Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Germany
Date: 2025-06-04
Institutions: European Commission, Reform and Investment Task Force
Subjects: Germany, budget policy, economic policy, economic recovery, economic reform, employment policy, energy policy, innovation, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 4.6.2025  COM(2025) 205 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Germany {SWD(2025) 205 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Germany 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and Article 148(4) thereof, 

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29 April  2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular 
Article 3(3) thereof, 

Having  regard  to  Regulation  (EU)  No 1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16 November 2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

General considerations 

(1) 

Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the 
objectives  of  the  economic  governance  framework,  which  aims  at  promoting  sound 
and  sustainable  public  finances  and  sustainable  and  inclusive  growth  and  resilience 
through reforms and investments, and preventing excessive government deficits. The 
Regulation  stipulates  that  the  Council  and  the  Commission  conduct  multilateral 
surveillance in the context of the European Semester in accordance with the objectives 
and requirements set out in the TFEU. The European Semester includes, in particular, 
the  formulation,  and  the  surveillance  of  the  implementation  of  country-specific 
recommendations.  The  Regulation  also  promotes  national  ownership  of  fiscal  policy 
and  emphasises  its  medium-term  focus,  combined  with  more  effective  and  coherent 
enforcement. Each Member State must submit to  the Council and the Commission  a 
national  medium-term  fiscal-structural  plan,  containing  its  fiscal,  reform  and 
investment  commitments,  over  4  or  5  years,  depending  on  the  length  of the  national 

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OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj. 
OJ L 306, 23.11.2011, p. 25, ELI: http://data.europa.eu/eli/reg/2011/1176/oj. 

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legislative  term.  The  net  expenditure3  path  in  these  plans  has  to  comply  with  the 
Regulation’s  requirements,  including  the  requirements  to  put  or  keep  general 
government debt on a plausibly downward path by the end of the adjustment period, or 
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to 
bring  and/or  maintain  the  general  government  deficit  below  the  3%-of-GDP  Treaty 
reference value over the medium term. Where a Member State commits to a relevant 
set  of  reforms  and  investments  in  accordance  with  the  criteria  set  out  in  the 
Regulation,  the  adjustment  period  may  be  extended  by  up  to  three  years.  Member 
States were required to submit their national medium-term fiscal-structural plans by 20 
September 2024, unless they agreed with the Commission to extend the deadline by a 
reasonable period of time. The Commission granted Germany the possibility to present 
a plan based on a solid political commitment, agreed to a delay in the submission of 
the plan, and expects Germany to present a medium-term plan by the end of July 2025.  
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council4,  which 
established  the  Recovery  and  Resilience  Facility  (the  ‘RRF’),  entered  into  force  on 
19 February 2021.  The  RRF  provides  financial  support  to  Member  States  for 
implementing  reforms  and  investments,  delivering  a  fiscal  impulse  financed  by  the 
Union.  In  line  with  the  priorities  of  the  European  Semester  for  economic  policy 
coordination, the RRF fosters economic and social recovery while driving sustainable 
reforms and investments, in particular promoting the green and digital transitions and 
making  Member  States’  economies  more  resilient.  It  also  helps  strengthen  public 
finances  and  boost  growth  and  job  creation  in  the  medium  and  long  term,  improve 
territorial cohesion within the Union and support the continued implementation of the 
European Pillar of Social Rights. 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council5  (the 
‘REPowerEU  Regulation’),  which  was  adopted  on  27 February 2023,  aims  to  phase 
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy 
security  and  diversify  the  Union’s  energy  supply,  while  increasing  the  uptake  of 
renewables,  energy  storage  capacities  and  energy  efficiency.  Germany  added  a  new 
REPowerEU chapter to its national recovery and resilience plan in order to finance key 
reforms and investments that will help achieve the REPowerEU objectives. 

On 28 April 2021, Germany submitted its national recovery and resilience plan to the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness, 
efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in  accordance  with  the 
assessment guidelines set  out  in  Annex V.  On 13 July  2021, the Council adopted its 
Implementing Decision approving the assessment of the recovery and resilience plan 

Net  expenditure  as  defined  in  Article  2,  point  (2),  of  Regulation  (EU)  2024/1263:  ‘net  expenditure’ 
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii) 
expenditure  on  programmes  of  the  Union  fully  matched  by  revenue  from  Union  funds;  (iv)  national 
expenditure  on  co-financing  of  programmes  funded  by  the  Union;  (v)  cyclical  elements  of 
unemployment benefit expenditure; and (vi) one-offs and other temporary measures. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
(OJ  L  57,  18.2.2021,  p. 17,  ELI: 
establishing 
http://data.europa.eu/eli/reg/2021/241/oj). 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February 2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No 1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj). 

the  Recovery  and  Resilience  Facility 

(2) 

(3) 

(4) 

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(5) 

(6) 

for Germany6, which was amended under Article 18(2) on 8 December 2023 to update 
the maximum financial contribution for non-repayable financial support, and on 9 July 
2024 to include the REPowerEU chapter7. The release of instalments is conditional on 
the  adoption  of  a  decision  by  the  Commission,  in  accordance  with  Article 24(5), 
stating that Germany has satisfactorily achieved the relevant milestones and targets set 
out in the Council Implementing Decision. Satisfactory achievement requires that the 
achievement  of  preceding  milestones  and  targets  for  the  same  reform  or  investment 
has not been reversed. 

On  26 November 2024,  the  Commission  adopted  an  opinion  on  the  2025  draft 
budgetary  plan  of  Germany.  On  the  same  date,  on  the  basis  of  Regulation  (EU) 
No 1176/2011, the Commission adopted the 2025 Alert Mechanism Report, in which 
it identified Germany as one of the Member States for which an in-depth review would 
be  needed.  The  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area and a proposal for the 2025 
Joint  Employment  Report,  which  analyses  the  implementation  of  the  Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights.  The  Council 
adopted  the  Recommendation  on  the  economic  policy  of  the  euro  area8  on  13  May 
2025 and the Joint Employment Report on 10 March 2025. 

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic framework that aims to boost the EU’s global competitiveness over the next 
five  years.  It  identifies  the  three  transformative  imperatives  of  sustainable  economic 
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To 
close  the  innovation  gap,  the  EU  aims  to  foster  industrial  innovation,  support  the 
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and 
promote the adoption of advanced technologies like artificial intelligence and quantum 
computing.  In  pursuit  of  a  greener  economy,  the  Commission  has  outlined  a 
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring 
that  the  shift  to  clean  energy  remains  cost-effective,  competitiveness-friendly, 
particularly  for  energy-intensive  sectors,  and  is  a  driver  for  growth.  To  reduce 
excessive dependencies and increase security, the Union is committed to strengthening 
global  trade  partnerships,  diversifying  supply  chains  and  securing  access  to  critical 
raw materials and clean energy sources. These priorities are underpinned by horizontal 
enablers, namely regulatory simplification, deepening of the single market, financing 
competitiveness and a Savings and Investments Union, promotion of skills and quality 
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned 
with  the  European  Semester,  ensuring  that  Member  States’  economic  policies  are 
consistent with the Commission’s strategic objectives, creating a unified approach to 
economic governance that fosters sustainable growth, innovation and resilience across 
the Union. 

(7) 

In  2025,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  implementation  of  the  RRF.  The  full  implementation  of  the 
recovery and resilience plans remains essential for delivering on the policy priorities 

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Council Implementing Decision of 13 July 2021 on the approval of the assessment of the recovery and 
resilience plan for Germany (10158/2021). 
Council Implementing Decision of  9 July 2024 amending the Implementing Decision of  13 July 2021 
on the approval of the assessment of the recovery and resilience plan for Germany (11674/2024). 
Council  Recommendation  of  13  May  2025  on  the  economic  policy  of  the  euro  area  (OJ  C, 
C/2025/2782, 22.5.2025, ELI: http://data.europa.eu/eli/C/2025/2782/oj). 

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(8) 

(9) 

under the European Semester, as the plans help effectively address all or a significant 
subset  of  challenges  identified  in  the  relevant  country-specific  recommendations 
issued  in  recent  years.  These  country-specific  recommendations  remain  equally 
relevant  for  the  assessment  of  amended  recovery  and  resilience  plans  in  accordance 
with Article 21 of Regulation (EU) 2021/241. 

The  2025  country-specific  recommendations  cover 
the  key  economic  policy 
challenges that are not sufficiently addressed by measures included in the recovery and 
resilience  plans,  taking  into  account  the  relevant  challenges  identified  in  the  2019-
2024 country-specific recommendations. 

On 4 June 2025, the Commission published the 2025 country report for  Germany. It 
assessed  Germany’s  progress 
relevant  country-specific 
in  addressing 
recommendations  and  took  stock  of  Germany’s  implementation  of  the  recovery  and 
resilience plan. Based on this analysis, the country report identified the most pressing 
challenges  Germany  is  facing.  It  also  assessed  Germany’s  progress  in  implementing 
the  European  Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on 
employment, skills and poverty reduction, as well as progress in achieving the United 
Nations Sustainable Development Goals. 

the 

(10)  The  Commission  carried  out  an  in-depth  review  under  Article 5  of  Regulation  (EU) 
No 1176/2011  for  Germany.  The  main  findings  of  the  Commission’s  assessment  of 
macroeconomic vulnerabilities for Germany for the purposes of that Regulation were 
published  on  13  May  20259.  On  4  June  2025,  the  Commission  concluded  that 
Germany  is  no  longer  experiencing  macroeconomic  imbalances.  In  particular, 
vulnerabilities  related  to  the  large  current  account  surplus,  which  had  cross-border 
relevance,  have  declined  over  the  years,  while  significant  policy  progress  has  very 
recently  been  announced.  The  current  account  surplus  came  below  6%  of  GDP  in 
recent years, after having reached a trough in 2022 on account of exceptionally high 
energy  prices.  The  reduction  of  the  current  account  is  largely  reflecting  an  adverse 
external  backdrop,  whereas  the  overall  underlying  vulnerabilities  in  terms  of  a 
significant savings-investment gap have not changed fundamentally. Investment needs 
have  been  increasing  over  the  years,  mainly  linked  to  public  investment  at  regional 
level and corporate investment, whereas actual investment has receded in real terms in 
recent  years.  Combined  with  other  structural  challenges,  low  public  and  private 
investment provided amongst the lowest contributions to potential GDP growth in the 
EU.  Real  wages  have  reached  their  pre-pandemic  level  during  2024  following 
moderate  increases  in  nominal  wages.  However,  considerable  policy  announcements 
were made in early March 2025, following the parliamentary elections, including the 
revision  of  the  Constitutional  budgetary  framework.  This  policy  package  marks  a 
major step and a clear acceleration from recent  patterns, which, if implemented, will 
lead to significantly higher defence spending and infrastructure investment. 

Assessment of the Annual Progress Report 

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SWD(2025) 69 final. 

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(11)  On 25 April 2025 Germany submitted its Annual Progress Report10 on relevant fiscal 
outturn  data  and  projections  and  the  implementation  of  reforms  and  investments 
responding  to  the  main  challenges  identified  in  the  European  Semester  country-
specific  recommendations.  The  Annual  Progress  Report  also  reflects  Germany’s 
biannual reporting on the progress made in achieving its recovery and resilience plan 
in accordance with Article 27 of Regulation (EU) 2021/241. 

(12)  Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  recommended  to 
activate the national  escape clause of the Stability and Growth Pact  in  a coordinated 
manner to support the EU efforts to achieve a rapid and significant increase in defence 
spending and this proposal was welcomed by the European Council of 6 March 2025. 
Following  the  request  of  Germany  on  24  April  2025,  the  Council,  upon  a 
recommendation  of  the  Commission,  could  adopt  a  recommendation  allowing 
Germany to deviate from, and exceed, the recommended maximum growth rates of net 
expenditure,  once  they  have  been  set  by  the  Council  following  a  recommendation 
from the Commission.  

(13)  Based  on  data  validated  by  Eurostat11,  Germany’s  general  government  deficit 
increased from 2.5% of GDP in 2023 to 2.8% in 2024, while the general government 
debt  fell  from  62.9%  of  GDP  at  the  end  of  2023  to  62.5%  at  the  end  of  2024. 
According to the Commission’s calculations, these developments correspond to a net 
expenditure  growth  rate  of  4.0%  in  2024.  In  the  2025  Annual  Progress  Report, 
Germany  estimates  the  net  expenditure  growth  in  2024  at  3.8%.  Based  on  the 
Commission’s  estimates,  the  fiscal  stance12,  which  includes  both  nationally  and  EU 
financed expenditure, was neutral in 2024. 

(14)  According to the Annual Progress Report, the macroeconomic scenario underpinning 
the  budgetary  projections  by  Germany  expects  real  GDP  growth  at  0.3%  in  2025, 
while  inflation  measured  by  the  GDP  deflator13  is  projected  at  2.1%  in  2025.  The 
Commission Spring 2025 Forecast projects real GDP to stay neutral at 0% in 2025 and 
grow by 1.1% in 2026, and HICP inflation to stand at 2.4% in 2025 and 1.9% in 2026. 

(15) 

In the Annual Progress Report, the general government deficit is expected to decrease 
to  2½%  of  GDP  in  2025,  while  the  general  government  debt-to-GDP  ratio  is  set  to 
increase  to  62¾%  by  the  end  of  2025.  These  developments  correspond  to  net 
expenditure growth of 2½% in 2025. The Commission Spring 2025 Forecast projects a 
general government deficit of 2.7% of GDP in 2025. According to the Commission’s 
calculations,  these  developments  correspond  to  net  expenditure  growth  of  2.1%  in 
2025.  The  difference  between  the  general  government  balance  projected  by 
Commission and Germany is due to slightly more pessimistic fiscal revenue numbers 
in  the Commission  forecast.  Based on the Commission’s estimates,  the fiscal  stance, 

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The  2025 Annual Progress Reports are  available on:   https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en. 
Eurostat-Euro Indicators, 22.4.2025. 
The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of 
the  general  government.  It  aims  to  assess  the  economic  impulse  stemming  from  fiscal  policies,  both 
those  that  are  nationally  financed  and  those  that  are  financed  by  the  EU  budget.  The  fiscal  stance  is 
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary 
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable 
support (grants) from the Recovery and Resilience Facility and other Union funds. 
Inflation measured by the Harmonised Index of Consumer Prices (HICP) is not reported in the Annual 
Progress Report.  

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which  includes  both  nationally  and  EU  financed  expenditure,  is  projected  to  be 
contractionary, by 0.4% of GDP, in 2025. The general government debt-to-GDP ratio 
is set to increase to 63.8% by the end of 2025. The increase of the debt-to-GDP ratio 
in 2025 mainly reflects low nominal GDP growth.  

(16)  General  government  expenditure  amounting  to  0.1%  of  GDP  is  expected  to  be 
financed  by  non-repayable  support  (“grants”)  from  the  Recovery  and  Resilience 
Facility  in  2025,  compared  to  0.1%  of  GDP  in  2024,  according  to  the  Commission 
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms 
without a direct impact on the general government balance and debt of Germany. 

(17)  General  government  defence  expenditure  in  Germany  amounted  to  1.0%  of  GDP  in 
2021, 1.0% of GDP in 2022 and 1.1% of GDP in 20236. According to the Commission 
Spring  2025  Forecast,  expenditure  on  defence  is  projected  at  1.3%  of  GDP  in  both 
2024  and  in  2025.  This  corresponds  to  an  increase  of  0.3  percentage  points  of  GDP 
compared  to  2021.  The  period  when  the  national  escape  clause  will  be  activated 
(2025-2028) would allow Germany to reprioritise government expenditure or increase 
government revenue so that lastingly higher defence expenditure would not endanger 
fiscal sustainability in the medium term. 

(18)  The  2025  Annual  Progress  Report  does  not  include  budgetary  projections  beyond 
2025.  Based  on  policy  measures  known  at  the  cut-off  date  of  the  forecast,  the 
Commission  Spring  2025  Forecast  projects  a  government  deficit  of  2.9%  of  GDP  in 
2026. The increase of the deficit in 2026 reflects declining revenue growth on the back 
of  lower wage  growth  and  elevated  expenditure  growth.  These  developments 
correspond to net expenditure growth of 3.2% in 2026. For Germany, a full assessment 
of compliance cannot yet be undertaken in the absence of a medium-term plan. Based 
on the Commission’s estimates, the fiscal stance, which includes both nationally and 
EU financed expenditure, is projected to be slightly expansionary, by 0.2% of GDP, in 
2026. The general  government debt-to-GDP  ratio is  projected by the Commission  to 
increase to 64.7% by the end of 2026. The increase of the debt-to-GDP ratio in 2026 
mainly reflects declining revenue growth.  

Key policy challenges 

(19)  Despite  a  slight  increase  in  public  investment  as  a  share  of  GDP  in  recent  years,  it 
continues  to  fall  short  of  actual  investment  needs.  Germany  has  streamlined  its 
planning and approval procedures for renewable energy, grid expansion and transport 
infrastructure  but  further  bottlenecks  persist  and  require  additional  measures.  Two 
decades  of  low  public  investment  have  significantly  reduced  planning  capacities  in 
crucial  sectors  such  as  construction.  The  complexity  of  federal  structures  and 
fragmented  responsibilities  may  hinder  the  timely  and  efficient  implementation  of 
projects. A lack of clear planning, strategic direction, and defined goals has previously 
curbed  the  flow  of  investment  in  infrastructure.  Public-private  partnerships  can  help 
mobilise  private-sector  expertise  and  finance  while  also  enhancing  public  service 
delivery.  The  new  infrastructure  fund  could  help  alleviate  the  shortfall  in  public 
investment. 

(20)  Demographic  ageing  and  labour  shortages  are  putting  pressure  on  the  old-age 
dependency  ratio,  the  sustainability  of  the  pension  system  and  the  adequacy  of 
pensions.  As  a  result,  overall  pension  expenditure  is  expected  to  increase.  In  recent 
years, transfers from the federal budget to the pension system have consistently been 

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over  EUR 100  billion  (around  25%  of  federal  government  expenditure),  leaving  less 
scope for more productive spending. Furthermore, attempts to build up a private-sector 
pension pillar are behind schedule and limit the scope to channel savings into possible 
long-term financing solutions for the economy.  

(21)  Other  measures  that  could  improve  the  sustainability  of  the  pension  system  include 
reducing the incentives for early retirement, adjusting pension indexation and revising 
contribution  ceilings.  Such  measures  could  also  help  contain  the  need  for  budget 
transfers and increases in social security contributions. The overall efficiency of public 
spending  can  also  be  improved, for instance by  conducting further spending  reviews 
and phasing out or replacing non-essential subsidies. 

(22)  An optimal tax mix is a key lever for more inclusive and sustainable growth as well as 
stronger competitiveness. Workers in Germany face the second highest tax wedge (the 
taxation  of  earnings  from  labour)  in  the  EU.  High  taxes  in  conjunction  with  strict 
benefit  rules  (such  as  reduced  benefits  as  income  increases)  reduce  the  incentives  to 
increase  the  number  of  hours  worked,  especially  for  low-wage  and  second  earners. 
These are often women, as indicated by the very high  share of working women who 
work part-time. Germany also has one of the highest corporate income tax rates in the 
EU,  including  the  local  trade  tax  (Gewerbesteuer).  The  corporate  taxation  system 
provides  few  incentives  for  investment  and  innovation.  Temporarily  increasing 
depreciation  options  and  offering  R&D  tax  credits  –  as  planned  in  the  coalition 
agreement – can be cost-effective ways of stimulating investment.  At the same time, 
there  is  scope  to  make  greater  use  of  environmental  taxes  and  other  less  distorting 
taxes. 

(23) 

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 
2.2  of  Annex  V  to  that  Regulation,  the  recovery  and  resilience  plan  includes  an 
extensive set  of mutually reinforcing  reforms and investments  to  be implemented by 
2026.  These  are  expected  to  help  effectively  address  all  or  a  significant  subset  of 
challenges  identified  in  the  relevant  country-specific  recommendations.  Within  this 
tight timeframe, finalising the effective implementation of the recovery and resilience 
plan  including  the  REPowerEU  chapter,  is  essential  to  boost  Germany’s  long-term 
competitiveness  through  the  green  and  digital  transitions,  while  ensuring  social 
fairness. The systematic involvement of local and regional authorities, social partners, 
civil society and other relevant stakeholders remains essential in order to ensure broad 
ownership for the successful implementation of the recovery and resilience plan. 

(24)  The implementation  of  cohesion  policy programmes, which encompass support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF), 
and the European Social Fund Plus (ESF+) has accelerated in Germany. It is important 
to  continue  efforts  to  ensure  the  swift  implementation  of  these  programmes,  while 
maximising  their  impact  on  the  ground.  Germany  is  already  taking  action  under  its 
cohesion policy programmes to boost competitiveness and growth. At the same time, 
Germany  continues  to  face  challenges,  including  those  relating  to  enhancing 
competitiveness in the context of industrial transition, affordable housing, skills, active 
inclusion  as  well  as  increasing  water  resilience.  In  accordance  with  Article  18  of 
Regulation (EU) 2021/1060, Germany is required – as part of the mid-term review of 
the  cohesion  policy  funds  –  to  review  each  programme  taking  into  account,  among 
other things, the challenges identified in the 2024 country-specific recommendations. 

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The  Commission  proposals  adopted  on  1  April  202514  extend  the  deadline  for 
submitting  an  assessment  –  for  each  programme    –  of  the  outcome  of  the  mid-term 
review  beyond  31  March  2025.  It  also  provides  flexibilities  to  help  speed  up 
programme  implementation  and  incentives  for  Member  States  to  allocate  cohesion 
policy resources to five strategic priority areas of the Union, namely competitiveness 
in strategic technologies, defence, housing, water resilience and energy transition. 

(25)  The  Strategic  Technologies  for  Europe  Platform  (STEP)  provides  the  opportunity  to 
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP 
is channelled through 11 existing EU funds. Member States can also contribute to the 
InvestEU  programme  supporting  investments  in  priority  areas.  Germany  could  use 
these initiatives to support the development or manufacturing of critical technologies, 
including clean and resource-efficient technologies. 

(26)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan  and  other  EU  funds,  Germany  faces  several  additional  challenges  related  to  the 
need  to  tackle  the  bottlenecks  for  investment  and  innovation  as  well  as  the  acute 
shortage  of  skilled  workers,  digitalisation  and  the  green  transition.  Additional 
investment would help narrow the investment-savings gap. 

(27)  Private-sector  innovation  is  highly  concentrated  in  large  companies  and  specific 
regions.  R&D  expenditure  by  small  and  medium-sized  enterprises  (SMEs)  remains 
low (0.20% in 2021 against the EU average of 0.42%). The declining share of SMEs 
engaged  in  innovation  activities  risks  slowing  productivity  growth  and  the  broader 
adoption of new technologies. Public R&D spending has also stagnated over the last 
years  (0.92%  of  GDP  in  2023,  0.90%  in  2015).  The  innovation  environment  could 
benefit from more public funding for deep tech  and transformative innovation. R&D 
output has fallen when measured as a share of the most cited publications and patent 
applications. The country struggles to turn excellent research into successful products, 
partly because knowledge transfer is not viewed as a holistic, continuous process. 

(28)  Business  dynamism  in  Germany  is  weak,  posing  challenges  to  its  economic 
transformation, as shown by the declining rate of business creation and weak business 
expansion  in  almost  all  sectors of the economy.  To foster innovation,  it is crucial  to 
create a more supportive environment for business creation, innovation and expansion. 
Financing remains a key challenge for young entrepreneurs, in particular for start-ups 
and  scale-ups.  Strengthening  the  role  of  institutional  investors  as  capital  providers 
could help deepen capital markets and improve efficiency and investment growth.  

(29)  As  set  in  the  Competitiveness  Compass,  all  the  EU,  national,  and  local  institutions 
must  make  a  major  effort  to  produce  simpler  rules  and  to  accelerate  the  speed  of 
administrative  procedures.  The  Commission  has  set  ambitious  goals  for  reducing 
administrative burden: by at least 25% and by at least 35% for SMEs; and has created 
new  tools  to  achieve  these  goals,  including  systematic  stress  test  of  the  stock  of  EU 
legislation  and  enhanced  stakeholders’  dialogue.  To  match  this  ambition,  Germany 
also needs to take action. 64% of businesses consider the complexity of administrative 
procedures  to  be  a  problem  for  their  company  when  doing  business  in  Germany15. 
Bureaucracy and tight regulations are critical barriers to investment, with 90% of firms 

14 

15 

Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE  COUNCIL 
amending  Regulations  (EU)  2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address 
strategic challenges in the context of the mid-term review - COM(2025) 123 final.  
‘Businesses' attitudes towards corruption in the EU’ Flash Report, Eurobarometer Report (April 2024). 

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reporting  this  as  an  obstacle.  The  bureaucratic  burden  is  considered  to  be  high  and 
increasing,  and  concerns  include  lengthy  administrative  procedures,  multiple  data 
entry requirements and the lack of communication between authorities. 

(30)  Germany has made further efforts to improve the digitalisation of its public services, 
but  implementation  progresses  slowly.  Germany  lags  behind  the  EU  average  on  key 
Digital  Decade  targets  regarding  the  provision  of  digital  public  services  for  citizens. 
The use of electronic identification and connected data registers for public services is 
underdeveloped. The nationwide roll-out of digital services faces particular difficulties 
given  the  lack  of  funding  at  municipal  level.  The  distribution  of  legal  and  financial 
responsibilities  between  different  government 
inconsistent 
implementation  of  services  between  federal,  state  and  municipal  levels,  with 
insufficient  coordination  and  cooperation  across  administrative  levels.  Increasing  the 
degree of standardisation of digital services to facilitate re-use and further guidance by 
the  federal  government  will  be  key  to  speeding  up  the  roll-out  of  services  and  to 
enabling citizens to take up these services nationwide. 

levels  has 

led 

to 

(31)  Germany  continues  to  make  good  progress  in  deploying  fibre  broadband  (FTTP) 
connections, but the country’s overall level of coverage (29.8%) remained the second 
lowest in the EU in 2023. The low level of fibre coverage (25.6% of households) and 
level of connections to the very high-capacity network (37.6%) remained pronounced 
in rural areas. The trend for 2024 appears positive but is not yet confirmed in EU-level 
data.  These  gaps  in  coverage  undermine  competitiveness  and  productivity  growth, 
especially  for  small  and  medium-sized  enterprises  (SMEs).  Improving  framework 
conditions  for  network  deployment,  for  example  by  increasing  planning  and 
implementation capacity in the public sector, is crucial to accelerate fibre coverage. To 
meet  the  network  targets,  Germany  could  work  on  the  administrative  procedures 
involved  in  applying  for  and  granting  permits  and  on  standardising  alternative,  less 
time-consuming installation methods. 

(32)  Housing investment in Germany fell in 2024 for the fourth year in a row, resulting in a 
shortage  estimated  at  up  to  600 000  homes.  Housing  scarcity  exacerbates  the 
affordability  challenges  and  has  macroeconomic  implications  as  it  hinders  labour 
mobility.  Addressing  this  challenge  requires  innovation  in  construction,  streamlined 
regulations,  better  land-use  planning  and  better  transport  links.  Overly  strict  rent 
controls risk deterring much-needed private investment. 

(33)  Germany  has  continued  to  make  progress  on  the  energy  transition,  notably  by 
increasing renewable electricity production and diversifying its gas supply. However, 
fossil fuels still account for a substantial share of the energy mix. To meet its climate 
goals,  Germany  should  further  accelerate  the  phase-out  of  fossil  fuels  across  all 
sectors, in particular in housing and transport, while supporting the cost-effective roll-
out of renewable energy. 

(34)  Despite the progress made, structural challenges remain in integrating new volumes of 
renewable  energy  generation  efficiently  into  the  electricity  system.  Grid  congestion 
due to the geographical mismatch between renewable generation and demand centres 
limits  the  full  use  of  renewable  energy  and  raises  system  costs.  Germany  continues 
work  to  expand  the  transmission  grid  but  progress  should  accelerate  to  ensure  a 
minimum  of  70%  of  technical  cross-border  capacity  available  for  trading.  Despite 
recent efforts to this end, higher grid fees in renewable-rich regions are a disincentive 
to locate industry near generation sites. Germany has taken steps under  the RRP and 
national  measures  to  accelerate  permitting  and  support  flexibility  solutions.  It  would 

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nevertheless be beneficial to increase the scope, ambition and pace of action to expand 
and digitalise the electricity grid. 

(35)  Emissions  from  the  housing  and  transport  sectors,  which  fall  under  the  EU’s  Effort 
Sharing  Regulation,  remain  significant.  Germany  should  accelerate  action  to 
decarbonise these sectors to meet its climate targets and improve energy efficiency. In 
the buildings sector, Germany has expanded its regulatory and financial measures, but 
further  cross-cutting  efforts  on  energy  efficiency,  including  reductions  in  primary 
energy  consumption,  are  needed  to  achieve  its  2030  targets.  In  the  transport  sector, 
battery  electric  vehicle  adoption  is  increasing,  supported  by  subsidies  and  fiscal 
incentives. However, progress remains insufficient, particularly in terms of expanding 
the charging infrastructure as needed. Investment in upgrading and expanding the rail 
network is also needed to support a modal shift from road to rail, particularly freight 
transport, where road haulage remains predominant. Despite ongoing measures funded 
under the RRF and other national  initiatives, major railway projects  continue to  face 
significant delays. 

(36)  Shortages of skilled labour are a significant bottleneck to growth, productivity and the 
digital  and  green  transitions.  In  early  2025,  around  one  third  of  companies  reported 
being  affected  by  labour  shortages  and  the  vacancy  rate  remains  above  the  EU 
average. Although the employment rate is high, average hours worked are among the 
lowest in the EU and continue to decline. The labour shortage is aggravated by a lack 
of skills.  For example, only  slightly  over half of all  adults  have at  least  basic digital 
skills,  far  below  the  national  Digital  Decade  target  of  80%  by  2030.  Consequently, 
labour  shortages  are  particularly  acute  in  the  care  and  IT  sectors,  the  construction 
sector,  and  scientific  and  technical  professions.  Labour  shortages  also  affect  sectors 
that  are  key  for  the  green  transition,  such  as  water  supply,  sewerage,  waste 
management and energy. Lastly, there is untapped potential for attracting and retaining 
talent, for example by speeding up administrative procedures for labour migration. 

(37)  Low  and  worsening  education  outcomes,  especially  for  disadvantaged  groups,  and 
significant  numbers  of  early  school  leavers  further  aggravate  the  shortage  of  skilled 
labour.  According  to  the  OECD  Programme  for  International  Student  Assessment 
(PISA),  the  share  of  high-performing  pupils  has  fallen,  while  the  share  of 
underachievers almost doubled over the last decade. Around 3 in 10 young students in 
Germany  lack  a  minimum  level  of  proficiency  in  mathematics,  and  1  in  4  lack  a 
minimum  level  in  reading  and  science.  The  influence  of  socioeconomic  and  migrant 
backgrounds on education outcomes has increased since the 2018 PISA results. 

(38)  Strengthening  quality  early  childhood  education  and  care  (ECEC)  and  whole-day 
schools could further enable full-time employment of carers, often women, as well as 
promote equal opportunities for all children. Half of all female employees work part-
time, one of the highest levels in the EU. Caring for children and elderly relatives is a 
frequent  reason  for  working  part-time,  partly  driven  by  a  gap  in  the  provision  of 
quality, flexible early childhood education and care and whole-day schools. Access to 
quality  ECEC  and  whole-day  schools  can  also  help  mitigate  disadvantages  due  to 
socioeconomic  background  and  language  deficiencies.  Currently,  children  from 
wealthier  households  are  enrolled  in  ECEC  at  nearly  twice  the  rate  of  their  less 
affluent peers. 

(39) 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2025,  the  Council  recommended  that  the  euro-area  Member  States  take 

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the  economic  policy  of 

action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2025 
the  euro  area.  For  Germany, 
Recommendation  on 
recommendations  (1),  (2),  (3),  (4)  and  (5)  help  implement  the  first  euro-area 
recommendation on competitiveness, while recommendations (1), (3), (4) and (5) help 
address the second euro-area recommendation on resilience, and recommendation (1) 
helps address the third recommendation on macro-economic and financial stability set 
out in the 2025 Recommendation. 

HEREBY RECOMMENDS that Germany take action in 2025 and 2026 to: 

1. 

2. 

3. 

4. 

Reinforce overall defence spending and readiness in line with the European Council 
conclusions of 6 March 2025. Submit the medium-term fiscal-structural plan by end-
July  2025,  as  planned.  In  line  with  the  requirements  of  the  reformed  Stability  and 
Growth  Pact,  limit  the  growth  in  net  expenditure  in  2025  and  2026  to  a  rate 
consistent  with  putting  the  general  government  debt  on  a  plausibly  downward 
trajectory  over  the  medium  term  and  maintaining  the  general  government  deficit 
below  the  3%  of  GDP  Treaty  reference  value,  while  making  use  of  the  allowance 
under  the  national  escape  clause  for  higher  defence  expenditure.  Strengthen  public 
investment  by  tackling  the  bottlenecks  in  planning  and  execution  at  all  levels  of 
government. Improve the quality of public finances by containing transfers from the 
federal budget to the pension system and reviewing the efficiency of public spending. 
Safeguard  the  long-term  sustainability  of  the  pension  system,  while  maintaining 
pension  adequacy,  including  by  promoting  longer  working  lives  and  reducing  the 
incentives for early retirement. Improve the tax mix to support inclusive growth and 
sustainable competitiveness, in particular for second earners. 

In  view  of  the  applicable  deadlines  for  the  timely  completion  of  reforms  and 
investments under Regulation (EU) 2021/241, ensure the effective implementation of 
the recovery and resilience plan, including the REPowerEU chapter.  Accelerate the 
implementation  of  cohesion  policy  programmes  (ERDF,  JTF  and  ESF+),  building, 
where  appropriate,  on  the  opportunities  offered  by  the  mid-term  review.  Make 
optimal use of EU instruments, including the scope provided by the InvestEU and the 
Strategic Technologies for Europe Platform, to improve competitiveness. 

Boost innovation by facilitating research commercialisation and by increasing public 
funding for transformative innovation. Facilitate the diversification of the economy, 
business  dynamism  and  boost  private  investment  by  supporting  entrepreneurship, 
improving access to finance for start-ups and scale-ups, simplifying regulation, and 
reducing  administrative  burden.  Speed  up 
the  public 
administration,  including  by  improving  the  geographic  coverage  of  digital  public 
services  and  facilitating  cooperation  between  governmental  levels.  Accelerate  the 
roll-out  of  very  high-capacity  digital  communication  networks,  also  involving  the 
private  sector.  Improve  the  conditions  for  housing  investments  by  simplifying 
regulation  and  procedures,  reviewing  rental  law  and  mobilising  additional  building 
land, with the concurrent aim of tackling the housing affordability challenges. 

the  digitalisation  of 

Further  reduce  the  overall  degree  of  dependency  on  fossil  fuels  and  facilitate  the 
expansion of renewable energy. Focus investment on efficient and integrated energy 
systems,  including  by  upgrading  the  electricity  network,  ensuring  cost-efficient 
expansion and flexibility to support the integration of renewable energy and to adapt 
to fluctuating demand and supply to meet increased balancing needs. Accelerate the 
process of decarbonising the buildings and transport sectors, including by renovating 
the rail network. 

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5. 

Increase  labour  supply  and  tackle  the  shortage  of  skilled  workers,  notably  by 
increasing  hours  worked,  strengthening  basic,  green  and  digital  skills  and  better 
attracting and retaining talent from non-EU countries. Improve education outcomes, 
including by promoting excellence and providing targeted support to disadvantaged 
groups.  Improve  the  availability  and  quality  of  early  childhood  education  and  care 
and  whole-day  schools  to  encourage  carers,  often  women,  to  work  and  to  promote 
equal opportunities for all children. 

Done at Brussels, 

For the Council 
The President 

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