainability in the coordination of economic and employment policies in the EU. Compared to the overall strength of the German economy, digitalisation is a relative weakness. Germany ranked 12th in the Digital Economy and Society Index (DESI) (European Commission, 2020d). While it performs reasonably well in most DESI dimensions and has made progress in addressing some key challenges, there is still room for improvement, in particular in digital public services and the integration of digital technology by companies. The government made significant efforts to present digital transformation strategies and allocate funding to several aspects of the digital transformation. While the regularly updated strategy ‘Shaping Digitalisation’ and the recently established Dashboard provide the direction, a national digital transformation strategy is missing, and coordination in the government is sometimes ad hoc. Germany leads in 5G readiness in Europe and has made significant progress in fast broadband coverage, but still faces regional and territorial gaps. Germany is the first EU Member State having fully assigned the spectrum of the identified pioneer bands to 5G purposes. There is also progress in other areas: as of mid-2020, 55.9% of households had access to broadband speeds of at least 1 Gbps, an increase of more than 21 percentage points over a year. However, an urban-rural digital divide still persists, and very high-speed fibre coverage (13.8% as of mid-2020) is increasing only slowly. To tackle the digital divide between regions, the government launched a federal funding programme for broadband expansion. The objective is to provide nationwide full gigabit network coverage by 2025, which can only be realised if bottlenecks in planning capacities and shortages of skilled workers are tackled. There is considerable potential for improving the digital skills of the population, especially when it comes to ICT specialists and those in education. Although the proportion of ICT specialists in the total workforce at 4.9% is higher than the EU average of 4.3%, numbers are insufficient to meet demand, and the shortage of ICT professionals has worsened during the pandemic. Germany also shows deficiencies in the use of digital technologies in schools (only 9% of primary and 48% of secondary schools are highly equipped). On the positive side, there are improvements and currently almost three out of four (72%) schools in Germany have access to high-speed broadband services capable of delivering 100 Mbps or more, while gigabit speeds are available for more than a third of schools (BMVI, 2020, p. 8). Digital skills of teachers are less developed, with only 20% having used it daily in class before COVID-19. Teachers lack digital devices and do not receive sufficient initial training and continued development (European Commission, 2020c). This amplified the disruptive impact of the pandemic on educational progress, in particular for disadvantaged students. Several recent measures focus on digital education, but in some cases (Digitalpakt Schule) take-up seems to have been limited by complexity and administrative burden. Although Germany maintains high basic digital and software skill levels across the population, further improving digital skills would allow it to increase the uptake and productivity of teleworking in the long term. Whilst a significant fraction of employees is in occupations that can be carried out from home (38.6% in Germany, 37% in the EU), just 9.6% (11% in the EU) had ever worked from home before the COVID-19 outbreak (Sostero et al., 2020; Milasi et al., 2020). Germany aims to strengthen its digital innovation potential and promote advanced technologies by investing in knowledge-based capital. The adoption of newer and more advanced ICTs is crucial for data-driven innovation and higher productivity. However, German businesses lag behind in the adoption of advanced ICT tools, including cloud computing (20% versus 26% in the EU, Eurostat, Community survey on ICT usage and eCommerce in Enterprises). Although the number of firms that use big data analysis is increasing slightly, there is still a need to boost the collection, sharing and use of data by businesses. With the GAIA-X project, the government aims to establish key building blocks for a European data infrastructure. Other measures include the commitment to create a national supercomputing infrastructure via the European Joint Undertaking ‘EuroHPC’, the important role Germany plays in helping develop proposals for planned IPCEIs on microprocessors and semiconductor technologies as well as on Next Generation Cloud Infrastructure and Services, and the adoption of strategies and related measures on artificial intelligence (AI) and blockchain. Although several initiatives boost digital investments in SMEs, the pace of digital transformation may still fall short. The COVID-19 crisis has increased the need for digital competences among SMEs where the lack of qualified personnel with the relevant skills is one of the main barriers for their digitalisation process (Leifels, 2021). SMEs face significant hurdles in digitalisation, with 34% of them not having digital competences. It is therefore crucial that Germany further accelerates, focuses and strengthens its initiatives to support SMEs’ digital transformation. The largest funding programme, Digital Jetzt, provides around EUR 50 million annually until the end of 2023, which might prove too limited to accelerate the digital transformation of over 2 million eligible firms (OECD, 2020). The latest ‘SMB Digital Maturity Study 2020’ indicates that German SMEs are using the COVID-19 crisis to invest in digitalisation. However, concerns about the digital gap between large firms and SMEs persist. The public sector is moving towards more digital services and open data, but implementation is slow. There has been relatively slow progress on online interactions between public authorities and the general public. Germany is underperforming other EU countries in terms of penetration of e-government services and digitisation of government services (European Commission, 2020b). Digital public services for businesses are at the same time above EU average. For individuals, one of the main obstacles hampering the use of public services is the low usability of Germany’s eID solution (national identity card). Germany has only recently announced steps to move to a mobile solution and could achieve this by building on similar efforts at European level. Overall, the reasons for slow progress in the digitisation of public services include the limited supply, the lack of user- and mobile-friendliness, and mistrust (OECD, 2020). In addition to the adoption of the Online Access Act (Onlinezugangsgesetz) in August 2017, two programmes have been launched to coordinate the Federal and the Länder level. By April 2021, 315 of the 575 online services planned by the end of 2022 had been put online. However, the recently published national dashboard for digital government paints too rosy a picture, as it counts a public service as ‘online’ if it is offered by at least one municipality. As many of the services have to be implemented by all 16 Länder, the main challenge is to organise an effective legal and organisational framework and strengthen the federal IT coordination body. Cloud adoption remains low in the public sector and could be improved by making use of the European Cloud initiative. There is further potential for digitalisation to accelerate the green and carbon-neutral transition. Germany should continue its efforts to increase energy efficiency in networks and use more energy-efficient devices, in line with the ‘energy efficiency first’ principle reflected also in Germany’s national energy and climate plan. In addition, the development and use of energy-efficient IT or the reuse of heat from IT (e.g. data centres) in homes and industry could be improved. At the same time, ICT-enabled solutions can reduce energy use considerably – this includes boosting energy efficiency and environment-friendly power generation and storage. The Digital Policy Agenda for the Environment (BMU, 2020) addresses the green digital transition through 70 measures. The momentum from COVID-19 could be used to boost energy transition, the circular economy and sustainable mobility (UBA, 2020b). Digitalisation can also support the further integration of renewables in electricity production. While Germany’s aim for a high share of renewables (see Section 2.3.1) is welcome, the deployment of variable renewable electricity requires an increasingly integrated energy system, more precise market signals, and enhanced flexibility and demand response. In addition to investments in additional electricity networks, the country can improve the situation by deploying, among others, smart grid solutions – combining investments in electric car charging infrastructure and in energy-efficient buildings with a digital communication layer that allows data access and data sharing. Figure 1. DESI 2020 - relative performance of Germany by dimension

Note: EU aggregate corresponds to EU28, based on 2020 DESI report - Digital Economy and Society Index 2020 (European Commission, 2020d).

Box 1: Progress towards the Sustainable Development Goals (SDGs) The objectives of the Sustainable Development Goals are integrated in the European Semester since the 2020 cycle. This provides a strong commitment towards sustainability in coordination of economic and employment policies in the EU. In that respect, this section outlines Germany’s performance with respect to SDGs with particular relevance for the four dimensions underpinning the 2021 Annual Sustainable Growth Strategy and of relevance to the recovery and resilience plans (green transition, fairness, digital transition and productivity, and macroeconomic stability), indicating possible areas where investments and reforms in line with the objectives of the Facility could further accelerate the progress on the SDGs. Figure : SDGs and key dimensions of the recovery and resilience plan Green transition Germany has the capacity to be at the forefront of climate and environmental protection. However, despite recent initiatives, meeting its climate and environmental targets requires additional efforts, and its record in green SDGs is somewhat mixed (see also Section 2.3.1). Final energy consumption remains high and is declining slowly; energy import dependency is high. Even though improvements have been made, the greenhouse gas emission intensity of energy consumption remains significantly above the EU-27 average, suggesting improvement potential on SDG 7 ‘Affordable and clean energy’ and SDG 13 ‘Climate action’. Persistently high ammonia and nitrate levels together with a lower-than-average share of organic farming (7.8% in Germany, 8.5% in the EU-27 in 2019) suggest the need for further greening of agriculture and enabling farmers and forester to embark on this transition. Given that the country is already the second largest global supplier of environmental technology, it has the potential to become a lead market and lead supplier (UBA, 2019). Fairness There has been considerable progress in most fairness-related SDGs, in particular on poverty (SDG 1 ‘No poverty’), well-being (SDG 3 ‘Good health and well-being’) and decent work (SDG 8 ‘Decent work and economic growth’). The employment rate of 80.6% (age group 20-64) in 2019 was one of the highest in the EU. While 20.6% of the population was at risk of poverty or social exclusion in 2014, this fell to 18.7% in 2018 and even further to 17.4% in 2019. There were clear improvements in avoidable mortality, work and traffic accidents, and exposure to particulate matter. At the same time, the gender pay gap remains high, even though it has been declining; it was 19.2% in Germany vs 14.1% in the EU-27 in 2019. Challenges persist on SDG 4 ‘Quality education’, where post-secondary educational attainment and participation in adult learning remain below the EU average and the share of early leavers from education and training even increased from 9.5% in 2014 to 10.3% in 2019, while it fell from 11.1% to 10.2% in the EU-27. Foreign born are about 2.5 times more likely to drop out compared to native born. On SDG 10 ‘Reduced inequalities’, there remain persistent and relatively high gaps between German nationals and non-EU citizens. Moreover, even if poverty statistics suggest improvements in recent years, the COVID-19 crisis is expected to have increased vulnerability. School closures and the switch to digital learning are also expected to have greatly affected vulnerable students, with only limited cushion provided. Digital transition and productivity Germany has high R&D spending that is on an upward trajectory, a relatively high and increasing share of the population working in science and technology as well as in R&D, and a high number of patent applications. These factors underpin good performance on SDG 9 ‘Industry, innovation and infrastructure’. At the same time, investments have been lagging – accelerated investments in digital infrastructure would support the economic recovery and help reduce Germany’s gap with other countries in the coverage of very high-capacity networks. While basic digital and software skills are widespread, specific and advanced digital skills are weaker, with clear shortages in the ICT specialist workforce. Macroeconomic stability The German economy has performed very well in recent years, reflected in good outcomes for SDG 8 ‘Decent work and economic growth’. It can rely on strong institutions, reflected in its high score for SDG 16 ‘Peace, Justice and strong institutions’. However, it faces structural challenges, and the booming economy coincided with a persistent current account surplus, reflecting subdued investment compared to savings. While Germany performed very well on employment, certain disadvantaged groups (including people with a migrant background) could be better integrated in the labour market. The proportion of women working part-time remains among the highest in Europe, driven partly by disincentives that hold them back from working more hours. 3.Objectives, structure and governance of the plan 3.1.Overall strategy of the plan The German recovery and resilience plan is a forceful response to the economic repercussions from the COVID-19 pandemic and consists mainly of future-oriented measures, with a strong focus on the green transition and digital transformation. It is composed of 10 components grouped in six thematic focus areas: 1 Climate action and energy transition, 2 Digitalisation of the economy and infrastructure, 3 Digitalisation of education, 4 Strengthening social inclusion, 5 strengthening a pandemic-resilient health system, 6 Modern public administration and reducing barriers to investment. The plan’s first focus area, Climate action and energy transition, is devoted to the green transition. With a total estimated cost of approximately EUR 11.3 billon, it represents about 40% of the gross costs of the recovery and resilience plan and implements climate-related policy measures in areas such as energy transition and adaptation to climate change (see also Section 2.3.1 for related policy challenges). The plan envisages a broad range of measures that are grouped under three components: ·Component 1.1 Decarbonisation using renewable hydrogen in particular focuses on supporting the development of hydrogen as a fuel (research, production) to mitigate climate change, notably with Hydrogen projects within the framework of planned Important Projects of Common European Interest (IPCEIs – 1.1.1). ·Component 1.2 Climate-friendly mobility focuses on the green transition in the transport sector. The largest measures under this component are the support for the replacement of the private vehicle fleet with zero- or low-emission vehicles (1.2.3) and for the construction of charging infrastructure (1.2.1), and the support for purchases of buses with alternative propulsion (1.2.5). These schemes are meant to lower the private acquisition and operating costs of electric vehicles and speed up the transition to low-emission mobility. ·Component 1.3 Climate-friendly renovation and construction is devoted to energy efficiency renovation of buildings. With an associated cost of EUR 2.5 billion, Building renovation: federal funding for energy-efficient buildings (1.3.3) represents a broad energy-efficient building renovation programme which is designed to deliver average primary energy efficiency savings of at least 30%. It is complemented by Municipal living labs for the energy transition (1.3.2), which will explore the use of new solutions for efficient and sustainable energy supply in urban neighbourhoods through pilot projects. The second focus area covers the Digitalisation of the economy and infrastructure and consists of two components, which together comprise around 21% of the plan’s estimated gross costs. ·Component 2.1 Data as the raw material of the future contains two planned IPCEIs, on Microelectronics and communication technologies (2.1.2), as well as on Next Generation Cloud Infrastructure and Services (2.1.3). The component also contains a measure to implement parts of Germany’s data strategy, which encompasses a large number of subprojects, such as bolstering Germany’s high-performance-computing capacity, increasing data skills and fostering the sharing and use of data by scientists, as well as by the federal administration services. ·Component 2.2 Digitalisation of the economy includes measures to support the digital transformation in the automotive sector, to develop continuing education and training networks, to strengthen the research and innovation on digital technologies through support to projects run by the centre for digitalisation and technology research of the Bundeswehr, as well as to contribute to the acceleration the digitalisation of the rail sector (as part of a plan already launched at national level). The third focus area is centred on the Digitalisation of education and includes expenditure on digital support for teachers, learning material and digital skills across the education and training sector, including in the armed forces. The focus area consists of a single component, which amounts to around 5.1% of the overall estimated gross cost of the plan. ·Component 3.1 Digitalisation of education includes four measures that have the potential to reach large parts of the education sector. It provides support to equip all teachers across Germany with digital devices for end users (3.1.1) and, within the largest measure of the component, EUR 620 million are provided to set up a single digital platform that will give access to education materials for all levels of institutional and autonomous teaching and learning (3.1.2). Scientific content is developed for Educational centres of excellence (3.1.3), supporting teachers with their digital skills and with digital learning content. The digital readiness of the education sites of the armed forces also gets support (3.1.4). The fourth focus area covers Strengthening social inclusion, with expenditure in early childhood education and care, reducing learning gaps in schooling and in apprenticeships, as well as a labour tax related reform. The focus area consists of a single component that amounts to around 5% of the plan’s estimated gross cost, while also including measures for which no RRF funding has been requested. ·Component 4.1 Strengthening social inclusion includes two measures with considerable impact: Apprenticeship support (4.1.3) provides vital support for apprenticeship contracts during the pandemic-related shock, and the Investment programme ‘Childcare-financing 2020/21’: special fund ‘Child Day-care Expansion’ (4.1.1) contributes to 90 000 new childcare places. A smaller measure creates a pension information portal. In addition, without asking for funding, Germany commits to putting a temporary ceiling to social security contributions at 40% in the Social Guarantee 2021 (4.1.2) and to Educational support for students with a learning backlog (4.1.4). The fifth focus area is titled Strengthening a pandemic-resilient healthcare system, which consists mainly of digitalisation investments for the health sector and a measure for vaccine research. The focus area consists of a single component with the same title and has an estimated cost of approximately 16% of the overall estimated gross cost of the plan. ·Component 5.1 Strengthening a pandemic-resilient health system has as its largest measure EUR 3 billion dedicated to a scheme to digitalise hospitals (5.1.2), which have in recent years not been able to invest sufficiently in their modernisation. Another measure focuses on the digitalisation of public health authorities (5.1.1), whose lack of digitalisation and insufficient interoperability across the federal states were revealed during the pandemic. A special programme to accelerate research and development of urgently needed vaccines against SARS-CoV-2 (5.1.3), which started in 2020, supports three vaccine producers.

The sixth focus area, Modern administration and reducing barriers to investment, consists mainly of digitalisation investments for the public administration and reforms to accelerate public investment. The focus area consists of two components, with a total estimated cost of approximately EUR 3.6 billion, which represents about 12.9% of the total estimated gross cost of the plan. ·Component 6.1 Modern public administration aims to accelerate Germany’s efforts to digitalise its public administration, an area in which the country has fallen behind in recent years. The largest investment of the focus area, with EUR 3 billion, is dedicated to making public services digitally available, in line with implementing the German Online Access Act (6.1.2). The two other measures in this component are the European identity ecosystem (6.1.1) and the modernisation of public registers (6.1.3). ·Component 6.2 Reducing barriers to investment contains mostly reforms and does not include costs under the recovery and resilience plan, apart from a EUR 50 million measure for projects with the public sector consultancy PD - Berater der öffentlichen Hand GmbH (6.2.2). Several reforms to reduce investment bottlenecks have been implemented already, others are to be developed by a working group comprised of the Federal Government and the Länder (6.2.1). Table 3. The plan’s components and their cost Component Costs (EUR million) 1.1. Decarbonisation using renewable hydrogen in particular 3 259.3 1.2. Climate-friendly mobility 5 427.9 1.3. Climate-friendly renovation and construction 2 577.0 2.1. Data as the raw material of the future 2 766.0 2.2. Digitalisation of the economy 3 136.5 3.1. Digitalisation of education 1 435.0 4.1. Strengthening social inclusion 1 259.3 5.1. Strengthening a pandemic-resilient healthcare system 4 563.9 6.1. Modern public administration 3 475.0 6.2. Reducing barriers to investment 50.0 3.2.Implementation aspects of the plan The plan is aligned with key European and national programmes and initiatives. The recovery and resilience plan ensures consistency, and leverages the synergies, with: ·the National Energy and Climate Plan and the National Hydrogen Strategy, as explained in detail in Sections 4.1 and 4.5, ·the German Sustainability Strategy for the plan’s focus area 1 Climate policy and energy transition and to implement the United Nations’ Agenda 2030 and strengthen the national sustainability policy as part of the Decade of Action (2020-2030) (see Sections 2.3.1, 4.4 and 4.5), ·the National Data Strategy, for the plan’s focus area 2 Digitalisation of the economy and infrastructure (see Sections 4.1 and 4.6), ·the Youth Guarantee along with a National Skills Strategy, with multiple measures to improve apprenticeships and fight school drop-out by filling education gaps, as part of the plan’s focus areas 3 Digitalisation of education and 4 Strengthening social inclusion (see Section 4.1). Furthermore, Germany puts the reforms and investments from its recovery and resilience plan into the context of the National Reform Programme under the European Semester, as part of the comprehensive agenda of the Federal Government to cushion the impact of the pandemic and respond to the challenges of the future (see Section 4.2). The reforms and investments in the German plan are consistent with the challenges and priorities identified in the most recent Draft Council Recommendation on the economic policy of the euro area. Major investments focus on modern emergency capacity and better digital infrastructure for hospitals (EUR 3 billion), supporting digital education (EUR 1.4 billion), increasing social inclusion and thus supporting a fair recovery through the post-pandemic catch-up programme for children and young people (euro area recommendations 1 and 2). The reforms in components 6.1 and 6.2 strive to modernise and digitalise public administration and increase its efficiency and to tackle investment bottlenecks. They are expected to reduce the administrative burden for businesses and citizens and improve the business environment (euro area recommendation 3). Gender equality issues and equal opportunities for all are adequately addressed. Aspects related to gender equality and challenges related to socio-economic backgrounds run through multiple components. A particularly relevant measure is improving the availability of quality early childhood education and care, which promotes gender equality and the reduction of socio-economic disadvantages, and enables women to return to work earlier after a period of maternity and parental leave and to work more hours. However, with the arrangements regarding joint taxation of spouses, an important disincentive for second earners to work more hours remains in place. Support for apprenticeships and help for students with COVID-19-related learning disadvantages are expected to benefit young people with vulnerable backgrounds over-proportionally, including those with migration background. Recently implemented measures outside of the plan also contribute to equality. For example, in July 2020 the federal government adopted a comprehensive gender equality strategy, while a law enhancing women’s representation in company boards (Zweites Führungspositionen-Gesetz) is close to being adopted. The legislation process in line with the European Accessibility act to reduce barriers to people with disabilities is in progress Still, the plan’s expected contribution to equal opportunities for specific groups, such as older persons and persons with disabilities, could have been described more clearly. The plan lays down a clear governance structure for its implementation, with a dedicated coordination unit at the Federal Ministry of Finance. The coordination unit (Koordinierungsstelle) is also charged with the monitoring of the plan’s implementation (see Section 4.8). This includes monitoring and reporting on progress with the implementation of milestones and targets, monitoring the implementation of the audit and control strategy, qualitative control of all financial data and submitting payment requests. The unit is further responsible for identifying and correcting early on any potential undesirable developments. To this end, but also to ensure coherence with the use of other sources of Union funding, the coordination unit is in close contact with the line ministries that are in the lead on the implementation of specific reforms and investments. In its role as coordinator, the Federal Ministry of Finance acts in agreement with the Federal Chancellery, co-penholder of the recovery and resilience plan, and with the Federal Parliament. Relevant stakeholders were involved in the preparation of the plan and their opinions were considered. Within the scope of their responsibilities, the Federal States (Länder) were involved at an early stage and in numerous steps in the elaboration of the recovery and resilience plan through the conferences of Ministers and through the upper chamber of Parliament, the Bundesrat, and their positions were considered in the final elaboration of the plan. The lower chamber of Parliament, the Bundestag, was regularly informed about the status of preparation and the content of the plan; questions of Members of Parliament were addressed. Social partners, social stakeholders, environmental organisations, youth organisations, industry representatives and the national productivity board were all involved in the preparation of the plan. Their views were taken into consideration and reflected in the structure of the plan. The views of the social partners were particularly reflected in the elaboration of the measures in component 4.1 Strengthening social inclusion and the continuing education and training networks (2.2.2) in component 2.2 Digitalisation of the economy. The critical evaluation by environmental organisations of some measures in the draft plan led to the exclusion of investments that were deemed problematic regarding climate protection. Germany worked closely with other Member States on the institutional and technical aspects of the cross-border projects included in the plan. It will be important to involve stakeholders also during the implementation of the plan, in particular for promoting and monitoring SME participation. An ongoing process of coordination with the Länder is planned also for the implementation phase. In the federal context, the Länder will be crucial players in the implementation of the plan, in particular regarding investments in the digitalisation of education and healthcare, apprenticeship support and reforms and investments to modernise public administration and to reduce barriers to investment. Close technical cooperation and coordination between the Länder and the federal Ministries responsible for these measures is indispensable to take appropriate account of regional structures during the implementation phase and is provided for in the plan through regular coordination meetings, as requested by the Länder, organised by the coordination unit. The Länder are expected to be involved closely and in a timely manner in the reporting on the implementation progress. A comprehensive three-pillar communication strategy is set out in the plan to promote it both to the public and to key stakeholders. The communication on the plan highlights its role for the modernisation of Germany’s economy and society in the context of post-pandemic recovery. The strategy is based on integrated communication (first pillar) with a cross-medial (second pillar) and multi-perspective (third pillar) approach. It is coordinated by the Federal Press Office, which develops the visuals, the key messages, and the horizontal narrative on the plan, to be included in the communication material prepared by the responsible federal ministries. The communication involves a mix of formats – text, visual and audio-visual content combined with live events – to be used both by the communication channels of federal ministries and subordinated public bodies and in overarching communication campaigns. The website of the Federal Ministry of Finance serves as a hub that ensures continuous and complete overview of the information on the plan. The third communication pillar establishes a close link between the recovery and resilience plan and the communication activities of the federal government on modernisation projects and plan-related aspects of the national fiscal stimulus package. Key visible landmark events such as the approval of the plan by Council, the launch of key programmes, and reviews of implementation progress are expected to be used as communication opportunities to generate and sustain public and media interest throughout the lifecycle of the plan. The plan has a strong cross-border dimension. Central elements of the German recovery and resilience plan are the planned IPCEIs in the areas of hydrogen (EUR 1.5 billion), microelectronics (EUR 1.5 billion) and cloud and data processing (EUR 0.75 billion) open for participation to all interested Member States. Other measures such as the one on the European identity ecosystem (6.1.2) are also centred on cross-border cooperation and interoperability.

The recovery and resilience plan does not include a security self-assessment for investments in digital capacities and connectivity. However, related concerns are alleviated by the fact that there is no measure that would relate to 5G deployment, and open strategic autonomy and security issues have been addressed in the description of the component for which they were most relevant, i.e. in component 2.1 Data as the raw material of the future. State aid and competition rules fully apply to the measures funded by the Recovery and Resilience Facility. Union funds channelled through the authorities of Member States, like the RRF funds, become State resources and can constitute State aid if all the other criteria of Article 107(1) TFEU are met. When this is the case and State aid is present, these measures must be notified and approved by the Commission before Member States can grant the aid, unless those measures are covered by an existing aid scheme or comply with the applicable conditions of a block exemption regulation, in particular the General Block Exemption Regulation (GBER) declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 TFEU. When State aid is present and it requires notification, it is the duty of the Member State to notify State aid measures to the Commission before granting them, in compliance with Article 108(3) TFEU. In this respect, the State aid analysis carried out by Germany in the recovery and resilience plan cannot be deemed a State aid notification. In as far as Germany considers that a specific measure contained in the recovery and resilience plan entails de minimis aid or aid exempted from the notification requirement, it is the responsibility of Germany to ensure full compliance with the applicable rules. In addition to complying with EU State aid rules, measures taken under this framework should be compatible with the EU’s international obligations, in particular under World Trade Organization rules. 4.Summary of the assessment of the plan 4.1.Comprehensive and adequately balanced response to the economic and social situation The plan follows a holistic approach to recovery and reinforcing socio-economic resilience. This is achieved through 40 measures that tackle key structural challenges and pave the way for the twin transition. The measures are organised in 10 components structured around six focus areas: 1 Climate policy and energy transition, 2 Digitalisation of the economy and infrastructure, 3 Digitalisation of education, 4 Strengthening social inclusion, 5 Strengthening a pandemic-resilient healthcare system, and 6 Modern public administration and reducing barriers to investment. Germany submitted its National Reform Programme on 13 April 2021. The information provided in the National Reform Programme is being considered and jointly assessed in this Staff Working Document together with the Recovery and Resilience Plan. Both the green and digital targets are met, with the digital one exceeded considerably. Overall, the plan is balanced across the six pillars of the RRF Regulation (see Table 4), is aligned with the European Pillar of Social Rights (see also Box 3) and focuses on a significant subset of Germany’s main challenges, which beside the twin transition include addressing investment bottlenecks and modernising the public administration. First RRF pillar: green transition The plan has a strong focus on the green transition. With a total envelope of approximately EUR 10.5 billion, measures devoted to the green transition represent at least 42.4% of the financial contribution. Measures in the plan are aligned with the German Climate Action Plan 2050 and in many instances also explicitly with the German National Energy and Climate Plan (NECP) for 2021-2030. The German NECP aims to achieve the goals of energy transition and decarbonisation, including the objectives of a reduction in GHG emissions of 38% (compared to 2005), an increase in energy efficiency of 30% (reduction in primary energy consumption), and the reinforcement of the share of renewable sources in energy generation (30% of renewable energy in gross final energy consumption).



Table 4: Coverage of the six pillars of the Facility by the German recovery and resilience plan components Components Green transition Digital transition Smart, sustainable & inclusive growth Social and territorial cohesion Health, and economic, social and institutional resilience Policies for the next generation 1.1. Decarbonisation using renewable hydrogen in particular ● ● ○ 1.2. Climate-friendly mobility ● ● 1.3. Climate-friendly renovation and construction ● ○ ○ 2.1. Data as the raw material of the future ○ ● ● ○ 2.2. Digitalisation of the economy ○ ● ○ ○ ○ ○ 3.1. Digitalisation of education ● ● ● ○ ● 4.1. Strengthening social inclusion ○ ○ ● ● 5.1. Strengthening a pandemic-resilient healthcare system ● ● ○ ● 6.1. Modern public administration ● ○ ○ ● 6.2. Reducing barriers to investment ○ ○ ○ ● ○ ○ Key: ‘●’ investments and reforms of the component significantly contribute to the pillar; ‘○’ the component partially contributes to the pillar. The plan envisages a broad range of climate-related policy measures in areas such as energy transition and mobility adaptation to climate change. These can be grouped in three main areas of action. The main actions targeting decarbonisation and energy transition in the economy foster the development of an efficient hydrogen economy, with a particular focus on renewable hydrogen. The plan contains a bundle of measures addressing various stages of the hydrogen value chain from production to use and from research to industrial application. With a cost of EUR 1.5 billion, the hydrogen projects within the framework of planned Important Projects of Common European Interest (IPCEIs – 1.1.1) aim to accelerate the necessary market uptake of hydrogen by supporting integrated projects along the entire value chain. This is complemented by further efforts to support flagship projects for research and innovation in the context of the National Hydrogen Strategy (1.1.5), a pilot scheme for climate action contracts based on the principle of carbon contracts for difference (1.1.3) and a support programme for decarbonisation in industry going beyond hydrogen (1.1.2). Efforts are also made to foster the use of hydrogen in the transport sector where electrification is difficult, both for bus purchases (1.2.5) and for funding research and the creation of a Technology and Innovation Centre for Fuel Cell Technology (1.2.7). A sizeable effort is made to accelerate investments in climate-friendly mobility to address Germany’s challenges regarding sustainable transport. The biggest measure under this objective establishes an innovation premium to promote the sale of electric vehicles (1.1.2) which will support battery–electric vehicles. This effort is complemented by support for the construction of charging infrastructure (1.2.1). The promotion of the purchase of alternative-powered buses, i.e. electric buses and hydrogen-powered buses (1.2.5), also represents an important contribution. These more sizable measures are complemented by smaller measures such as the extension of the initial registration period for granting the ten-year tax exemption for purely electric vehicles (1.2.4), the above-mentioned funding of hydrogen and fuel cell applications for the vehicle and supplier industry, and the creation of a Technology and Innovation Centre for Fuel Cell Technology (1.2.7). Lastly, the plan steps up climate-friendly construction and renovation, with a prominent focus on energy efficiency renovation. The measure Building renovation: Federal funding for energy-efficient buildings (1.3.3) represents a broad energy efficiency building renovation programme, in continuity with existing measures (Castellazzi et al., 2019; European Commission, 2021c), which is expected to deliver primary energy efficiency savings of at least 30%. It is complemented by the funding of Municipal living labs for the energy transition (1.3.2), which will explore the use of new solutions for efficient and sustainable energy supply in urban neighbourhoods through pilot projects. In addition, Germany plans to introduce administrative simplifications, which is expected to facilitate the construction and renovation of buildings and help keep housing affordable (6.2.1). Beyond climate change mitigation, these measures contribute also to other objectives of the green transition. The measures contribute directly to climate change mitigation, and indirectly to objectives such as environmental protection, including circular economy. For example, all projects in measure Building renovation: federal funding for energy-efficient buildings (1.3.3) will have to comply with circularity principles (recycling of construction waste, and recyclability and reparability of equipment). Other measures linked to the digital transition such as the planned Important Project of Common European Interest on Next Generation Cloud Infrastructure and Services (2.1.3) and some parts of the programme for vehicle manufacturers and suppliers (2.2.1) contribute to carbon emission reduction but also to energy efficiency. The plan does not contain any measure which has biodiversity as its objective. However, some of the measures for climate mitigation may indirectly benefit biodiversity, given that climate change in itself is an important threat to biodiversity. This is for instance the case for measures supporting the decarbonisation of industry or projects on research and innovation in the context of the National Hydrogen Strategy. Also, Germany has carried out a systematic do-no-significant-harm assessment indicating that none of the proposed measures under the plan generates significant harm to biodiversity.

Based on the methodology for climate tracking set out in Annex VI to Regulation (EU) 2021/241, the quantitative assessment of the plan in relation to the climate target finds a contribution of at least 42.4% of the total allocation, thereby complying with the minimum threshold of 37%, with a direct contribution from 5 of the 10 components. Second RRF pillar: digital transformation The recovery and resilience plan puts a strong emphasis on the digital transition and the challenges resulting from it across all sectors. This is reflected both in the share of digital in the overall envelope and the prominence of digital aspects across the components. With a total envelope of approximately EUR 13.5 billion, measures devoted to the digital transition represent at least 52.6% of the financial contribution. The strong focus on digital is particularly welcome as Germany is a medium performer in digitalisation. In 2020, Germany ranked 12th amongst EU Member States in the Digital Economy and Society Index (DESI), with performances below EU average on the integration of digital technology by enterprises and digital public services (European Commission, 2020a). These two aspects, especially the latter, are well addressed in the proposed recovery and resilience plan. More than one-fourth of the plan’s budget is dedicated to the digitalisation of public services. Key contributions come from component 6.1 Modern public administration, with measures on implementing the European identity ecosystem (6.1.1), the Online Access Act (6.1.2) and the modernisation of public registers (6.1.3). The plan also includes measures to simplify the access to information about pension rights for citizens (4.1.5) and to overhaul data policy that are expected to contribute to improving the use and management of data in the public administration (2.1.1). Digitalisation is also an essential aspect of the measures to modernise the German health system, reflected in upgrading and connecting all public health offices and linking them with other key institutions for public health surveillance (5.1.1) and in the programme for future-proof hospitals to substantially increase their digital maturity (5.1.2). Furthermore, digitalisation of railway signalling devices is also included (2.2.4). Efforts to digitalise businesses focus on the automotive industry. More than half of the budget for component 2.2 Digitalisation of the economy is earmarked to help the automotive sector address the challenges of the digital transformation, both through investments in research and development and cluster-building (2.2.1). The measures to improve digital infrastructure and skills are expected to contribute significantly to digitalisation. Various measures promote the digitalisation of education. Teachers will be equipped with digital devices (3.1.1), an education platform will be set up to help learners all over the life cycle (3.1.2), educational centres of excellence will equip teachers with necessary digital skills (3.1.3) and the Bundeswehr’s educational and training facilities will be modernised (3.1.4). Digital skills in the workplace will be also promoted by supporting continuing education and training networks (2.2.2), supporting companies that offer apprenticeships (4.1.3), and training staff to use the digital tools supplied in the framework of the future-proof hospitals programme (5.1.2). Key advanced technologies are an important enabler of a successful digital transformation. A comprehensive set of actions is planned to promote an innovative data policy (2.1.1), including an action on high-performance computing, a pilot measure on data cooperation on sustainability, ecosystem services in the food value chain, and measures for strengthening data literacy in the society and in the federal public administration. Data-driven innovation will be fostered, including through contributions to two multi-country projects for which IPCEIs are planned, on advanced technologies in the areas of microelectronics (2.1.2) and next generation cloud, edge and data processing (2.1.3). This innovation effort will be complemented by funding research and development projects carried out by the Centre for Digitalisation and Technology Research of the Federal Armed Forces (Zentrum für Digitalisierungs- und Technologieforschung der Bundeswehr; dtec.bw; 2.2.3) in areas such as cybersecurity, artificial intelligence, robotics, innovative mobility, and the digitalisation of energy. Third RRF pillar: smart, sustainable and inclusive growth, including economic cohesion, jobs, productivity, competitiveness, research, development and innovation, and a well-functioning internal market with strong SMEs The plan is expected to contribute significantly to the various objectives of the third RRF pillar. The green and sustainable growth dimension is well covered by the plan (for a detailed discussion see Sections 4.4 and 4.5), and the same holds for digital aspects of smart growth and competitiveness and innovation (see Section 4.6). Given the wide scope of the third RRF pillar, the below list is not exhaustive. The plan is expected to contribute to economic cohesion, jobs and social fairness, productivity and competitiveness through a number of measures. The green and digital transitions facilitated by the plan have the potential to create and secure jobs, make the economy more competitive, and contribute to economic and social cohesion. For instance, positioning Germany as an important player in renewable hydrogen also has the potential to create new jobs in this emerging sector. Component 4.1 Strengthening social inclusion is fully devoted to inclusive growth, thereby directly contributing to the third RRF pillar, including through maintaining job creation and by putting a temporary cap on social security contributions (4.1.2). Various measures contribute to upgrading skills and thus addressing labour shortages and enhancing productivity; both through individual learning on an Education platform (3.1.2), as well as through improving the operation of the education system by enhancing availability of digital devices (3.1.1) and improving teaching competences and methodology (3.1.3). Numerous measures in the plan are expected to contribute to research, development and innovation. These include the innovative IPCEIs planned on hydrogen (1.1.1), microelectronics (2.1.2) and next generation cloud, edge and data processing (2.1.3), as well as measures with a dedicated research focus. Among the latter are, for instance, support for vaccine research (5.1.3), innovation premiums on electro-mobility (1.2.3), setting up a technology and innovation centre for hydrogen (1.2.7), and project-based research on climate change (1.1.4). Research and development are also supported by new low carbon integrated energy systems for urban neighbourhoods (1.3.2) and by developing and implementing greenhouse gas neutral production services (1.1.2) The well-functioning of the internal market and the role of strong SMEs is given particular consideration. Some measures, in particular those that include a call for projects, positively factor in the involvement of SMEs. The role of SMEs is explicitly considered, for instance, in measures 1.2.5, 1.2.7, 1.3.1, 2.1.1, 2.1.2, 2.1.3, 2.2.1 and 2.2.2. Other measures are expected to benefit SMEs in particular. It is for instance the case for the implementation of the Online Access Act (6.1.2) and the modernisation of registers (6.1.3), which are set to reduce the administrative burden for all companies and constitute a noticeable improvement especially for SMEs. By providing training and guidance on new business models, new technologies, digitalisation and sustainability, SMEs will be supported also in the timber construction sector (1.3.1). The objectives of continuing education and training networks (2.2.2) include supporting SMEs in particular. It will be important to promote and to monitor SME participation also throughout the implementation phase, including by designing the projects and application procedures with a particular focus on SMEs and with a minimum bureaucratic burden. Fourth RRF pillar: social and territorial cohesion The plan is expected to contribute to social and territorial cohesion. A number of measures relate to areas in which also European structural funds promote cohesion, while ensuring that double funding is avoided. Key areas for social cohesion include apprenticeships (4.1.3), the education platform (3.1.2), the educational centres of excellence (3.1.3), creating additional childcare places (4.1.1) and development of continuing education and training networks (2.2.2). Areas relevant for territorial cohesion include the development of the climate-friendly timber construction sector (1.3.1), municipal laboratories for the energy transition (1.3.2), energy-efficient building renovation (1.3.3) and electromobility with hydrogen technology. Social cohesion is advanced by a range of educational measures, with a more limited contribution from social measures. Many measures in components 3.1 Digitalisation of education and 4.1 Strengthening social inclusion promote education and skills, also by tackling specific disadvantages (see also the sixth pillar). Capping social security contributions (4.1.2) helps low-wage workers keep their income and jobs, as for them labour demand is more elastic to prices. Less developed areas can benefit from the deployment of a decentralised renewable hydrogen production and energy-efficient renovation. This is particularly the case for energy-efficient building renovation (1.3.3), which is likely to benefit less developed areas over-proportionally, as those areas tend to have a larger building stock in need of energy-efficient renovation. Also, the digitalisation and connection of all public health services (5.1.1) as well as of hospitals (5.1.2) is expected to support the effective provision of such health services across the country and has the potential to reduce regional differences. Tackling investment bottlenecks is expected to help areas with infrastructural challenges. Efforts to accelerate planning procedures (6.2.1 and 6.2.3) and to help municipalities manage investment subsidies and digitalise schools (6.2.2) are expected to help municipalities reduce their investment gap, regardless of whether they are representing densely populated areas that need to cope with population inflows or remote, depopulating areas. Fifth RRF pillar: health and economic, social and institutional resilience, with the aim of increasing crisis preparedness and crisis response capacity, among others The plan contains substantial investment to bolster the healthcare system’s resilience, mainly through measures in component 5.1 Strengthening a pandemic-resilient healthcare system. The pandemic revealed the drawbacks of the heterogeneous landscape of often not interoperable IT systems used by the health authorities. The measures included in the plan aim at creating an interoperable digital infrastructure to connect the public health authorities and other actors in the public health system and are embedded in a more comprehensive strategy to modernise the public health offices (5.1.1). A measure dedicated to vaccine research against SARS-CoV-2 also contributes to Germany’s resilience to the current and potential future pandemics (5.1.3). The digitalisation of hospitals, addressed in a large measure in the plan (EUR 3 billion), is expected also to contribute to the overall resilience of the healthcare system and remedy an investment shortfall in the digitalisation of hospitals in recent years (5.1.2).

Social resilience is reinforced through making education more digital. The COVID-19-related switch to remote education was particularly disruptive to the non-digitalised German education system, with shortages or lack of digital equipment and expertise. Component 3.1 Digitalisation of education tackles this vulnerability by providing digital equipment to teachers (3.1.1), better supporting them with digital teaching methodologies (3.1.3) and improving access to online learning materials through a dedicated platform (3.1.2). The resilience of Germany’s public administration is increased by digitalisation and modernisation measures. Component 6.1 is expected to improve citizens’ access to digital public services and develop a European digital identification ecosystem. By reducing the need for in-person interactions in the provision of public services, these measures contribute to a public administration that is more resilient to disruptions than one using the current analogue workflows. Sixth RRF pillar: policies for the next generation, children, and young people, such as education and skills The plan has a strong focus on acquiring skills, starting from nursery age. High quality nurseries and kindergartens can play a key role in mitigating socio-economic disadvantages before entering school. The plan’s effort to add 90 000 childcare places (4.1.1), and improve childcare quality is thus an important contribution to equal opportunities. The plan’s measures help avoid the compounding effects of learning disadvantages and early school leaving. Pupils with a learning backlog because of COVID-19 (around 1 million students) will receive an offer for additional tutoring services and other learning support (4.1.4). To avoid a surplus demand for apprenticeship placement due to companies scaling back their apprenticeship programmes, businesses will receive financial support to keep on hiring (4.1.3). Through an effective use of digital resources, the education system is expected to improve thanks to the plan. Teachers will receive digital equipment such as laptops and tablets (3.1.1) and support in the form of digital teaching methodologies through educational centres of excellence (3.1.3). Young people are expected to have more opportunities to improve their skills. A one-stop web portal is expected to make educational content more accessible to learners of all ages (3.1.2). The creation of continuing education and training networks (2.2.2) is expected to help companies provide their staff with relevant trainings. Taking into consideration all reforms and investments planned by Germany, its recovery and resilience plan represents to a large extent a comprehensive and adequately balanced response to the economic and social situation, thereby contributing appropriately to all six pillars referred to in Article 3 of the RRF Regulation, taking the specific challenges and the financial allocation of Germany into account. This would warrant a rating of A under the assessment criterion 2.1 in Annex V to the RRF Regulation. 4.2.Link with country-specific recommendations and the European Semester Overall, the plan represents a comprehensive and adequate response to the challenges faced by Germany’s economy and society. The plan introduces reforms and investments notably in the areas of climate and digital transition, resilience of the healthcare system, modernisation of the public administration, removing investment bottlenecks, promoting social inclusion, education and skills. These constitute a significant subset of the challenges identified in the country-specific recommendations to Germany. Nevertheless, considering the entrenched nature of the challenges, further efforts are needed in the coming years on several reform areas. This is particularly the case for recommendations in areas such as taxes on labour and the tax wedge, disincentives to work for second earners, competition in business services and regulated professions, and sustainability of the pension system while maintaining adequacy. The COVID-19 pandemic led to the deepest recession on national record, yet the economic and social impact was cushioned by far-reaching measures to sustain the economy and support the ensuing recovery (CSR 1 in 2020). The economy contracted by 4.8% in 2020, recording an unprecedented -9.7% in the second quarter of 2020. The federal government swiftly made use of its ample fiscal space to support decidedly its economy and society and alleviate the immediate impact of the pandemic. The federal government and Länder provided liquidity for companies, subsidising them to keep their skilled workforce, and provided income support for workers including through the short-time work scheme Kurzarbeit, from which about 6 million workers benefitted at the peak in April/May 2020. Insolvency rules were modified to avoid technical insolvency procedures. Liquidity support also helped contain risks to financial stability. The government balance deteriorated by 5.7 pps. to a deficit of 4.2% of GDP in 2020, due to the size of public support measures related to the COVID-19 pandemic. Still, the deficit turned out smaller than expected on account of administrative bottlenecks causing delays in the pay-out of support measures accounting for 1% to 2% of GDP. The relevant amounts