Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Germany
Date: 2026-06-03
Institutions: European Commission, Reform and Investment Task Force
Subjects: Germany, budget policy, economic policy, economic recovery, economic reform, employment policy, energy policy, investment, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 3.6.2026  COM(2026) 205 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Germany {SWD(2026) 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 
Articles 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  1466/97 (1),  and  in 
particular Article 3(3) 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: 

(1) 

(2) 

1 

2 

Regulation  (EU)  2024/1263  specifies  the  objectives  of  the  economic  governance 
framework,  which  aims  at  promoting  sound  and  sustainable  public  finances, 
sustainable  and  inclusive  growth  and  resilience  through  reforms  and  investments,  as 
well  as  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 
Treaty  on  the  Functioning  of  the  European  Union  (TFEU).  The  European  Semester 
includes, in  particular, the formulation and the surveillance of the implementation of 
country-specific recommendations.  

On  16 July 2025,  the  European  Commission  adopted  its  proposal  for  a  regulation 
establishing  the  European  Fund  for  economic,  social  and  territorial  cohesion, 
agriculture  and  rural,  fisheries  and  maritime,  prosperity  and  security  for  the  period 
2028-2034  and  amending  Regulation  (EU)  2023/955  and  Regulation  (EU,  Euratom) 
2024/2509 (2).  The  proposal  aims  to  increase  the  effectiveness  of  Union  funding  by 

Regulation 

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 
ELI: 
http://data.europa.eu/eli/reg/2024/1263/oj). 
Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  establishing  the  European 
Fund  for  economic,  social  and  territorial  cohesion,  agriculture  and  rural,  fisheries  and  maritime, 
prosperity  and  security  for  the  period  2028-2034  and  amending  Regulation  (EU)  2023/955  and 

(EC)  No 

2024/1263, 

30.4.2024, 

1466/97 

(OJ 

L, 

EN 

1 

  EN 

 
 
(3) 

(4) 

(5) 

(6) 

reducing the fragmentation of the financial architecture and to support Member States 
in the coordination of their economic policy in line with Article 175 of the TFEU.  

On  25 November 2025,  the  Commission  adopted  an  opinion  on  the  2026  draft 
budgetary  plan  of  Germany.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2026  Alert  Mechanism  Report,  in  which  it 
did not identify 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,  a  recommendation  for  a 
Council recommendation on human capital in the European Union, and a proposal for 
the  2026  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 area (3) 
on  21 April 2026  and  the  Joint  Employment  Report,  and  the  Recommendation  on 
human capital, on 9 March 2026.  

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic  framework  that  aims  to  boost  the  Union’s  global  competitiveness  over  the 
next  five  years.  It  identifies  the  three  transformational  imperatives  of  innovation, 
decarbonisation  and  competitiveness,  and  security  as  critical  pillars  for  sustainable 
economic  growth.  The  European  Semester  is  aligned  with  the  Competitiveness 
Compass,  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. 

In  2026,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  final  stage  of  Recovery  and  Resilience  Facility  (RRF) 
implementation (4). Recovery and resilience plans (RRPs), along with cohesion policy 
funding, have been essential for delivering on the policy priorities under the European 
Semester, as the plans were required to effectively address all or a significant subset of 
challenges identified in the relevant country-specific recommendations issued in recent 
cycles, and programmes funded by the European cohesion policy were required to take 
country-specific recommendations into account. As the RRF approaches the end of its 
lifetime,  it  remains  essential  to  sustain  the  reforms  and  investments  supported  and 
implemented  under  the  RRF,  in  particular  those  that  contribute  to  addressing 
challenges identified in the country-specific recommendations. 

On  3 June 2026,  the  Commission  published  the  2026  country  report  for  Germany.  It 
assessed  Germany’s  progress 
relevant  country-specific 
in  addressing 
recommendations  and  took  stock  of  Germany’s  implementation  of  the  RRP.  On  the 
basis  of  that  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 

3 
4 

Regulation (EU, Euratom) 2024/2509 - COM(2025) 565 final. The proposed Regulation is currently the 
subject of negotiations with the co-legislators. 
OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj. 
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). 

the  Recovery  and  Resilience  Facility 

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(7) 

(8) 

Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  has  invited  Member 
States  to  request  the  activation  of  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 (5)  and  this  proposal  was  welcomed  by  the 
European  Council  of  6 March 2025.  On  10 October 2025,  the  Council,  upon  the 
assessment  and  recommendation  of  the  Commission,  adopted  a  Recommendation 
endorsing  the  national  medium-term  fiscal-structural  plan  of  Germany  and  allowing 
Germany  to  deviate  from  the  maximum  growth  rate  of  net  expenditure  as  set  by  the 
Council  under  Regulation  (EU)  2024/1263  (Activation  of  the  national  escape 
clause) (6).  The  plan  covers  the  period  from  2025  until  2029  and  presents  a  fiscal 
adjustment  spread  over  seven  years.  The  Council  recommended  the  following 
maximum growth rates of net expenditure: 4.4% in 2025, 4.5% in 2026, 2.3% in 2027, 
1.7%  in  2028  and  1.6%  in  2029,  which  correspond  to  the  maximum  cumulative 
growth rates calculated by reference to the base year of 2024 of 4.4% in 2025, 9.0% in 
2026, 11.5% in 2027, 13.3% in 2028 and 15.2% in 2029. At the same time, following 
the  request  of  Germany,  on  10 October 2025  the  Council,  upon  a  recommendation 
from the Commission, adopted a Recommendation allowing Germany to deviate from 
the  recommended  maximum  growth  rates  of  net  expenditure.  The  period  when  the 
national  escape  clause  is  activated  (2025-2028)  allows  Germany  to  reprioritise 
government  expenditure  or  increase  government  revenue  so  that  lastingly  higher 
defence expenditure would not endanger fiscal sustainability in the medium term. 
On  30 April 2026,  Germany  submitted  its  2026  Annual  Progress  Report (7)  on 
adherence  to  the  recommended  maximum  growth  rates  of  net  expenditure,  the 
implementation  of  the  set  of  reforms  and  investments  underpinning  the  extension  of 
the adjustment period and the implementation of reforms and investments responding 
to the main challenges identified in the country-specific recommendation. The Annual 
Progress  Report  also  reflects  Germany’s  biannual  reporting  on  the  progress  made  in 
implementing  its  recovery  and  resilience  plan  in  accordance  with  Article  27  of 
Regulation (EU) 2021/241.  

(9) 

Real  GDP  growth  in  2025  was  0.2%  and  HICP  inflation  stood  at  2.3%.  The 
Commission  Spring  2026  Forecast  projects  real  GDP  to  grow  by  0.6%  in  2026  and 
0.9% in 2027, and HICP inflation to stand at 2.9% in 2026 and 2.7% in 2027. 
(10)  Based  on  data  provided  by  Eurostat (8),  Germany’s  general  government  deficit 
remained constant between 2024 and 2025 at 2.7% of GDP. Based on policy measures 
known  by  the  cut-off  date  of  the  forecast,  the  Commission  Spring  2026  Forecast 
projects a deficit of 3.7% of GDP in 2026 and 4.1% of GDP in 2027. The increase in 
2026  and  2027  mainly  reflects  an  increase  in  infrastructure  and  defence-related 
spending and revenue-decreasing tax relief measures.  

Communication  from  the  Commission,  'Accommodating  increased  defence  expenditure  within  the 

5 
Stability and Growth Pact’, Brussels, 19 March 2025, C(2025) 2000 final. 
6 
Council  Recommendation  of  10 October 2025  endorsing  the  national  medium-term  fiscal-structural 
plan of Germany and allowing Germany to deviate from the maximum growth rates of net expenditure as set by 
the Council under Regulation (EU) 2024/1263 (Activation of the national escape clause)] (OJ C, C/2025/5635, 
22.10.2025, ELI: http://data.europa.eu/eli/C/2025/5635/oj). 
7 
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en. 
8 

The  2026  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-

Eurostat-Euro Indicators, 22 April 2026. 

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(11)  Based  on  the  Commission’s  estimates,  the  fiscal  stance (9),  which  includes  both 
nationally and EU financed expenditure, was broadly neutral in 2025. It is projected to 
be expansionary both in 2026 and 2027, by 1.3% and 0.5% of GDP, respectively. 
(12)  Based  on  data  provided  by  Eurostat (10),  Germany’s  general  government  debt 
increased from 62.2% of GDP at the end of 2024 to 63.5% of GDP at the end of 2025. 
The increase in the debt ratio in 2025 mainly reflects a higher stock-flow adjustment in 
2025.  Based  on  policy  measures  known  at  the  cut-off  date  of  the  forecast,  the 
Commission Spring 2026 Forecast projects the debt-to-GDP ratio to increase to 65.8% 
by the end of 2026 and to further increase to 68.0% by the end of 2027. The increases 
in 2026 and 2027 mainly reflect increases in the primary deficit. 

(13)  Based on Eurostat data (11), total general government defence expenditure in Germany 
amounted  to  1.5%  of  GDP  in  2025,  corresponding  to  an  increase  of  0.4  percentage 
points  of  GDP  compared  to  the  reference  year  2021.  According  to  the  Commission 
Spring  2026  Forecast,  it  is  projected  at  1.9%  of  GDP  in  2026,  corresponding  to  an 
increase of 0.8 percentage points of GDP compared to 2021. 

(14)  The  Union  continues  to  face  risks  of  energy  supply  disruptions  and  elevated  price 
volatility,  exacerbated  by  geopolitical  tensions  which  affect  global  oil  and  gas 
markets.  Experience  from  the  2022-2023  energy  crisis  has  shown  that  broad  and 
untargeted  measures  entail  large  fiscal  costs  and  are  socially  and  economically 
inefficient.  Since  the  outbreak  of  the  war  in  the  Middle  East  in  February  2026, 
Germany adopted fiscal policy measures to mitigate the impact of high energy prices 
on households and firms (12). These include an untargeted reduction in the energy tax 
on diesel and gasoline for May-June 2026. According to the Commission Spring 2026 
Forecast,  the  fiscal  cost  of  these  measures  is  projected  to  amount  to  approximately 
0.1% of  GDP in  2026.  According to  Commission estimates,  if the measures were to 
remain in force until end-2026, the fiscal cost of the measures would amount to 0.2% 
of GDP in 2026. 

(15)  Based on the Commission’s calculations, net expenditure in Germany grew by 3.8% in 
2025.  The  net  expenditure  growth  in  2025  is  below  the  recommended  maximum 
growth rate.  

(16)  Based on the Commission’s calculations, net expenditure in Germany is projected to 
grow by 5.6% in 2026, and 9.7% cumulatively over 2025 and 2026. The projected net 
expenditure  growth  in  2026  is  above  the  recommended  maximum  growth  rate, 
corresponding to a deviation of 0.5% of GDP in annual terms. When considering 2025 
and  2026  together,  the  projected  cumulative  growth  rate  of  net  expenditure  is  also 
above the recommended maximum growth rate, corresponding to a deviation of 0.3% 
of GDP in cumulative terms. However, the projected deviation is within the flexibility 
of the national escape clause based on current projections for defence spending. 

9 
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. 
10 
Eurostat-Euro Indicators, 22 May 2026. 
11 
Eurostat, government expenditure by classification of functions of government (COFOG). 
12 
This reflects the situation at the cut-off date of the Commission’s Spring 2026 Forecast (4 May 2026). 

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(17)  The recommendation endorsing the medium-term plan of Germany specifies the set of 
reforms  and  investments  underpinning  the  extension  of  the  adjustment  period,  along 
with a timeline for their implementation. Taking into account the information provided 
by  Germany  in  its  Annual  Progress  Report,  the  Commission  finds  that  the 
implementation of the key steps of these reforms and investments that were due by 30 
April  2026  seems  to  be  broadly  on  track.  The  Commission  considers  that,  overall, 
Germany has complied with its commitments in a satisfactory manner (13). 

(18)  On  3  June  2026,  the  Commission  adopted  a  report  under  Article  126(3)  TFEU  (14). 
That  report  assessed  the  situation  of  Germany  vis-à-vis  the  deficit  criterion,  as  its 
planned  general  government  deficit  in  2026  exceeds  the  reference  value  of  3%  of 
GDP.  The  report  concluded  that  the  deficit  criterion  is  not  fulfilled  by  Germany. 
However, the Commission was of the view that there is no case to open an excessive 
deficit procedure for Germany, as the Council has activated the national escape clause 
for Germany and the projected deficit in excess of the reference value in 2026 is fully 
explained  by  the  increase  in  defence  expenditure  since  2021,  based  on  the 
Commission Spring 2026 Forecast. In light of this and after considering the opinion of 
the Economic and Financial Committee as established under Article 126(4) TFEU, the 
Commission has not proposed to open an excessive deficit procedure. 

(19)  After two decades of underinvestment, public investment as a share of GDP increased, 
from 2.2% in 2005 to 2.9% in 2023 to 3.3% in 2025. Yet, net public investment, that 
is,  investment  after  depreciation,  remains  among  the  lowest  in  the  EU,  at  0.4%  of 
GDP. This shows the need to further strengthen public investment to enhance growth 
and  competitiveness.  In  addition,  further  efforts  to  streamline  planning  and  approval 
procedures  and  to  address  bottlenecks  in  administrative  capacity  remain  important. 
Typical  high-return  priorities  for  investment  include  schools  and  early  childhood 
education  and  care,  rail  infrastructure  as  well  as  the  innovation  system.  The 
complexity  of  federal  structures,  fragmented  responsibilities  and  limited  financial 
capacities at the municipal level may hinder the timely and efficient implementation of 
projects.  

(20)  The relatively low share of public investment in GDP pertains to the quality of public 
finances,  which  could  be  improved  considerably.  The  implementation  of  the  Special 
Fund  for  Infrastructure  and  Climate  Neutrality  is  expected  to  further  finance  public 
investments.  Still,  there  is  room  to  boost  the  additionality  and  quality  of  spending 
under the special fund. A stronger focus on capital formation in areas that increase the 
productive capacity and competitiveness of the economy – including infrastructure for 
education  and  skills  development  –  instead  of  consumptive  purposes  can  help  to 
maximise the positive impact on long-term growth. Another challenge for the quality 
of public finances is the transfer from the federal budget to the pension system, which 
reached  EUR  122  billion  in  2025,  around  25%  of  federal  government  expenditure, 
diminishing the scope for more productive spending. The commitments made in 2025 
to increase mothers’ pensions and to maintain a statutory pension replacement ratio of 
48% until 2031 are expected to further increase pension expenditure. Pension reform 
options  underlined  in  Recital  (22)  could  mitigate  the  need  for  budget  transfers  and 

13 
Communication from the Commission to the European Parliament, the Council, the European Central 
Bank, the European Economic and Social Committee, the Committee of Regions and the European Investment 
Bank, 2026 European Semester – Spring Package, COM(2026)200 final. 
14 
Functioning of the European Union, 3.6.2026, COM(2026)302 final. 

Report  from  the  Commission,  prepared  in  accordance  with  Article  126(3)  of  the  Treaty  on  the 

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increases  in  social  security  contributions,  thereby  promoting  inter-generational 
fairness. Other opportunities to enhance the overall efficiency of public spending can 
arise from further spending reviews and following them up with specific policy action, 
for instance on rationalising or eliminating non-essential subsidies. 

(21)  Demographic  ageing  is  exerting  pressure  on  the  old-age  dependency  ratio,  thereby 
challenging  the  long-term  sustainability  of  the  pension  system  and  the  adequacy  of 
statutory  pensions.  Between  2025  and  2035,  the  working  age  population  (20  to  64 
years old) is projected to decline from 49 million to 45 million. The sustainability of 
the  pension  system  is  also  being  undermined  by  attractive  early  retirement  options, 
and the failure to account for demographic pressures through the sustainability factor 
or  adjust  the  retirement  age  reflect  increases  in  life  expectancy.  Revising  pension 
indexation and adjusting contribution ceilings could help to make the pension system 
more sustainable. The pension commission’s report presents a propitious opportunity 
for  far-reaching  ambitious  reforms.  The  entire  pension  system  must  ensure  adequate 
old age income; with occupational and individual pension schemes complementing the 
statutory pension pillar. Better utilising capital-backed pension solutions is advisable. 
The 2026 reform of occupational pensions is a positive step, but occupational pension 
schemes,  along  with  statutory  pension  schemes  for  regulated  professions,  remain 
fragmented.  For  some  schemes  supervision  is  decentralised  to  the  Länder  level;  for 
others,  benefits  remain  unfunded  as  there  is  no  dedicated  pool  of  assets  backing  the 
pension  promise.  Furthermore,  the  lack  of  a  deep  asset  base,  and  inadequate 
management and oversight in some schemes, pose a barrier for deeper venture capital 
markets  in  the  EU.  Moreover,  occupational  pensions  cover  only  about  51%  of 
employees subject to social insurance contributions, and this share has been declining, 
as employment has been shifting to sectors with lower occupational pension coverage. 
Automatic enrolment  of  employees in  an asset-backed pension scheme could  benefit 
in  particular  lower  earners  who  are  currently  less  covered,  improving  pension 
adequacy.  Given  Germany’s  high  savings  rate,  reforms  should  prioritise  low-income 
groups  that  currently  save  little  for  retirement;  aside  from  that,  a  reallocation  of 
savings towards providing more capital to companies, including venture capital, would 
be  desirable,  rather  than  increasing  the  overall  savings  rate.  For  individual  pensions, 
the  legislated  reform  of  a  retirement  savings  account  (Altersvorsorgedepot)  without 
mandatory  guarantees  paves  the  way  for  the  possibility  of  higher  returns.  However, 
ensuring that management costs of such accounts are contained will be a key challenge 
for implementation. The fact that voluntary retirement savings are included in means-
testing of benefits during periods of unemployment may undermine the impact of the 
reform. Considering the currently relatively limited (30%) coverage rate of individual 
pensions,  a  government-mandated  fund  could  be  envisaged,  which  retirement  savers 
would  use  by  default  (i.e.  if  they  do  not  want  to  choose  their  own  funds),  with  low 
operating cost. This could also guide the market in terms of costs and practices. 

(22)  A  labour-friendly  tax  structure  is  key  for  strengthening  incentives  to  increase  hours 
worked. Workers in Germany face one of the highest tax wedges (including taxes on 
earnings from labour and social security contributions)  in the EU. In particular, high 
taxes in  conjunction with strict benefit withdrawal rules (such as reduced benefits  as 
income  increases)  lower  the  incentives  to  increase  the  number  of  hours  worked,  in 
particular  for  low-wage  earners.  The  rules  of  joint  taxation  of  married  couples 
(Ehegattensplitting)  provide  disincentives  to  increase  hours  worked  for  second 
earners,  often  women.  Potential  improvements  concerning  streamlining  benefit 
withdrawal  and  digitalising  social  administration  were  recently  pinpointed  by  the 
Welfare  State  Commission,  which  also  proposed  to  improve  the  effectiveness  of  the 

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welfare system  and thereby to  reduce poverty risks,  by simplification and improving 
access to benefits. Accompanying social benefit reforms by a reduction of income tax 
especially  for  low  and  middle  incomes  –  as  announced  in  the  coalition  agreement  – 
and adjusted rules of joint taxation as well as of health insurance coverage of spouses, 
could increase labour supply incentives considerably. Shifting the tax mix towards less 
distorting taxes instead could raise alternative revenue potential, also at regional level, 
as well as reducing environmentally harmful tax subsidies, instead of increasing them. 

(23)  The systematic, meaningful and timely 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 Union’s funding 
instruments, as well as in the context of the European Semester. 

(24)  The implementation of cohesion policy programmes, which encompasses support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF) 
and the European Social Fund Plus (ESF+) in Germany, remains below EU average, 
both  in  terms  of  project  selection  and  payments.  It  is  important  to  step  up  and 
accelerate efforts to ensure the swift delivery of investments, 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 in implementation, including those relating to meeting the 
spending  targets  at  end  of  2026.  It  is  essential  to  ensure  that  the  new  investments 
identified  by  Germany  in  its  mid-term  review  of  the  cohesion  policy  funds,  notably 
those linked to the five priorities identified in  the Mid-Term Review Regulation (15), 
are deployed rapidly and effectively 

(25)  Germany also faces several challenges related to innovation, the diversification of the 
economy,  business  dynamism  and private investment,  the digitalisation of the public 
administration,  digital  infrastructure,  housing  affordability,  the  dependency  on  fossil 
fuels, investment in energy systems and the decarbonisation of buildings, transport and 
industry, labour supply, skills,  attracting and retaining  talent  from  non-EU countries, 
educational outcomes as well as the availability of early childhood education and care 
and all-day schools.  

(26)  Private-sector innovation is concentrated in large companies, specific regions and mid-
tech  sectors.  R&D  expenditure  by  small  and  medium-sized  enterprises  (SMEs) 
remains low (0.18% in 2023 against the EU average of 0.47%). Innovation activity is 
concentrated in mid-tech sectors. 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. 
Germany  struggles  regarding  commercialisation  of  academic  research.  A  more 
systematic  approach  to  knowledge  transfer,  including  through  prioritising  public 
funding  to  disruptive  innovation,  could  enhance  the  conversion  of  high-quality 
academic research into commercially  viable products.  Currently, the process  is  often 
hindered by structural limitations like funding and career incentive systems that do not 
adequately  prioritise  commercialisation  as  well  as  protracted  and  bureaucratic 
intellectual property negotiations, delaying or discouraging the translation of research 
into market-ready innovations. For  cutting-edge  innovation,  it is  important  to  bolster 

15 

Regulation  (EU)  2025/1914  of  the  European  Parliament  and  of  the  Council  of  18 September 2025 
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. 

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high-performing  clusters  (e.g.  through  excellence  initiatives)  while  fostering  tailored 
R&D  ecosystems  and  ensuring  research  and  technology-transfer  infrastructure  for 
businesses.   

(27)  Economic  transformation  in  Germany  is  intensifying,  with  insolvencies  having 
reached  their  highest  level  in  20  years.  The  number  of  distressed  companies  is 
increasing and structural challenges are mounting, in particular in regions of industrial 
transformation.  Therefore,  it  becomes  even  more  crucial  to  facilitate  firm  entry  and 
growth  and  speed  up  resource  reallocation  from  non-viable  companies  to  productive 
and innovative firms, including start-ups and scale-ups. The number of newly founded 
start-ups increased in 2025 from the previous year, but start-up activity remains below 
its  2018  level,  and  the  general  propensity  to  start  a  business  in  Germany  remains 
relatively  low.  Germany’s  reliance  on  mid-tech  industries  and  a  weaker  innovation 
output  rate  suggest  that  the  country  may  be  experiencing  lock-in  effects  where 
established industries and technologies prevail, while new entrants face challenges to 
promote emerging technologies and bring innovations to the industrial base. Financing 
remains  a  key  challenge  for  young  entrepreneurs,  in  particular  for  scale-ups. 
Strengthening the role of institutional investors as capital providers could help deepen 
capital  markets  and  improve  efficiency  and  investment  growth.  While  a  range  of 
government programmes, primarily  through the  development bank  KfW,  support the 
venture capital system, reducing tax uncertainty regarding partnership structures could 
make  managing venture  capital  and  private equity funds in  Germany more attractive 
for private managers. More broadly, corporate financing could be improved by a more 
efficient banking market, providing lower-cost loans and more flexible products. This 
is  hindered  by  operational  inefficiencies:  the  cost-to-income  ratio  of  German  banks 
stood at 58.3% in March 2025 compared with an EU average of 54%. Consolidation, 
mergers,  including  with  banks  from  other  EU  Member  States,  centralisation  of 
operations could considerably reduce such inefficiencies. 

(28)  The  government  plans  to  cut  administrative  costs  for  businesses  by  25%  during  the 
current  legislative  period.  However,  the  ambitious  goals  do  not  seem  to  be 
accompanied  by  fundamentally  new  instruments  or  a  consolidation  of  competences 
that  would  promote  effective  burden  reduction.  This  is  critical  as  many  businesses 
report  delays  (62%)  and  increased  operational  costs  (44%)  due  to  administrative 
interactions.  Effective tools  could  include  simplified rules on documentary evidence, 
the wider use of administrative approval by default and flat-rate approaches rather than 
exact  case-by-case  verification.  A  thorough  cost-benefit  assessment  could  help  to 
ensure  that  the  effort  associated  with  new  regulation  is  in  proportion  to  the  benefits 
they  provide.  Given  the  centrality  of  Germany  in  the  single  market,  there  is  a 
particular  need  to  reduce  national  and  regional  barriers  to  intra-EEA  trade  in  goods 
and services, also by avoiding burdensome national implementation of EU legislation 
and by reducing the packaging and waste management compliance burden. 

(29)  Germany  is  making  efforts  to  improve  the  digitalisation  of  its  public  services,  but 
these have not yet resulted in much measurable progress. Germany’s performance on 
key  Digital  Decade  targets  regarding  the  provision  of  digital  public  services  for 
citizens  and  businesses  remains  below  the  EU  average.  Key  enabling  conditions  for 
seamless digital administration, electronic identification and connected data registers, 
are underdeveloped. The country lags behind in digital solutions to initiate and follow 
proceedings  in  civil/commercial  and  administrative  court  cases.  In  addition,  newly 
developed  digital  services  are  not  rolled  out  consistently  across  regions  and 
municipalities, limiting their territorial coverage and scalability. Where digital services 

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exist, they are often not sufficiently user-friendly as citizens and businesses still face 
complex, only partially digitalised procedures and repeated interactions with multiple 
authorities.  This  points  to  a  broader  need  to  modernise  public  administration,  with 
improved  coordination  or  adjusted  responsibilities  between  levels  of  government. 
Federal and regional and local governments could expand their use of common digital 
building blocks and standards and consolidate overlapping administrative procedures. 
Such  a  modernisation  is  also  increasingly  necessary  to  preserve  administrative 
capacity in the face of mounting staff shortages, which make digitalisation, automation 
and  simpler  procedures  as  key  enablers  of  an  effective  and  resilient  public 
administration. 

(30)  Germany  continues  to  make  progress  in  expanding  its  connectivity  infrastructure, 
legislating  to  facilitate  permitting  for  fibre  optics  and  mobile  communication 
networks. Nevertheless, the country’s fibre-to-the-premises (FTTP) coverage remained 
the  second  lowest  in  the  EU.  Persistent  coverage  gaps,  combined  with  significant 
regional  disparities,  risk  constraining  competitiveness,  limiting  productivity  growth, 
and  slowing  the  uptake  of  data-intensive  digital  technologies.  Catching  up  requires 
effective implementation of commitments by federal and regional authorities to enable 
continued investment by the private sector where possible and provide public support 
where necessary. 

(31)  Housing  investment  in  Germany  fell  in  2025  for  the  fifth  year  in  a  row,  having 
contracted  by  20%  since  2020,  contributing  to  housing  affordability  challenges  and 
broader  economic  stagnation.  A  widening  gap  between  rental  prices  in  existing  and 
new  contracts  leads  to  a  frozen  housing  market,  limiting  labour  mobility.  Rent 
regulation measures do not address the underlying causes of housing shortages and can 
weaken private investment incentives and hinder the efficient use of available housing. 
Complex and lengthy land-use planning can stand in the way of more reallocation of 
land  to  housing  purposes  or  densification.  The  adopted  “construction  turbo”  aims  to 
accelerate  planning  and  permitting  procedures,  but  its  uptake  remains  uneven  across 
municipalities. Reducing construction costs, which are the highest in the EU, is key in 
delivering  more  housing.  Implementing  the  announced  “housing  type  E”,  a  simpler, 
needs-based  standard  in  construction,  will  need  to  provide  legal  certainty  when 
applying  simpler  standards.  Addressing  the  housing  investment  challenge  requires 
innovation  in  construction,  further  simplified  and  streamlined  regulations,  digitalised 
processes,  better  land-use  planning,  better  transport  links  as  well  as  increasing  the 
stock of social housing and making more socially targeted use of existing units.  

(32)  Germany  has  continued  to  make  progress  on  the  energy  transition,  notably  by 
increasing  renewable  electricity  production.  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  and 
modernisation of grid infrastructure. 

(33)  Despite  the  progress  made,  structural  challenges  remain  in  integrating  growing  and 
variable  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, raises system 
costs, and reduces the transmission capacity available for cross-border trade. Germany 
is  working  to  expand  the  transmission  grid,  but  progress  will  need  to  accelerate  to 
ensure  that  a  minimum  of  70%  of  technical  cross-border  capacity  is  available  for 
trading.  Despite recent  efforts to  this  end, higher grid fees in renewable-rich regions 

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remain a disincentive for locating industry close to generation sites. A reform towards 
dynamic,  regionalised  network  charges  could  link  fees  to  actual  grid  load,  thereby 
creating locational  price signals. While Germany has taken steps under the RRP and 
national measures to accelerate permitting and support flexibility solutions, challenges 
remain  in  scaling  up  system  flexibility  and  ensuring  more  efficient  integration  of 
renewable  energy  into  the  electricity  system.  Flexibility  options  such  as  storage  and 
demand  response  are  not  yet  deployed  at  sufficient  scale,  limiting  the  ability  of  the 
system to accommodate variable renewable generation without costly interventions. In 
addition,  the  digitalisation  of  electricity  networks,  particularly  at  distribution  level, 
continues to lag behind, with particularly slow progress in smart meter roll-out, limited 
data availability and a lack of standardisation across grid operators. 

(34)  Emissions  from  the  housing  and  transport  sectors,  which  fall  under  the  EU’s  Effort 
Sharing Regulation, continue to significantly exceed national and European reduction 
targets, and industrial emission remain high. Germany will need to accelerate action to 
decarbonise  these  sectors  in  order  to  meet  its  climate  targets  and  improve  energy 
efficiency.  In  the  building  sector,  Germany  has  expanded  existing  financial  support 
measures  under  the  RRP,  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 to 
meet the 2030 targets, particularly regarding the expansion of charging infrastructure. 
Greater investment is also needed to upgrade, expand, and digitalise the rail network 
to support a modal shift from road to rail, in particular for freight transport, where road 
haulage  remains  predominant.  Despite  ongoing  measures  funded  under  the  RRP  and 
other  national  initiatives,  major  railway  projects  continue  to  face  delays,  while  the 
slow  deployment  of  digital  signalling  systems,  notably  the  European  Rail  Traffic 
Management  System  (ERTMS),  continues  to  limit  capacity,  reliability  and  cross-
border interoperability. At the same time, Germany’s economic security and industrial 
competitiveness hinge on swiftly moving manufacturing production, including energy-
intensive  industries,  away  from  fossil  fuels.  Yet,  complex  permitting  procedures 
marked by overlapping  jurisdictions  and unclear  division  of responsibilities continue 
to  delay  critical  investments  in  non-fossil  low-carbon  and  net  zero  industrial 
production  technologies.  To  address  these  bottlenecks,  Germany  should  streamline 
approvals for infrastructure and facilities contributing to the clean industry transition. 

(35) 

In light of the crucial role of human capital in enhancing the Union’s competitiveness 
and  strategic  autonomy,  in  2026  the  Council  recommended  that  Member  States  take 
action  to  urgently  address  human  capital-related  structural  challenges  in  the  area  of 
skills  and  education,  which  hamper  competitiveness.  The  2026  country-specific 
recommendations  addressed to  Germany can contribute to  the implementation of the 
Council Recommendation on human capital in the Union. 

(36)  Shortages  of  skilled  labour  have  decreased,  but  remain  a  significant  bottleneck  to 
growth, productivity and the digital and green transitions. In late 2025, close to 30% 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.  Labour  shortages  are 
aggravated by skills gaps and skills mismatches. Digital skills are improving gradually 
but remain uneven. Labour shortages are particularly acute in the care and ICT sectors, 
the  construction  sector,  and  scientific  and  technical  professions,  requiring  skills  in 
science,  technology,  engineering  and  mathematics  (STEM).  Labour  shortages  also 

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affect  sectors  that  are  key  for  the  green  transition,  such  as  water  supply,  sewerage, 
waste  management  and  energy.  Shortages  partly  reflect  territorial  and  skills 
mismatches. Also reflecting manufacturing decline, areas such as Saarland, Rhineland-
Palatinate,  parts  of  North  Rhine-Westphalia  (the  Ruhr  region),  Lower  Saxony,  and 
Eastern  regions  such  as  Thuringia,  Saxony-Anhalt  and  Brandenburg,  are  undergoing 
pronounced  structural  shifts,  with  limited  capacity  to  absorb  displaced  labour.  To 
accommodate structural  change, policy tools to support job-to-job transitions need to 
gain relevance, and there needs to be a focus on promoting occupational changes and 
regional  labour  mobility,  which  is  currently  limited  by  low  housing  supply  in  areas 
with  labour  market  needs.  In  addition  to  these  preventive  measures,  comprehensive 
support for the low-skilled of all ages, especially those lacking a vocational diploma, 
could help Germany counteract skills shortages. Lastly, there is untapped potential for 
attracting  and  retaining  talent,  for  example  by  speeding  up,  digitalising  and 
centralising administrative procedures for labour migration and further facilitating the 
recognition of qualifications, with a faster and more transparent process.  

(37)  Low  and  worsening  education  outcomes,  especially  for  disadvantaged  groups,  and 
significant  numbers  of  early  school  leavers  further  aggravate  the  shortage  of  skilled 
labour.  Between  a  quarter  and  a  third  of  15-year-olds  underperform  in  mathematics, 
reading and science, and the share of top performers has also been dropping strongly. 
The  impact  of  students’  socio-economic  background  on  education  outcomes  is  very 
pronounced.  In  2022,  46.6%  of  students  from  disadvantaged  backgrounds  failed  to 
reach  minimum  proficiency  in  mathematics,  a  noticeable  rise  from  29.8%  in  2015. 
Additionally, two-thirds (64%) of students born abroad underachieve in mathematics, 
compared  to  21.9%  of  non-immigrant  students,  further  contributing  to  the  widening 
socio-economic  gap  in  education.  Almost  one  in  seven  of  Germany’s  young  people 
(18-24  years  old)  have  no  or  only  very  low  qualifications  and  are  considered  early 
leavers  from  education  and  training.  With  this,  Germany  is  one  of  the  worst 
performing  Member  States,  with  a  deteriorating  trend.  Preventive  and  remedial 
measures,  taking  into  account  regional  differences,  could  help  reduce  early  school 
leaving  and  improve  education  outcomes.  Enhanced  data  collection  and  data 
interoperability  between  schools,  social  services,  and  the  Länder  would  allow  for 
better monitoring of educational trajectories. This would help with tailoring support to 
underachieving  learners  from  an  early  age,  strengthening  mandatory  schooling  or 
training until age 18 and providing flexible learning pathways. As the digitalisation of 
the economy  accelerates, education investments  also  need to  keep pace. Tailor-made 
education  is  crucial  for  effective  outcomes,  making  teacher  shortages  particularly 
concerning  –  as  of  now,  the  Standing  Conference  of  the  Ministers  of  Education  and 
Cultural Affairs (KMK) forecasts a shortage of 49 000 teachers by 2035.  

(38)  Strengthening quality early childhood education and care (ECEC) and all-day schools 
could further enable full-time employment of carers, often women, as well as promote 
equal opportunities for 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  ECEC  and  all-day  schools.  It  is  estimated  that  300 000  childcare  and 
kindergarten places are missing currently and 150 000 all-day school places still need 
to  be  created  by  2029,  with  regional  disparities  in  unmet  needs.  Access  to  quality 
ECEC and all-day schools can also help mitigate disadvantages due to socioeconomic 
language  proficiency.  The  roll-out  of  nationwide 
background  and  German 
standardised language support in ECEC could help build strong foundations for basic 
skills  acquisition  in  primary  school,  thereby  improving  the  equity  of  the  German 

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(39) 

education  system  characterised  by  very  early  tracking  of  pupils  into  different  paths. 
Currently,  children  from  wealthier  households  are  enrolled  in  ECEC  at  nearly  twice 
the rate of their less affluent peers. Expanding cost-efficient long-term care, especially 
home  and  outpatient-based  services,  could  also  provide  relief  from  caring 
responsibilities and promote intergenerational fairness. 

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  2026  the  Council  recommended  that  the  euro-area  Member  States  take 
action, including through their RRPs, to implement the 2026 Recommendation on the 
economic  policy  of  the  euro  area.  For  Germany,  the  recommendation  (1)  helps 
implement the first, the second, the third, the fifth and the seventh recommendations 
on the euro area, recommendation (2) helps implement the fourth recommendation on 
the euro area, recommendation (3) helps implement the fifth, the seventh and the ninth 
recommendations on the euro area, recommendation (4) helps implement the seventh 
recommendation  on  the  euro  area  and  the  recommendation  (5)  helps  implement  the 
fifth recommendation on the euro area. 

HEREBY RECOMMENDS that Germany take action in 2026 and 2027 to:  

1. 

2. 

3. 

Continue adhering to the maximum growth rates of net expenditure recommended by 
the  Council  on  10 October 2025,  while  making  use  of  the  flexibility  under  the 
national  escape  clause  for  higher  defence  expenditure.  Reinforce  defence  spending 
and readiness while ensuring spending efficiency and gradually adapting the budget 
to  sustain  structurally  higher  defence  spending.  Ensure  that  any  measures  taken  to 
mitigate the impact of the hike in energy prices are temporary, targeted at protecting 
vulnerable households or at addressing the needs of energy-intensive firms, preserve 
incentives for energy savings while ensuring that their fiscal cost is compatible with 
the commitments under the EU fiscal framework. Implement the set of reforms and 
investments  underpinning  the  extended  adjustment  period  as  recommended  by  the 
Council on 10 October 2025. Support the rollout of public investments by expanding 
measures to  accelerate permitting and execution procedures. Improve the quality of 
public finances by ensuring that the new Special Fund for Infrastructure and Climate 
Neutrality  (Sondervermögen)  increases  the  productive  capital  stock  and  by  limiting 
subsidies  and  transfers  from  the  federal  budget  to  the  pension  system.  Improve  the 
sustainability  of  statutory  pensions,  including  by  promoting  longer  working  lives, 
and  strengthen  occupational  and  individual  pension  schemes.  Improve  the  tax  mix 
and the effectiveness and efficiency of the welfare system to strengthen incentives to 
increase hours worked, including by second earners. 

Ensure continuity of reforms and investments implemented under the Recovery and 
Resilience  Facility.  Accelerate  efforts  to  implement  cohesion  policy  programmes, 
building, where appropriate, on the reallocation to strategic priorities and flexibilities 
in the mid-term review of the cohesion policy framework. 

by 

including 

innovation 

transformative 

Boost 
research 
commercialisation.  Facilitate  the  diversification  of  the  economy  and  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  modernisation  and  digitalisation  of  public 
administration,  including  by  reducing  complexity  between  government  levels, 
increasing  the  use  of  common  standards  and  redesigning  public  services  to  make 
them user-friendly and consistently available across the country. Accelerate the roll-

facilitating 

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4. 

5. 

out  of  very  high-capacity  digital  communication  networks.  Improve  the  conditions 
for  housing  investments  in  order  to  make  housing  more  affordable  by  further 
simplifying  regulation  and  procedures,  reviewing  rental  law,  mobilising  additional 
building land and strengthening social housing. 

Further  reduce  the  overall  degree  of  dependency  on  fossil  fuels  and  facilitate  the 
expansion  of  renewable  energy,  including  by  advancing  flexible  systems  such  as 
storage solutions to reduce prices at peak demand. Steer investment towards a cost-
efficient  and  carbon-neutral  electricity  system,  including  by  encouraging  grid-
friendly  renewable  electricity  generation  and  flexible  consumption  patterns,  while 
strengthening  regional 
transmission  corridors  and 
supporting the cross-border integration of electricity markets and grids. Promote the 
digitalisation  of  electricity  grids,  particularly  at  distribution  level  and  advance  the 
roll-out  of  smart  meters.  Accelerate  the  process  of  decarbonising  the  buildings, 
industry,  and  transport  sectors,  including  by  renovating  and  digitalising  the  rail 
network,  and  by  reducing  permitting  bottlenecks  for  infrastructure  and  facilities 
contributing to the clean industry transition.  

integration  by  expanding 

Increase  labour  supply  and  tackle  the  shortage  of  skilled  workers,  notably  by 
increasing hours worked, strengthening skills, facilitating transitions to and between 
jobs through active labour market policies, and better attracting and retaining talent 
from  non-EU  countries.  Improve  education  outcomes,  including  by  promoting 
excellence,  preventing  early  school  leaving,  and  providing  targeted  support  to 
disadvantaged  groups.  Improve  the  availability  and  quality  of  early  childhood 
education and care and all-day schools, as well as of cost-efficient long-term care. 

Done at Brussels, 

For the Council 
The President 

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