Soovitus - COM(2026) 205, SWD(2026) 205

EN EN

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}

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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) 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.

(2) 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

1 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 (OJ L, 2024/1263, 30.4.2024, ELI:

http://data.europa.eu/eli/reg/2024/1263/oj). 2 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

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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.

(3) 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.

(4) 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.

(5) 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.

(6) On 3 June 2026, the Commission published the 2026 country report for Germany. It

assessed Germany’s progress in addressing the relevant country-specific

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.

Regulation (EU, Euratom) 2024/2509 - COM(2025) 565 final. The proposed Regulation is currently the

subject of negotiations with the co-legislators. 3 OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj. 4 Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021

establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17, ELI:

http://data.europa.eu/eli/reg/2021/241/oj).

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(7) 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.

(8) 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.

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

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 The 2026 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. 8 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 Report from the Commission, prepared in accordance with Article 126(3) of the Treaty on the

Functioning of the European Union, 3.6.2026, COM(2026)302 final.

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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

EN 11 EN

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

background and German language proficiency. The roll-out of nationwide

standardised language support in ECEC could help build strong foundations for basic

skills acquisition in primary school, thereby improving the equity of the German

EN 12 EN

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.

(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 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. 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.

2. 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.

3. Boost transformative innovation including by facilitating 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-

EN 13 EN

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.

4. 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 integration by expanding 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.

5. 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

EN EN

EUROPEAN COMMISSION

Brussels, 3.6.2026

SWD(2026) 205 final

COMMISSION STAFF WORKING DOCUMENT

2026 Country Report - Germany

Accompanying the document

Recommendation for a COUNCIL RECOMMENDATION

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

{COM(2026) 205 final}

ECONOMIC DEVELOPMENTS AND KEY POLICY CHALLENGES

2

Years of economic stagnation are leaving their mark

Germany has been experiencing weak

economic performance for several years,

with almost no real GDP growth since 2019. Since the COVID-19 pandemic, Germany has recorded one of the weakest recoveries and lowest long-term growth rates in the EU. Global export market shares have declined sharply due to waning competitiveness in the context of the rise of China as a global competitor (1). This trend is compounded by the recent global fragmentation of trade and US tariffs. Drivers of the loss in competitiveness include fading technological leadership and skills shortages in the wake of a shrinking working-age population. In addition, wage costs and energy prices are high. Private investment had fallen back to below its 2015 level by 2025, driven by weakness in manufacturing and construction. Signs of structural change are visible as industrial value added and production diverge (particularly for cars and machines), indicating a shift of physical production abroad and an increased focus on the provision of industry-related services domestically. The public sector has cushioned the downturn somewhat, also due to rising public consumption and expenditure for defence and infrastructure (see Graph 1.1). Despite recent increases, public investment remains considerably below the EU average.

(1) Bundesbank, 2025, What’s behind the sustained decline

in German export market shares, bundesbank.de.

Years of stagnation and accelerating

structural change are leaving their mark

on the labour market. Reflecting the sluggish economy and weak labour demand, unemployment increased from 3.5% in January 2025 to 4.0% in March 2026. Employment growth in past years turned into job shedding, with an employment decline of 0.1% in Q1 2026, year-on-year. Hiring intentions remain weak. Employment destruction has accelerated in manufacturing, while the public sector has continued to hire, increasing employment by 17.4% since 2015 compared with 6.4% in the rest of the economy.

Looking ahead, the war in Iran has

reduced growth prospects and driven

inflation up. In 2026, the economy is set to recover by 0.6%, driven by the ramp-up in public spending. However, elevated inflation as well as uncertainty due to the situation in the Middle East and US tariffs detract from private consumption, investment, and exports and therefore weaken this recovery. As these effects subside slowly, growth in 2027 is forecast to accelerate to 0.9% and inflation to decelerate.

3

Structural reforms urgently needed on top of public investment

Long-term growth remains among the lowest in the EU. Potential growth is the rate

at which an economy grows over the long term when using its resources at a normal level. For Germany, it is projected to average just 0.5% annually over the period 2026- 2030, placing it at the low end among EU economies (see Graph 1.2). Demographic ageing is dampening economic growth as the labour force shrinks. This effect is compounded by low average hours worked. At the same time, weak and deteriorating education outcomes, coupled with a very high share of early school leavers, further aggravate the situation (see Section 4). Low public and private investment over many years has led to an ageing capital stock (the economy’s existing buildings, machines and infrastructure). Together with a lack of disruptive innovation, this is weighing on productivity and the overall growth potential of the economy.

The government has put forward a flagship public investment fund to reboot

growth. Next to the reform of the national debt brake (2), a Special Fund for Infrastructure and Climate Neutrality worth EUR 500 billion was legislated in 2025. Spending from the special fund is expected to continue a positive trend in public investment, which has been apparent since 2023 (see Graph 1.1), after decades of underinvestment. Still, there is room to boost the additionality and quality of spending (see below). A stronger focus on capital formation and the use of quantitative methods, such as cost-benefit analyses of measures, can help to maximise the positive impact on potential growth. Typical high-return priorities for investment include schools and early childhood education and care (see Section 4), rail infrastructure (see Section 3), as well as the innovation system (see Section 2).

(2) The debt brake (Schuldenbremse) in Germany is a

constitutional fiscal rule that limits government borrowing, allowing a structural deficit of 0.35% of GDP for the federal level. The 2025 debt brake reform created additional fiscal space. Defence spending above 1% of GDP is not considered in the debt brake any more and the Länder can issue debt of 0.35% of GDP annually in structural terms.

Graph 1.1: GDP, public and private investment and public consumption

Source: National Accounts

​Private Investment

Public Consumption

​GDP

Public Investment

95

105

115

125

135

145

155

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

4

Graph 1.2: Potential growth

Average potential growth 2026-2030 Source: Commission spring 2026 forecast

By contrast, the reform agenda lacks

momentum. To have a lasting effect, the

additional public spending must be accompanied by an ambitious reform agenda. However, so far, there has only been limited progress on structural reform measures. Several expert committees were set up in 2025 to work on key issues such as a further reform of the debt brake, long-term care, health insurance, the welfare state, the pension system and fiscal relations between the federal level and the Länder (see Annex 18). Some of these committees have presented their results; others are expected to do so by mid-2026. However, the recommendations are non-binding, and political discussions are still ongoing in several fields. Increasing the efficiency and effectiveness of the healthcare, long-term care and pension systems is essential to preventing further increases of budget transfers or social security contribution rates (see also Annex 15). Workers in Germany already face the second highest level of taxes and social security contributions on earnings in the EU (see below and Section 4). Beyond the

tax and social security system, the current reform agenda emphasises competitiveness, but with a focus on traditional industries, as opposed to disruptive innovation and economic transformation. More would be needed to be done to revamp the traditionally industry- based, export-oriented economic model, and the deepening of the EU single market can play a significant role in rebooting Germany’s sources of growth and jobs.

Delivering ambitiously on the new push

for State modernisation, simplification

and digitalisation could yield significant

results. The newly created Ministry for Digital Transformation and Government Modernisation has ambitious targets for reducing administrative burden and boosting digital, modern administration. However, the instruments to enforce these targets often remain uncertain, in particular in light of the constitutional division of responsibilities between different levels of the State (see Section 2). To improve permitting and planning procedures for public investment, the government has put in place several measures. Among them are the Procurement Acceleration Act, and the Future Infrastructure Act, the latter aiming at prioritising, simplifying and digitalising rail, motorway and waterway projects and currently going through the parliamentary process. These measures relate to the 2025 country-specific recommendation (CSR) to increase public investment by removing relevant bottlenecks.

Germany faces several economic security

challenges linked to its export-oriented

economy and strong industrial base. To

prevent shortages, a raw materials fund was launched in late 2024, supporting projects in extraction, processing and recycling. A first project received funding in 2025. It aims to extract and process lithium in Germany for up to 500 000 electric cars per year (see Annex 5). In addition, the government adopted a national economic security strategy and plans to introduce stronger screening of foreign investments in sensitive technologies. Digital sovereignty and cyber security are also growing concerns for Germany. Cyberattacks

0 1 2 3 4 5

MT IE

CY HR BG PL ES SI LT DK SE EL PT CZ RO LV LU SK BE NL HU FR FI

AT IT

DE EE

5

are estimated to have caused losses of almost EUR 200 billion in 2025 (5% of GDP) (3). Recent initiatives, such as the high-tech agenda or the data centre strategy, include measures to strengthen the cybersecurity of advanced technologies and infrastructure. In times of increasing geopolitical fragmentation, the single market plays a central role in ensuring economic security by providing reliable supply chains, enabling cross-border energy trade during supply shocks and affording economies of scale to sustain strategic industries such as semiconductors and batteries.

Accelerating the green transition is essential for sustainable growth and

economic security. Germany has rapidly expanded renewables, but insufficient grid capacity and a lack of flexible infrastructure are creating bottlenecks in integrating clean energy. Energy supplies have been diversified considerably and a further expansion of liquefied natural gas import capacity is planned. Nevertheless, Germany remains dependent on fossil fuel imports. Additional investment in renewables, energy storage and energy efficiency would reinforce energy security (see Section 3).

Rising public debt and deficits

After a period of decreasing public debt and deficits, fiscal policy is now

expansionary. Debt-to-GDP rose from 62.2%

in 2024 to 63.5% in 2025 and is expected to rise to 68.0% in 2027. The fiscal expansion is partly due to additional spending related to the reform of the 2025 national debt brake and the creation of the Special Fund for Infrastructure and Climate Neutrality. Defence expenditure above 1% of GDP has been exempted from the national debt brake. Defence spending has increased as a share of GDP, from 1.1% in 2021 to 1.5% in 2025 and is planned to rise to 2.2% in 2027. In order to facilitate an increase in public spending on

(3) Bundesamt für Verfassungsschutz & Bitkom, 2025,

Wirtschaftsschutz 2025, verfassungsschutz.de.

defence,the Council of the European Union has activated the National Escape Clause (NEC) for Germany (4). Germany’s recovery and resilience plan (RRP) contains two defence- related investments (worth around EUR 670 million), both including a final target or milestone planned to be completed in 2026. Germany has not requested EU loans under SAFE (Security Action for Europe) for defence procurement.

Graph 1.3: Impact of revenue measures on the

government balance (% of GDP)

The graph shows the impact of the reformed depreciation rules for firms, the VAT reduction for restaurants and the reduction in corporate taxes. The government balance is expressed as percentage-of-GDP deviations from the model baseline. The estimates include macroeconomic feedback effects. Source: European Commission using QUEST

Besides an increase in expenditure,

several revenue-reducing measures have

been adopted. Loosened depreciation rules for private equipment investment, a reduction in the corporate tax rate as of 2028, and the VAT reduction for restaurants will exert further pressure on public finances by reducing revenues, but are also expected to provide a boost to growth in the short term. Simulations by the European Commission, which account for second-round effects, show that this package of revenue measures is estimated to have a balance-deteriorating impact in cumulative terms of approximately 0.2 percentage points (pps) in 2027. This impact

(4) The activation of the national escape clause provides

Member States with budgetary flexibility to increase defence expenditure, without an immediate need to finance such increase with spending cuts or revenue- raising measures. The flexibility thus gives Member States the necessary time to accommodate higher defence expenditure within national budgets.

-0.15

-0.20

-0.07

-0.12

-0.16

2026 2027 2028 2029 2030

6

decreases subsequently due to the expiry of the reform of depreciation rules (see Graph 1.3).

The German medium-term fiscal-

structural plan (MTP) and the federal budgetary planning make provision for

some fiscal consolidation from 2027. Under the plan, Germany committed to limiting its net expenditure growth until 2029, aiming to bring debt on a downward trajectory after a period of fiscal expansion in 2025 and 2026. This would imply an improvement of the structural primary balance of 1.5 pps between 2025 and 2029.

Boosting the quality of public finances remains a priority

The Special Fund for Infrastructure and

Climate Neutrality will raise investment

growth in the years to come. The fund

relates to the 2025 CSR to strengthen public investment and improve the quality of public finances. Although the fiscal boost in 2025 was smaller than programmed by the government (plan: EUR 37 billion, outturn according to additional borrowing: EUR 24 billion), public investment as a share of GDP rose from 3.1% in 2024 to 3.3% in 2025 and is set to grow further to 3.7% in 2027. In the decade 2010-2019, the share was significantly lower, at 2.5% of GDP. The bulk of the new expenditure is dedicated to investment in transport infrastructure and digitalisation, thus addressing productivity and competitiveness issues. Spending is subject to an additionality criterion, according to which investment can only be financed by the fund if an investment ratio of 10% in the core budget is safeguarded.

At the same time, implementation of the Special Fund is facing challenges. The fund also finances expenditure not directly related to public infrastructure or climate neutrality. First, the fund finances investment grants and subsidies, which do not necessarily increase the productive capital stock. Second, some investment was shifted from the core budget

to the Special Fund for Infrastructure and Climate Neutrality, thereby creating fiscal space for non-investment spending in the core budget and reducing the need for consolidation efforts. The same applies to the Climate and Transformation Fund and for the Länder (EUR 100 billion each out of EUR 500 billion in total). The additionality of investment will increasingly come into play in the coming years as planning and implementation of projects takes time and therefore an increasing number of new projects can be realized.

The medium-term trend of rising spending on government consumption,

social affairs and subsidies continued in

2025. The public expenditure share in GDP increased from 45.5% in 2019 to 50.6% in 2025. Half of the increase is due to social benefits, and social security contribution rates are among the highest in the EU. Pension- related transfers from the federal budget exceed EUR 120billion per year, around 25% of federal government expenditure, which risks crowding out other, more growth-enhancing public spending. Recently proposed health system reforms can help prevent further increases to the statutory health insurance contribution rates if adopted, but this is only a short-term solution which does not address systemic issues such as the lack of focus on more cost-effective models of care delivery (see Annex 15) (5). The recent decision to keep the average income replacement level of pensions at 48%, along with the increase of pensions entitlements for parents (Mütterrente) will raise expenditure further. Capital transfers and other support measures have also risen. For example, investment grants linked to the green transition increased significantly from 0.7% of GDP in 2019 to 1.5% in 2025. The grants are to a large extent dedicated to improving the energy efficiency of the housing stock. These expenditures must be assessed in terms of their efficiency, particularly in light of the need for fiscal consolidation, the possibility of subsidies being given for actions that would have happened

(5) BMG, 2026, GKV-Beitragssatzstabilisierungsgesetz,

bundesgesundheitsministerium.de.

7

anyway and alternative policies, such as higher carbon taxes, which are widely regarded as economically efficient measures for reducing carbon emissions (6).

A further pension system reform can help

to avoid rises in fiscal transfers or social security contribution rates. In the coming decade, the working-age population in Germany is expected to decline by 400 000 every year, weighing on tax revenue and driving up expenditure. At the same time, life expectancy increased from 78.6 years in 2001 to 81.2 years in 2024, and is expected to increase further. A reform of statutory pensions is unavoidable to prevent further cost increases. Levers to enhance the sustainability of the statutory pension system include reducing incentives for early retirement, linking the statutory retirement age to rising life expectancy, adjusting pension indexation, fully reintroducing the sustainability factor and revising contribution ceilings. An increased differentiation of pension replacement rates by income level could contribute to addressing adequacy concerns (see Annex 12). Moreover, recent pension reforms of occupational and voluntary pensions (see Annexes 2 and 6) can contribute to overall future pension streams, by allowing more flexible asset allocation. Still, there remains potential for increasing coverage (see Section 2) and it will remain important to monitor and ensure low system costs, for both occupational and individual pensions which currently contribute only 11% of total pension income (7).

The distribution of revenues and

responsibilities in the federal structure

poses a challenge to ensuring local investment and services. Net municipal investment has been negative for two decades, and by 2024 there was an estimated investment gap of EUR 215.7 billion (5% of GDP) especially in schools and roads (8)(9).

(6) See, for example, Anthony Wiskich, 2024, A carbon tax

versus clean subsidies: Optimal and suboptimal policies for the clean transition, sciencedirect.com.

(7) BMAS, 2024, Alterssicherungsbericht, bmas.de.

(8) KfW, 2025, KfW-Kommunalpanel, kfw.de.

EUR 100 billion of the Special Fund for Infrastructure and Climate Neutrality dedicated to the German Länder and municipalities is supposed to improve the situation. However, improving the structural revenue base of municipalities could also play an important role in the longer term (see Annex 18). Recent reforms of taxes on immovable property (Grundsteuer) and the system of municipal multipliers (Hebesätze) are unlikely to strengthen municipal finances significantly.

Promoting a growth- and investment-friendly tax structure

First steps have been taken towards a

more investment-friendly tax structure. In 2025, Germany received a CSR to improve the tax mix as a key lever for more inclusive and sustainable growth and stronger competitiveness. Since then, Germany has implemented accelerated depreciation options and the first corporate tax rate reduction since 2008, which is to become effective in 2028. The R&D tax credit has also been extended, stimulating investment in innovation. To make better use of existing employment potential, the active pension (Aktivrente) generates incentives for people above retirement age to work longer, making it possible to earn EUR 2 000 without paying taxes as of 2026. However, the measure creates fiscal costs, while the size of the effect on labour supply is uncertain.

There is scope to improve Germany’s

overall tax mix, in particular, by shifting

the burden away from labour. Reform

steps to address Germany’s high labour tax wedge (personal income taxes and social- security contributions) are still pending. Potential improvements concerning streamlining benefit withdrawal to strengthen work incentives and digitalising social administration were pinpointed by the Welfare State Commission (Sozialstaatskommission). A

(9) German Council of Economic Experts, 2025, Annual

Report 2025/2026, svr-wirtschaft.de.

8

reduction of income tax, especially for low and middle incomes, is announced in the coalition agreement. Reducing taxes on middle incomes could flatten the steep tax progression in that income bracket (Mittelstandsbauch). To increase labour supply of second earners, often women, a reform of the joint taxation system of married couples (Ehegattensplitting) remains essential. Lowering tax wedges will also require solutions to limit social security contributions, as these account for two thirds of the overall burden on labour income. The average income tax burden of a single earner is around 15%, and social security contributions are around 34% (see Annex 3).

Shifting the tax mix towards less distorting taxes could increase revenue

potential. Instead of broadening the VAT base, a reduction of the VAT rate for restaurants was added to the list of exemptions as of 2026, despite its limited economic justification. Germany introduced a national carbon price in 2021, but overall environmental taxes still generate modest revenues relative to peers (1.75% of GDP in 2024; EU average: 2.08%). The lower taxation of diesel compared to gasoline (Dieselprivileg) remains questionable, as it lowers tax revenue and reduces incentives to switch to e-mobility. As of 2026, environmentally harmful subsidies rise even further, with tax reductions for diesel used in agriculture (Agrardiesel) increasing back to the level that applied until 2024 and further raised commuter allowances (Pendlerpauschale). Following the recent spike in energy prices linked to the conflict in the Middle East, some European countries have prioritised supporting clean alternatives, while Germany has also relied on temporary fuel tax

cuts, distorting price signals and lowering incentives to shift away from fossil fuels (see Annex 9). Local tax revenue sources show further potential as well (see above). Along with ongoing efforts in other areas – like digitalising tax administration, reducing compliance costs and fighting aggressive tax planning as well as tax fraud – improvements along these lines could make Germany’s tax system more growth-friendly, resilient and aligned with EU policy objectives.

Facilitating construction to address housing challenges

Housing investment fell for the fifth year

in a row in 2025. It has contracted by 20% since 2020, contributing to economic stagnation. Housing completions remain far below the levels needed (see Annex 16) and housing affordability has further deteriorated (see Annexes 14, 17 and 18). A tentative recovery has only recently begun. In 2025, housing permits increased by 11% compared with the year before but they were still 37% below the 2021 level, signalling continued low construction activity (see Annex 16). Moreover, the gap between rents in existing and new contracts is widening. This leads to a frozen housing market, limiting labour mobility (10).

The ‘Construction Turbo’ Act could help to increase the supply of housing,but its

(10) ifW Kiel, 2026, Wachstumseffekte und

Wachstumshebel, insm.de.

Box 1: UN Sustainable Development Goals (SDGs)

Germany performs above the EU average and is further improving on most SDGs related to productivity (SDGs 8 and 9) but needs to catch up with the EU average on quality education (SDG 4).

Worsening education outcomes, a high number of young people leaving school early and weak basic digital skills risk exacerbating skills shortages and further hampering economic growth and competitiveness. Out of the 17 indicators, 7 SDGs remain below the EU average. These relate to quality education (SDG 4), environmental sustainability (SDGs 2, 12 and 13) and fairness (SDGs 5, 7 and 10) (see Annex 17).

9

uptake remains uncertain.Germany received a CSR in 2025 to 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 government has adopted a ‘Construction Turbo’ Act that aims to mobilise additional building land and speed up procedures. This could represent an important step forward. However, its application depends on approval by municipalities, thereby potentially limiting the overall impact. In addition, rental rules have not been made more investment-friendly as recommended.

Further steps would help to increase

housing supply. Reducing construction costs, which are the highest in the EU, is key to delivering more housing. Important reforms, such as a fundamental reform of the Federal Building Code to accelerate construction, which was announced in the coalition agreement, should go hand in hand with the digitalisation of relevant procedures. The introduction of ‘housing type E’, a simpler, needs-based standard in construction, has been announced but not yet implemented. It will need to provide legal certainty for construction firms when applying simpler standards in order to effectively reduce construction costs. Further harmonisation of regulations across regions would facilitate modular and serial construction. Improving transport links to suburban areas could encourage the use of available land and housing outside cities (see Annex 16). Furthermore, the stock of social housing, which has experienced a significant decline over the past two decades, needs to be increased (see Annex 16).

EU funding instruments provide considerable resources to Germany. They support investments and structural reforms to increase competitiveness, environmental sustainability, skills, social fairness and security, while helping to address challenges identified in the CSRs. Key instruments include the Recovery and Resilience Facility (see Box 2) and Cohesion policy funds (see Box 3). In addition, the Common Agricultural Policy (CAP) provides Germany with an EU contribution of EUR 30.7 billion under the CAP strategic plan for 2023-2027 (11), while EUR 212 million are allocated under the Common Fisheries Policy (CFP). A further EUR 2.6 billion are available under the Asylum, Migration and Integration Fund (AMIF), together with the Border Management and Visa Instrument (BMVI) and the Internal Security Fund (ISF). Other EU programmes also support competitiveness in Germany, for instance through open calls under Horizon Europe and the Connecting Europe Facility.

(11) An overview of Germany’s formally approved strategy

to implement the EU’s common agricultural policy nationally can be found at agriculture.ec.europa.eu.

10

(12) European Commission, 2025, Economic impacts of the

Recovery and Resilience Facility: the Case of Germany, reforms-investments.ec.europa.eu.

Box 2: Key achievements of the Recovery and Resilience Facility (RRF)

Germany’s recovery and resilience plan represents a total budget of EUR 30.3 billion, corresponding to 0.7% of 2023 GDP, aimed at supporting reforms and investments contributing to the green and digital transitions, strengthening economic resilience and addressing structural challenges identified in the European Semester.

As of 1 June 2026, EUR 24.4 billion (around 80% of the total allocation) has been disbursed following the satisfactory fulfilment of 100 milestones and targets.

Germany is the largest beneficiary of spillover effects stemming from other recovery and resilience plans in the EU. The total macroeconomic impact of the RRF in Germany has been estimated at EUR 66.1 billion, double the size of Germany’s own recovery and resilience plan (12).

Highlights and impact of the plan

• Reform package with 20 measures adopted by the federal government and the Länder to accelerate planning and approval procedures, the outflow of grants and housing

construction.

• Improving access to over 200 public services across Germany by standardising and

digitalising them.

• New regulatory framework for offshore wind deployment and acceleration.

• Support for the purchase of around 1 million electric vehicles and the necessary

charging infrastructure.

• Digitalisation of hospitals. With over 1200 hospitals improving their digital and IT-

infrastructure (expected).

• Energy-efficient renovations in buildings. Supporting 375 000 renovations to make

buildings more energy efficient (expected).

11

(13) European Regional Development Fund (ERDF), European

Social Fund Plus (ESF+), Cohesion Fund (CF) and Just.

(14) The mid-term review is carried out halfway through the 2021-2027 programming period. It is a formal assessment process required under Article 18 of the Common Provisions Regulation that aims to assess the implementation of programmes and, where necessary, propose adjustments to improve their performance, ensure their relevance in light of new and emerging needs and keep them aligned with other EU policies.

Box 3: Contribution of cohesion policy funds

EU cohesion policy funding is supporting Germany’s efforts to boost

competitiveness, environmental sustainability, as well as skills and social

fairness. In the 2021-2027 programming period,EU cohesion policy funds(13) are providing EUR 19.9 billion (amounting to EUR 37.3 billion paired with national co- financing) to Germany. The value of selected projects corresponded to 60.8% of the total allocation as of March 2026, with additional calls for projects in the pipeline.

• Innovation, business environment and productivity.EUR 8.3 billion is allocated for

research and innovation and competitiveness of small to medium-sized enterprises (SMEs) and for the regions most affected by the transition away from carbon-intensive activities. Around 29 000 firms have already seen their projects approved.

• Decarbonisation, energy affordability and sustainability.EUR 6.4 billion is dedicated to

clean transition projects and for the regions most affected by the transition away from carbon-intensive activities. This funding contributes, among other things, to an increase in waste-recycling capacity of 15 323 tonnes per year and provides EUR 9.75 million in support for investments addressing natural risks.

• Skills, quality jobs and social fairness.The European Social Fund Plus (ESF+) supports

education and training measures (EUR 2.04 billion), labour market measures (EUR 1.83 billion) as well as social inclusion (EUR 2.16 billion) and social innovation (EUR 0.24 billion). 13.8% of the ESF+ funding is allocated to youth employment measures and 5.8% to combating child poverty. EUR 36.9 million is used to support the Strategic Technologies for Europe Platform (STEP) in the area of upskilling for the future in STEP technologies.

The mid-term review (14) reinforced the cohesion policy’s contribution to emerging strategic priorities, reallocating nearly EUR 2.1 billion. The highest share of reallocations (90.5%) supports critical technologies (EUR 1.9 billion from the European Regional Development Fund and the Just Transition Fund). The mid-term review also improves water resilience and provides additional investments in more affordable and sustainable housing. It also strengthens increased energy connectivity through recharge infrastructure, as well as research and development projects to enhance defence- related capacities. In addition to cohesion policy funding, Germany will be allocated up to EUR 5.32 billion under the Social Climate Fund over 2026-2032 to help mitigate the social impact of the new emissions trading system (ETS2), supporting vulnerable households.

INNOVATION, BUSINESS ENVIRONMENT AND PRODUCTIVITY

12

Germany received country-specific

recommendations (CSRs) in 2025 to boost

innovation, strengthen venture capital, simplify regulation, accelerate

digitalisation of administration and

expand digital infrastructure. Several

measures have been implemented to foster research and innovation as well as to increase venture capital. The new Ministry for Digital Transformation and Government Modern- isation has proposed ambitious modernisation agendas for the federal level and multilevel governance, seeking to reduce bureaucracy, accelerate end-to-end digitalisation and strengthen interoperable solutions across the federal government, Länder and municipalities (see Annex 7).

Diversifying the economy, modernising

the state and strengthening

competitiveness and the single market

remain priorities. High-quality, mid-tech

manufacturing plays a major role in the economy; fast-growing cutting-edge technologies less so. Furthermore, venture capital financing remains shallow in international comparison. Germany still has a significant backlog regarding digital infrastructure and the digitalisation of public administration. To strengthen competitiveness and the single market, it is crucial that the government achieves its objective of reducing cumbersome regulation and procedures.

Fostering new sources of growth

Research and innovation are key to unlocking new growth opportunities. Germany was advised in the 2025 CSRs to boost innovation by facilitating research commercialisation and by increasing public funding for transformative innovation. The government has expanded the research

allowance to companies and launched a new initiative to strengthen spin-offs in selected hubs (‘start-up factories’). The “1 000 Heads Programme” aims to attract international top researchers to Germany with 286 researchers having relocated in the first year. Furthermore, the high-tech agenda aims to foster investment in research and innovation for six key technologies with funding of up to EUR 18 billion. However, it is unclear to what extent the budget is additional to existing support and if it will be used for disruptive innovation, rather than incrementally in traditional sectors (see Annex 4). Despite tangible efforts, innovation activity remains concentrated in large companies and in mid-tech sectors, including automotive. Since 2019, expenditure on research and development has stagnated, while other leading countries have increased investment significantly (15). The shift towards new tech fields is slow compared with the US. Only 36% of German R&D spending is going to high-tech, compared to 45% in the EU as a whole and 85% in the US. This is also reflected in the decrease of patenting activity in the last 12 years (see Annex 4).

Germany still struggles to turn excellent

research into successful products. Although technology transfer is formally recognised as a core mission, it often receives limited strategic attention, funding and career incentives, which discourages researchers from engaging in commercialisation. Negotiations over intellectual property between universities and founders take on average 18 months (16). This slows down the creation of spin-offs and innovation transfer. The coalition agreement envisions a national

(15) For example, by 43% in China, 25% in the United

States, 21% in South Korea, and 8% in Japan (all numbers are inflation-adjusted); see: kfw.de.

(16) EFI, 2026, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit, e-fi.de.

13

intellectual property strategy that should enable the creation of spin-offs in 24 hours, but implementation is pending (see Annex 4).

Boosting business dynamism is crucial for

competitiveness, as the old economic structure increasingly faces challenges.

Economic transformation is intensifying, with insolvencies having reached their highest level in 20 years (see Annex 4). Many German regions that once drove growth through strong industry are now increasingly struggling with structural change (Annex 18). As the number of distressed companies increases, 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 (17). The number of start-ups increased by 29% in 2025, yet overall there is no major improvement compared with 2018. Reducing administrative burden and improving digital interactions with authorities might help to encourage business founders (see Annex 5).

Despite efforts, venture capital funding

remains limited. Germany received a CSR in

2025 to facilitate the diversification of the economy and business dynamism and to boost private investment by supporting entre- preneurship and improving access to finance for start-ups and scale-ups. To address these challenges, it has expanded public-private investment vehicles such as the Growth Fund (Wachstumsfonds) to mobilise venture and growth capital for innovative firms, with a funding commitment of EUR 17 billion. Despite these promising initiatives, venture capital funding volume stagnated in 2025, and was similar to its 2023 level (see Annex 6). The tax treatment of venture capital funds, potentially subjecting them to local trade tax, acts as a deterrent for managing funds in Germany.

Institutional investors could help deepen venture capital markets. Pension funds

rarely invest in venture capital (see Annex 6). The occupational pensions reform aims to boost diversification of portfolios of Pensions-

(17) German Council of Economic Experts, 2025, Annual

Report, sachverstaendigenrat-wirtschaft.de.

kassen and Pensionsfonds from government securities to financing businesses. However, the sector remains fragmented and super- vision for some schemes is decentralised. For some schemes, benefits remain unfunded, i.e. there is no dedicated pool of funded assets backing the pension promise. Moreover, introducing automatic enrolment in asset- backed occupational pension schemes for new employees could deepen capital markets. Yet, an expansion of funded pension schemes may increase high domestic savings further.

Consolidation among banks could improve financing conditions. Banks maintain a

leading role in the domestic capital market, by owning over 50% of total domestic financial assets. Their operational costs are relatively high, as the banking sector includes many small institutions. Facilitating mergers across Germany’s three banking pillars (commercial, savings and cooperative banks) and across borders could reduce costs and thus enable banks to provide cheaper financing. Establishing a portable investment and savings account in line with the Commission recommendation could boost competition.

Modernisation and digitalisation of public administration are key to improved implementation capacity

Digital transformation is too slow and

fragmented to improve public service

delivery. The CSRs have long recommended

speeding up the digitalisation of the public administration, including by improving the geographic coverage of digital public services and facilitating cooperation between governmental levels. The Recovery and Resilience Facility has supported several measures to modernise public administration, among them a European identity ecosystem, the digitalisation of public services (Online Access Act) and the modernisation of data registers. Despite these efforts, the availability and uptake of digital public services remain below EU levels, especially for businesses. Digitalisation often still mirrors analogue complexity rather than replacing it, leading to

14

significant dissatisfaction among businesses with public administration (40%, EU average 24%), and suggesting that digitalisation has not reduced the time and effort to obtain a service (28% of businesses, EU average 25%)(18). User feedback suggests that many procedures are digitalised only partially, without sufficient simplification of the underlying process or improved delivery across authorities. Efforts to digitalise the judiciary could usefully continue, including via a single website giving access to laws and court decisions and providing digital solutions for court proceedings in civil, commercial and administrative cases (19).

Graph 2.1: Pre-filled forms

Source: European Commission, State of the Digital Decade report 2025

Fragmented responsibilities and a lack of

common standards between levels of

government hinder modernisation and

digitalisation. Despite past reforms,

significant overlaps of responsibilities persist, and fragmented competencies are an implementation bottleneck for service delivery.

(18) European Commission, 2026, Flash Eurobarometer 568

on satisfaction with administrative services, europa.eu.

(19) European Commission, 2025, Rule of Law Report, commission.europa.eu.

More than three quarters of not-yet-digitalised services fall under Länder and municipal responsibility. Digitalisation efforts often need to be coordinated at the federal level before being rolled out by the Länder and municipalities. This decentralised roll-out leads to uneven territorial coverage and limited scaling even of solutions intended for nationwide deployment. This is illustrated by the ‘one-for-all’ (‘Einer-für-Alle’) service bundle for craft business registration, whose implementation varies from around 90% in some Länder to 0% in others (20). The National Regulatory Control Council stated in 2025 that ‘public administration in Germany […] is trapped in an implementation organisation that is no longer up to date’. This is particularly problematic in view of mounting capacity pressures at subnational level, with around 30% of municipal employees expected to retire by 2030 (21) (see Annex 18). The low share of pre-filled forms (38%; EU: 78%), points to limited data sharing and weak interoperability of applications across the administration (see Graph 2.1). To address this, Germany is developing the Deutschland-Stack, an open standard technology stack of digital building blocks for government services. However, its delivery is still uncertain. Successful state modernisation will require multilevel governance reform, infrastructure that is interoperable vertically and horizontally (between the Länder) and bundling of service delivery.

The business environment would benefit from less bureaucracy, a stronger single market and better digital infrastructure

The bureaucratic burden remains high. According to the National Regulatory Control Council, the costs of complying with national legislation fell in 2025. However, the overall

(20) Behörden-Digimeter 2026.

(21) DStGB, 2025, Demografie: Schleichenden Blackout der öffentlichen Verwaltung abwenden, dstgb.de.

0 20 40 60 80 100

PT LT MT FI

DK SE PL BE EE ES EL NL AT SI

BG LU LV FR HU SK IE IT

CY HR CZ DE RO

15

burden remains high (22), which affects small to medium-sized enterprises (SMEs) in particular (23). Many businesses report delays (57%) and increased operational costs (36%) due to administrative interactions (24). Germany received a CSR to simplify regulation and reduce administrative burden. To address this, the government plans to cut administrative costs for businesses by 25% during this legislative period. The government has already introduced measures to reduce compliance costs by more than EUR 3 billion annually. Administrative processes are examined through ‘reality checks’ with relevant stakeholders. However, the ambitious goals do not seem to be accompanied by fundamentally new instruments or a consolidation of competencies that would promote effective burden reduction. Effective tools could include the wider use of approval by default and flat-rate schemes rather than exact case-by-case verification. A thorough cost-benefit assessment could prevent disproportionate regulation.

Recent economic volatility and trade

tensions underlined the importance of the

single market for growth and resilience.

The single market plays a significant role in German prosperity as about half of German exports remain within the EU (compared with 9% going to the US and 5% to China). Deepening the single market could generate an extra 3% of GDP for Germany (25), with potential improvements in various sectors (26). Major restrictions remain regarding the free movement of goods, services and people and the registration of businesses. Companies report that divergent packaging, labelling and waste rules, for instance related to

(22) National Regulatory Control Council, 2025, Annual

Report, normenkontrollrat.bund.de.

(23) German Chamber of Industry and Commerce, 2025, Mittelstand droht dauerhaft abzurutschen, dihk.de.

(24) European Commission, 2026, Flash Eurobarometer 568 on satisfaction with administrative services, europa.eu.

(25) Fontagné, L. & Yotov, Y.V., 2025, The low-hanging fruit of the single European market, ec.europa.eu.

(26) Bernasconi, R. et al., 2026, What is the untapped potential of the EU Single Market?, ecb.europa.eu, Adilbish, O. et al, 2025, Europe’s productivity weakness, imf.org.

requirements for waste shipment or printed food contact materials, increase compliance costs for foreign businesses (see Annex 5). Sometimes, harmonised rules suffer from burdensome implementation. Easing administrative requirements as regards implementing the rules on the posting of workers could reduce regulatory fragmentation within the single market, facilitate cross-border mobility and foster competitiveness, without undermining workers’ protections. Recognition of professional qualifications of foreign workers can be time- consuming, and regulatory restrictiveness remains high for some professions (see Annex 5). National or regional regulations going beyond the requirements of EU legislation (‘gold plating’) also add to market fragmentation. The implementation of EU regulations creates additional complexity. For instance, 33% of businesses in Germany perceive data protection and compliance with the EU General Data Protection Regulation burdensome (EU average 13% (27). The lack of cross-border energy and transport infrastructure creates a further barrier to the free flow of goods and people (see Annexes 9 and 19). For example, a missing rail link connecting Germany to the Brenner tunnel creates a gap in a major EU freight corridor. Finally, the banking sector remains highly fragmented, in part due to political resistance to foreign acquisition (see Annex 6).

Germany needs to continue expanding its

digital connectivity infrastructure. The CSRs in 2025 highlighted the need to accelerate the roll-out of very high-capacity digital communication networks, also involving the private sector. In a welcome step, the Telecommunications Act has been amended to create an overriding public interest for network development. Fibre-to-the-premises coverage increased to 36.8% in 2024 (EU: 69%) but is still the second lowest in the EU. Coverage is generally better in northern regions. Swift and effective implementation of the acceleration pact between the federal government and the Länder can speed up progress.

(27) European Commission, 2026, Flash Eurobarometer 568

on satisfaction with administrative services, europa.eu.

DECARBONISATION, ENERGY AFFORDABILITY AND SUSTAINABILITY

16

The 2025 country-specific

recommendations (CSRs) called on

Germany to further reduce its dependence on fossil fuels and accelerate

the expansion of renewable energy, while

strengthening investment in efficient and

integrated energy systems, including

electricity grids, flexibility solutions and

digital infrastructure. The recommendations also emphasised the need to accelerate decarbonisation in the buildings and transport sectors, including through rail network renovation.

Overall, progress has been mixed. Grid investments and renewable electricity deployment have advanced, supported by accelerated approval procedures and increasing auction volumes. However, important structural challenges remain. There is not enough flexibility in the electricity market, as the digitalisation of electricity networks and the roll-out of smart meters are also progressing slowly. Fossil fuels still dominate the overall energy mix, and electricity prices remain structurally high, as prices are set in most hours by fossil fuel generation. Decarbonisation in buildings is advancing only gradually due to low renovation rates, while progress in transport is uneven, with stronger developments in road electrification than in rail infrastructure modernisation.

Investments in grids have increased, but digitalisation benefits remain largely untapped

Modernising energy infrastructure in

Germany has progressed unevenly. Grid expansion has increased significantly in recent years, while the digitalisation of grids is

progressing slowly. The 2025 CSR calls for investments in energy systems, including by upgrading the electricity system and ensuring cost-efficient expansion and flexibility. In 2025, transmission grid expansion saw significant progress in planning, approval and construction. This progress was mainly driven by accelerated approval procedures. 2 000 km of new transmission grids, 1 280 km of them newly built, were approved at the federal level in 2025, an increase of 45% compared with 2024 (28). However, the transmission grid continues to represent a bottleneck. This causes redispatch costs, which, although declining since their peak in 2022, have remained close to EUR 3 billion annually over the past four years (see Graph 3.1). These costs amount to roughly 0.7 cents per kWh on average, indicating avoidable inefficiencies.

Even with rising investment, distribution

grids remain strained and digitalisation

efforts, including smart meter roll-out,

continue to fall short. Distribution grid investments have consistently increased in recent years, with EUR 12.4 billion invested in 2024 and EUR 14.7 billion planned in 2025. However, distribution grid operators (DSOs) are subject to increasing demands. Connection requests, particularly for large battery storage systems, can only be processed with delays. Meanwhile, shortages and price increases of material and labour pose a growing challenge for cost-efficient modernisation (29). At the same time, the fragmentation of distribution grids, with more than 850 DSOs operating in Germany (30), and disparities in financial and administrative capacities lead to significant

(28) Source: Bundesnetzagentur.

(29) dena, 2026, Großbatteriespeicher effizient integrieren, dena.de.

(30) Bundesnetzagentur, Bundeskartellamt, 2025, Monitoringbericht, bundesnetzagentur.de.

17

regional differences in grid connections and the deployment of smart meters, whose overall roll-out remains exceptionally slow. As of December 2025, only 5.5% of customers were equipped with smart meters compared with 63% in the EU (31). Expanding and modernising the electricity grid in a cost- efficient way remains a key prerequisite for aligning electricity demand, renewable energy, and storage. The digitalisation of distribution grids is a key lever as smart grids can detect bottlenecks earlier, enable more efficient expansion planning and improve system stability.

Graph 3.1: Redispatch volumes and costs in

Germany, 2019-2025

(i) Upward redispatch refers to increasing electricity feed-in (esp. gas and coal power plants). Downward redispatch refers to reducing feed-in (esp. wind and solar photovoltaics). Total redispatch costs include compensation to generators for additional electricity produced under upward redispatch and reimbursements for reduced production under downward redispatch. (ii) Volume and costs for 2025 including January-November. Source: Bundesnetzagentur; Fraunhofer ISE Energy-Charts

(31) Bundesnetzagentur, 2025, Roll-out of intelligent

metering systems:, bundesnetzagentur.de; Berg Insight, 2025, Smart Metering in Europe, berginsight.com.

Further reducing fossil fuel reliance to structurally lower energy prices

Progress in expanding renewable electricity capacity was significant, but

fossil fuels continue to play a structural

role in the energy system. The 2025 CSR calls for a reduction in fossil fuel dependence and faster renewable expansion. Germany has accelerated the deployment of renewable energy capacity in recent years, supported by large auction volumes and strong activity in the market for long-term renewable power purchase agreements (PPAs). In 2025, renewable energy sources accounted for 61.1% of Germany’s electricity generation, but the price was set by fossil-fuel-generated electricity at 58% of the hours and coal still accounted for 23% of the mix. Despite the advances in renewable deployment, fossil fuels still dominated overall energy consumption. In 2024, oil accounted for roughly 37% of gross inland energy consumption, natural gas for 26% and coal for 15%, compared with about 20% of renewables (32), a 1 percentage point increase compared with 2023. Thus, further efforts would be beneficial to continue the roll-out of renewable capacity while ensuring security of supply through sufficient system flexibility and dispatchable capacity.

Legal pathways to increased renewable

energy have been strengthened, but

efficient system operation requires further flexible solutions. With the entry into force of legislative acts, such as the Hydrogen Acceleration Act and the Geothermal Energy Acceleration Act (33), the legal framework for clean energy has been strengthened. However, Germany’s enabling infrastructure for industry decarbonisation could usefully be rolled out further. The development of CO₂ transport and storage infrastructure is facing delays. Lengthy and

(32) Eurostat, 2024, Energy Balances, Eurostat.

(33) Bundesgesetsblatt, 2025, Geothermal Energy Acceleration Act, recht.bund.de.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0

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10

15

20

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45

2019 2020 2021 2022 2023 2024 2025

Co st

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Re di

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Upward Redispatch Downward Redispatch

Total Redispatch Costs

18

complex permitting for industry installations hinders the swift deployment of clean industry technologies, undermining decarbonisation efforts. As part of the Recovery and Resilience Facility (RRF), Germany has introduced the Wind Energy on Land Act and the Offshore Wind Energy Act to accelerate wind power deployment. Under the RRF and the European Regional Development Fund (ERDF), Germany is investing in hydrogen capacity. The integration of growing shares of variable renewable energy requires increasing system flexibility to balance fluctuations in wind and solar output and ensure security of supply. Market-based mechanisms that encourage flexibility solutions, such as storage, demand response and other balancing resources, are increasingly important for efficient system operation as renewable capacity expands.

The continued reliance on fossil fuels in

the energy mix is also reflected in high prices, despite fiscal interventions. In

2025, Germany abolished the gas storage levy, reduced grid fees and the electricity tax, subsidised electricity for energy-intensive industry and financed the renewable energy sources surcharge from the federal budget. Despite these interventions, electricity prices have remained high, with households paying 31% more than the EU average. Electricity prices for non-household consumers, including industry, were 7% above EU average (see Annex 9).

High electricity wholesale prices occur at

times of low renewables output paired

with high demand, in particular in the

evenings. Germany’s energy system is

characterised by high shares of wind and solar power and regional imbalances between generation and demand. It would therefore be highly beneficial to expand storage capacity in order to shift excess renewables generation to periods of high demand. This would reduce peak prices and limit the need for expensive marginal generation. More storage capacity would help prevent negative price episodes during periods of high renewable generation and alleviate grid congestion by reducing the need for curtailment and long-distance electricity flows.

On top of high wholesale prices come network charges and electricity taxation

that are among the highest in the EU.

Network charges are driven by grid reinforcement needs, an inefficient bidding zone and the low level of smart meter deployment. More north-south transmission capacity and cross-border interconnector capacity could provide further flexibility and bridge supply gaps. Increasing digitalisation of the grid, closer cooperation between distribution system operators and retail suppliers and demand-driven solutions such as dynamic grid fees could help lower prices.

Germany introduced a range of short-

term measures to address rising fuel

costs, though some of these counteract

with longer-term decarbonisation goals. In response to recent energy price spikes

linked to instability in the Middle East, Germany temporarily reduced fuel taxes by 17 cents per litre, thereby distorting price signals and dampening incentives to shift away from fossil fuels at a time when other European countries have prioritised supporting clean alternatives. Additional measures included coordinating the release of emergency oil reserves with the IEA, restricting petrol stations to a single daily price increase at noon, and introducing a reversal of the burden of proof for fuel pricing: as of 1 April, refineries and wholesalers are required to justify how their prices are composed, with the starting presumption being that refinery prices must be cost-justified (see Annex 9).

Uneven progress in buildings and transport decarbonisation

Germany made moderate progress on the

decarbonisation of buildings. The 2025 CSR calls for the process of decarbonising buildings to be accelerated. A reduction in energy consumption could be observed, reflecting efficiency gains and behavioural changes. However, with renovation rates below 1% per year, progress remains too slow to meet climate goals (see Annexes 8 and 9). The RRF has made a significant contribution to

19

improving energy efficiency in buildings via numerous measures, such as energy-efficient building renovations and municipal living labs serving as real-world testing grounds for integrated energy solutions in urban neighbourhoods. Moreover, the Climate and Transformation Fund (KTF) supports energy efficiency with revenues from the EU emissions trading system (ETS). However, the planned reform of the Building Energy Act would abolish previously legislated requirements for switching to climate-friendly heating solutions, allowing the continued installation of gas and oil boilers in residential buildings.

Germany has made notable progress in decarbonising road transport. The 2025

CSR calls for faster decarbonisation of transport, including through rail network renovation. Progress has been most visible in road transport, with a marked increase in electric vehicle uptake. In 2025, almost one in five newly registered cars in Germany had a purely battery-electric drive (19.1%). This represents a significant increase compared to the previous year (13.5%). The public charging network also expanded further to around 200 830 charging points (8 GW capacity) by April 2026(34), with relatively low utilisation rates suggesting that capacity is sufficient even for future demand. Measures under the recovery and resilience plan contributed to this expansion, including investments in publicly accessible charging infrastructure and zero- emission commercial vehicles. While measures to decarbonise road transport are advancing, high acquisition costs remain a constraint for businesses and consumers (35) and progress remains too slow to bring the transport sector in line with Germany’s climate goals (see Annex 8).

Progress in rail remains limited despite

substantial financial commitments to infrastructure renovation. Total spending on rail infrastructure reached EUR 23.1 billion in 2025, including EUR 18.1 billion in federal investment. While this constitutes an increase

(34) Bundesnetzagentur, 2026, bundesnetzagentur.de.

(35) bdew, 2025, BDEW-Elektromobilitätsmonitor, bdew.de.

compared to previous years, the additional impact of the newly created Special Fund for Infrastructure and Climate Neutrality on investments could have been greater. Despite increased funding, infrastructure remains heavily utilised, notably on key east- west and north-south trans-European transport network (TEN-T) axes around urban nodes and major ports. Digital deployment is uneven, and the punctuality of long-distance services remains low (around 62-63% versus 87% in the EU (36), indicating that renovation efforts have not yet translated into a structurally more reliable and higher-capacity network (see Annex 8). Furthermore, the roll- out of the European Rail Traffic Management System – the EU-wide digital signalling system needed to increase capacity and enable cross- border operations – remains particularly slow. At the end of 2024, only about 5% of Germany’s core European rail corridors were equipped with this system, well below the EU average of 17% (37). Total transport emissions exceed national reduction targets and increased by 1.4% between 2024 and 2025 (38).

Addressing biodiversity loss and strengthening climate resilience

Biodiversity loss and water resilience remain significant challenges, with many

habitats in an unfavourable condition and

persistent investment gaps. Germany faces considerable challenges in combating nature degradation, which poses significant risks to biodiversity and the economy (39). More than half of Germany’s habitat types are in an unfavourable condition, with 60% showing insufficient or poor conservation status (see Annex 10). Despite rich biodiversity, many

(36) European Commission, 2025, Commission Staff

Working document on the Ninth monitoring report on the development of the rail market, EUR-Lex.europa.eu.

(37) European Commission, 2026. ERTMS, see: op.europa.eu.

(38) Umweltbundesamt, 2026, Umweltbundesamt.de.

(39) European Environment Agency, 2025, Germany country profile, EEA.europa.eu.

20

designated protected areas do not meet the criteria of the EU biodiversity strategy’s 30% protected area target. National initiatives, like the action plan on nature-based solutions for climate and biodiversity, aim to address these issues, but efforts are hindered by funding shortfalls, with a biodiversity financing gap of EUR 638 million annually. In addition, seasonal water scarcity and a very low share of water bodies with good ecological and chemical status put pressure on biodiversity and economic activities that rely on water (see Annex 10). Strengthening site management and boosting investment are essential to bolster the resilience of ecosystems and water bodies and protect the economy from vulnerabilities stemming from its dependence on ecosystem services.

Further progress would be beneficial in

order to strengthen climate adaptation and resilience. Significant investments in

climate adaptation are crucial for Germany. An estimated EUR 9.6 billion annually up to 2050 would be of benefit, focusing primarily on infrastructure retrofitting (see Annex 10). While progress has been made at subnational level, with regions like Hamburg and Bremen adopting new adaptation strategies, transparency gaps persist, as documentation remains decentralised across regional (Länder) ministries. Nature-based solutions promoted through projects, such as ‘LIFE Living River Lahn’, which receives support from the EU, show promise but depend on overcoming municipal capacity issues and securing long- term financing. Scaling up these solutions is critical to enhancing resilience and meeting future climate challenges effectively.

SKILLS, QUALITY JOBS AND SOCIAL FAIRNESS

21

Germany received country-specific

recommendations (CSRs) in 2025 to

increase its labour supply, strengthen

skills, attract and retain talent, improve

education outcomes and improve early childhood education and care and all-day

schools. Since then, measures have been implemented to increase the labour supply of older workers and people receiving social assistance. It also continued work on its Startchancen programme, which aims to improve opportunities for disadvantaged students, and on rolling out childcare provision and all-day schools.

Adjusting the tax and benefit system

could make the system fairer and more

efficient. As the Welfare State Commission

(Sozialstaatskommission) suggested, social benefits could be simplified and benefit withdrawal adjusted to improve work incentives. Second earners still face tax disincentives, and despite progress, there are provision gaps in nurseries and kindergartens, all-day schools and long-term care. These stand in the way of increasing hours worked. Accelerating measures to attract foreign talent and stepping up resources on education and adult learning could expand the talent pool.

Enhancing labour supply is key for the economy and social inclusion

Increasing employment, enabling more

hours worked and addressing skills

shortages are key to counteracting the

effects of demographic ageing. In 2025, Germany received a CSR to increase labour supply, notably by increasing hours worked. Recently adopted reforms aim to increase employment after the retirement age, though the size of the effects on labour supply is uncertain (see Section 1). Job seekers were

provided with additional incentives to work by reinforcing the conditionality of minimum income support. Going beyond these reforms, the Welfare State Commission suggested simplifying benefits and gradually withdrawing them to increase work incentives. Furthermore, for older people, policies could be implemented to raise their effective retirement age, including by tightening the conditions for early retirement (see Section 1); providing incentives for older workers laid off in manufacturing to remain employed instead of retiring; and adopting labour market policies to support longer healthy working lives (see Annexes 3, 11, 12, 13 and 14).

Further tax and benefit reforms could

encourage women to increase their hours

worked. Labour shortages have eased due to

weak economic growth, but remain structurally high and may increase again with economic recovery. Demographic ageing is expected to reduce the working age population by 4 million by 2035. Along with declining net migration, this will exacerbate skills shortages (see Annex 11). Unless countermeasures are taken, future GDP growth in Germany is expected to be low due to the decline in employment and hours worked (see Graph 4.1). Recent reforms to support full-time employment have focused on expanding early childhood education and care and promoting all-day schools (see Annexes 11 and 13). Informal caregiving responsibilities, mainly carried out by women, contribute to Germany’s high rate of part-time employment among women (40). A federal and state level commission proposed reforms in long-term care which could improve the availability and quality of care while ensuring fiscal sustainability. These reforms would indirectly support the employment of carers, who are mostly women. Further tax and social security incentives could help to increase the

(40) Statistisches Bundesamt, destatis.de.

22

number of hours worked by women. These incentives could be brought about by reforming (i) the taxation of the income of married couples (Ehegattensplitting); (ii) the non-contributory co-insurance of spouses with no or limited earnings; and (iii) the disincentives in benefits and social security contributions to move from part-time to full- time work. The costs of early childhood education and care for those in need could be reduced and incentives created for transitioning from marginal part-time employment to regular employment. Such reforms could also help reduce the size of the low-wage sector and support employment with better pay and career prospects (see Section 1 and Annexes 3 and 11). Along with improved pay transparency, they could not only improve labour supply and potential growth in Germany (see Graph 4.1), but also reduce gender gaps in hours worked, lifetime incomes, pensions and poverty.

Graph 4.1: Components of potential growth

* forecast Source: European Commission spring 2026 forecast

Skills could be better aligned with changing labour market needs

Policies that support the training of people with lower qualifications and with

a migrant background could help tackle

skills shortages. In 2025, Germany received

a CSR to increase labour supply and to tackle the shortage of skilled workers, including by

strengthening basic, green and digital skills. To address this, Germany continued its national skills strategy and planned to launch a ‘skills offensive’, with a digital skills pact and a funding programme for digital participation, whose implementation is important (see Annexes 4 and 13). Measures include support for in-company training and modular education and training courses. The latter aim to support the labour market integration of people above the age of 25 without vocational qualifications. Skills policies could improve the access of vulnerable groups, such as low- income youth and people with migrant backgrounds, to apprenticeship training through individualised support. The relevance and value added of vocational education could be increased through additional funding for vocational schools, including for targeted support and improvements to their digital infrastructure. In existing programmes such as DigitalPakt 2.0, the focus on rural areas could be stepped up. For people with lower qualifications, combining adult learning with support measures can be particularly beneficial. These measures could address gaps in their basic skills and barriers to their access to training, such as language skills or mental health and psycho-social support. Data-driven tools, such as the planned Bildungs- verlaufsregister, an anonymous educational trajectory register, and the Schüler-ID, a personalised pupil ID, can improve access, transitions and long-term skilled labour supply by guiding targeted interventions.

As manufacturing employment declines,

policy tools to support job-to-job

transitions need to gain relevance. Thus far, increasing public sector employment has compensated for the decline of employment in manufacturing. With intensifying pressures for structural change, policy tools to manage transitions in the labour market are becoming more relevant. The use of regional employment hubs (Arbeitsmarktdrehscheiben) and of transfer short-time work (Transfer Kurzarbeit) could be evaluated and good practices could be promoted among companies. Enhancing the training component of short-time work can help this instrument to facilitate the transition of sectors from decline to growth. Prolonged use of short-time work beyond one year could be accompanied by

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Employment Hours worked Capital acc. TFP Pot. Growth

23

training participation. Policies to promote regional labour mobility could prevent regional disparities from being exacerbated.

Skilled migration efforts show promise, but more reforms needed

Recent measures to support migration

are likely to have an impact only at a later stage. In 2025, Germany received a

CSR to better attract and retain talent from non-EU countries in order to increase the labour supply and tackle shortages of skilled workers. To digitalise and accelerate skilled immigration processes, a digital work-and-stay agency will establish a central portal as single access point for skilled workers, including the application for recognition of foreign qualifications. Furthermore, by end-2028, the work ban for people claiming asylum is expected to be reduced to a maximum of three months. These two new measures will only have a medium- to-long-term impact on the shortage of skilled workers and on labour supply. Further improvements and investments are needed regarding the visa and work permit process, the procedures at the local immigration authorities and the procedures for the recognition of foreign qualifications in order to maximise the impact of recent national reforms aiming at modernising migration administration by digitalisation and improving data exchange across agencies (41).

The labour market integration of people

with a migrant background could be

better supported. The initiative ‘Regional Integration Networks for a Culture of Welcome and Recognition of International Workers’ supports the labour market integration of people with a migrant background. The number of recognised foreign qualifications has increased significantly over time, from 28 000 procedures closed in 2016 to 82 000 in 2024. More and more recognition applications are submitted from abroad, with

(41) Bertelsmann Stiftung, 2023, An den Grenzen?

Ausländerbehörden zwischen Anspruch und Alltag. bertelsmann-stiftung.de.

their share having risen from 11% of all applications to 41%. Further measures to ensure that people from outside Germany (among them EU nationals) work in professions matching their qualifications could contribute to addressing skills shortages, including in regulated professions (see Annex 5). To reduce the employment gaps between German nationals and people with a migrant background (42), procedures in migration and asylum administration could be streamlined, to reduce barriers for apprentices and job applicants.

Gaps in early childhood education and care as well as high early school leaving are major problems

Full use is not being made of the

potential of early childhood education

and care and all-day schools to boost

labour market participation. In 2025,

Germany received a CSR to improve the availability and quality of early childhood education and care and all-day schools to encourage carers, often women, to work and to promote equal opportunities for all children. However, despite investment to increase capacity in recent years, there is still significant unmet demand for early childhood education and care. There remains a supply gap of 300 000 childcare and kindergarten places as of now, and 150 000 all-day school places still need to be created by 2029. The investment planned under the Special Fund for Infrastructure and Climate Neutrality could provide further support. The legal right to all- day schooling for primary pupils as of school year 2026/2027 is a step in the right direction, even if this right may only be partially fulfilled initially. Speeding up the implementation of the proposals made in the coalition agreement to improve the quality of provision (Sprach-

(42) Germany has one of the largest gaps in employment

rate of nationals (84.2%) vs non-EU nationals (64.6%), and between people born in Germany (80.1%) vs people born outside the EU (66.5%).

24

Kitas and Startchancen-Kitas (43) and the roll- out of nationwide standardised language support would contribute to basic skills acquisition, especially for children who do not have German as their mother tongue and for children from a disadvantaged socio-economic background.

Graph 4.2: Early school-leavers

Source: Eurostat

The decline in basic skills and widening

socio-economic inequalities in education

outcomes would benefit from further

action. While the 2025 CSRs for Germany call on it to improve education outcomes, including by promoting excellence and providing targeted support to disadvantaged groups, limited progress has been observed. Germany has seen a marked drop in basic skills since 2015 and declining equity in education outcomes, alongside declining top- performance. The 2015 strategy to support high-potential students led to the 'Leistung macht Schule' initiative, for which the federal and state governments are mobilising EUR 125 million, with implementation in 850 schools starting in 2023. Results will take time to materialise and the initiative will have to be rolled out on a larger scale to show a systemic effect. The Startchancen programme, which seeks to improve opportunities for disadvantaged students, is an important step

(43) Startchancen-Kitas offer additional financial resources

and opportunities for disadvantaged children, while Sprach-Kitas focus on improving German language development.

in the right direction. However, with its aim of reaching 10% of Germany’s 40 000 schools by 2034/2035, the coverage of learners at risk of underachievement may be incomplete. The structure of the education system has remained unchanged, encouraging early tracking by ability and reinforcing inequality from an early age. While investment in education has increased over time, coming closer to the EU average (4.5% vs 4.7% of GDP in 2023), further efforts could expand targeted support for underachieving pupils, starting from an early age.

Human capital is lost as more young people miss out on qualifications. Almost one in seven of Germany’s young people (18- 24-year-olds) left education and training with no or with very low qualifications. While in the EU the number of early leavers is falling, in Germany it is one of the highest in the EU and increasing (see Graph 4.2). Against the background of demographic ageing, skills shortages and a stagnating economy, this underutilisation of human capital is significantly restricting the size of the skilled work force and undermining Germany’s potential for higher productivity growth. Decisive policy action could include collaboration between the federal government and the Länder to help at-risk learners. These efforts could be supported by better use of data (such as the anonymous educational trajectory register(Bildungsverlaufsregister)proposed in the coalition agreement, however not yet implemented). Combining preventive measures (such as strengthening the acquisition of basic skills, psycho-social support and the enforcement of mandatory schooling or training until the age of 18) and remedial measures (such as flexible learning pathways) (see Annex 13) could support learners at a socio-economic disadvantage.

There is scope to improve cost- efficiency of the welfare system

Poverty and inequality remain challenges,

as housing, energy and everyday living

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costs rise (44). In 2025, 21.2% of the population was at risk of poverty or social exclusion (AROPE), roughly in line with the EU average. However, behind this overall figure, there are pockets of vulnerability. Risks are particularly pronounced in urban areas, among the unemployed, single-parent households and for people born outside the EU. The number of households with very low work intensity has increased in recent years, suggesting that maintaining a stable foothold in the labour market is becoming more difficult.

With nearly every fourth child at risk of

poverty or social exclusion, child poverty

remains a pressing concern. The share of

children at risk of poverty or social exclusion rose from 22.9% in 2024 to 23.4% in 2025. Children with a migrant background are disproportionately affected, and structural factors such as shortages in early childhood education and care, and persistent gaps in educational outcomes linked to parental socio- economic background, continue to limit progress (45). Germany’s 2023 action plan implementing the European Child Guarantee aims to address these issues, but success will depend on sustained funding and stronger implementation at local level.

Reforms could increase the efficiency and

effectiveness of the welfare system. The welfare system is complex and fragmented, with more than 170 benefit schemes and around 30 different administering bodies (46). This complexity can make the system difficult to navigate and may prevent some eligible households from receiving support. The 2026 report of the Welfare State Commission proposes reforms to simplify the welfare system and make it more efficient (47). The government decided to transform the Bürgergeld system of basic income support for

(44) Paritätischer Wohlfahrtsverband, 2025, Armutsbericht,

der-paritaetische.de.

(45) GESIS, 2020, Wealth stratification in the early school career in Germany, blog.gesis.org.

(46) Initiative für einen Handlungsfähigen Staat, 2025, ghst.de.

(47) BMAS, 2026, Empfehlungen der Kommission zur Sozialstaatsreform, bmas.de.

jobseekers into a new minimum income scheme (neue Grundsicherung). The reform introduces stricter conditionality and stronger sanctions to encourage labour market participation. While these changes could help improve administrative efficiency and reduce long-term benefit dependence, they also create new social risks: stricter sanctions and tighter rules on housing costs may disproportionately affect vulnerable groups, including families with children, people with mental health conditions and individuals with limited German language skills. Implementing the hospital reform and the proposed primary care reform could help to contain increasing healthcare expenditure and curb further rises in social security contributions. Levers include strengthening prevention, enhancing the integration of care and reducing the reliance on inpatient care (see Annex 15).

Wealth inequality remains at a high level. A rebalancing of the tax mix, increasing wealth-related taxes, could ease pressure on labour. In 2025, the wealth Gini coefficient was 0.76, one of the highest levels in the euro area, with the top 10% of households holding nearly 60% of total net wealth, and the top 5% alone holding 46%. Wealth inequality also has a strong regional dimension(48). Fiscal revenues from property and wealth taxation remain comparatively low, contributing to the persistence of wealth concentration, and weighing on social mobility. For younger generations, parental income and background increasingly shape educational and labour market outcomes. Rising wealth inequality and declining social mobility risk undermining social cohesion and equality of opportunity in the longer term (49).

(48) According to data of the HFCS study from 2021, on

average, households in eastern Germany have assets of EUR 150 900, compared with EUR 359 800 in the west.

(49) ifo, 2025, Rising Inequality, Declining Mobility: The Evolution of Intergenerational Mobility, ifo.de.

KEY FINDINGS

26

In areas covered by existing country-specific recommendations, Germany would benefit from:

• enhancing the quality of public

finances by strengthening the

additionality and productivity of public investment,furtheraddressing bottlenecks in permitting and execution procedures, and limiting subsidies and transfers to the pension system;

• improving the sustainability of

statutory pensions and enhancing future pension adequacy by

reforming the pension system and strengthening occupational and voluntary pension schemes;

• improving the tax mix, notably by

reducing the labour tax wedge and improving the effectiveness and efficiency of the welfare system to strengthen incentives for increasing hours worked, including for second earners;

• increasing housing supply and affordability by further simplifying

rules and procedures, mobilising additional building land, reviewing rental law and strengthening social housing;

• boosting innovation by further improving the commercialisation of research and funding for disruptive innovation, strengthening high- performing clusters and fostering R&D ecosystems in regions where performance has stagnated;

• supporting growth financing for

start-ups and scale-ups, notably by expanding venture capital access and

strengthening the role of institutional investors as capital providers;

• enhancing competitiveness and

private investment by simplifying

regulations and creating lean administrative procedures;

• strengthening the single market by reducing national and regional barriers to the free flow of goods and services as well as the registration of businesses, also by avoiding burdensome national implementation of EU legislation;

• strengthening economic security,

also by supporting the diversification of trade and investment ties, including to secure access to essential resources, supply chains, markets and technologies and by supporting the domestic supply of critical raw materials;

• accelerating the modernisation

and digitalisation of public

administration by reducing

governance complexity through the expansion of common digital building blocks and data register connectivity across levels of government, by simplifying internal workflows and by providing more user-friendly digital services;

• speeding up the digital infrastructure roll-out of very high- capacity networks, especially fibre optics;

• accelerating the modernisation

and expansion of electricity

infrastructure, including transmission and distribution grids as well as storage, while improving grid

27

digitalisation, coordination of system operators and the roll-out of smart meters;

• reducing structural reliance on

fossil fuels in the energy system as well as energy prices, including by accelerating renewable deployment, ensuring the elimination of bottlenecks for electricity flows between regions and taking measures to alleviate the regional mismatch of supply and demand, enabling demand-side flexibility, and increasing cross-border transmission capacity to help preserve system stability;

• accelerating decarbonisation of the transport, buildings and

industry sectors, including through improvements in rail infrastructure and digitalisation, the effective roll-out of building renovations particularly in the western and northern regions, and the expansion of clean industrial infrastructure and permitting for hybrid renewable systems especially in sectors with high energy and emissions intensity;

• supporting labour market adjustment and improving growth

prospects by boosting participation of women, low-income earners and older workers, expanding early childhood education and care and all-day schools, as well as cost-efficient long- term care, facilitating transitions on the labour market through active labour market policies, and attracting talent from third countries; and

• promoting human capital

development through better access to adult learning, improving basic and digital skills and education outcomes, and reducing early school leaving, especially by disadvantaged groups, including by integrating preventive and remedial measures and attracting qualified teaching staff.

ANNEXES

LIST OF ANNEXES

31

A1. CSR implementation 33

Fiscal 39

A2. Fiscal developments and debt sustainability 39

A3. Taxation 44

Productivity 48

A4. Innovation to business 48

A5. Single market and industry 55

A6. Savings, investment and access to finance 63

A7. Effective institutional framework 71

Sustainability 77

A8. Industry decarbonisation, circularity and climate mitigation 77

A9. Affordable energy transition 86

A10. Climate adaptation, preparedness and environment 92

Fairness 101

A11. Labour market 101

A12. Social policies 106

A13. Education and skills 110

A14. Social scoreboard 115

A15. Health and health systems 116

A16. Housing 120

Horizontal 126

A17. Sustainable development goals 126

A18. Competitive regions 128

A19. Transport 135

LIST OF TABLES

A1.1. CSR implementation and Commission assessment 33 A2.1. Projected change in ageing-related expenditure in 2025-2040 and 2025-2070 41 A2.2. Supplementary pension schemes - scope for expansion 41 A2.3. Fiscal Governance Database indicators and Public Accounting Maturity 42 A2.4. Reforms and investments underpinning the extension of the adjustment period of Germany 43 A3.1. Taxation indicators 45

32

A4.1. Key innovation indicators 54 A5.1. Single Market and Industry 62 A6.1. Savings and Investment Union summary diagnostics 63 A6.2. Financial Sector Indicators 70 A7.1. Germany. Selected indicators on better regulation practices 72 A7.2. Digital Decade key performance indicators: availability of digital public services 73 A8.1. Key clean industry and climate mitigation indicators: Germany 85 A10.1. Key Adaptation Indicators 100 A14.1. Social Scoreboard for Germany 115 A15.1. Key health indicators 117 A16.1. Housing affordability selected indicators 125 A18.1. Main development trends, challenges and the concentration of resources 129 A18.2. Key regional indicators (at NUTS 1 level) for Germany 132 A19.1. ERTMS deployment in Germany. 136

LIST OF GRAPHS

A2.1. Contributions to the change in the general government balance (% of GDP) 39 A2.2. Public investment evolution and composition (% of GDP) 40 A2.3. Primary spending evolution and composition 40 A3.1. Tax revenue by economic function in 2024, %, DE (outer ring) and EU-27 (inner ring) 44 A3.2. Tax wedge for single and second earners as a % of total labour costs, 2025 44 A4.1. Business formation rates in Germany by sector (2010-2024) 52 A5.1. Manufacturing industry production: total and selected sector, index (2021=100), 2015-2024 61 A6.1. Composition of non-financial corporations' funding 64 A6.2. Capital markets and financial intermediaries 64 A6.3. Composition of households' financial assets 66 A7.1. Trust in justice, regional / local authorities and in government 71 A7.2. Most time-consuming aspects of service delivery 73 A8.1. Greenhouse gas emissions in the effort sharing sectors, 2005, 2023, and 2024 80 A9.1. Electricity and gas prices for household and non-household consumers, first half of 2025 87 A9.2. Low-carbon electricity generation vs. electricity wholesale prices, 2025 87 A9.3. Germany’s installed renewable capacity vs electricity generation mix 89 A11.1. Key labour market indicators 101 A12.1. At-risk-of-poverty rate and its components 106 A13.1. Early leavers from education and training, of those aged 18-24 110 A15.1. Life expectancy at birth, years 116 A15.2. Treatable mortality 116 A16.1. House supply indicators in DE since 2005 120 A16.2. Price level for residential construction, % compared to the EU average 121 A16.3. House prices, rents and price-to-income evolution in DE and EU27 since 2005 122 A17.1. Progress towards the SDGs in Germany 126

LIST OF MAPS

A18.1. GDP per head compared with the EU average. 127 A18.2. Automotive sector: share in total employment in industry, 2023 (%) 129 A18.3. Housing cost overburden (% of population), 2024 132 A19.1. TEN-T Cross-Border & National Priority Sections in Germany. 136

ANNEX 1: CSR IMPLEMENTATION

33

Table A1.1: CSR implementation and Commission assessment

(Continued on the next page)

Germany faces challenges in a wide range of policy areas, as identified in the country-specific recommendations (CSRs). Germany was recommended, among other things, to strengthen public investment, improve the quality of public finances, safeguard the long-term sustainability of the pension system, improve the tax mix, boost innovation, speed up the digitalisation of the public administration, improve the conditions for housing investment, reduce the dependency on fossil fuels, focus investment on efficient energy systems and decarbonisation of buildings and transport, increase the labour supply and improve education outcomes.

The Commission has assessed the degree of implementation of the 2025 CSRs considering the policy action taken by Germany to date*. To do so, the Commission has taken into account the information provided by Germany in its Annual Progress Report as well as other information sources. This annex provides summary information on the policy actions taken or planned by Germany for each CSR. More detailed information on these actions is included in the relevant chapters and other annexes of the report.

*CSR 2 is not assessed in CeSaR. RRP implementation is monitored through the assessment of RRP payment requests and analysis of the bi-annual reporting on the achievement of the milestones and targets, to be reflected in the country reports. Progress with the cohesion policy is monitored in the context of the Cohesion Policy of the European Union.

Recommendation text Main measures adopted or

implemented By 30 April 2026

Preparatory steps / credibly

announced measures By 30 April 2026

Assessment

of progress

1.1 Reinforce overall defence and security spending and readiness while ensuring debt sustainability in line with the European Council conclusions of 6 March 2025.

Total general government defence expenditure in 2026 is projected at 1.9% of GDP, corresponding to an increase of 0.5 ppt. compared to 2024.

Total general government defence expenditure in 2027 is projected at 2.2% of GDP, corresponding to an increase of 0.8 ppt. compared to 2024.

Substantial progress

1.2 Submit the medium-term fiscal-structural plan by end- July 2025, as planned.

The MTFSP has been submitted on 19 August 2025 and adopted by the Council on 10 October 2025.

Full implementation

1.3 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.

- Cumulated deviation in 2025 amounted to -0.3% of GDP. - Cumulated deviation in 2026 projected at 0.3% of GDP but it is

fully explained by the NEC flexibility (0.8 pps. of GDP).

Full implementation

1.4 Strengthen public investment by tackling the bottlenecks in planning and execution at all levels of government.

- Set up of the Special Fund for Infrastructure and Climate Neutrality worth EUR 500 bn, including for additional investment - Accelerated planning and procurement for the German Armed Forces - Simplification of Renewable Energy Permits

- Future Infrastructure Act (parliamentary process has begun): seeking to prioritise, simplify and digitalise rail, motorway and waterway projects - Procurement Acceleration Act (parliamentary process has begun), with the aim to improve permitting and planning procedures

Some progress

34

Table (continued)

(Continued on the next page)

Recommendation text Main measures adopted or

implemented By 30 April 2026

Preparatory steps / credibly

announced measures By 30 April 2026

Assessment

of progress

1.5 Improve the quality of public finances by containing transfers from the federal budget to the pension system and reviewing the efficiency of public spending.

- Federal government spending review in Summer 2025 - 2025 subsidy report, identifying trends and inefficiencies in federal subsidy expenditure, albeit without concrete follow-up

- Implementation of performance budgeting recommendations (from the conceptual framework report produced by the government) - The government-appointed welfare state commission presented 26 suggestions on how to improve the efficiency of the welfare system. - The cabinet adopted a law to balance the contributions to statutory health insurance funds which would contribute to sustainability in the short-term once adopted

Limited progress

1.6 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.

- Pension package, including the extension of a guarantee that the pension level will not go below 48% of the average person’s wage until 2031 (Haltelinie) - Mothers’ Pension: increase of pensions accredited for parenting These measures put additional pressure on the sustainability of the pension system. - The Second Act Strengthening Company Pensions can improve earnings from occupational pensions and thus contribute to pension adequacy, yet coverage extends only to around half of employees. - The reform of individual capital- based pensions (Altersvorsorgedepot) may help strengthen 3rd pillar pensions. - The early start pension (Frühstartrente) creates private savings accounts for children and teenagers, making capital market- based savings more attractive.

- The government has established a pension committee, to propose further pension reforms (expected June 2026).

Limited progress

1.7 Improve the tax mix to support inclusive growth and sustainable competitiveness, also by reducing disincentives to increase hours worked, in particular for second earners.

- “Investment booster” (accelerated depreciation until end-2027), extended R&D tax credit, and others (Investitionssofortprogramm) - Active pension (Aktivrente): EUR 2,000/month tax-free income for employees above retirement age - Further measures go against an improvement of the tax mix (VAT rate reductions for restaurants, increased environmentally harmful subsidies)

Gradually reducing the corporate tax rate by 1 pp per year 2028- 2032 (as part of Investitionssofortprogramm)

Limited progress

35

Table (continued)

(Continued on the next page)

Recommendation text Main measures adopted or

implemented By 30 April 2026

Preparatory steps / credibly

announced measures By 30 April 2026

Assessment

of progress

3.1 Boost innovation by facilitating research commercialisation and by increasing public funding for transformative innovation.

- Introduction and subsequent expansion of the research allowance worth around EUR 1 bn - New initiative to strengthen spin- offs in selected hubs (“Start-up Factories”) - About one-quarter of the investment of the RRP supports research and innovation-related measures

- High Tech Agenda aims to boost investment in research and innovation for six key technologies (funding of up to EUR 18 bn) but unclear to what extent the budget is truly additional and if it will be used for disruptive innovation - Important Project of Common European Interest on artificial intelligence to develop foundational technologies and sector-specific models for industrial AI application

Some progress

3.2 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.

- Capital Growth Fund II: public support for venture capital with limited scale and market coverage - Creation of Deutschlandfonds: EUR 30 bn in guarantees to leverage EUR 130 bn in total investments (uptake unclear) - Location Promotion Act aims to improve conditions for private investment into venture capital, infrastructure, and renewables (impact unclear)

- Modernisation agenda aims to reduce administrative costs for businesses by 25% (EUR 16 bn), to cut compliance burden by EUR 10 bn, reduction of federal staff by 8% and the number of federal agencies as well as a cut in operating expenditure by 10%

Limited progress

3.3 Speed up the digitalisation of the public administration, including by improving the geographic coverage of digital public services and facilitating cooperation between governmental levels.

- RRP 6.1.2 – Amended OZG (Online Access Act) implementation since 2024. However, many online services are only available in some Kommunen or Länder. - RRP 6.2.1 - Joint programme of the federal government and the Länder for an efficient administration that benefits citizens and businesses - RRP 2.1.1 - datalabs and chief data scientists in ministries since 2021 - Ordnance on the Standards for Online Access to Public Services to Strengthen Government Digitalisation (OZSV)

- RRP 6.1.3 - National Once-Only Technical System (NOOTS) to link registers and online services - Roll-out of Deutschlandstack, a digital platform for public administration across all levels of government - Online legal proceedings More limited in scope: - Nationwide digital services announced (e.g. centralisation of car registration to achieve nationwide coverage; 24h company founding) - Digital platform to accelerate planning and approval procedures - Building Information Modelling for construction

Limited progress

3.4 Accelerate the roll-out of very high-capacity digital communication networks, also involving the private sector.

- Telecommunications Law amendment accelerates the expansion of fibre optic and mobile communications networks by creating an ‘overriding public interest’ - Gigabitförderung 2.0 subsidy for network expansion - Federal-regional agreements to speed up permitting in 2023. Implementation depends on Länder

- Further amendment to Telecommunications Law (draft bill published in March) - BnetzA copper-to-fibre migration strategy

Some progress

36

Table (continued)

(Continued on the next page)

Recommendation text Main measures adopted or

implemented By 30 April 2026

Preparatory steps / credibly

announced measures By 30 April 2026

Assessment

of progress

3.5 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.

- “Construction turbo” (effective since October 2025) helps to mobilise additional building land and speeds up processes but is subject to approval by each municipality - Rent price brake has been prolonged until 2029 supporting affordability but with possible implications for investment incentives in the rental market

- Concept paper for a “housing type E” allowing for a simpler, needs-based standard in construction; announced for 2026 - A law to limit the increase of indexed rents was announced - Fundamental reform of the Federal Building Code to accelerate construction is foreseen

Limited progress

4.1 Further reduce the overall degree of dependency on fossil fuels and facilitate the expansion of renewable energy.

- Adoption and update of several legislative packages incl. Hydrogen Acceleration Act, Carbon Dioxide Storage Act (KSpG) and Geothermal Energy Acceleration Act - Continued expansion of renewable energy capacity with installed renewable capacity reaching 200 GW, including 150.6 GW of solar (+16.5% compared to 2024), 68.1 GW of onshore wind (+4 GW) and 9.5 GW of offshore wind (+0.3 GW)

- Kraftwerkstrategie / Capacity Market: Tender of 12 GW of controllable power capacity, of which 10 GW for gas. While this increases reliance on gas for electricity generation, it is meant to facilitate the phase-out of coal

Some progress

4.2 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.

- German state bought 25% stake in TenneT Germany (TSO) - Implementation of RED III - EUR 36.6 bn for investments under Climate and Transformation Fund (but partly used for temporary relief measures such as subsidising industrial electricity prices) - 2,000 km of new transmission grids, 1280 km of them newly built, were approved on the federal level in 2025, an increase of 45% compared to 2024 - 14.7 bn planned investments in distribution grid in 2025

- AGNES Reform (BNetzA, paper Nov 2025, 5-year implementation) - NEST: Network Regulation Overhaul (BNetzA)

Some progress

4.3 Accelerate the process of decarbonising the buildings

- RRP measures supported at least 145,000 specific renovations related to, inter alia, systems technology (without heating), solar collectors, biomass heating systems and others, and the complete renovation of of 10,000 housing units (1.3.3). - Funding programmes (BEG, KfW) continued but outlook uncertain

- Buildings energy act to be replaced by Buildings modernisation act (Gebäudemodernisierungsgesetz): plans to abolish previously legislated requirements for switching to climate-friendly heating solutions, allowing the continued installation of gas and oil boilers in residential buildings. - Energy Performance of Buildings Directive transposition expected

Some progress

37

Table (continued)

(Continued on the next page)

Recommendation text Main measures adopted or

implemented By 30 April 2026

Preparatory steps / credibly

announced measures By 30 April 2026

Assessment

of progress

4.4 and transport sectors, including by renovating the rail network.

- RRP measures included the support for publicly accessible recharging points (1.2.1), support for the purchase of 339,450 electric vehicles (1.2.3), projects for hydrogen and fuel cell applications in transport (1.2.7), and registration of 670 zero-emission commercial vehicles (REPowerEu). - Tax incentives for EVs - Rail infrastructure investments of EUR 23.1 bn in 2025, including EUR 18.1 bn in federal investment

- Special Fund for Infrastructure and Climate Neutrality: EUR 16 bn planned for rail maintenance and replacement

Some progress

5.1 Increase labour supply and tackle the shortage of skilled workers, notably by increasing hours worked,

- Active pension (Aktivrente): allows people who have reached the statutory retirement age to voluntarily continue working and benefit from up to EUR 2,000/month tax-free, however with a limited impact, - Citizen benefit act reform to create a “basic security” model to increase incentives for jobseekers’ integration into employment - The ban on consecutive uses of fixed term contracts (Anschlussverbot) was abolished for people having reached the statutory retirement age

- Making overtime, hours worked beyond regular or collectively agreed full time hours tax-free (which may lead to some distortions)

Limited progress

5.2 strengthening basic, green and digital skills and

- Adult education and integration measures provided by the Federal Employment Agencies include basic skills as well as digital skills within labour-market and integration programmes - DigitalPakt II implementation started in January 2026, continuing federal support for school digitalisation

- Further develop the National Skills Strategy, shaped by two main priorities: 1. supporting employees and companies in continuing education during structural change, and 2. using digitalisation and AI for continuing education

Limited progress

5.3 better attracting and retaining talent from non-EU countries.

- Expansion of the Integration through Qualification (IQ) funding programme: “Regional integration networks to promote a culture of welcome and recognition for international workers”

- Work-and-stay agency to simplify working immigration procedures: guidelines adopted November 2025, set up of the agency by 2029 - Reducing the work-ban period for asylum seekers in reception facilities

Limited progress

38

Table (continued)

Source: Germany’s reporting and Commission assessment

Recommendation text Main measures adopted or

implemented By 30 April 2026

Preparatory steps / credibly

announced measures By 30 April 2026

Assessment

of progress

5.4 Improve education outcomes, including by promoting excellence and providing targeted support to disadvantaged groups.

- ‘Leistung macht Schule (LemaS)’, the nation-wide rollout of evidence- based strategies for high-performing students - Support to disadvantaged groups: Start Opportunities Programme: 10- year federal–Länder programme that concentrates EUR 2 bn yearly on 4,000 disadvantaged schools (10% of all schools)

Limited progress

5.5 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.

- RRP 4.1.1 – Investment Programme for Childcare Facilities: EUR 3.8 bn for the expansion of childcare places (2026–2029). - Law establishing a legal entitlement to all-day care: gradual phase-in 2026-2030, combined with EUR 3.5 bn to Länder for infrastructure investments

- Early childhood education and care (ECEC): the 2025 coalition agreement reconfirms federal commitment to high-quality, accessible ECEC, but strong reliance on Länder implementation choices and availability of qualified staff - All-day schools: the 2025 coalition agreement commits to the legal entitlement to all-day primary schooling, but scope of entitlement (daily duration, holidays, inclusion standards) yet to be decided; requires Bund- Länder agreement on standards and delivery models

Limited progress

FISCAL

ANNEX 2: FISCAL DEVELOPMENTS AND DEBT SUSTAINABILITY

39

This annex discusses selected topics in public

finance and developments in fiscal-

structural country-specific recommendations

(CSRs) addressed to Germany in July 2025. These CSRs include a call to strengthen defence spending and readiness while implementing a fiscal strategy in line with the Council Recommendation of 10 October 2025. Germany also received recommendations in 2025 to: (i) strengthen public investment; (ii) improve the quality of its public finances by containing transfers from the federal budget to the pension system; (iii) review the efficiency of public spending; and (iv) safeguard the long-term sustainability of the pension system.

On 10 October 2025, the Council of the

European Union adopted the

Recommendation endorsing Germany’s medium-term fiscal-structural plan. The plan

includes a fiscal adjustment over seven years. At the same time, the Council also activated the national escape clause for Germany to facilitate its transition to higher levels of defence spending (50)(51).

Developments in the government balance, debt and public expenditure (52)

Germany’s government deficit amounted to

2.7% of GDP and the government debt-to-

GDP ratio was 63.5% at the end of 2025.

Based on the Commission Spring 2026 Forecast, Germany’s government deficit is projected to increase to 3.7% of GDP in 2026 and 4.1% of GDP in 2027. The increase in the deficit is set to be driven by Germany’s rising general government

(50) OJ OC, C/2025/5635,

ELI:http://data.europa.eu/eli/C/2025/5635/oj.

(51) Compliance by Germany with the maximum growth rates of net expenditure recommended by the Council is assessed in COM(2026)200.

(52) Figures underpinning fiscal surveillance (net expenditure growth) are provided in the Fiscal Statistical Tables (SWD(2026)200) providing background data relevant for the assessment of the budgetary policies of the Member States.

expenditure on defence, infrastructure, and tax- relief measures.

Graph A2.1: Contributions to the change in the

general government balance (% of GDP)

Source: European Commission Spring 2026 Forecast

Rising public investment is improving the

quality of expenditure in Germany. Public investment is set to increase in the coming years (CSR 2025 1.4), driven by the Special Fund for Infrastructure and Climate Neutrality, with spending forecast to rise as a share of GDP from 3.3% in 2025 to 3.7% in 2027 (Graph A2.2), focusing mainly on transport and digitalisation to boost productivity. However, not all spending directly supports infrastructure or climate goals, as some funds are set to be used for subsidies or reallocated from the core budget, reducing true additional investment. At the same time, overall government expenditure has grown significantly since 2020, largely due to rising spending on social benefits, alongside increased subsidies for the green transition, particularly in the energy efficiency of dwellings. This trend raises concerns about spending efficiency (CSR 2025 1.5) and whether alternative approaches – by prioritising social spending (CSR 2025 1.6) and higher carbon taxes - could achieve similar goals more effectively.

-2

-1

0

1

2

3

2021 2022 2023 2024 2025 2026 2027

Expenditure Revenue Change in budget balance

% of GDP

40

Graph A2.2: Public investment evolution and

composition (% of GDP)

Source: European Commission Spring 2026 Forecast

The type of expenditure that has a greater

impact on GDP increased from 2007. Zooming in on the composition of spending, social protection accounts for the largest share of total expenditure (above 40%), followed by health, general public services and economic affairs(53), representing more than 10% of total spending.

(Since 2019, transport) has increased strongly (see Graph A2.3). Spending on general public services, housing, interest, other economic affairs and defence has risen more moderately, with the rise in defence spending reflecting recent security developments. By contrast, spending on communication (including IT & digitalisation) has remained broadly stable since 2019, while spending on education R&D and healthcare has declined. This trend deserves attention, as these categories are generally considered growth- friendly spending categories. In the case of education, this decline is particularly concerning given the drop in Germany’s performance in this area (see Annex 13 for further details).

Tax revenues in Germany as a share of GDP

are close to the EU average and the country

relies heavily on labour taxes, while more

growth-friendly taxes are underused. In 2024 Germany’s total tax revenues as a percentage of GDP (including compulsory social contributions)

(53) This refers to the set of government activities, policies, and

expenditures aimed at regulating, supporting, and developing economic activity across major sectors, including general economic and labour policies, agriculture and natural resources, energy, industry, construction, and other economic functions not elsewhere classified. Although transport and communication, as well as research and development activities, are normally considered part of this function, they are treated separately in the graph presented.

amounted to 39.7%, slightly above the EU average of 39.5%.Total tax revenues are projected to increase to 41.1% of GDP in 2026 and 2027 and 7 according to the Spring 2026 Forecast (54). The tax mix in Germany relies heavily on labour taxation (CSR 2025 1.7), which is high at all wage levels, while tax types that are considered less detrimental to growth such as recurrent property or environmental taxes are underused (see Annex 3).

Graph A2.3: Primary spending evolution and

composition

Based on the economic literature, the categories considered to have a greater growth impact include education, R&D, health, transport and communication (See Bartiero and Coumede (2013), Gemmel et al. (2016), Lupu et al. (2018) Cepparulo and Mourre (2020) and OECD (2025)). Source: Based on the Classification of the Function of Government (COFOG data).

(54) Data retrieved from the AMECO database (https://economy-

finance.ec.europa.eu/economic-research-and- databases/economic-databases/ameco-database_en).

-1

1

3

5

% o

f G

D P

Defence RRF grants and other EU funds Other nationally-financed

10

14

18

22

40

44

48

52 2

0 0

7

2 0

0 8

2 0

0 9

2 0

1 0

2 0

1 1

2 0

1 2

2 0

1 3

2 0

1 4

2 0

1 5

2 0

1 6

2 0

1 7

2 0

1 8

2 0

1 9

2 0

2 0

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

a) Evolution (% of GDP)

Primary expenditure

Spending with higher impact on GDP (rhs)

-1.0

-0.5

0.0

0.5

1.0

S ocia

l pro tection

H ea

lth

Ed u ca

tion

P u b lic o

rd er/sa

fety

En vironm

ent

R &

D

C om

m u nica

tion

C u ltu

re

H o u sing

O th

er econom ic

In terest spen

d in

g

G en

era l services

D efen

ce

Tra n sport

b) Compositional change (% total spending) since 2019

41

The costs of ageing

Total ageing-related spending in Germany is

projected to rise by about 1.5 pps between

now and 2040, to around 26% of GDP, with a

further 0.5 pps increase between 2040 and

2070 (Table A1.12). The overall increase is the

result of a projected rise in pension, long-term care and healthcare expenditure. These projections do not account for the recent pension measures decided by the German government.

Public pension spending as a share of GDP is

projected to increase by about 0.5 pps between now and 2040 and by about 1 pp. of

GDP between 2040 and 2070. In 2025,

Germany received a CSR to safeguard the fiscal sustainability of its pension system (CSR 2025 1.6), including by promoting longer working lives and reducing the incentives for early retirement. Since then, the Mütterrente (an extra pension for eligible mothers) was increased and the Haltelinie (a minimum pension replacement rate of 48% of full-time salary for people on the average wage who have contributed to the public pension system for 45 years) was extended again to 2031. Both elements will result in an upward revision of projections in Table A2.1 – all else being equal –

and thus greater transfers from the federal budget to the pension system (CSR 2025 1.5).

Supplementary pension schemes can make

the pension system more resilient by

diversifying retirement income sources. In Germany, however, uptake of these supplementary schemes remains limited.By the end of 2024, private pension assets amounted to around 7% of GDP, while participation covered around 50% of the working-age population (55). This coincides with rising medium-term public pension spending pressures and a projected decrease in the replacement rate by 2.9 pps between 2025 and 2040 (Table A2.2 and A2.3) (56).

Public healthcare expenditure is projected to

be 7.7% of GDP in 2025 (above the EU

average of 6.6%) and is expected to increase by 0.2 pps of GDP between now and 2040

and by a further 0.3 pps between 2040 and

(55) Source: OECD Pension Market in Focus 2025. The highest

participation rate in at least one supplementary pension plan is reported.

(56) The (gross) replacement rate refers, depending on data availability, to both public and private pensions. It is based on projections from the 2024 Ageing Report.

Table A2.1: Projected change in ageing-related expenditure in 2025-2040 and 2025-2070

Source: 2024 Ageing Report (EC/EPC).

Table A2.2: Supplementary pension schemes - scope for expansion

Source: European Commission.

DE 24.4 0.6 0.2 0.3 0.2 1.4 25.8 DE

EU 24.3 0.5 0.3 0.4 -0.3 0.9 25.2 EU

DE 24.4 0.9 0.5 0.4 0.2 1.9 26.4 DE

EU 24.3 0.2 0.6 0.8 -0.3 1.3 25.6 EU

Ageing-related

expenditure

Change in 2025-2040 (pps GDP) due to: Ageing-related

expenditure Pensions Healthcare Long-term care Education Total

Ageing-related

expenditure

Change in 2025-2070 (pps GDP) due to: Ageing-related

expenditure Pensions Healthcare Long-term care Education Total

Assets in

2024 (% GDP)

Participation in 2024

(% working-age

population)

DE 6.4 -2.9 51.0 DE

EU 32.4 -2.8 55.9 EU

Gross replacement rate

at retirement:

(pps change 2025-2040)

42

2070 (57). Public expenditure on long-term care is projected to be 2.0% of GDP in 2024 (above the EU average of 1.7%) and is expected to increase by 0.3 pps of GDP between 2024 and 2040 and by a further 0.1 pps of GDP between 2040 and 2070. Not included in these projections is the expenditure that will be made by the compulsory private insurance system in Germany, which covers roughly 10% of the population.

National fiscal framework

The German independent fiscal institution

(IFI), the Advisory Board to the Stability

Council, is very small and has a narrow

mandate. Its technical staff is less than one full- time equivalent and its mandate has so far focused on monitoring compliance with the fiscal rule focusing on the structural balance of the general government andthe attached Joint Forecast Group is responsible for endorsing the macroeconomic forecast. No public policy dialogue takes place between the German IFI and the government, and the IFI’s media presence is relatively limited. Although the Board members are well qualified in practice, they are not subject to any formal professional competence requirements. The Advisory Board’s access to information is not protected in law, and some issues have been signalled in this area, for example with the format

(57) Key performance characteristics, recent reforms and

investments of the German healthcare system are discussed in Annex 15.

and timeliness of some information sent by the government to the IFI. The Advisory Board has never been subject to an independent, external evaluation, but an evaluation is planned for the near future.

Spending reviews are an established practice

in Germany, but the country would benefit

from further institutionalisation of review

processes. The federal government carries out

spending reviews roughly every two years, but this only covers selected parts of the federal budget. There is a commitment in the national medium- term fiscal-structural plan to run two more spending reviews by 2029. However, there is no explicit commitment or obligation to use the recommendations from these reviews to inform the budgeting process.

Accrual accounting improves transparency

over a public body’s financial position and

performance and can also support

sustainability and intergenerational equity. Most (14) Member States have implemented accrual accounting across the general government sector and a further five are set to do so by 2030 (58). Germany lags behind the EU average in this area (see Table A2.3), in particular at the federal and state levels of government. The country has no medium-term plans to transition towards accrual accounting (59).

(58) Report on public accounting in the EU (COM(2025)746 and

accompanying Staff Working Document SWD(2025)396). Countries with an accounting maturity of 70% or more in relation to International Public Accounting Standards are deemed to apply accrual accounting.

(59) Annexes 3.1 and 3.4 of SWD(2025)396.

Table A2.3: Fiscal Governance Database indicators and Public Accounting Maturity

(1) The Country Fiscal Rule Strength Index (C-FRSI) shows the strength of national fiscal rules aggregated at the country level based on: i) the legal base; ii) how binding the rule is; iii) monitoring bodies; iv) correction mechanisms; and v) resilience to shocks. The Medium-Term Budgetary Framework Index (MTBFI) shows the strength of the national MTBF based on: i) coverage of targets/ ceilings included in national medium-term fiscal plans; ii) connectedness between these targets/ceilings and the annual budgets; iii) involvement of the national parliament in the preparation of the plans; iv) involvement of independent fiscal institutions in their preparation; and v) their level of detail. Higher scores are associated with higher rule and MTBF strength. The score for public accounting reflects the degree of maturity in relation to the International Public Sector Accounting Standards (IPSAS). Countries with an accounting maturity of 70% or more in relation to IPSAS are deemed to apply accrual accounting. For more information, see the report on public accounting in the EU (COM(2025)746 and accompanying Staff Working Document SWD(2025)396). Source: Fiscal Governance Database, European Commission

2024 Germany EU Average

Country Fiscal Rule Strength Index (C-FRSI) 14.33 14.81

Medium-Term Budgetary Framework Index (MTBFI) 0.68 0.72

2025 Public accounting maturity of general government 35% 65%

43

Germany is making progress on the reforms

and investments from the MTP. Germany’s Medium-term Plan (MTP) includes a set of reforms and investments underpinning the extension of the fiscal adjustment period. This set is composed of: (i) 15 additional commitments to reforms and investments and (ii) two commitments from the

recovery and resilience plan (RRP). Taking into account the information provided in the Annual Progress Report, Table A2.4 shows the implementation status of the set of reforms and investments due in 2025 and the first half of 2026.

Table A2.4: Reforms and investments underpinning the extension of the adjustment period of Germany

The progress of each backward-looking key step (i.e., those scheduled for completion by 30 April 2026) is classified as either ‘completed’ or factual information is provided. The status of forward-looking key steps due after December 2026 do not appear in the table, as these will be assessed by the Commission in future Country Reports. * These key steps correspond to milestones 136 and 137 of Germany’s RRP, which have been assessed as fulfilled as part of a payment request under the RRF. Source: Annual Progress Report of Germany and Commission’s assessment.

Measures  Key steps

Recommended

implementation

date 

COM assessment 2026

Operationalisation of the

Special Fund for

Infrastructure and Climate

Neutrality

Step 1: By Q3 2025, adopt the laws for the creation of the Special

Fund for Infrastructure and Climate Neutrality. Q3 2025 Completed

Research allowance to support

R&D

Step 1: By Q1 2026, adopt a law on the extension of the tax base

and eligible expenditure for the research allowance. Q1 2026 Completed

Simplification of procurement law

for the Armed Forces

Step 1: By Q2 2026, simplify procurement laws for the Armed

Forces by extending the scope for simplified procurement

procedures, speeding up and digitalising procedures.

Q2 2026 Completed

Simplification of procurement law

Step 1: By Q2 2026, simplify procurement laws by extending the

scope for simplified procurement procedures, speeding up and

digitalising procedures.

Q2 2026 Adopted, entry into force

1 July 2026.

Facilitating employment after

reaching retirement age

Step 1: By Q2 2026, lift the ban on pre-employment to facilitate

workers' temporary return to the labour market after reaching

retirement age by changing the relevant legislation.

Q2 2026 Completed

Extension of the tobacco tax Step 1: By Q4 2026, adopt a law for an extension of the tobacco

tax model. Q4 2026 Planned, no draft law yet.

Facilitating housing investment

(Housing Turbo)

Step 1: By Q1 2026, simplify the legislation for housing

construction through temporary rule exemptions, more flexible

planning, extended special regulations, and clearer noise conflict

guidelines.

Q1 2026 Completed

Set up of a government-backed

venture capital (VC) fund

Step 1: By Q4 2026, start fundraising for the ‘Growth fund II’

targeted at institutional investors with the government as an

anchor investor.

Q4 2026 Completed

Report on government subsidies

Step 1: By Q4 2025, publish a first federal subsidy report that

analyses the impact of subsidised programmes following the

subsidy policy guidelines.

Q4 2025 Completed

Step 1: By Q4 2025, publish a first spending review. Q4 2025 Completed

Improving conditions for

geothermal energy investments

Step 1: By Q2 2026, simplify authorisation proceduresthrough a

Geothermal Energy Acceleration Act. Q2 2026 Completed

Improving conditions for hydrogen

investments

Step 1: By Q3 2026, simplify planning, permitting and related

procurement procedures through a Hydrogen Acceleration Act. Q3 2026 Completed 

Federal-Länder working group for

an efficient public administration

(RRP reform 6.2.1)

Step 1: By Q2 2021, finish a first progress report with

recommendation

Step 2: By Q2 2022, finish a second progress report

Step 3: By Q1 2025, finalise at least 80 % of the measures from the

2nd progress report.

RRP Completed*

Offshore Wind Energy Act (RRP

reform 7.1.5)

Step 1: By Q1 2023, reduce barriers to the development of

renewable energies and the necessary grid infrastructure by

simplifying the planning and permitting procedures for relevant

projects.

RRP Completed*

Spending reviews

ANNEX 3: TAXATION

44

This annex provides an indicator-based

overview of Germany’s tax system. It includes information on the tax mix, on competitiveness and fairness aspects of the tax system, and on tax collection and compliance. In the area of taxation, the 2025 country-specific recommendations for Germany highlighted challenges in the tax mix to support inclusive growth and sustainable competitiveness, including better work incentives for second earners. Further, the set of reforms and investments underpinning the extended adjustment period for Germany’s medium-term fiscal-structural plan includes the extension of the research allowance (see below).

Graph A3.1: Tax revenue by economic function in

2024, %, DE (outer ring) and EU-27 (inner ring)

Source: Taxation Trends Data, DG TAXUD

Germany's tax revenue structure is heavily biased towards labour taxes. In 2024, revenues

from labour taxes (personal income tax (PIT), and social contributions) reached 22.7% of GDP, of which social contributions alone accounted for about 16.2% (Table A3.1). Consumption taxes yielded 9.9 % of GDP, mainly from VAT (6.9 %), while taxes on capital contributed 7.0%. Recurrent property taxes accounted for just 0.4% of GDP, well below the EU average of 0.9%, signalling potential to raise revenue and at the same time support municipal finances. Environmental taxes amounted to 1.75% of GDP in 2024, compared to an EU average of 2.08% of GDP. The revenue mix thus deviates markedly from the EU’s policy objectives of shifting taxation toward less distorting taxes on property, consumption and environmental bases (Graph A3.1).

Graph A3.2: Tax wedge for single and second

earners as a % of total labour costs, 2025

Note: The second earner tax wedge shows a household’s tax wedge resulting from the wage that a second earner taking up a job at 67% of the average wage receives. It does not show the total tax wedge of the household. The household is assumed to have a first earner at 100% of the average wage and no children. For the methodology of the tax wedge for second earners, see OECD (2024), Taxing Wages 2024. Source: European Commission

The labour tax burden is considerably higher

and less progressive than the EU average.

Graph A3.2 shows that the labour tax wedge (60) for Germany in 2025 was much higher than the EU average, not only for single people at the average wage level, but also for those earning low wages (50% and 67% of the average wage) and high wages (167% of the average wage). The tax wedge for second earners at 67% of the average wage whose partners are at 100% of the average wage was considerably above the EU average. In addition, the difference between the tax wedge for these second earners at 67% of the average wage and for single people at the same wage level was particularly high in Germany, which is indicative of the significant role that the joint taxation system for couples (Ehegattensplitting) still plays in reducing work incentives for second earners. The difference between the tax wedge for high- and low-wage earners (i.e. those at 167% and 50% of

(60) The tax wedge is an indicator of the tax burden on labour

that can be assessed at various levels of earnings. It is defined as the sum of personal income taxes, employee and employer social-security contributions and other mandatory contributions, expressed as a percentage of total labour costs (composed of the net wage, personal income tax, social security contributions, and other mandatory contributions). Tax wedge data in the 2026 country reports are calculated by the Joint Research Centre of the European Commission and based on the EUROMOD model, while in the past country reports they were based on the Tax and Benefit model of the OECD. While the underlying methodology is very similar, differences in the assumptions can lead to different results between both models.

51.5

26.8

21.6

57.3

25.1

17.6

Taxes on labour Taxes on consumption Taxes on capital

39.4 42.7 46.6

49.8 52.2

20

25

30

35

40

45

50

55

50 100 150

Ta x

w ed

ge , %

o f

to ta

l l ab

o u

r co

st s

Earnings as % of the average wage

Single earner - DE Single earner - EU average

Second earner - DE Second earner - EU average

45

the average wage respectively) is considerably lower for Germany than for the EU as a whole, indicating the low progressivity of the labour tax system.

The tax and benefit system reduces income

inequality. The difference in the Gini coefficient before and after taxes and transfers is estimated at around 10.9 percentage points (pps), clearly above the EU average of 7.8 pps (61). While this indicates that the tax‑benefit system performs an important redistribution function, its progressivity is limited by several factors: social‑security contributions are capped and capital income benefits from separate, often lower taxation (at 25%), being exempt from social security contributions. The tax wedge for low‑income earners remains well above the EU average, and high marginal tax rates for second earners discourage full participation in the labour market.

However, the system is complex and overall

has limited progressivity, partly generating

(61) The Gini coefficient measures the extent to which the

distribution of income within a country deviates from a perfectly equal distribution. A coefficient of 0 expresses perfect equality where everyone has the same income, while a coefficient of 100 expresses full inequality where only one person has all the income.

disincentives to work. With over 500 types of

benefits, the social transfer system is complex, reducing rightful take-up while high transfer withdrawal rates generate disincentives to work. Potential improvements were recently pinpointed by the Welfare State Commission (see Annex 12). A reduction in income tax particularly for low and medium incomes is still planned in the government’s coalition agreement and could flatten the steep tax progression in that ‘middle class bulge’ income region (Mittelstandsbauch). The ‘active pension’ (Aktivrente) in effect as of 2026 allows employees above retirement age to earn up to EUR 2 000 per month tax-free, creating incentives to work longer.

Inheritance and gift taxation is complex,

regressive and shows further revenue potential. Although Germany’s wealth inequality

is among the highest in the euro area (see Annex 12), a complex system of allowances to inheritance and gift taxation currently result in higher effective tax rates for low- and medium inheritances than for high inheritances. In particular the transfer of business assets benefits

Table A3.1: Taxation indicators

(1) Forward-looking effective tax rate (KPMG). (2) A higher value indicates a stronger redistributive impact of taxation. (*) EU-27 simple average. (**) Forecast value for 2024. EU-27 refers to the median value. For more data on tax revenues as well as the methodology applied, see the Data on Taxation Trends webpage. Source: European Commission, OECD, ISORA.

2019 2022 2023 2024 2025 2019 2022 2023 2024 2025

Tax structure Total taxes (including compulsory actual social contributions) (% of

GDP) 40.1 40.1 38.8 39.6 39.9 39.7 39.0 39.4

Taxes on labour (% of GDP) 22.5 22.2 21.8 22.7 20.6 20.1 19.9 20.3

of which, social security contributions (SSC, % of GDP) 15.5 15.4 15.5 16.2 13.0 12.7 12.7 13.0

Taxes on consumption (% of GDP) 10.7 10.5 9.8 9.9 11.2 10.9 10.5 10.6

of which, value added taxes (VAT, % of GDP) 6.9 7.3 6.9 6.9 7.1 7.4 7.1 7.1

Taxes on capital (% of GDP) 6.9 7.5 7.1 7.0 8.1 8.7 8.5 8.5

Personal income taxes (PIT, % of GDP) 9.6 9.5 8.9 9.2 9.6 9.4 9.3 9.6

Corporate income taxes (CIT, % of GDP) 2.6 3.1 3.0 2.9 2.6 3.2 3.2 3.1

Total property taxes (% of GDP) 1.1 1.2 1.0 0.9 2.2 2.1 1.9 1.8

Recurrent taxes on immovable property (% of GDP) 0.4 0.4 0.4 0.4 1.2 1.0 0.9 0.9

Environmental taxes (% of GDP) 2.4 1.8 1.7 1.75 2.6 2.1 2.1 2.08

Effective carbon rate in EUR per tonne of CO2 equivalents na na 96.9 na na na 84.8 na

Tax wedge at 50% of average wage (single person) (*) 38.9 37.5 38.2 38.7 39.4 32.4 31.6 31.5 31.5 31.6

Tax wedge at 100% of average wage (single person) (*) 46.6 45.3 45.7 46.0 46.6 40.1 39.7 39.9 39.9 40.0

Corporate income tax - effective average tax rates (1) (*) 30.3 29.7 29.7 30.6 20.0 19.2 19.0 19.3

Difference in Gini coefficient before and after taxes and cash social

transfers (pensions excluded from social transfers) (2) (*) 7.9 11.2 11.3 10.9 7.8 8.0 7.9 7.8

Outstanding tax arrears: total year-end tax debt (including debt

considered not collectable) / total revenue (in %) (*) 1.0 2.7 3.1 na 31.8 32.6 30.7 na

VAT gap (% of VAT total tax liability, VTTL) (**) 10.5 6.6 9.7 9.7 10.5 7.3 8.2 na

Progressivity &

fairness

Tax administration &

compliance

By tax base

Some tax types

EU-27Germany

46

from substantial tax advantages (62). A lower overall tax rate, a broader assessment basis without special exemptions combined with generous deferral rules for non-liquid business assets and allowances that protect smaller inheritances could reduce bureaucracy, lower incentives for tax avoidance, and lead to a fairer distribution of the tax burden (63). Such a reform seems possible without endangering business continuity (64) and could increase fiscal revenues from EUR 12 billion by about EUR 2-8 billion (65). A decision by the Federal Constitutional Court on the preferential treatment of inherited business assets currently in place is expected by the end of 2026.

Reducing environmentally harmful subsidies

could also increase tax revenues. While Germany has introduced a national carbon price in 2021, other environmental taxes generate only modest revenues relative to peers. This is also partly due to tax reliefs tackling high energy prices to protect the economy and private households. However, the generally lower taxation of diesel compared to petrol (Dieselprivileg) is environmentally unjustified and eliminating it could increase fiscal revenues by EUR 7 billion (66). As of 2026, environmentally harmful subsidies increased even further, with higher tax expenditures for diesel used in agriculture (Agrardiesel) and for the commuter allowance (Pendlerpauschale).

Taxation of real estate is relatively limited. A

long‑overdue reform of the municipal property tax came into force in 2025, though not aimed at increasing revenues. Generous tax expenditures for capital income from selling or renting existing buildings, which distort capital allocation, contribute to rising housing prices and increase inequality. Abolishing these or better targeting

(62) Malmendier, U., Schnitzer, M., Truger, A., & Werding, M., 2026,

Reformbedarf bei der Erbschaft-und Schenkungsteuer in Deutschland.

(63) Fuest, C., Peichl, A., & Windsteiger, L., 2026. Zur Reform der Erbschaftsteuer.

(64) Dörrenberg, P., & Langenmayr, D. (2026). Betriebsvermögen in der Erbschaftsteuer: Was spricht für Ausnahmen–und was dagegen?

(65) Bach, S., & Sinclair, T., 2026. Erbschaftsteuerreform: Vergünstigungen abbauen, Freibeträge erhöhen, Steuertarifstufen reduzieren. DIW Wochenbericht 4/2026.

(66) Bundesrechnungshof, 2025, Maßnahmen zur Stärkung der Einnahmenbasis.

them to incentivise the expansion of housing supply could raise up to EUR 12 billion per year. Profits of real estate companies are fully exempted from the municipal-level corporate income tax (Gewerbesteuer) with an average rate of 15%, entailing a revenue loss of around EUR 5 billion (67).   For the Länder, the property transfer tax (Grunderwerbsteuer) is a major revenue source alongside inheritance and gift tax. However, transfer taxes disincentivise transfers and thus mobility.

Company taxation is relatively high.

Germany’s statutory corporate income tax (CIT) consists of a 15% federal CIT, a 5.5% solidarity surcharge and a municipal trade tax that varies by locality. The effective average CIT rate is around 29.7%, the highest in the EU, with the EU average at 12.7%. Combined with complex rules and separate state and federal administration, the corporate tax system creates significant compliance costs and disincentives for investment.

However, reform efforts have been

undertaken to enhance investment incentives

and make Germany more competitive as a

tax location for businesses. To improve tax

conditions for businesses, in July 2025 Germany adopted an act for an immediate tax investment programme (Investitionssofortprogramm) to strengthen Germany as a business location. Among other things, this act reintroduces a declining-balance depreciation for movable fixed assets of up to 30% for investments between July 2025 and end of 2027. It also provides for the first reduction of the corporate tax rate since 2008, by 1 pp. per year between 2028 and 2032 from 15% to 10%, as well as an improved preferential tax treatment of retained profits for limited liability partnerships, which are subject to income tax. In addition, the R&D tax credit was further extended, increasing incentives to invest in innovation.

Municipal business tax remains a cornerstone

of local revenue in Germany, despite large

differences at regional level. German municipalities rely heavily on the municipal-level business tax (Gewerbesteuer) which accounted for almost half of their tax revenue in 2024 (68). In

(67) OECD Economic Surveys: Germany 2025.

(68) https://www.iwkoeln.de/studien/martin-beznoska-tobias- hentze-bjoern-kauder-eine-reform-der-gewerbesteuer-fuer-

47

order to limit intermunicipal tax competition and stabilise revenues (69), the federal government recently raised the minimum threshold for tax multipliers that municipalities can set (Hebesatz).

Tax compliance is generally good in Germany,

yet gaps remain. The VAT compliance gap was 9.7% in 2023 and 2024, corresponding to a loss of EUR 32 billion in tax revenue in 2024 (70). From the potential VAT revenue, 11.7% was foregone in 2024 because of national tax exemptions and reduced rates. Exemptions increased further as of 2026 with the reduction of the VAT for restaurants from 19% to 7% (71). The CIT compliance gap is estimated at 7.6%, below the EU average of 10.9%. Enforcement could be improved to move closer to Denmark, Netherlands and Finland where around 2% of the company tax revenue is missed, or Austria where 3.8% is missed (72). In addition, company tax revenue losses due to profit shifting are among the highest in the EU, with profits amounting to 1.6% of GDP shifted abroad, resulting in the loss of 28% of corporate tax collected (73). Outstanding tax arrears (including uncollectable debts) have increased to about 3.1% of tax revenue. Germany lacks an official estimate of the PIT gap, and the shadow economy is estimated at around 8.8% of GDP. Offshore tax evasion through undeclared foreign deposits amounts to roughly 0.24% of GDP (74)(75).

Digital transformation of the tax administration is slow and fragmented. Unlike

tragfaehige-kommunalfinanzen.html Bundesministerium der Finanzen, 2025, Eckdaten zur Entwicklung und Struktur der Kommunalfinanzen 2015 bis 2024.

(69) Beznoska, M., Hentze, T., and Kauder, B., 2026, Eine Reform der Gewerbesteuer für tragfähige Kommunalfinanzen. IW- Kurzbericht Nr. 18, 10 March 2026.

(70) European Commission, Syntesia, Poniatowski, G., Bonch- Osmolovsky, M., Śmietanka, A. et al., 2025, VAT gap in Europe – Report 2025.

(71) Boysen-Hogrefe, J., 2025, Gastro-Mehrwertsteuer: Keine überzeugenden Gründe. Wirtschaftsdienst, 2025/6.

(72) European Commission, 2025, Corporate Income Tax Gap, Towards an European approach to measuring losses in corporate tax revenues, Final Report.

(73) Tørsløv, T., Wier, L., & Zucman, G., 2023, The missing profits of nations. The Review of Economic Studies, Volume 90, Issue 3.

(74) VAT Gap report 2025.

(75) Mind the Gap – Country Fiche Germany, Section 2: Monitoring of compliance gaps.

most EU Member States, Germany has no national digital taxation strategy. Responsibilities are divided between the federal and Länder authorities and the long‑running ‘KONSENS’ IT project has suffered delays and cost overruns. Pre‑filled electronic returns are available only for PIT; companies must still fill in all CIT and VAT fields manually. E‑filing rates for PIT (around 79 %) and VAT (around 95 %) remain below the EU average. Artificial‑intelligence tools, such as the X‑PIDER risk‑scoring system and virtual assistants, are being used at federal level but are only slowly being rolled out in the Länder. The Growth Opportunities Act from 2024 introduced mandatory e‑invoicing and an electronic VAT reporting platform, which should improve compliance and reduce the VAT gap (76).

Germany’s dividend‑arbitrage scandal shows

how tax fraud can harm public finances. In

‘cum‑ex’ and ‘cum‑cum’ transactions, shares were rapidly traded around the dividend record date so that multiple investors could claim refunds of withholding tax that had only been paid once. Investigative reports estimate that these schemes siphoned about EUR 36 billion from the German treasury between 2000 and 2020 (77). The government told the parliament in 2023 that roughly EUR 3 billion had been recovered through final court judgments (78). Germany has tightened its laws and will introduce a standardised reporting model under the EU’s FASTER directive in 2027 to prevent similar frauds. Germany will receive technical support from the Commission to implement the FASTER directive.

(76) Mind the Gap – Country Fiche Germany, Section 5 “Digital

transformation of the tax administration”.

(77) CORRECTIV: The CumEx Files.

(78) https://dserver.bundestag.de/btd/21/005/2100548.pdf.

PRODUCTIVITY

ANNEX 4: INNOVATION TO BUSINESS

48

Germany’s traditionally strong performance

in research and innovation (R&I) is under

pressure. Reforms are needed to implement the 2025 country-specific recommendations to boost innovation by facilitating research commercialisation and by increasing public funding for transformative innovation and to 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.The 2025 European Innovation Scoreboard ranks Germany as a ‘strong innovator’, with a performance above the EU average (111.1%) yet on a decreasing trend (79) and with significant regional differences (see Annex 18). Germany’s R&D intensity (80) exceeds the EU average but since 2018 has stagnated, standing at around 3.1%, short of its own target of 3.5% (81) by 2030 and behind global leaders like Israel (6.3%), South Korea (4.96%), the US and Japan (both 3.4%) (82). Germany’s R&I performance would benefit from the timely implementation of the measures included in the new government’s coalition agreement and the new High-tech Agenda (83). Likewise, it would be beneficial to ensure that R&I funding remains a clear priority and that its level, effectiveness and efficiency are continuously strengthened. Firms are gradually adopting digital technologies in line with the EU average, although uptake of data analytics has stalled. Expanding digital adoption could make up for Germany’s under- representation in high-growth sectors and strengthen its long-term competitiveness.

(79) European Commission, 2025, European Innovation

Scoreboard (EIS), country profile: Germany, ec.europa.eu.

(80) Gross domestic expenditure on R&D as a percentage of GDP.

(81) The 2025 coalition agreement restates the 3.5% R&D target, extending it to 2030 (from 2025).

(82) Also, the gap to China has almost disappeared, as China increased its R&D intensity from 0.9% in 2000 to 1.8% in 2010, 2.4% in 2020 and 2.8% in 2025.

(83) The Hightech Agenda Germany (launched in 2025) is a national research and innovation strategy aimed at strengthening science and six key technologies to position Germany as a leading high-tech hub.

Excellent science

Germany has a strong public research base, but reform is needed to sustain its

performance. Its science system is anchored in a

well-established network of public research institutions and backed by numerous R&I funding programmes (84). Despite this, the impact of Germany’s research – as indicated by the share of publications among the world’s top 10% most cited – is only just above the EU average (10.2% vs 9.4% in 2022). This impact has been slightly decreasing over time, also reflecting broader global shifts. Despite standing above the EU average (0.92% of GDP, compared with an EU average of 0.72% in 2024), public R&D investment has broadly stagnated as a share of GDP, which may limit its contribution to achieving the 3.5% of GDP target (85). In this context, it would be highly beneficial to: (i) ensure that the planned EUR 18 billion in the Hightech Agenda provides additional funding beyond existing budgets to support strategic technologies; and (ii) use the Special Infrastructure Fund to strengthen research infrastructure and universities. Germany’s research system could also benefit from strengthening the attractiveness and transparency of research careers and modernising personnel structures. This could be achieved in particular by creating more permanent positions below that of the professor position and by strengthening the tenure track programme (86).

Germany’s R&I funding framework can be

more effective and efficient. Currently, only a minority of federal R&I funding programmes undergo causal evaluation to assess whether their

(84) Bundesbericht Forschung und Innovation (2024).

(85) The literature considers a one-third / two-thirds split between public and private R&D expenditure to be a suitable mix. See for example OECD, 2003, Targeting R&D: Economic and Policy Implications of Increasing R&D Spending. For Germany this would give 1.16% as a target value (i.e. one third of 3.5%).

(86) Compared internationally, Germany has a very low share of permanent academic positions. In early-career stages, 96% of researchers are on fixed-term contracts; even among PhD- qualified staff, 90% are temporary. Wissenschaftsrat, 2025, Personalstrukturen im deutschen Wissenschaftssystem.

49

objectives are achieved cost-effectively (87). Given the multiple layers of public R&I funding – at both federal and state levels – a more systematic and coordinated evaluation approach could increase the overall impact. Large-scale initiatives such as the excellence strategy would benefit from rigorous assessment of their effectiveness in strengthening critical mass in top-tier research (88). Meanwhile, complex administrative and reporting requirements continue to burden recipients and slow down decision-making and the implementation of R&I activities. This includes burdensome funding application procedures and lengthy public procurement processes (89). Against this background, swift adoption of the planned Innovation Freedom Act aimed at reducing bureaucratic hurdles to securing research funding would be highly beneficial (90).

Business innovation

Germany’s reliance on mid-tech industries and a weaker innovation output rate suggest

lock-in effects and difficulties in adapting to

emerging technologies. Business expenditure on R&D as a percentage of GDP is well above the EU average (2.14% vs 1.49% in 2024) but has broadly stagnated in recent years and is well below global leaders. R&D activity in Germany is concentrated in mid-tech sectors such as automotive, relying even more heavily on mid-tech industries than the EU overall (91). The shift

(87) Expertenkommission Forschung und Innovation, 2024,

Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2024, e-fi.de.

(88) OECD, 2025, OECD Economic Survey: Germany 2025 and Schubert et al. (2024): Research, Technology and Innovation Policy Must Focus on the Generation of Critical Mass as well as Expertenkommission Forschung und Innovation, 2026, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2026.

(89) See for instance Stifterverband, 2025, Wege aus der Bürokratie.

(90) The Innovationsfreiheitsgesetz, currently being prepared, aims to reduce bureaucratic hurdles to securing research funding, lower administrative burdens and increase freedom for innovation. See among others Expertenkommission Forschung und Innovation, 2025, Keine Zeit verlieren in der Forschungs- und Innovationspolitik for concrete proposals on what the act should entail.

(91) See OECD, 2022, Innovation Review: Germany 2022, oecd- ilibrary.org; Dietrich et al., 2024, ‘EU-Innovationspolitik: Wie entkommt Europa der „Midtech-Falle“ and European

towards new tech fields is slow compared with the US. This is also reflected in the level of patenting activity which, though still high by average EU standards, has decreased substantially over the last 12 years (92). To encourage a shift towards high-tech fields, and in line with the 2025 country- specific recommendation on increasing public funding for transformative innovation, the Agency for Disruptive Innovation (SPRIND) supports the development of breakthrough technologies. Results from the first evaluation show that the agency’s instruments are well suited to fostering breakthrough innovations, particularly following the expanded autonomy granted by the SPRIND Freedom Act (93). However, there is room for further flexibility (94). The agency’s budget has increased but remains below that of relevant players in other countries (relative to GDP) (95), while relevant expert bodies are calling for more funding for breakthrough innovation (96).

The uptake of digital technologies by firms is

gradually increasing, and Germany is making

strong efforts to advance its digital

technologies and infrastructure. The country performs above the EU average on basic digital intensity for SMEs and the uptake of AI by enterprises. Cloud adoption by enterprises remains broadly in line with the EU average, while the use of data analytics has stagnated (37.1% in 2023 and 37.7% in 2025). This is in contrast with continued progress at EU level (33.3% in 2023 and

Commission’, 2023 EU Industrial R&D Investment Scoreboard.

(92) Patent applications filed under the Patent Cooperation Treaty per billion of GDP (in purchasing power standards EUR) stood at 4.3 in 2022 (EU average 2.8), compared with 5.9 in 2016 and 7.2 in 2010. Other sources also show a slower increase in patent intensity (per one million employed) in R&D intensive technologies compared with other countries worldwide, see: https://www.e- fi.de/dashboard/dev/patente/patentintensitaet.

(93) Fraunhofer ISI, 2025, Evaluation der Bundesagentur für Sprunginnovationen SPRIND GmbH.

(94) Expertenkommission Forschung und Innovation, 2024, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2024, e-fi.de.

(95) For instance, Defense Advanced Research Projects Agency (US), ARIA (UK), Innovation Fund Denmark, Innosuisse (Switzerland) These examples are indicative only; direct comparisons are difficult given differing mandates and objectives.

(96) See also Grimm et al., 2025, Eine Wachstumsagenda für Deutschland, calling for more funding for ‘high risk – high return’ projects.

50

39.9% in 2025). To boost digital adoption and innovation, Germany is introducing new measures and updating existing ones: AI service desks assist companies and public administrations in adopting and developing AI solutions. The ‘ERP promotional loan for digitalisation’ programme now covers more fundamental digital needs, such as basic product improvements. Meanwhile, a digitalisation check assesses companies’ digital readiness to optimise investments. On semiconductors, the Important Project of Common European Interest (IPCEI) on Microelectronics and Communication Technologies is complemented by a strategy on microelectronics for research, skilled workers and production. This aims to strengthen production capacities and investment in the semiconductor ecosystem. In parallel, Germany continues to develop interoperable and accessible European data processing technologies via the IPCEI on Next Generation Cloud Infrastructure and Services. Establishing a multi-provider cloud-edge continuum is key for efficient data processing and storage. Both IPCEIs are supported by the Recovery and Resilience Facility (investments 2.1.2 and 2.1.3). Overall, higher adoption rates of digital technologies and increased investment in digital technologies could significantly boost productivity. With Germany under-represented in high-growth sectors, long-term competitiveness could benefit from shifting focus towards innovation, e.g. in AI, semiconductors, and ICT more broadly (97).

Germany has strengthened its R&D tax incentive scheme to improve the innovation

activity of small to medium-sized

enterprises. R&D expenditure by SMEs as a percentage of GDP remains low (0.18% in 2023 vs the EU average of 0.47%). The share of SMEs engaged in innovation has declined, but recent evidence shows that when accounting for firm size and sector, SMEs are often more active in introducing product or process innovations than comparable larger firms, even with lower R&D spending. At the same time, SME innovation continues to be held back by shortages of skilled labour, the costs and risks associated with innovation, and bureaucratic hurdles (98). In 2025, Germany expanded its R&D tax incentive scheme

(97) McKinsey, 2025, The power of one: How standout companies

grow national productivity | McKinsey.

(98) Expertenkommission Forschung und Innovation, 2026, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2026.

once more by raising the maximum eligible amount to EUR 12 million, keeping the reimbursement rate at 25% (35% for SMEs), and introducing a flat 20% allowance to cover general overhead costs. Recent reports indicate that companies were increasingly using the tax incentive scheme even before the most recent expansion. Nevertheless, further simplification and targeted adjustment could facilitate the application process (99).

Structural barriers limit the

commercialisation of academic research.

Classical channels of science–business collaboration remain strong, driven by dedicated organisations such as Fraunhofer, while public– private scientific co-publications account for 11.7% of total publications in 2024 (EU average: 7.6%). At the same time, privately funded R&D in public research organisations and universities (contractual research) remains high, though slightly declining (100). However, this model has mainly supported incremental innovation, while more fundamental transfer of knowledge and technology - e.g. in the form of academic spin-offs - has remained limited (101).One contributing factor is thatdespite being formally recognised as a core mission, technology and knowledge transfer often receives limited strategic attention, funding and career incentives, discouraging researchers from engaging in commercialisation. Relevant support structures such as technology transfer offices often suffer from financial and personnel instability and high dependency on third-party funding (102). In addition, as intellectual property typically lies with the institution, entrepreneurs face bureaucratic and financial hurdles in

(99) ZEW, 2025, Forschungszulage: Ein neues Förderinstrument

wächst und gedeiht and Expertenkommission Forschung und Innovation, 2026, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2026.

(100) As measured in public expenditure on R&D financed by business enterprises (national) as % of total public expenditure on R&D. It stood at 11.29 in 2023 (EU average at 7.51) but was on a decreasing trend in the years prior.

(101) See for instance OECD, 2022, Innovation Review: Germany 2022, oecd-ilibrary.org and more recently Expertenkommission Forschung und Innovation, 2026, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2026.

(102) See Stifterverband, 2025, Gruendungsradar.

51

accessing it, with negotiations averaging 18 months (103).

Germany has launched new flagship

initiatives to accelerate commercialisation

activities, in line with the 2025 country- specific recommendation. July 2025 saw the launch of the ‘Start-up Factories’ initiative to strengthen spin-off activity in selected hubs (104). Looking forward, the government aims to bundle transfer-relevant instruments under the ‘Initiative Forschung & Anwendung’ (105). The set-up will require good coordination to avoid overlaps, particularly as two ministries are still involved (106). To simplify and increase flexibility of funding instruments, the initiative could build on examples such as the DATIpilot and SPRIND instruments. This should be paired with a reduction of bureaucratic and financial hurdles to entrepreneurs transferring intellectual property. The coalition agreement envisions a national intellectual property strategy that should enable the creation of spin-offs in 24 hours, but concrete implementation is lacking (107). Stronger budgetary prioritisation of transfer activities at state and university level (108) would strengthen incentives for researchers and universities across research funding programmes to engage in commercialisation. Greater consistency across R&I funding schemes would help address fragmentation and support a more systematic transition from early-stage research to higher technology readiness levels (109).

(103) Ibid.

(104) Start-up Factories.

(105) This should include three pillars, including the new ‘Applied Research Association’ (Deutsche Anwendungs- und Forschungs Gemeinschaft - DAFG).

(106) The two ministries involved are the Federal Ministry of Research, Technology and Space and the Federal Ministry for Economic Affairs and Energy.

(107) In this context, the planned IP strategy requires swift adoption, taking into account existing expert recommendations. The aim is to reduce hurdles to the transfer of intellectual property.

(108) See Stifterverband, 2025, Gruendungsradar.

(109) Expertenkommission Forschung und Innovation, 2026, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2026.

Entrepreneurial dynamism

Germany’s overall number of start-ups has

grown recently, but sustaining this trend will

depend on further increases in venture capital. The number of new start-ups increased by 29% between 2024 and 2025, after growing by 11% the previous year. However, the number of unicorns (110) remains below that of international competitors (111) and it remains to be seen whether the downward trend in the high-tech business formation rate can be reversed (see Graph A4.1 below). Venture capital has tripled over the last 10 years (as a percentage of GDP) but remains substantially below that of the US (112). Increases took place across the different stages (seed, start-up, later-stage), with the gap to the US still particularly pronounced at the later stage. In line with the 2025 country-specific recommendation to facilitate the diversification of the economy, business dynamism and boost private investment by supporting entrepreneurship (see also next paragraph), Germany is making an effort to increase the level of venture capital. Later-stage funding has benefited (among others) from initiatives such as the Future Fund (EUR 10 billion until 2030). More recently it has been supplemented by the WIN initiative (113) and the Deutschlandfonds (114). Considering the sizeable

(110) New companies with a market capitalisation of over one

million dollars.

(111) See Start-up Verband, 2026, Startup-Neugründungen in Deutschland and Deutscher Startup Monitor, Bitkom, 2025, Unicorn Report 2025. In mid-2025 Germany was home to 31 unicorns, while the UK had 55 and the US 682 (in early 2025).

(112) 2013: 0.023%, 2022: 0.085%, 2024: 0.069% (venture capital in the US stood at 0.54% of GDP in 2024). The 2024 figures for other selected countries are: Denmark – 0.12%, France - 0.09%, Sweden – 0.12. Data from Invest Europe. See also other sources that indicate a stagnation between 2024 and 2025: KFW.

(113) The WIN initiative strengthens Germany’s growth and innovation capital market by mobilising private investment for later-stage financing. It complements the Future Fund by improving conditions for venture and growth capital.

(114) The Deutschlandfonds is a framework addressing a spectrum of investment needs, making it easier for private companies and investors to invest in Germany. For instance, through the Deutschlandfonds, KfW co-invests with private investors in large venture and growth capital rounds for German start- ups and scale-ups, with a focus on later-stage financing and industrial technologies.

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gap with the US, continued efforts to broaden access to venture capital across all growth phases could play a major role in sustaining momentum and strengthening Germany’s start-up ecosystem (see Annex 6 for more details).

Graph A4.1: Business formation rates in Germany

by sector (2010-2024)

(1) High-tech encompasses industries with the highest R&D intensity and advanced technology industries with moderate R&D intensity (see Neuhaeusler et al. (2022) for more information). The business formation rate is calculated as the number of start-ups in relation to the number of companies. Source: Based on the German Commission of Experts for R&I (2026).

Timely adoption of planned policy initiatives to reduce regulatory barriers can support

innovation. Germany currently faces fragmented and inconsistent rules for accessing and using research data (e.g. varying data access rules between universities and states). Addressing this will require swift adoption of the planned research data act to simplify and legally secure data access through privacy-compliant sharing and reduced bureaucracy (115). The proposed regulatory sandboxes act, designed to formalise controlled testing of innovative technologies, has yet to be adopted. It remains essential that the experimentation clauses have broad definitions. This would provide flexibility in testing diverse innovations, make it possible to adapt to unforeseen changes and ensure a lasting impact (116). Reports show that Germany performs

is a public–private investment vehicle through which KfW co- invests with private investors in large venture and growth capital rounds for German start-ups and scale-ups, with a focus on later-stage financing and industrial technologies.

(115) Forschung & Lehre, 2025, Entwurf zu Forschungsdatengesetz noch in 2025.

(116) Expertenkommission Forschung und Innovation, 2024, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2024, e-fi.de.

above the EU average in the Innovation Procurement Policy Framework Benchmarking (117). Further progress depends on making it easier for start-ups and innovative firms to participate in public tenders. This can be achieved through the planned public procurement acceleration act(118) and through greater transparency by making it mandatory to publish tenders on the federal e-procurement platform (119) (see Annex 5).

The shortage of skilled workers affects

Germany’s innovation capacity. Almost half (43.5%) of SMEs consider that a lack of skilled workers/demographic developments is their greatest challenge (120). This bottleneck is particularly evident in sectors crucial to Germany’s innovation performance, e.g. in artificial intelligence and for ICT professionals more generally (121). This is also reflected in the number of computing graduates per 1 000 people aged 25-34, which is rising and at a similar level than the EU average (3.8 in 2024) (122). While post- secondary educational attainment remains low, Germany has the highest rate for PhD graduates (see Annexes 11 and 13).

Germany is actively addressing the shortage

of skilled workers. To further attract and develop innovative talent, Germany’s plans include updating its skilled labour strategy, attracting international start-up founders and boosting women’s participation in science, particularly in ICT fields (123). In 2024, Germany granted approximately 56 000 EU Blue Cards for highly

(117) European Commission, 2024, Benchmarking of national

policy frameworks for innovation procurement, Country profile Germany. The study assesses 10 indicators, including spending targets for innovation procurement, existence of action plans, and other measures of national innovation procurement capacity.

(118) Vergabebeschleunigungsgesetz.

(119) OECD, 2025, OECD Economic Survey: Germany 2025.

(120) Expertenkommission Forschung und Innovation, 2026, Gutachten 2026, e-fi.de.

(121) OECD (2024): Artificial Intelligence Review of Germany and Cedefop Labour and Skills Shortage Index | CEDEFOP.

(122) At the same time, the share of STEM graduates (new graduates in science and engineering per thousand population) remains above the EU average (18.27 vs 16.82 in 2024).

(123) See Hightech Agenda, 2025.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Business formation rate overall

Business formation rate in high-tech sectors

Business formation rate in advanced tech sectors

53

skilled professionals (124). This represents 72% of the total across the EU. Germany continues to attract a high number of international students, making it one of the top hosting countries worldwide (125). However, lengthy and complex administrative procedures still limit access to highly educated workers (126). Since 2023, Germany has simplified legal requirements for recruiting skilled workers from non-EU countries, including recognition of foreign qualifications and a pathway for qualified professionals (127). Further support may come from the announced Work-and- Stay-Agency. Comparable steps are proposed in the 2024–2034 higher education internationalisation strategy, which calls for easing visa and access rules and improving recognition of prior learning (see Annex 11). Germany set up a “1 000 Heads Programme” with to aim to attract international top researchers, particularly in response to recent pressure on US academia, with 286 researchers relocated in the first year(128).

Germany is one of only a few EU countries

lacking a top-level strategy to support

entrepreneurship education. Entrepreneurship education is neither integrated into primary and general secondary education through a cross- curricular approach nor taught as a standalone subject. As in most EU countries, entrepreneurship education is not explicitly mentioned in the teacher competence framework, nor is there an explicit reference to entrepreneurship education in training opportunities for teachers. Nonetheless, entrepreneurial experiences are encouraged and supported as extracurricular activities, even though

(124) The EU Blue Card is a fast-track tool for recruiting highly

skilled non-EU nationals with higher education or equivalent experience (Source for data: Eurostat).

(125) DAAD, 2025, Number of international students well over 400 000.

(126) Expertenkommission Forschung und Innovation, 2024, Gutachten zu Forschung, Innovation und Technologischer Leistungsfähigkeit Deutschlands 2024, e-fi.de.

(127) See BMBF and KMK, 2024, Internationalization of the Higher Education Institutions in Germany; Under the SGB III Modernisierungsgesetz, responsibility for the recognition of foreign qualifications will be transferred to the Federal Employment Agency (the Bundesagentur für Arbeit) from 2029, institutionalising the previously ESF co-funded IQ Network structures (see Annex 13).

(128) Homepage - Ein Jahr 1.000-Köpfe-Plus: 286 Spitzenforschende gefördert - BMFTR.

they are not compulsory (129). However, the Standing Conference of the Ministers of Education and Cultural Affairs recognises career orientation as a compulsory aspect of all educational programmes (130) and includes economic education (131) within this framework. Although entrepreneurship education is not a defined focus in school curricula, several nationwide initiatives exist (132). There is also a growing number of programmes in higher education that aim to support entrepreneurship (133).

(129) European Commission / EACEA / Eurydice, 2025,

Entrepreneurship education at school in Europe – 2025. Eurydice Report.

(130) KMK, 2006, Vereinbarung über die Schularten und Bildungsgänge im Sekundarbereich I – Beschluss der Kultusminister Konferenz vom 03.12.1993 Ld.F. vom 02.06.2006.

(131) KMK, 2025, Empfehlung zur Verbraucherbildung an Schulen – Beschluss der Kultusminister Konferenz vom 12.09.2013 i.d.F. der Bildungsministerkonferenz vom 05.06.2025,

(132) e.g. 'Gründung in School’, ‘Jugend Gründet’, ‘Deutscher Gründerpreis für Schüler:innen’.

(133) The Hochschulkompass for example lists 391 study programmes for Business and Organisational Management.

54

Table A4.1: Key innovation indicators

EU average for the last available year or the year with the highest number of country data. * Break in series Source: Eurostat, DG JRC, OECD, Science-Metrix (Scopus database), Invest Europe, European Innovation Scoreboard

R&D intensity (gross domestic expenditure on R&D as % of GDP)

2.68 2.88 3.09 3.04 3.13 3.13 : 2.24 3.44

Public expenditure on R&D as % of GDP 0.89 0.9 1.03 0.92* 0.92* 0.92 : 0.72 0.64

Scientific publications of the country within the top 10% most-cited publications worldwide as % of total publications of the country

11.88 11.27 10.35 10.21 : : : 9.44 12.31

Researchers (FTEs) employed by public sector (Gov+HEI) per thousand active population

3.6 3.9 4.4 4.3* 4.2* 4.2 : 4.3 :

International co-publications as % of total number of publications

44.26 49.03 53.39 53.72 54.16 55.92 : 57.24 :

Business enterprise expenditure on R&D (BERD) as % of GDP

1.79 1.97 2.06 2.05 2.14* 2.14 : 1.49 2.69

Business enterprise expenditure on R&D (BERD) performed by SMEs as % of GDP

: 0.17 : : 0.18* : : 0.47 0.30

Researchers employed by business per thousand active population

4.7* 5.7 6.7 7.1 7.4* 7.6 : 5.9 :

Patent applications filed under the Patent Cooperation Treaty per billion GDP (in PPS €)

7.16 5.86 5.13 4.30 : : : 2.81 2.20

Employment share of high-growth enterprises measured in employment (%)

: : : : 0.65 0.83 : 0.87 :

SMEs with at least a basic level of digital intensity % SMEs (EU Digital Decade target by 2030: 90%)

: : : : 61.38 : 73.55 71.39 :

Data analytics adoption % enterprises (EU Digital Decade target by 2030: 75%)

: : : : 37.08 : 37.67 39.85 :

Cloud adoption % enterprises (EU Digital Decade target by 2030: 75%)

: : : : 38.50 : 46.03 46.69 :

Artificial intelligence adoption % enterprises (EU Digital Decade target by 2030: 75%)

: : : : 11.55 19.75 25.97 19.95 :

Public-private scientific co-publications as % of total number of publications

9.96 10.45 11.2 11.81 11.91 11.72 : 7.62 :

Public expenditure on R&D financed by business enterprises (national) as % of GDP

0.11 0.12 0.11 : 0.1* : : 0.06 0.02

Total public-sector support for BERD as % of GDP : 0.08 : : 0.13* : : 0.21 :

R&D tax incentives: foregone revenues as % of GDP : 0.00 0.00 0.00 0.01 : : 0.10 0.16

BERD financed by the public sector (national and abroad) as % of GDP

: 0.08 : : 0.12* : : 0.11 :

Venture capital (market statistics) as % of GDP (calculated as a 3-year moving average)

0.03 0.03 0.05 0.08 0.08 0.07 : 0.06 :

Seed stage funding share (% of GDP) 0.00 0.00 0.00 0.01 0.01 0.00 : 0.01 :

Start-up stage funding share (% of GDP) 0.01 0.01 0.03 0.04 0.04 0.03 : 0.03 :

Later-stage funding share (as % of GDP) 0.02 0.01 0.02 0.04 0.04 0.03 : 0.03 :

New graduates in science & engineering per thousand population aged 25-34

: 17.13 17.6 18.56 18.34* 18.27 : 16.82 :

Graduates in the field of computing per thousand population aged 25-34

: 2.42 2.77 3.34 3.42* 3.86 : 3.84 :

R&D investment & researchers employed in businesses

Innovation outputs

Digitalisation of businesses

Academia-business collaboration

Innovative talent

Public support for business innovation

Financing innovation

Science and innovative ecosystems

Headline indicator

Germany 2010 2015 2020 2022 2023 2024 2025 EU average

(1) US

ANNEX 5: SINGLE MARKET AND INDUSTRY

55

Germany’s business environment has many

strengths, but faces structural challenges

that impact its long-term competitiveness. The 2025 country-specific recommendations (CSRs) called for measures to facilitate the diversification of the economy, boost private investment, entrepreneurship and innovation, simplify regulation and reduce administrative burden, speed up the digitalisation of the public administration and accelerate the roll-out of very high-capacity communication networks. The German recovery and resilience plan (RRP) has led to improvements like enhanced digital public services and streamlined approval processes. However, business investment continued to fall in 2025.While Europe is an important stabiliser for German exports, businesses still face obstacles within the Single Market, including complex business establishment procedures, restrictive or diverging national regulations and a lack of digital administrative procedures. The federal government has taken steps to boost investment, reduce red tape and modernise public administration, which contribute to addressing the related CSRs.

Business dynamics

Germany has an open and diversified

economy, but it is particularly vulnerable due

to its strong export orientation. Manufacturing contributed 19.4% to total value added in 2025, which is considerably above the EU average of 15.9% (134). Motor vehicles remain Germany’s most important export goods (16.3% of total exports or EUR 254.0 billion in 2025), followed by machinery (13.7% or EUR 214.6 billion), data processing equipment, electronic and optical products (8.7% or EUR 136.2 billion) and chemical products (8.6% or EUR 135.0 billion) (135). Much of Germany’s economic strength is based on its ‘Mittelstand’, a network of highly specialised small to medium-sized enterprises (SMEs) and midcap businesses, often grouped in industry clusters (136).

(134) Federal Statistical Office, 2026, Gross value added,

www.destatis.de/.

(135) Federal Statistical Office, 2026, Foreign trade, www.destatis.de/.

(136) Clusterplattform Deutschland, 2026, Cluster Policy, www.clusterplattform.de/. The German cluster platform currently includes 480 cluster organisations, also supported by the ‘go-cluster’ and ‘clusters4future’ programmes.

However, SMEs are even more affected than larger companies by structural challenges such as high energy and labour costs, administrative burden and economic and geopolitical uncertainties (137). Furthermore, business succession is a major challenge, as an increasing number of business owners cannot find a suitable successor (138).

The challenging economic situation has led to further reductions in business investment.

Investment in machinery and equipment fell by about 5.2% in 2025, following a decline by 6% in 2024. German firms also invest less in new products or services than the EU average (14% vs 20% EU average) but more in replacing existing equipment (55% vs 43%) (139). While the ifo Business Climate Index showed a modest recovery in 2025, it has fallen again to a four-year low in April 2026 due to the Middle East conflict (140). However, the high foreign direct investment (141) underlines Germany’s central role in the EU economy and still attractive business location.

The federal government is taking steps to

boost investment and entrepreneurship. An Investment Programme Act adopted in July 2025 introduced additional tax incentives and a gradual reduction in corporate income tax by 1 percentage point per year from 2028 to 2032 (142) (see Annex 3 and Annex 4). In December 2025, a ‘Germany Fund’ was launched, managed by the national investment and development bank KfW. The government provides about EUR 30 billion in public funds and guarantees, which is intended to generate around EUR 130 billion in additional investment (143). The Location Promotion Act, adopted in December 2025, aims to boost investment by improving financing conditions for infrastructure and renewable energy projects as well as SMEs and start-ups (144). These measures contribute to addressing the 2025 CSR to boost

(137) German Chamber of Industry and Commerce, 2025,

Mittelstand droht dauerhaft abzurutschen, www.dihk.de/.

(138) German Chamber of Industry and Commerce, 2025, Report Unternehmensnachfolge 2025.

(139) European Investment Bank, 2025, EIB investment survey.

(140) ifo Institute, 2026, ifo Business Climate Index for Germany.

(141) Eurostat, 2026, Data on FDI stock.

(142) Federal Government, 2025, Investitions-Sofortprogramm.

(143) Federal Government, 2025, Deutschlandfonds.

(144) Federal Government, 2025, Standortfördergesetz.

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private investment by supporting entrepreneurship and improving access to finance for start-ups and scale-ups (see also Annex 4 and Annex 6).

Lack of skilled staff, high energy costs and

uncertainty about the future are highlighted

by firms as main investment obstacles. According to the EIB Investment Survey, the main long-term obstacles to investment reported by German firms in 2025 were the availability of skilled staff (91%, 2024: 90%), high energy costs (87%, 2024: 83%) and uncertainty about the future (87%, 2024: 80%) (145). The availability of skilled staff remains a major concern, though pressure has eased since 2023 (see Annex 11). The recent surge in energy prices following the Middle East conflict has added further pressure on many businesses (see Annex 9).

Despite the challenging economic

environment, the number of start-ups has

increased in the past year. In 2025, a record

high of 3 568 newly founded start-ups was reached, representing an increase of 29% compared with 2024. This positive trend was evident in almost all federal states, but was particularly strong in Bavaria, North Rhine- Westphalia and Saxony. The software sector thereby showed the largest absolute increase, driven in particular by AI-based business models. (146). However, looking at the longer-term development and structure, despite the recent increase, start-up activity has tended to be on a sideways trend since 2018 and the general propensity to start a business in Germany remains relatively low (147) (see Annex 4).

Insolvencies have increased significantly

while payment performance by public

authorities has worsened. While German SMEs

overall still have good access to finance, companies report a tightening of credit conditions and more restrictive bank lending (148) (see Annex 6). Overall, the share of SMEs experiencing late payments is below the EU average (33.7% vs 48.7%) (149). However, while in previous years Germany was among the earliest payers in the EU,

(145) European Investment Bank, 2025, EIB investment survey.

(146) Start-up Verband, 2026, https://startupverband.de/.

(147) KfW 2025, Gründungsmonitor, KfW-Gründungsmonitor.

(148) KfW, 2026, KfW-ifo-Kredithürde, kfw.de.

(149) ECB, 2026, Survey on the access to finance of enterprises.

in 2024 it ranked fifth among EU Member States with the longest payment times in government-to- business transactions and the average payment time was the second highest observed for German public authorities over the 2019-2024 period (150). In 2025 the payment gap also exceeded the EU average (see Table A5.1) At the same time, insolvencies increased significantly, reaching the highest level in 20 years in early 2026, due to the challenging economic environment (151), but late payments also weigh on liquidity-constrained SMEs.

Business environment

German businesses call for a substantial

reduction in administrative burden. According to the EIB Investment Survey, the burden of business regulation was reported as being an obstacle by 83% of businesses in 2025, which was considerably higher than the EU average of 69% (152). The national regulatory control council reported a noticeable increase in compliance costs over the last years (153). Efforts over the last years aiming to reduce red tape provided only marginal relief (see Annex 7).

There are ambitious objectives to reduce red

tape and modernise federal and regional

public administration. In line with the CSR to

simplify regulation and reduce administrative burden, several ongoing measures aim to improve the business environment. Under Germany’s RRP (154), Germany is modernising registers and is implementing the Online Access Act. In December 2025, federal and regional authorities launched a state modernisation agenda, focused on driving digitalisation and reducing bureaucracy (155) (see Annex 7). In November 2025, the government

(150) European Commission, 2025, EU Payment Observatory,

Annual Report 2025.

(151) Leibniz-Institut für Wirtschaftsforschung Halle (IWH), 2026, Insolvenztrend, iwh-halle.de.

(152) European Investment Bank, 2025, EIB investment survey.

(153) National Regulatory Control Council, 2025, Annual Report, normenkontrollrat.bund.de.

(154) European Commission, 2026, Germany’s recovery and resilience plan.

(155) Federal Government, 2025, Föderale Modernisierungsagenda.

57

adopted a comprehensive package to further reduce bureaucracy (156). Eight adopted measures aim to, amongst other things, simplify trade and tax regulations, abolish various reporting obligations and digitise the execution of property contracts. An additional 50 planned measures include an infrastructure reform law to streamline and digitise planning and approval processes, and a further reduction in sustainability reporting requirements. Germany’s medium-term fiscal- structural plan includes commitments to further cut red tape for businesses, individuals and administration.

The federal government aims to accelerate

business establishment procedures (157). Setting up a company takes about three to six weeks, depending on the legal form and type of business. The government aims to reduce this time by implementing a one-stop shop for registration, allowing companies to register within 24 hours through a new web portal as of 2028. This will simplify digital registration by using the federal ID number for identification and automatically forwarding the data to various authorities such as the commercial register, the tax office and social security (158). Some regions already facilitate faster and fully digital business registration, e.g. Schleswig-Holstein (159) (see Annex 7).

Although the trends and initiatives for connectivity infrastructure are promising,

there is still room for improvement. Fibre-to- the-premises (FTTP) coverage increased from 29.8% in 2023 to 36.8% in 2024, but was still significantly below the EU average of 69.2% (160). Coverage is higher in the north than in other parts. The coverage of very high-capacity networks in rural areas increased from 37.6% in 2023 to 45.2% in 2024 but remained below the EU average of 61.9%. Overall 5G coverage increased to 99% (above the EU average of 94.4%), close to saturation levels (see also Annex 18). A

(156) Federal Government, 2025, Bundesregierung beschließt

umfassendes Entlastungspaket.

(157) Part of the barriers highlighted in the Single market strategy (‘Terrible Ten’) and the 2026 Annual Single Market and Competitiveness Report.

(158) Federal Government, 2025, Modernisierungsagenda.

(159) Start-up Hafen Schleswig-Holstein, 2026, Unternehmen online gründen mit startuphafen.sh.

(160) European Commission, 2025, Germany 2025 Digital Decade Country Report.

government study identifying areas without mobile broadband provides a detailed data basis for targeted action to improve rural coverage (161). Amendments to the German communication law are expected to accelerate the network roll-out and could contribute to addressing the 2025 CSR to accelerate the roll-out of very high-capacity digital communication networks.

Public investment in infrastructure is set to

perform strongly. Germany has a well- developed transport infrastructure, which is, however, in need of maintenance and upgrading. The federal government decided to invest about EUR 115 billion in 2025 and EUR 120 billion in 2026 (162). These measures help to address the 2025 CSR to strengthen public investment. While Germany made progress on digitalising its railway infrastructure by installing the European Rail Traffic Management System (ERTMS), it is still among the EU Member States with the lowest rate of ERTMS implementation (Annex 19).

Single Market

Recent economic volatility and trade

tensions underlined the importance of the

Single Market for growth and resilience. German businesses have a strong export orientation, illustrated by an exports-to-GDP ratio of about 41% and two thirds of German firms being engaged in international trade (163). Germany’s industry has been particularly affected by recent trade tensions, a decline in global demand and increased competition for some of its key export products. In 2025, exports to China and the US – Germany’s most important trading partners – declined by about 12% and 8% respectively (164). Increased exports to the EU of just under 3% almost completely offset these

(161) Federal Ministry for Digital Transformation and Government

Modernisation, 2025, Analyse von weißen Flecken.

(162) Federal Ministry of Finance, 2025, Special Fund for Infrastructure and Climate Neutrality.

(163) European Investment Bank, 2025, EIB investment survey.

(164) Federal Statistical Office, 2025, Foreign trade.

58

declines (165), underlining the importance of the Single Market.

Regulatory and administrative barriers to the

Single Market persist, affecting goods and

services trade as well as the freedom of business establishment. Business associations (166) and economic experts (167) call for trade barriers to be reduced and cross-border business activities, financing and start-ups to be made easier. Regarding goods, businesses report that divergent requirements for waste shipment across Member States and within Germany as well as specific requirements for printed food contact materials increase compliance costs for cross- border operations, creating frictions to the seamless functioning of the Single Market. Complex processes for mandatory registration for recycling programmes were also reported to add to the administrative burden for cross-border providers. Regarding services, businesses report that burdensome procedures for the posting of workers, such as those provided under the Minimum Wage Act, create additional obstacles for cross-border operators (168)(169)(see Annex 11). The recognition of professional qualifications can also be time-consuming, with procedures decentralised at state or in some cases chamber level and often entailing requirements to provide certified copies. The application process cannot always be completed online. Moreover, Germany faces also challenges in cross-border infrastructure, particularly with respect to rail transport and energy grids (see Annex 9 and Annex 19).

Restrictive or diverging regulation can pose a

barrier for cross-border and domestic

(165) Institut der deutschen Wirtschaft, 2025, Entwicklung der

deutschen Exporte im Jahr 2025 nach Ländern.

(166) German Chamber of Industry and Commerce, 2026, Binnenmarkt: Europas Herzstück verwirklichen; 2024, DIHK-Umfrage zu Binnenmarkthindernissen.

(167) German Council of Economic Experts, 2025, Annual Report 2025/26, www.sachverstaendigenrat-wirtschaft.de.

(168) European Round Table for Industry (ERT), Single Market Compendium of Obstacles, 21 May 2025, Single Market Compendium of Obstacles.

(169) Institut für Mittelstandsforschung, 2023, Influence of administrative burdens on the cross-border posting of employees by SMEs in border regions

business activities (170). The overall regulatory

framework provides favourable conditions for trade in services, but restrictions remain regarding the movement of people and the registration of businesses (171). Business establishment is complicated by – depending on the company form – non-digital procedures in some regions and notarisation requirements as well as different municipal zoning rules. Online business registration is not possible in all municipalities and requirements for registration and licensing might differ between local authorities. Moreover, Germany’s relatively good overall performance in the economy-wide Product Market Regulation indicator hides an uneven performance at the level of individual sectors and regulatory areas (172). For example, regulatory restrictiveness remains relatively high for architects, civil engineers and tax advisers. So far, progress in addressing barriers in the field of business services has remained limited. In answer to a Commission survey, Germany reported it fully implemented 5 and partially implemented 1 out of 16 of the 2021 Commission recommendations (173). The Commission is currently assessing Germany’s answer to measure actual progress in implementing the 2021 recommendations. In addition, Germany has diverging regional construction codes and variations also exist for technical rules, while the government is working on reforms to simplify and accelerate construction (see Annex 16). The fragmentation of data protection rules across the different federal states also creates additional complexity for businesses.

There is also room for improvement in the

timely and compliant transposition of Single

Market directives (174). This would contribute to

reducing legal fragmentation and uncertainty for firms. Germany ranks 14th in the EU average (1.1%) but above the target set by the EU Council in transposing EU directives into national law. Regarding the conformity of the transposed directives, it ranks low (21st) and below the EU

(170) Part of the barriers highlighted in the Single market strategy

(‘Terrible Ten’) and the 2026 Annual Single Market and Competitiveness Report.

(171) OECD, 2025, Services Trade Restrictiveness Index (STRI).

(172) OECD, 2025, Product market regulation.

(173) COM(2021) 385 final eur-lex.europa.eu/.

(174) Part of the barriers highlighted in the Single market strategy (‘Terrible Ten’) and the 2026 Annual Single Market and Competitiveness Report.

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average (1.5% vs 1.1%). The average duration of infringement proceedings also exceeds the EU average (175). However, Germany resolved 90.2% of the SOLVIT cases it handled in 2025 as lead centre, which is better than the EU average of 84.6%.

Compliance of products circulating in the Single Market (176) is key to ensuring a level-

playing field for law-abiding companies and

the safety of consumers. In Germany, the

number of market surveillance investigations has increased compared with 2019. In 2025, national authorities reported in the EU system for market surveillance (ICSMS) a total of 136 investigations per one million inhabitants, which is equivalent to the EU median. The number of notifications remains limited in absolute terms, which may also be the result of insufficient IT national interoperability to the ICSMS system. The upcoming revision of the Market Surveillance Regulation will upgrade ICSMS to a fully interoperable EU digital platform.

As technological change accelerates, the

effectiveness of the European

Standardisation System depends on the

ability of national standardisation bodies to

mobilise experts. Germany should support the

German Institute for Standardisation (DIN) and the Electrotechnical standardisation institute (DKE) to ensure continued involvement of a critical mass of stakeholders and experts in standardisation activities. Emerging fields such as AI and quantum technologies require not only broader participation but also continuous upskilling of experts to make them fit for the digital transition and remain responsive to innovation. For Germany, this investment is key to building a future-proof standardisation system and maintaining its influence within the ESS and at the international level, ensuring that businesses can fully benefit from the opportunities of the Single Market.

Digitalisation of public services remains a

challenge, including for Single Market procedures, despite positive developments. 40% ofbusinesses are dissatisfied with public

(175) European Commission, 2025, Single Market and

Competitiveness Scoreboard, Country data: Germany.

(176) Part of the barriers highlighted in the Single market strategy (‘Terrible Ten’) and the 2026 Annual Single Market and Competitiveness Report.

administration services, which is considerably higher than the EU average of 24%, and 44% of businesses indicate that this leads to additional costs for them (see Annex 7) (177). Germany is still lagging behind in the digitalisation of public services in the context of the Digital Decade targets (178), including in administrative procedures relevant for the Single Market for cross-border users (179). Despite some recent progress, the use of e-IDs remains limited (see Annex 7). Similarly, progress concerning length and digitalisation of building permits is limited (see Annex 16).

Germany has a decentralised procurement

system. Most procurement is done at local and regional levels. Indicators suggest a good performance overall. For example, the percentage of contracts awarded based on a single bid was 18% in 2025 (improving from 20% in 2024 and below the EU median), signalling more competition. The rate of direct awards without an open or competitive procedure was 7% in 2025, in line with the EU median (see Table A5.1). This is also corroborated by the OECD indicator on public procurement (180).

Germany has taken steps to modernise and

simplify its public procurement system. Germany’s medium-term fiscal-structural plan contains a commitment to reform its public procurement system by mid-2026. In line with this commitment, the federal government has launched a reform to simplify, digitalise and accelerate public procurement procedures, which was adopted by the Bundestag in April 2026 and enters into force on July 1st 2026 (181). The reform package aims at awards above the EU thresholds and should reduce red tape costs by around EUR 300 million annually. A further reform of the procurement regulation below the EU thresholds is also planned for 2026. Moreover, a national notification service for public contract awards

(177) European Commission, 2025, Eurobarometer – Public opinion

in the European Union, Eurobarometer 568.

(178) European Commission, 2025, State of the Digital Decade 2025 report.

(179) Part of the barriers highlighted in the Single market strategy (‘Terrible Ten’) and the 2026 Annual Single Market and Competitiveness Report.

(180) OECD, 2024, Product Market Regulation indicators.

(181) Federal Ministry of Economic Affairs and Energy, 2026,

Bundesrat stimmt Vereinfachung und Beschleunigung der öffentlichen Beschaffung zu.

60

centralises data on tenders from different platforms and contributes to making Germany’s procurement processes more transparent by publishing data on awarded contracts using a standard format (182).

Businesses’ views on corruption risks in public procurement are below the EU

average. In Germany, 51% of companies (EU

average: 58%) consider tailor-made specifications for particular companies in public procurement procedures and 51% (EU average: 51%) collusive bidding to be a ‘very’ or ‘fairly widespread’ practice. Among companies that have experience of and have participated in a public procurement procedure, 18% think that corruption has prevented them from winning a public tender or a public procurement contract in practice (EU average: 25%). 53% of businesses perceive the level of independence of the Federal Cartel Office to be ‘very’ or ‘fairly good’ when it is reviewing public procurement cases (EU average: 59%) (183).

A fragmented e-procurement landscape and

data quality issues highlight the need for

interoperable systems, common standards

and stronger data governance. Given

Germany’s decentralised e-procurement service, with at least 21 or more different separate procurement services in operation, economic operators must use several systems to access all public procurement procedures, creating complexity and barriers to participation. This underlines the need for introducing interoperability and common standards. The once-only principle is only partially implemented at national level, and buyers across the EU still lack digital access to relevant evidence. Moreover, Germany lacks a dedicated entity responsible for monitoring and assessing the uptake of public procurement. The German system would benefit from a dedicated public procurement data collection and analysis

(182) Procurement Office of the Federal Ministry of the Interior,

2026, e-Vergabe. “Marktplatz Deutschland” is the Federal Government’s central project to advance the modernisation of government procurement, which is to be launched in 2027.

(183) European Commission, 2025, Justice Scoreboard, Flash Eurobarometer survey 555 on the Perceived independence of the national justice systems among companies in the EU.

service to support data-driven oversight of the procurement lifecycle (184) (see Annex 7).

Industry and economic security

Energy-intensive industries have been facing particular challenges. High energy costs and global competition put pressure on energy- intensive industries, which account for about 16% of Germany’s total manufacturing gross value added. Production of chemicals, paper, glass and ceramics for example has declined by over 20% since 2021 (see Graph A5.1) (185). To provide additional relief, the government agreed to introduce an ‘industrial electricity price’ for the years 2026-2028 with a target price of 5 cents/kWh (186), to be financed in particular through the ‘Special Climate and Transformation Fund’. ‘Carbon contracts for difference’ support climate-friendly production processes, for example in steel, cement, paper or glass industries (187) (see Annex 8 and Annex 9).

(184) European Court of Auditors, Public Procurement in the EU.

Less competition for contracts awarded for works, goods and services in the 10 years up to 2021, 2023, https://www.eca.europa.eu/.

(185) Federal Statistical Office, 2025, www.destatis.de/.

Production index as of December 2025: Glass and ceramics 78.2%, Chemicals 74.0%, Paper 80.3%, Metal 90.5%, Mineral products 91.4% (2021 = 100).

(186) Federal Ministry for Economic Affairs and Energy, 2025, https://www.bundeswirtschaftsministerium.de/.

(187) Federal Ministry for Economic Affairs and Energy, 2025, Carbon Contracts for Difference - Klimaschutzverträge

61

Graph A5.1: Manufacturing industry production:

total and selected sector, index (2021=100),

2015-2024

Source: Eurostat

Germany’s largest industrial sector, the

automotive industry, is facing increased

competition. Output of the German car industry

showed a slow recovery in 2025, with overall passenger car production increasing slightly to around 4.2 million units, but is still about 12% below pre-crisis 2019 levels. The industry faces strong competitive pressure from China, high costs associated with the transition to electric vehicles and declining profits and sales in key markets. This has led to significant job losses over the last years. The RRP supported the replacement of the private vehicle fleet by electric vehicles. In 2025, 2.86 million new passenger cars were registered, with battery electric vehicles reaching a market share of about 19.1% (up from 13.5% in 2024) (188). With the support of the RRP, public electric vehicle charging points have further increased.

Germany supports the transition towards a

net-zero economy and has made sound

progress in implementing the Net-Zero Industry Act. It has successfully designated a system of single points of contact at regional level, which is crucial for streamlining communication and coordination among stakeholders. Furthermore, the regions have established contact points to administer net-zero

(188) Kraftfahrt-Bundesamt, 2026, Neuzulassungen von

Personenkraftwagen (Pkw) im Jahresverlauf 2025.

strategic projects (189). Germany has four confirmed net-zero strategic projects, in Schleswig‑Holstein, Bavaria and North Rhine‑Westphalia (190). With regard to net-zero acceleration valleys, the country’s interest in promoting net-zero activities is evident, with the net-zero valleys Lausitz and Nordwest Germany having been formally designated and other such initiatives in progress, which can help attract further strategic projects and investments. In February 2026, Germany launched a EUR 3 billion state aid scheme to support strategic investments that add cleantech manufacturing capacity in line with the objectives of the Clean Industrial Deal (191).

Manufacturing depends heavily on imports of

raw materials. With 39.5% of material inputs stemming from imports (EU average: 22.4%), Germany is particularly vulnerable to supply chain disruptions (see Table A5.1). Moreover, Germany’s industry strongly relies on critical raw materials for the green and digital transitions, which are essential for the production of high-tech products, including electric vehicles, wind turbines and electronics. The government encourages the diversification of strategic value chains. A raw materials fund was launched in 2024 to support projects in the areas of extraction, processing and recycling (192) and a first project received funding in 2025 (193), which aims to extract and process lithium in Germany for up to 500 000 electric cars per year. Recycling may also still offer potential to further reduce the need for imported raw materials (see Annex 8).

(189) Federal Ministry for Economic Affairs and Energy, 2026, Der

europäische Net Zero Industry Act (NZIA).

(190) Federal Ministry for Economic Affairs and Energy, 2025, A big boost for climate-neutral key-enabling technologies.

(191) European Commission, 2026, Commission approves €3 billion German State aid scheme.

(192) Federal Ministry for Economic Affairs and Energy, 2024, Rohstofffonds der Bundesregierung startet | BMWE.

(193) Bundesregierung, 2025, Startschuss für erstes Projekt des Rohstofffonds.

70

75

80

85

90

95

100

105

110

115

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Manufacturing

Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials Manufacture of paper and paper products

Manufacture of chemicals and chemical products

Manufacture of rubber and plastic products

Manufacture of other non-metallic mineral products

Manufacture of basic metals

62

Table A5.1: Single Market and Industry

Source: (1) Eurostat, (2) EIB Investment Survey, (3) EIF SME Access to Finance Index, (4) Intrum Payment Report, (5) SAFE survey,

(6) OECD, (7) data up to 2024: Single Market and Competitiveness Scoreboard, 2025: Commission calculation based on TED data, accessible at the Public Procurement Data Space (PPDS) (*) the value represented here under EU average is the median, (8) Single Market and Competitiveness Scoreboard, (9) European Commission calculations.

POLICY AREA 2021 2022 2023 2024 2025 EU-27

average

116.0 119.7 118.5 117.6 115.9 100.0

15.8 15.4 15.3 14.1 - 12.6

3.6 3.4 3.7 3.9 - 3.9

Business environment

and simplification 35.4 26.1 30.2 46.8 41.0 34.0

0.73 0.70 0.52 0.37 - 0.43

0.19 0.12 0.14 0.10 - 0.19

11.7 13.6 16.6 13.7 15.3 17.4

11.8 13.7 15.4 18.1 14.8 13.6

from private entities in the previous

or current quarter - - - 42.6 44.6 47.1

from public entities in the previous or

current quarter - - - 16.9 12.1 15.9

38.3 42.1 39.3 37.6 37.1 40.7

0.063 0.062 0.062 0.062 0.062 0.050

26 28 28 36 27 27

10 8 7 12 12 6

1.9 1 1 1.2 1.5 1

1.5 1.2 1.4 1.5 1.7 1.1

74.44 71.9 70 79.8 73.3 84.6

29 27 24 26 26 25

0.0875 0.1513 0.1971 0.1539 0.1405 0.1462

30.8 29.3 29.2 - - 32.7

34.6 34.1 41.6 43.0 - 25.2

43.0 41.9 41.6 40.9 - 22.4

11.2 12.2 14.2 15.2 - 12.2

Austria

INDICATOR NAME

Business environment and investment

Productivity and

investment

Labour productivity (GDP per hour worked in PPP terms), % of

EU271

Business investment (share of GDP)1

Public investment (share of GDP)1

Impact of regulation on long-term investment, % of firms

reporting business regulation as a major obstacle2

SME liquidity

EIF Access to Finance for SMEs index - loans3

EIF Access to Finance for SMEs index - equity3

Late payments

Payment gap - corporates B2B, difference in days between

offered and actual payment4

Payment gap - public sector, difference in days between offered

and actual payment4

Share of SMEs experiencing late

payments, %5

Industry and economic security

Single Market

Integration

EU trade integration, average(intra-EU imports + intra EU

exports)/GDP, %1

EEA Services Trade Restrictiveness index6

Public procurement

Single bids, % of total contractors7*

Direct awards, % of negotiated procedures7*

Compliance

Transposition deficit, % of all directives not transposed8

Conformity deficit, % of all directives transposed incorrectly8

SOLVIT, resolution rate per country, %8

Number of pending infringement proceedings8

Energy-intensive

industries

Electricity prices for non-household consumers1

Electrification (electricity as a share of total energy consumption

in industry)1

Share of energy from renewable sources (renewable energy

generation as a share of overall energy consumption)1

Critical raw materials Material import dependency, %1

Circular material use rate1

Operational cleantech

manufacturing capacity

in 20259

- Solar PV (c: cell, w: wafer, M:module), GW 0.01 (c ), 0.475 (m) - Electrolyzer, GW -

- Heat pump assembly 0.06 - Battery, GW -

ANNEX 6: SAVINGS, INVESTMENT AND ACCESS TO FINANCE

63

Germany’s economic and financial landscape

is characterised by conservative and low-risk investment behaviour across firms,

households and institutional investors. This

has supported stability, but limited growth. Although German financial wealth and institutional assets are large in aggregate, risk-taking remains concentrated among a small subset of firms and households. Ongoing reforms aim to rebalance the financial system towards greater use of capital- based financing and funded pensions, in line with the CSR 2025 on improving access to finance for start-ups and scale-ups, but progress remains modest so far. In particular, in 2025, Germany stepped up implementation of the CSR on improving access to finance for start-ups and scale-ups by expanding and operationalising key public-private investment vehicles to mobilise additional venture and growth capital for innovative firms, in particular: (i) the Wachstumsfonds Deutschland (including Wachstumsfonds II); (ii) Deutschlandfonds; and (iii) the Zukunftsfonds.

Business landscape and company funding

The German Mittelstand is the structural

backbone of the national economy. Germany’s

business landscape is characterised by a large base of small and medium-sized enterprises (SMEs), the so-called Mittelstand, which make up 99.6% of all companies and employ 58.4% of the

workforce (194). Despite their large number, a sharp divide exists in their economic output: while SMEs generate 49.4% of total value added, a small group of large enterprises (0.4% of firms) account for 50.6% of the German economy's value added (see Annex 5for more details). This business structure has concrete implications for the corporate sector’s demand for funding, which are discussed in this annex.

German companies prioritise internal capital

use over external financing. In aggregate, the total assets of German NFCs were equivalent to 212.7% of GDP in 2024, below the average EU level of 238.4%. The funding mix of German NFCs presents some marked differences compared with the EU average, largely reflecting the specific legal structure of the German corporate sector. In particular, ‘other equity’ accounts for 38% of total NFC funding in Germany, compared with only 21% in the EU on average. This ‘other equity’ category mainly covers equity held in quasi-corporations (such as GmbH&CoKG), which are highly prevalent within the German Mittelstand. It further highlights the strong reliance of German firms on retained earnings and non-market equity financing. At the same time, there are several large, globally active German corporations with shares listed on stock markets and a substantial share of revenues generated abroad. This is reflected in the fact that listed shares play a somewhat larger role in Germany, accounting for 22% of total NFC funding, compared with 19% on average in the EU. By contrast, loans account for a very similar share of NFC funding in Germany and the EU (around

(194) 2025 SME Country fact sheet, Germany.

Table A6.1: Savings and Investment Union summary diagnostics

Source: ECB (pensions), Eurostat (households' financial wealth), FISMA CMU dashboard (VC and PE), national sources (capital taxation).

Germany

Main features Relative EU positioning

Assets at 17.2% of GDP (32.3% in the EU) 10-year real return of 0.6 (1.4% in the EU)

Medium level pension assets yielding a low real return.

EUR 113,035 per capita (EUR 85,098 in the EU) o/w 9.0% in listed shares and bonds (7.6% in the EU) o/w 13.6% in investment funds (11.0% in the EU) o/w 13.4% in life insurance (13.4% in the EU) o/w 13.5% in pension claims (13.6% in the EU)

A relatively well-diversified portfolio, though overinvested in bank deposits.

VC at 0.069% of GDP (0.064% in the EU) PE at 0.343% of GDP (0.487% in the EU)

Modest venture capital and private equity investments.

26.375 % tax on capital gains and €1,000 tax-free per person per year via a Freistellungsauftrag,

No preferential tax treatment for equity investments, average rates of capital taxation. No savings and investment account.

1-3 4-10 11-17 18-24 25-27

Colours indicate the country's relative ranking based on five groups, ranging from the three best to the three worst performers. The relative ranking as

regards an SIU diagnostic topic derives from a consistent cross-country comparison, the starting point of which is the average of the underlying main

features.

Topic

Assets-backed pension

schemes

Households' financial assets

Venture capital (VC)

Private equity (PE)

Capital taxation

64

27% of total funding in both cases), underlining the continued importance of bank intermediation across Europe. Finally, market-based debt financing remains considerably less developed in Germany, with corporate bonds accounting for only 3% of total NFC funding, compared with nearly 5% in the EU on average. German corporations also have pension liabilities on their balance sheet equivalent to 8.1% of GDP in 2024.

Graph A6.1: Composition of non-financial

corporations' funding

Source: Eurostat, FISMA E2 calculations, end-2024

Size and structure of the financial sector

Germany’s financial sector is characterised

by a large number of small banks with

relatively high operational costs. In December

2025, German banks held assets worth EUR 10.8 trillion, equivalent to 238.7% of GDP, and slightly below the EU average of 245.3% (see Graph A.6.2) The German banking sector is strongly decentralised, reflecting the presence of many small and locally oriented cooperative banks and savings banks. The top five banks in Germany accounted for only 35% of total German banking assets in 2024. Banks are organised along three so-called pillars, namely savings banks, cooperative banks and commercial banks, each of which has a different ownership structure and legal mandates. Mergers of banks across pillars remain difficult and rare despite operational inefficiencies in the banking sector. These operational inefficiencies are also reflected in relatively high costs: the cost-to-income ratio of German banks stood at 58.3% in March 2025 compared with an EU average of 54%.

Investment funds, especially real estate

funds, play an important role. Germany is the third largest domicile for investment funds in the EU, with EUR 4.5 trillion under management, roughly equivalent to Germany’s GDP. In particular, Germany is the leading European domicile for real estate funds. German insurance corporations hold assets worth the equivalent of 55.5% of GDP. Pension funds of different types (Pensionsfonds Pensionskassen, berufsständische Versorgungswerke) remain relatively modest, with total assets equivalent to 17.2% of GDP at end- 2024 (195).

Graph A6.2: Capital markets and financial

intermediaries

(1) MFIs refers to monetary financial institutions Source: ECB, AMECO, FISMA E2 calculations, end-2024

The size of the domestic capital market is

relatively modest in comparison with

European peers. The market capitalisation of

listed equity issued by German corporations was equivalent to 56.4% of GDP in Q2-2025, significantly lower than in some of the most developed capital markets in the EU. German equity accounts for only 19% of all outstanding shares issued in the EU, which pales in comparison with Germany’s 24% share of the EU economy. This is primarily because many of Germany’s most successful companies are privately held and not listed stock exchanges. Moreover, significant

(195) These figures do not include all assets underpinning future

pension claims. In particular it omits direct claims, direct insurance and support funds, with a total value of about EUR 470 billion (11% of GDP), and which are three of the five different implementation alternatives of occupational pension provision in Germany. Nor does it include any third pillar schemes.

0

100

200

300

DE EU

% of GDP

Insurance, pensions and standardised guarantees Other equity Unlisted shares Listed shares Bonds Trade credit and advances Loans

N o n -f

in a n ci

a l c

o rp

o ra

ti o n s

Fi n a n ci

a l c

o rp

o ra

ti o n s

N o n -f

in a n ci

a l c

o rp

o ra

ti o n s

M FI

s

In su

ra n ce

a n d p

en si

o n f

u n d s

O th

er f

in a n ci

a ls

G o ve

rn m

en t

M FI

s

P en

si o n f

u n d s

In su

ra n ce

c o rp

o ra

ti o n s

In ve

st m

en t

fu n d s

0

50

100

150

200

250

300

Listed equity Bonds Assets by sector

% of GDP

65

sectors in Germany, like automotive and chemicals, often trade at lower price-to-earnings ratios than high-growth tech or high-margin luxury sectors. The outstanding volume of debt securities issued by German issuers reached 95% of GDP at end-2024. The public sector accounts for the largest share (52% of GDP), followed by debt issued by the financial sector (38% of GDP) and NFCs (6% of GDP). The structure of German debt securities has been relatively stable in recent years, with only a modest increase in the share of corporate bonds.

Germany hosts seven stock exchanges, the

largest of which is the Frankfurt Stock

Exchange, owned by Deutsche Börse Group. Although Frankfurt maintains a traditional trading floor, approximately 90% of share trading in Germany happens on Xetra, Deutsche Börse’s electronic trading platform. Deutsche Börse is the second-largest stock exchange group in the EU with around EUR 2.3 trillion in listed market capitalisation (196), trailing Euronext’s EUR 6.6 trillion, and has remained independent despite a trend for consolidation among European exchanges. Many foreign companies choose Deutsche Börse as a secondary listing venue for their shares. Including those secondary listings, the total number of all companies listed on German exchanges reached 12 711 at end-2025 (197). Deutsche Börse also owns Eurex, a leading derivatives marketplace. Outside Frankfurt, six regional stock exchanges support smaller and local companies. The largest regional exchange is the Stuttgart Stock Exchange, known for its electronic trading platform Euwax and for having the largest trading volume in bonds, especially those issued by SMEs. Börse Stuttgart also owns the Nordic Growth Market, Sweden’s second-largest exchange, BX Swiss in Bern, and the OTC platform Cats, making it the sixth-largest stock exchange group in Europe. Other regional German exchanges include those in Berlin and Munich, and the exchanges operated by BÖAG Börse AG in Düsseldorf, Hamburg, and Hannover.

(196) FESE monthly statistics, March 2026.

(197) CEIC.

The number of German-listed companies on

German stock exchanges has steadily

declined over recent years. Despite a recent minor surge with four initial public offerings in 2024 and three in 2025, the number of domestic companies listed on German exchanges stood at 539 at end-2025, and thus well below the 662 listed companies recorded in 2015. Small and medium-sized German enterprises rarely use capital markets for financing. Moreover, some well-known German companies, have recently chosen to list abroad, for example in New York.

Households’ participation in capital markets

German households hold substantial

financial wealth and show a preference for low-risk instruments. In 2024, German

households held financial assets of around EUR 112 000 per capita on average, compared with around EUR 85 000 in the EU on average. In GDP terms, the financial assets of German households are equivalent to 267% of GDP, broadly comparable to the EU average of 262%. When comparing the relative composition of these portfolios with EU peers, German households differentiate themselves through a significantly higher concentration in currency and deposits, alongside a greater preference for investment funds and listed shares than the EU average. This is reflected in portfolios that are more oriented toward liquid and publicly traded assets than private equity compared with European peers. Germany currently lacks a dedicated savings and investment account with a favourable tax treatment. The rise of online broker accounts is expanding retail access to capital markets and creating new financing opportunities for companies, potentially boosting investment and economic growth. At the same time, the rise of online broker accounts introduces new risks in the digital relationship between these ‘neo-brokers’ and their customers. In 2025, the Consumer Arbitration Office of BaFin, Germany’s Federal Financial Supervisory Authority, received 35% more complaints than the previous year, mostly related to securities transactions, largely involving neo-brokers. These complaints reflected challenges such as order execution, transfer delays, and issues with tax reporting.

66

Graph A6.3: Composition of households' financial

assets

Source: Eurostat and FISMA E2 calculations., end-2024

Despite relatively strong international

performance, financial literacy in Germany

remains uneven and insufficiently

coordinated. Germany is among the few Member

States that does not have a comprehensive national strategy for financial literacy in place. The federal government formally launched work on their strategy in March 2023 however, progress on the strategy seems to have stalled. Despite not having a strategy Germany performs relatively well in international comparisons, including the OECD/INFE survey (2023), the lack of recent comprehensive data on the level and coverage of financial education makes it difficult to assess developments over time. At the same time, various recent indicators point to weaknesses in basic financial literacy among parts of the population. For instance, according to a private source (198), over-indebtedness increased again in 2025 for the first time since 2018, reaching around 5.67 million cases (8.16% of the population). And recent evidence from the Deutsche Bundesbank (199) further highlights disparities in financial outcomes: while wealthier households benefit from positive returns driven by capital market investments, less

(198) https://www.creditreform.de/aktuelles-wissen/schuldneratlas.

(199)https://www.bundesbank.de/de/presse/pressenotizen/geldver moegensbildung-und-aussenfinanzierung-in-deutschland- im-dritten-quartal-2025-936614.

wealthy households tend to hold low-yield deposits and insurance products, resulting in negative real returns. Moreover, financial education initiatives in Germany remain fragmented, with significant overlaps in target groups and content, limited coordination among providers, and no comprehensive national strategy (200).

The banking sector: resilience and financing of the economy

German banks face a profitability challenge

although they have solid capital and liquidity metrics and are thus not constrained in their

role of funding the economy. German banks are well capitalised, with capital ratios close to the EU average (see Table A6.2), improving overall resilience in the banking system. Although German banks have been able to improve their profitability in recent years, largely thanks to higher interest rates and lending margins, they remain less profitable overall than banks in other European countries. This lower profitability reflects high costs, high staffing levels and explicit mandates in parts of the banking system that prioritise stakeholder welfare over shareholder value. Return on equity rose to 5.7% in 2023 and 7.1% in the first half of 2025, but it remained far below the EU average of 9.8%. MREL (minimum requirement for own funds and eligible liabilities) and the combined buffer requirement in addition to MREL, comfortably exceed all regulatory requirements. Both liquidity and asset quality metrics (see Table A6.2) are very strong, and all major domestic banks have navigated the EU-wide stress tests effectively. However, the banks’ asset quality outlook is subject to increased uncertainty due to the current conflict in the Middle East and its impact on energy prices and economic growth.

Corporate credit growth has been volatile in

the past few years. After stagnating for several

years, credit demand for new corporate loans started to pick up again in 2024 and accelerated in 2025, with credit growing by 4.8% year-on-year in

(200) «Finanzbildungsangebote in Deutschland:

Bestandsaufnahme, kritische Würdigung und Perspektiven für die nationale Strategieentwicklung Zeitschrift für ökonomische Bildung». Heft Nr. 13/2024, S. 238-335.

0

50

100

150

200

250

0

20

40

60

80

100

120

DE EU DE EU

per capita (000 EUR) (lhs) % of GDP (rhs)

Other equity Unlisted shares

Listed shares Bonds

Investment funds Insurance and pension funds

Currency and deposits HH Debt (liability)

67

Q3 2025. Credit demand was widespread across both large and small firms in 2024. This credit recovery is expected to continue as policy rates have been steadily decreasing, and banks have been easing their lending standards. Sectors with particularly strong growth in demand for credit include construction, real estate, and manufacturing, all of which are sectors that benefit from robust public infrastructure spending. Lending to households grew relatively strongly in both 2024 and Q1 025, with year-on-year growth of 5.2% in Q3 2025, driven by mortgage credit. Overall, household credit is poised for more gradual growth in the coming years.

Role of non-bank financial intermediaries

Although Germany’s insurance sector has

substantial assets and some risk-bearing

capacity, its overall impact on deepening the

country’s capital market remains modest. Germany’s insurance sector is one of Europe's largest, with total assets of insurers equivalent to 53.6% of GDP in Q2 2025. As investors, insurance companies typically stick to safe, fixed-income securities and liquid assets. Although the performance of these assets remains modest, insurers have maintained a stable solvency profile. Based on data from EIOPA’s Insurance Statistics for Q2 2025, German insurers’ asset exposure is clearly tilted towards market-based instruments and diversified investment vehicles. Collective investment undertakings represent the largest asset class, with exposures of around EUR 824 billion, underscoring the importance of fund-based intermediation in insurers’ portfolios. Direct equity holdings are also significant at roughly EUR 480 billion, pointing to significant risk-bearing capacity. Fixed income remains a core component, with corporate bonds amounting to around EUR 351 billion and government bonds about EUR 305 billion, reflecting the continued role of bonds for income generation and capital preservation. In addition, insurers hold sizeable positions in mortgages and loans of around EUR 112 billion and maintain cash and deposits of approximately EUR 82 billion for liquidity management. Property exposures stand at around EUR 30 billion, while structured notes and collateralised securities together remain relatively small. Overall, the asset mix suggests a balance

between yield seeking through equities and funds, and prudence through bonds and loans, consistent with the long-term liability profile of German insurers.

The investment strategies of German

institutions for occupational retirement

provision (IORPs) continue to prioritise

capital preservation over greater returns. German IORPs managed total assets of EUR 254.8 billion in September 2024, broadly stable compared with pre-pandemic levels after a dip observed in 2022. Investments accounted for around EUR 239 billion, with collective investment undertakings representing by far the largest exposure at EUR 149 billion, or about 58% of total assets. Direct bond holdings amounted to EUR 79 billion, equivalent to roughly 31% of total assets, split between corporate bonds at EUR 52 billion and government bonds at EUR 25 billion. Direct equity exposure remained limited, with total equities at just EUR 4 billion, corresponding to around 1.4% of assets, of which listed equities accounted for less than EUR 0.1 billion. Direct real estate exposures stood at EUR 6 billion, or around 3% of assets, while alternative funds represented EUR 11 billion, or around 4%. Cash and cash equivalents remained marginal at below 1% of assets. Overall, the data point to a strongly risk-averse investment profile, with German IORPs relying predominantly on fixed-income instruments and fund-based structures and maintaining very limited direct exposure to equities and alternative assets. This partially explains the rather meagre investment return of pension providers with a 10-year real return average of just 0.6%.

Pension provision in Germany relies on a mix

of public, occupational and private schemes

with a moderate degree of capital backing. The backbone of Germany’s pension system is the public pension insurance scheme, which is a pay- as-you-go scheme. Participation in this scheme is obligatory for most employees in Germany. Certain professions are covered by their own pillar 1 schemes. There are 91 of these schemes in Germany with about 1.1 million members in total compared with a working population of about 47.4 m. These pillar 1 schemes are generally capital backed and held total assets of about EUR 280.2 billion in 2023 (201). They are not

(201) Deutscher Bundestag, Drucksache 21/723, June 2025.

68

supervised by BaFin, the Federal Financial Supervisory Authority, but by relevant authorities of the Länder. Cases of significant asset losses have raised questions about the professionalism of supervision and the management of the schemes. In addition to the pillar 1 schemes, half (51%) of employees liable to social insurance contributions benefit from a workplace pension arranged by their employer. These take various forms: direct claims, direct insurance, support funds, pension funds type 1 (Pensionskassen) and pension funds type 2 (Pensionsfonds). The assets of pension funds type 1 and pension funds type 2 (159 funds in total) were valued at EUR 321.6 billion in 2024, equivalent to 7.4% of GDP. However, the biggest share of occupational pension schemes is accounted for by so-called direct claims, that is direct pension liabilities owed by the relevant companies. These pension liabilities are insured in the event that the sponsoring company falls insolvent. Some of the companies with such schemes, especially large corporations, have removed them from their balance sheets via contractual trust arrangements which are managed separately and independently from the companies. As the population ages, these funded systems, which in the past 10 years offered an annual real return of 0.6% on average, may play an increasingly critical role in supplementing statutory provisions in the future. Further promoting supplementary pension pillars may be beneficial to the wider German economy via additional investment, provided it is designed to strengthen capital markets without further increasing the already high cash saving rate. The more widespread adoption of funded pension schemes across the population could reduce precautionary saving, as households would gain confidence that their retirement needs are secured through professionally managed, diversified capital investments rather than relying primarily on low-yield bank deposits. Moreover, a larger funded second pillar in Germany would create institutional demand for equities and long‑term bond financing, providing stable capital for corporate investment. The recent Second Act Strengthening Company Pensions (Betriebsrenten- stärkungsgesetz II), in force since 1 January 2026, is a key reform that allows more employees to benefit from an occupational pension, in particular by: (i) promoting collective defined contribution schemes; (ii) introducing automatic enrolment options; (iii) enhancing tax incentives and subsidies; and (iv) reducing employers’ liability risks. Almost all occupational pension schemes in

Germany are set up as defined benefit (DB) schemes, entailing clearly determined liabilities decades in advance. Therefore, the investments of these DB pension schemes are relatively conservative with limited equity exposures. Furthermore, pension provision is complemented by a range of pillar 3 schemes that individuals can take out at their own discretion, mainly in the form of insurance contracts and fund investment plans. In March 2026, the Bundestag paved the way for a fundamental overhaul of Germany’s third pillar pensions. The Riester-Rente, which has been the central vehicle in Germany’s pillar 3 private pension system, will be reformed effective for new contracts by January 2027, and replaced by a new system called Altersvorsorgedepot. Under the new regime, individuals can choose from a broad range of investment products including funds. Crucially, the mandatory 100% capital guarantee is removed, allowing savers to benefit from higher long-term returns in the stock market, albeit with higher personal risk. Individual contributions will be topped up by the government The new scheme has the potential to substantially increase participation in financial markets for broad swathes of the population.

Venture capital ecosystem

The German venture capital (VC) ecosystem

suffers from a lack of domestic sources of

financing, especially for scale-up financing. As in other European countries, the German VC market is quite small, with annual start-up financing by VCs equivalent to roughly 0.07% of GDP (202), close to the EU average of 0.06% (see Annex 4 for more details). Deal volume in 2025 amounted to EUR 7.2 billion, declining from EUR 7.5 billion in 2024. As in other European countries, companies in the growth or scale-up stages struggle to obtain sufficient financing (203). Given a shortage of domestic sources, 57% of

(202) Average of the years 2022-2024, OECD.

(203) See Bundesfinanzministerium 2026: Kukies, J. and Noyer, C., Financing innovative ventures in Europe. Recommendations to close the scaleup financing gap, deepen the Savings and Investments Union and strengthen Europe’s competitiveness, 2026.

69

funding in the scale-up stage originates from other countries (204).

A range of government programmes supports

the VC system, but the exclusively private

players are still small. Public support for the VC ecosystem in Germany is characterised by a small number of programmes that invest in VC funds on a pari-passu basis. These have been set up by the Federal Government under the leadership of KfW, the government-owned development bank, and the European Investment Fund. The programmes are designed to ‘crowd-in’ private investments. There are also some small boutique private funds-of-funds. In recent years, financing opportunities for start-ups in the early or seed stage have improved thanks to a number of public sector initiatives. Given a pronounced gap in financing for companies in the scale-up stage (i.e. companies that are more mature than those in the start-up or seed stages), recent government policy has shifted to give more attention to the scale-up phase.

Tax arrangements complicate the development of VC in Germany. VC/PE funds

typically operate in a partnership structure and are thus tax-transparent, aiming to avoid taxation at fund level. However, the requirements for this regime are quite stringent in Germany. Therefore, since VC/PE funds actively support or intervene in the management of their investment companies, local tax authorities may classify their activity as “commercial” (Gewerbliche Infektion). This could render a fund’s entire income subject to Trade Tax, creating a tax burden that cannot be recovered by tax-exempt investors such as pension funds or charitable organisations. This risk persists even for funds incorporated abroad if the effective place of management is Germany. Since VC is a localised business, requiring domestic-focused knowledge, this directly hampers the competitiveness of the VC/PE ecosystem (see also Annex 4).

Germany has consolidated its start-up

funding programmes into a multi-layered

investment offensive, with the Germany Fund

(Deutschlandfonds) serving as the central

pillar. The Germany Fund supports investments across the energy and industrial sectors, as well as venture capital, allowing for total investments of

(204) FISMA 2025: Study of barriers to, and drivers of, the scaling-

up of funds investing in innovative and growth companies.

up to EUR 30 billion in public funds and guarantees to catalyse EUR 130 billion in total investment. The Germany Fund incorporates the German Future Fund (GFF, Zukunftsfonds) which provides financing for start-ups, especially for their capital-intensive growth phase. Within this framework, KfW-Capital, a specialised subsidiaryof the government-owned development bank KfW, manages several programmes, often in cooperation with the European Investment Fund. Additional funding comes from the European Recovery Programme (ERP) Special Fund, which supports funds-of-funds programmes managed by KfW Capital and the European Investment Fund acting as an anchor investor. One such programme is the ERP-VC Fund which invests directly in VC funds targeting German start-ups. While technology-agnostic, the ERP-VC Fund prioritises information and communication technology, life sciences, and industrial technology, typically co- investing alongside private investors. Another key instrument is the High-Tech Gründerfonds, Germany’s most active seed-stage investor. Operating as a public-private partnership, it provides early financing (typically around EUR 1 million) for high-potential tech start-ups with a focus on industrial technology, life sciences, climate technology, and digital technology. The Growth Fund Germany (Wachstumsfonds), part of the GFF, completed fundraising in 2023 at a volume of roughly EUR 1 billion, ranking it among Europe's largest VC funds-of-funds. It aims to mobilise institutional capital (pension funds, insurers) and targets the growth stage of young companies (series B and beyond). Its goal is to reduce reliance on US or Asian investors for scaling German ‘unicorns’. Its successor Growth Fund II (Wachstumsfonds II), began fundraising in 2026. To further bolster deep tech, the government recently introduced the Scale-up Direct and FOAK (First-of-a-Kind) modules as part of the Deutschlandfonds. These efforts are reinforced by the WIN Initiative, a 2024 pact with the private financial sector aiming to mobilise EUR 12 billion in additional growth capital by 2030. Finally, direct incentives like the INVEST-Grant remain crucial, providing business angels with a 20% tax-free acquisition grant and an exit grant to offset capital gains taxes.

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Table A6.2: Financial Sector Indicators

(1) Annualised data EU data for credit growth and pension fund assets (ECB) refer to the euro area average. Private equity and VC, % of GDP is calculated as a three-year moving average. Pension assets (OECD) include assets of Pensionskassen and Pensionsfonds, but not other types of funds, and thus understate the volume of pension assets. Source: ECB, Eurostat, OECD, EIOPA, CMU Dashboard, AMECO

2018 2019 2020 2021 2022 2023 2024 2025-Q3 EU Total assets of MFIs, % of GDP 226.4 235.0 259.2 249.1 263.1 244.5 249.6 241.4 246.1 Common equity Tier 1 ratio 15.7 15.5 16.0 15.7 15.9 17.0 17.6 17.2 16.8 Total capital adequacy ratio 18.4 18.1 18.8 18.5 18.8 19.8 20.5 20.2 20.2 Overall NPL ratio, % of all loans 1.4 1.2 1.2 1.1 1.1 1.3 1.5 1.6 1.9 NPL ratio, loans to NFCs 2.7 2.3 2.5 2.2 2.2 2.9 3.6 3.7 3.5 NPL ratio, loans to HHs 1.7 1.3 1.4 1.3 1.2 1.3 1.5 1.6 2.1

Return on equity ratio 1

2.4 2.1 2.2 4.0 4.3 5.7 5.6 6.8 9.6 Loans to NFCs, % of GDP 26.3 27.0 28.8 28.4 29.0 27.7 27.2 26.5 29.3 Loans to HHs, % of GDP 48.9 49.6 53.2 52.4 50.6 48.2 47.4 46.6 43.6 NFC credit growth rate, % 5.3 5.1 3.9 5.2 10.9 1.0 0.1 0.2 2.5 HH credit growth rate, % 3.9 4.4 4.7 5.1 4.3 0.6 0.8 1.8 2.6 Stock market capitalisation, % of GDP 47.6 54.1 56.7 62.5 46.6 48.8 51.3 55.8 69.9 Initial public offerings, % of GDP 0.20 0.02 0.14 0.58 0.00 0.06 0.10 - 0.06 Market funding ratio 53.6 52.0 50.7 51.0 49.9 49.5 49.8 - 49.7 Private equity, % of GDP 0.317 0.385 0.409 0.473 0.453 0.413 0.343 - 0.487 Venture capital, % of GDP 0.042 0.048 0.052 0.075 0.083 0.084 0.069 - 0.064 Financial literacy, composite index - - - - - 48.5 - - 45.5 Bonds, % of HHs' financial assets 2.2 2.1 1.8 1.6 1.8 2.6 2.6 - 2.8 Listed shares, % of HHs' financial assets 4.3 5.0 5.5 6.6 5.8 6.2 6.4 - 4.8 Investment funds, % of HHs' financial assets 9.5 10.3 10.5 12.2 11.6 12.2 13.6 - 11.0 Insurance/pension funds, % of HHs' financial assets 33.7 33.8 32.7 30.9 28.2 27.7 27.4 - 27.8 Total assets of insurers, % of GDP 64.3 67.6 72.7 69.7 54.9 54.7 55.2 54.0 53.9 Pension assets, bn EUR - - - 326.3 293.9 311.8 321.6 - 5813.8 Pension assets, % of GDP - - - 8.9 7.4 7.4 7.4 - 32.3 10y real return average of pension assets, % - - - - - 0.9 0.6 - 1.4 Pension funds assets, ECB (% of GDP) - 17.3 18.8 19.0 16.9 16.8 17.2 17.1 23.0

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ANNEX 7: EFFECTIVE INSTITUTIONAL FRAMEWORK

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An effective institutional framework is

essential for competitiveness. This requires public trust built on integrity, quality legislation, regulatory simplification and efficient services for people and businesses.The 2025 country-specific recommendations call on Germany to simplify regulation, reduce administrative burden and speed up digitalisation of the public administration, including by improving the geographic coverage of digital public services and facilitating cooperation between governmental levels. To address these challenges, in 2025 the government adopted a comprehensive modernisation strategy for the federal administration alongside a modernisation strategy for federal–Länder cooperation. A Ministry for Digitalisation and State Modernisation was founded to steer reforms across governance levels, particularly on digitalising and modernising the public administration.

Public trust

Graph A7.1: Trust in justice, regional / local

authorities and in government

EU-27 since 2019; EU-28 before Source: European Commission, Standard Eurobarometer

surveys

Public trust in Germany’s institutions varies

significantly (Graph A7.1). There is an erosion of trust in the federal government, with a sharp decline from 61% to 38% (EU: 36%), the second- largest decline in the EU. In addition, people view

public administration as complex (48%) and slow in delivering services (40%)(205), and consider the state overwhelmed and lacking the capacity to fulfil its functions (73%).(206) This points not only to service delivery problems, but deeper structural weaknesses in how administrative responsibilities, procedures and interfaces are organised. In contrast, trust in the judiciary remains robust, at 70%, placing Germany in the top seven Member States, a figure which has stayed relatively unchanged. Trust is highest in regional and local authorities, at 74%, above the EU average. However, this figure has been declining slightly since 2017, suggesting that pressures linked to administrative overload, complex regulation and limited implementation capacity are affecting all governance levels.(207) Both people and companies express strong confidence in public administration protecting their data (68% and 76% respectively). However, 33% of businesses report difficulties due to data protection rules, significantly higher than the EU average of 13%, positioning Germany highest in this issue(208) and showing fragmented implementation across all governance levels, with 18 general public data protection supervisory authorities (one federal and one for each Land, apart from Bavaria which has two).(209)

Quality of lawmaking

Germany's strong lawmaking framework

falters in practice. There are comprehensive formal requirements for regulatory impact assessments (RIAs) and ex post evaluations for both primary and subordinate legislation at federal level. However, RIAs are not systematically published. The Normenkontrollrat (national regulatory control council) repeatedly identifies shortcomings in the problem definition, baseline

(205) European Commission, 2026, Flash Eurobarometer surveys

567 and 568 on satisfaction with administrative services.

(206) Dbb Beamtenbund und Tarifunion, 2025, Handlungsfähigkeit des Staates: Geyer fordert Reformen | dbb.de.

(207) Deutsche Städtetag, 2025, Kommunalhaushalte kollabieren – bislang undenkbare Verschuldungsspirale droht | Staedtetag.de.

(208) European Commission, 2026, Flash Eurobarometer surveys 567 and 568 on satisfaction with administrative services.

(209) OECD, 2025, OECD Economic Surveys: Germany 2025, OECD Publishing, Paris, OECD Economic Surveys: Germany 2025 (EN).

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72

setting and impact anticipation of legislation. Many legislative proposals fail to adequately assess counterfactual (’do-nothing’) scenarios and only partially quantify administrative burdens and compliance costs. Although ex post evaluations are formally intended to inform new legislation, they are not consistently applied, which reduces learning effects and allows complexity to build over time(210). These weaknesses, combined with risk avoidance, lack of continuous monitoring and persistent coordination failures across ministries and administrative layers undermine delivery and contribute to complex implementation arrangements and higher administrative burdens.

Stakeholder engagement is formally well

developed but measures having an impact on

Länder and municipalities are not always

considered(211). Open public consultations are also rare and stakeholders, including from the business sector, criticise short consultation periods in practice(212). Also, there is no unified publicly accessible platform to help identify implementation risks and administrative burdens at an early stage(213). The Digitalcheck (digital- ready legislation)is now obligatory and applied to

(210) NKR - Presse & Aktuelles - Einfach, schnell, wirksam. Den

Staat neu gestalten.

(211) NKR, 2025, NKR - Annual Reports.

(212) European Commission, 2025, Rule of Law Report, p. 16.

(213) OECD, 2025, Better Regulation Practices across the European Union 2025, https://doi.org/10.1787/6f007516-en.

over 80% of federal regulatory proposals, improving transparency in the legislative workflow. However, it is often perceived as a checklist rather than an analytical steering tool(214). In addition, Praxis-Checks (reality checks) are increasingly used to test the impact of implementation, with around 20 conducted between July 2024 and February 2025, though their scale remains limited relative to the volume of legislation(215).

Forthcoming reforms intend to strengthen regulatory quality oversight and the

lawmaking process more broadly. These include expanding the mandate of the Normenkontrollrat to include reviewing the bureaucratic burden of subordinate legislation(216) and strengthening the ’Zentrum für Legistik’ (centre for lawmaking) as a hub for consolidated tools and methodological support. Their success will depend on consistent application across ministries, sufficient analytical capacity and strong central steering to deliver measurable improvements in regulatory quality.(217)

(214) NKR, 2025, NKR - Annual Reports.

(215) NKR, 2025, NKR - Presse & Aktuelles - Einfach, schnell, wirksam. Den Staat neu gestalten.

(216) Federal Ministry for Economic Affairs and Energy, 2025, German Medium-Term Fiscal-Structural Plan 2025-2029.

(217) Federal Ministry for Digital Transformation and Government Modernisation, 2025, Modernization Agenda for a Fast German.

Table A7.1: Germany. Selected indicators on better regulation practices

(1) The indicators refer to primary legislation. Source: OECD (2025), Regulatory Policy Outlook 2025 [https://doi.org/10.1787/56b60e39-en] and Better Regulation across the European Union 2025

Tools for smart legislation:

Share of possible impacts assessed for all primary laws when developing legislation 1

Regulators are required to identify and quantify the benefits of a new primary law 0

Regulators are required to identify and assess the impacts of alternative non-regulatory options 1

Tools for effective implementation: when developing laws, regulators are required to:

Assess the level of compliance 0

Identify and assess potential enforcement mechanisms 1

Specify the methodology of measuring progress in achieving the law's goals 1

Oversight of better regulation:

There is an external body responsible for reviewing the quality of RIAs and of ex post evacuations 1

There are publicly available assessments of the effectiveness of RIA in modifying regulatory proposals 1

There are reports on the level of compliance by government department with the requirements of RIA 1

There are indicators on the percentage of ex post evaluations that comply with guidelines 0

The effectiveness of ex post evaluations in improving the regulatory stock has been assessed in the last five years 0

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Digital and user-friendly public services

Digitalisation and user-friendliness of public

services remain a key challenge, in particular

for businesses. While53% of people are satisfied with public administration services, only 35% of businesses are, placing Germany among the weaker performers in the EU. Some 47% of people – the highest proportion in the EU – believe that more digital services would improve their experience, indicating unmet demand(218).People also report frequent friction, with 44% needing more contact with the administration than expected and 60% being repeatedly asked to provide the same information(219).

Graph A7.2: Most time-consuming aspects of

service delivery

Source: European Commission. Flash Eurobarometer 567 / 568 on satisfaction with administrative services (2026)

(218) European Commission, 2026, Flash Eurobarometer surveys

567 and 568 on satisfaction with administrative services.

(219) European Commission, 2026, Flash Eurobarometer surveys 567 and 568 on satisfaction with administrative services.

The availability of digital public services for

citizens remains below the EU average (Table

A7.2). The proportion of internet users that interacted with e-government services is still catching up with the EU (Germany: 70%; EU: 76%)(220). For example, the central administrative portal verwaltung.bund.de is known to only 36% of citizens and used by only 12%, a slight improvement since 2022(221). Other factors that would encourage greater use are mobile access (69%), user-friendly design (68%) and step-by- step guidance (67%).

Low uptake of digital identity compounds the digital gap. Only 25% of people use the eID

function despite it being available for 15 years already, a figure that has increased only slowly. Only 42% of ID holders even activated the eID function. Usage varies significantly among different demographic groups, suggesting that complexity and eID usability disproportionately affect women, older people, lower-educated groups and people in rural areas, compounding digital divides(222). Availability of electronic health records is above the EU average (Germany: 87; EU: 83)(223), yet only 13% of people have used digital health services. The electronic patient record system ’ePA für alle’ became mandatory for some information (for example, medical reports) in 2025(224).

The availability of digital public services for

businesses also remains below the EU

average (Table A7.2).Challenges with public

(220) European Commission, Eurostat, 2026, E-government

activities of individuals via websites.

(221) Initiative D21, 2025, eGovernment MONITOR 2025.

(222) Initiative D21, 2025, eGovernment MONITOR 2025.

(223) European Commission, 2025, Digital Decade: eGovernment Benchmark.

(224) Initiative D21, 2025, eGovernment MONITOR 2025.

0%

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Application forms

Documents preparation

Application forms

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Ensuring compliance

and reporting

People Businesses

EU

Table A7.2: Digital Decade key performance indicators: availability of digital public services

(1) Digital Decade target by 2030: 100. (2) Publishing year, data were collected in the previous year Source: European Commission, State of the Digital Decade report 2025

EU-27

2023 2024 2025 2025

78 76 79 82

81 79 77 86

70 87 87 83Access to electronic health records (0 to 100)

Digital public services for citizens (0 to 100)

Digital public services for businesses (0 to 100)

Germany

74

administration services translate into higher costs for business: 62% of businesses report delays, 44% increased operational costs and 22% lost business opportunities due to dealings with public administration, underlining the competitiveness implications of slow and fragmented digitalisation(225). Some 28% of businesses report that digital public services do not reduce but actually increase time and effort, suggesting replication of analogue complexity(226).

Germany's digitalisation efforts are hindered

by fragmented implementation across

different administrative levels. Despite substantial investments supported by the Recovery and Resilience Facility, such as the development of the national once-only technical system (NOOTS; RRF investment 6.1.3) and the digitalisation push under the Online Access Act(227) (RRF investment 6.1.2), there is uneven adoption, divergent procedures and unclear responsibilities across administrative layers. The structural challenges to this lie in the decentralised administrative model. While strategic digital initiatives and legislative design are often decided at federal level, implementation often lies with the Länder and the over 11 000 municipalities, each retaining substantial autonomy over procedures, IT systems and organisational arrangements. As a result, digitalisation often reproduces and sometimes exacerbates existing administrative complexity instead of delivering end-to-end simplification. Around 60% of administrative services have been digitalised under the OZG framework so far, yet only a few services are consistently available nationwide, and a patchwork of solutions rather than uniform service delivery exist, depending on where people or businesses are based. Limited data reuse is reflected in the low availability of pre-filled forms (score of 38 out of 100), which are offered for life events for citizens and businesses, far below the EU average of 71(228). The lack of pre-filled data suggests limited data exchange, service integration and interoperability.

(225) European Commission, 2026, Flash Eurobarometer surveys

567 and 568 on satisfaction with administrative services.

(226) European Commission, 2026, Flash Eurobarometer surveys 567 and 568 on satisfaction with administrative services.

(227) BSI, Online Access Act.

(228) European Commission, 2025, Digital Decade: eGovernment Benchmark.

Germany is working on the national and

cross-border exchange of data between

authorities through the NOOTS and the EU once-only technical system(229). Germany still

has to identify the types of documents and data to exchange through the system and explore ways to shift from the submitting documents to exchanging structured data. The NOOTS will start connecting registers and online services in 2026.

Although formats of cooperation exist, additional tools are needed to overcome fragmentation. These include common standards, mandatory reuse of digital building blocks, shared infrastructures and more systematic task bundling or consolidation where tasks and needs are similar across governance levels, which could improve service quality and generate significant savings(230).

The permits system illustrates how digital

fragmentation affects competitiveness and

investment. Slow and complex planning and approval procedures continue to delay housing, energy and infrastructure projects and raise compliance costs for businesses. Germany’s public investment efficiency has declined by about 15% overthe last decade and Germany scores below other EU Member States on infrastructure planning/coordination. These bottlenecks are exacerbated by uneven local administrative capacity, fragmented registries and limited use of shared digital platforms. Differences in procedures across Länder and municipalities reduce scale effects and act as barriers to more efficient service delivery(231).

The new Ministry for Digitalisation and State Modernisation, along with its Digitalvorbehalt and initiatives like the Deutschland-Stack, signals stronger political ambition and steering. The Association of local counties (Landkreistag) is also

(229) European Commission, Once-Only Technical System

Acceleratormeter, Ec.europa.eu.

(230) NKR, 2025, Bündelung im Föderalstaat. Zeitgemäße Aufgabenorganisation für eine leistungsfähige und resiliente Verwaltung.

(231) Germany: 2025 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Germany; IMF Country Report No. 26/036; January 26, 2026.

75

receiving technical support for IT consolidation and increasing interoperability between counties(232).

Civil service

The civil service remains a key institutional strength but is increasingly constrained by

structural challenges which affect the

implementation of digital and administrative

reforms. Demographic pressure is particularly

acute.The retirement wave over the next 15 years is expected to create a deficit of nearly one third of federal staff, raising significant replacement and knowledge-loss risks, above the EU average. (For municipal employees see Annex 18). At the same time, the share of staff with higher education remains below the EU and participation in continuous training is also significantly lower, limiting re- and upskilling in digital, analytical and managerial skills(233). A persistent gender gap in senior management limits leadership diversity and reduces the attractiveness of the civil service for highly qualified women(234). These pressures are becoming harder to absorb as personnel expenditure has doubled over the past decade and material expenditure has also risen strongly, while complexity and staffing gaps persist(235).

A core challenge lies in the fragmented and

insufficiently transparent organisation of the

federal administration, particularly HR and

support functions. Under the Ressortprinzip, each ministry and many of the around 950 subordinate federal entities maintain their own HR processes, while no central civil service agency or shared federal HR data repository exists to support common standards in recruitment, mobility, training or performance management. This limits the ability to manage the workforce strategically across the federal administration, weakens transparency on tasks, structures and costs,

(232) Germany - Reforms and Investments - European

Commission.

(233) Eurostat 2024. European Commission, Eurostat, 2026, European Union Labour Force Survey, Employed persons by economic activity (NACE Rev. 2) (2008-2026).

(234) European Institute for Gender Equality, 2025, Gender Statistics Database.

(235) Konrad Adenauer Foundation, 2025, Mehr Leistung – Weniger Staat?.

reduces economies of scale in support functions and makes it harder to respond coherently to demographic change and new skill needs.

The newly adopted modernisation agenda

seeks to address some of these weaknesses

through more strategic and service-oriented

personnel management. It includes measures on

strategic workforce planning, mobility and reskilling, leadership development, digital and change management skills, modernisation of service law and the bundling of personnel services where needs are similar. This acknowledges that greater administrative effectiveness will require not only better staffing policies, but also more standardised processes, shared service provision and a more coherent organisational set-up across the federal administration. It also aims to reduce staff by 8% in parts of the federal administration by 2029 and to streamline structures and internal service delivery, marking a shift away from continued expansion. At the same time, many measures remain based on pilots, shared standards and cross-government coordination, meaning that ministries retain substantial responsibility for implementation(236).

In parallel, Technical Support (TSI) projects support the federal administration in strengthening implementation capacity, including on task reviews, service redesign, monitoring frameworks for burden reduction and reforms in HR management.

Integrity

Perception of corruption when doing business

remains very low, but experienced corruption is slightly higher than EU average. Some 47% of businesses consider corruption widespread (EU: 63%) but only 14% of businesses consider that corruption is a problem when doing business, way below the EU average(237). Sectors particularly vulnerable to corruption are health and the construction sector (see Annex 5). At the same

(236) Federal Ministry for Digital Transformation and Government

Modernisation, 2025, Modernisierungsagenda Bund - Bundesministerium für Digitales und Staatsmodernisierung.

(237) European Commission, 2025, Flash Eurobarometer survey 557 on Businesses' attitudes towards corruption in the EU.

76

time, more businesses have been asked or expected to offer a gift, a favour or extra money for permits, services or procurement compared to the EU average (Germany: 12%; EU: 10%). Businesses reporting appropriate punishment for bribery of senior officials matches the EU average (Germany: 33%; EU: 33%)(238).

Germany has taken limited new steps to improve corruption prevention and detection

while remaining effective. High-level cases are pursued, and no systemic weaknesses have been identified. However, broader reforms to strengthen the liability of legal persons and corporate sanctions for foreign bribery have still not been completed. Germany also operates a well- functioning public register for lobbyists. Concerns remain regarding the secondary activities of Members of Parliament (MPs). Certain prohibitions are in place for remunerated lobbying activities of MPs. However, there is no requirement to disclose potential conflicts of interest, especially in respect of private companies. There have been no developments to increase transparency over financial and business interests of federal ministers and other high-level officials.

Justice

The justice system is continuing to operate

efficiently overall. The time taken to reach a decision in civil and commercial cases at first instance courts decreased slightly (from 249 days in 2023 to 232 days in 2024). The estimated time to resolve administrative cases at first instance courts remained consistently higher (391 days in 2023 compared to 389 days in 2024). The quality of the justice system is good overall. Germany is performing moderately well in terms of digitalising its justice system. The country lags behind in digital solutions to initiate and follow proceedings in civil/commercial and administrative cases, as well as in the general public’s online access to published judgments. But it performs very well on arrangements for producing machine-readable judicial decisions(239).

(238) European Commission, 2025, Rule of Law Report.

(239) For a more detailed analysis of the performance of the justice system in Germany, see the upcoming 2026 EU Justice Scoreboard and the 2025 Rule of Law Report.

SUSTAINABILITY

ANNEX 8: INDUSTRY DECARBONISATION, CIRCULARITY AND CLIMATE MITIGATION

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Germany’s industrial base is undergoing a

transformation to meet climate targets and

remain competitive in a net-zero and circular

setting. With a strong policy landscape that includes initiatives like the climate and transition fund (Klima- und Transformationsfonds, KTF), Germany is fostering innovation in low-carbon technologies and supporting the transition to clean industrial production, but the slow build-up of the required infrastructure and lengthy industrial permitting constitute bottlenecks. In 2025, Germany received a country-specific recommendation to renovate the rail network as part of accelerating the decarbonisation of the transport sector. For the next years, Germany has allocated significant funding to decarbonised mobility including rail infrastructure. At the same time, persistent capacity constraints and low punctuality highlight unresolved structural challenges despite governance and funding reforms. Despite being a leader in recycling and secondary raw material patents, the integration of these materials into manufacturing is sluggish, pointing to a reliance on primary resources. Challenges such as air and water pollution continue to persist, while enhanced fiscal measures could strengthen circularity efforts. This annex reviews the areas in need of urgent attention in Germany’s clean industry decarbonisation, circular economy and climate mitigation, looking at a number of different aspects (240).

Industry decarbonisation

Greenhouse gas emissions from industry

Germany’s manufacturing sector is relatively

greenhouse gas (GHG) emission efficient,

with most emissions coming from energy use

rather than industrial processes (241). About

(240) For regional aspects of decarbonisation, see Annex 18.

(241) This Annex discusses the transition of Germany’s manufacturing industry, specifically its energy-intensive industries, to low-carbon and net-zero modes of production, which is key to preserving competitiveness on the path towards climate neutrality as mandated by the European Climate Law. A broader perspective on the current competitiveness challenges facing Germany’s manufacturing industry is provided in Annex 5. For a more detailed

one-fifth of Germany’s total emissions are from manufacturing (242). While Germany’s manufacturing production has the highest proportion of energy-related emissions among the EU countries (2023), its total emissions in the sector are 20% more efficient than the EU average, making Germany the sixth best in the EU in this regard (243). However, Germany’s reduction in emission intensity was slower than the EU average, decreasing by 16% in the five years to 2023. The energy-related GHG emission intensity of Germany’s manufacturing production has fallen, but a significant shift to clean energy has not yet happened (244). Iron and steel, cement and chemicals are the biggest GHG emitters in Germany’s manufacturing sector, with the manufacture of metals being particularly GHG emission intensive compared with the EU average.

Policies to promote industry decarbonisation

Germany complements the carbon price

incentive of the EU emissions trading system

(ETS) with targeted support of about

EUR 35 billion per year for industry

decarbonisation (245). Its climate law (amended in June 2021) prescribes limiting GHG emissions from industry to 118 Mt CO2eq by 2030, or about two thirds of the 2021 level of 182 Mt (246).

description of greenhouse gas emissions from industry, see European Commission (2025), 2025 Country Report - Germany, Annex A7. Clean industry and climate mitigation.

(242) 21%, in 2024. Data on the manufacturing sector exclude the NACE division C19 – manufacture of coke and refined petroleum products, for better match of the sectoral data from Eurostat (gross value added) with those from the UNFCCC under the Common Reporting Format. Also see further indicators on industry decarbonisation, as well as the annotation for further information, in table A8.1 at the end of this Annex.

(243) See European Commission (2025), 2025 Country Report – Germany, pp. 61ff.

(244) Energy-related emission intensity dropped by 8% (EU average: 16%), while the share of electricity and renewables remained at around 39%. Emission intensity from industrial processes fell by 18%, which is less than the EU’s average of 23%.

(245) Funding for industry decarbonisation under the KTF, including hydrogen infrastructure but excluding electricity cost subsidies; see footnote 6 for details.

(246) Erstes Gesetz zur Änderung des Bundes-Klimaschutgesetzes, vom 18. August 2021, Bundesgesetzblatt Jahrgang 2021, Art. 1 (10).

78

Germany’s key funding instrument for climate mitigation is the climate and transition fund (Klima- und Transformationsfonds, KTF), boosted by a new special fund for infrastructure and climate neutrality (247). Its measures to facilitate the decarbonisation of manufacturing production comprise subsidies for: (i) developing the hydrogen value chain as part of the first Important Project of Common European Interest (IPCEI) on hydrogen (with EUR 1.2 billion in 2025 and EUR 1.5 billion in 2026) (248); (ii) supporting energy and resource efficiency measures in the economy (with about EUR 950 million each for 2025 and 2026); and (iii) providing specific funding for industry and climate mitigation (Bundesförderung Industrie und Klimaschutz, BIK) and carbon contracts for difference (Klimaschutzverträge) (with about EUR 700 million for 2025 to 2026). Bundesförderung Industrie and Klimaschutz supports small and medium-sized industries (known as Mittelstand) in particular, covering industry decarbonisation and carbon management, and also including applied research and development projects (249). The first call for

(247) For an overview, see Bundesfinanzministerium, Das

Sondervermögen für Infrastruktur und Klimaneutralität, 5.12.2025. The special fund for infrastructure and climate neutrality (Sondervermögen Infrastruktur und Klimaneutralität) is a debt-financed government vehicle adopted by the parliament in March 2025. The KTF was set up in 2022 to support the transition to climate neutrality. A main part of its funding is revenue accruing to Germany from the EU ETS and from CO2 pricing under the Fuel Emissions Trading Act (Brennstoff-emissionshandelsgesetz, BEHG), with revenue of EUR 5.3 billion and EUR 4.3 billion (from the EU ETS) and EUR 15.4 billion and EUR 16.7 billion (from the BEHG) expected for 2025 and 2026 respectively. The special fund is expected to boost the KTF by a total of EUR 100 billion through annual tranches of EUR 10 billion from 2025. With further revenue from reserves, overall funding is envisaged of about EUR 37 billion in 2025 and EUR 35 billion in 2026. For planned expenditure from the KTF, see the government’s draft budgetary plan of 15 August 2025 (Deutscher Bundestag – 21. Wahlperiode, Drucksache 21/600), Annex 3, Chapter 6092., Overview X on the 20 largest grants from the federal government as defined in the 29th subsidy report on p. 139 of the same document, and the recommendation for a decision of the budget committee on Germany’s draft budget 2026 of 17 November 2025 (Deutscher Bundestag, Drucksache 21/600), ibid.

(248) See Bundesministerium für Wirtschaft und Energie: IPCEI Wasserstoff: Gemeinsam einen Europäischen Wasserstoffmarkt schaffen, accessed on 12.12.2005. The figures for the planned spending for 2025 and 2026 on the different measures are from the 2025 draft budgetary plan and the recommendation of the budget committee as indicated above.

(249) Source: exchange in writing (questionnaire) with national authorities as part of the fact-finding for the European

applications focused on energy-intensive sectors such as chemicals, steel, ceramics, paper and pulp, and cement and lime (250). Ongoing projects include the electrification of blast furnaces for steel production, low-carbon technologies for technical ceramics, and CO2 capture in cement production, to name a few (251). As of early 2026, the second call for application remains in a preparatory phase, with the competitive auction expected in mid-2026, subject to EU state aid approval (252). In autumn 2025, Germany also launched the preparatory stage of the 2026 bidding round for carbon contracts for difference, which now also includes support for carbon capture utilisation and storage projects (253). Germany’s measures to foster industry decarbonisation, also form part of its recovery and resilience plan (254). In addition to subsidies for low-carbon and net-zero industrial production technologies, Germany has budgeted subsidies for electricity-intensive companies to compensate for emissions trading-related electricity price

Semester analysis. On the BIK initiative, also see Projektträger Jülich (PTJ), Bundesförderung Industrie- und Klimaschutz (BIK) - Förderung von CCU und CCS, and Kompetenzzentrum Klimaschutz in energieintensiven Industrien: Bundesförderung Industrie und Klimaschutz: Modul 1, both accessed on 12.12.2025. The first funding guidelines of module 1 expired in 2023; for the amended version, see Bundesanzeiger, Amtliche Veröffentlichungen 30.08.2024, B1 to B3.

(250) Without excluding other sectors. For an overview, see Bundeswirtschaftsministerium (2024), Gute Nachricht für die Transformation des Mittelstands: Bundesförderung Industrie und Klimaschutz gestartet, Schlaglichter der Wirtschaftspolitik 10/2024, and Industrie- und Handelskammer zu Hagen: Bundesförderung Industrie und Klimaschutz (BIK).

(251) See the product database of Kompetenzzentrum Klimaschutz in energieintensiven Industrien (accessed on 12.12.2025).

(252) See Kompetenzzentrum Klimaschutz in energieintensiven Industrien, Bundesförderung industrie und Klimaschutz, accessed on 12.12.2025, as well as Clean Energy Wire, 2025, https://www.cleanenergywire.org/news/germany- starts-preparations-2026-round-industry-climate-contracts.

(253) See Bundesministerium für Wirtschaft und Energie, Vorbereitendes Verfahren für CO2-Differenzverträge startet, 6.10.2025. These contracts specify decarbonisation milestones within their duration of 15 years, while hedging for CO2 and energy price risks and cost differences with fossil-based production methods in this period.

(254) With EUR 2.105 billion from the Recovery and Resilience Facility and EUR 3.5 billion from the KTF, see Bundesfinanzministerium, Übersicht zum Deutschen Aufbau- und Resilienzplan (DARP), Komponente 1.1 Dekarbonisierung, insb. durch erneuerbaren Wasserstoff, 5.11.2025.

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increases. Those subsidies are worth about EUR 2.85 billion in 2025 and EUR 4 billion in 2026 respectively (255).

Germany has taken legislative measures to

expand the infrastructure needed for net-

zero industry. In late 2025, the amended CO2 Storage Act entered into force (256), paving the way for the larger-scale commercial capture and storage of CO2, with the aim of providing a fully functional carbon capture and storage infrastructure in the early 2030s. The amended framework makes it possible to retrofit natural gas pipelines to transport CO2, to tap into Germany’s potential for geological storage in its exclusive economic zone and continental shelf in the North Sea and to opt into onshore storage at Land level. In late February, the Bundestag also adopted legislation to accelerate the supply framework for green hydrogen(257). Both acts qualify sectoral infrastructure projects as serving overriding public interest, with the aim of speeding up permitting procedures. In the meantime, the ratification of the London Protocol and the amendment of the Deep Sea Disposal Act (the legal bases for CO2 export and storage in the North Sea respectively) are pending adoption. Germany is also considering stimulating demand for climate-friendly products through public procurement (258). To step up coordinated efforts to achieve its sustainability objectives for 2030, including in the areas of sustainable economic growth and climate mitigation, the government has tasked a deputy ministers’ committee for sustainable development with setting out specific actions to implement its 2025 sustainability strategy (259).

(255) Bundeshaushaltsplan 2026, Annex 3, bundeshaushalt.de..

(256) Gesetz zur Änderung des Kohlendioxid-Speicherungsgesetzes vom 25. November 2025, Bundesgesetzblatt Nr. 282/2025, 27.11.2025.

(257) Deutscher Bundestag, 2026, https://www.bundestag.de/dokumente/textarchiv/2026/kw09- de-wasserstoffhochlauf-1149758?.

(258) Source: exchange in writing (questionnaire) with national authorities as part of the fact-finding for the European Semester analysis.

(259) Deutscher Bundestag – 21. Wahlperiode, Drucksache 21/2696, Unterrichtung durch die Bundesregierung: Nachhaltigkeit für ein modernes und zukunftsfähiges Deutschland: Beschluss der Bundesregierung, zugeleitet mit Schreiben des Bundeskanzleramtes vom 5. November 2025, 5.11.2025.

Despite Germany’s broad toolkit to facilitate

the clean industry transition, challenges

remain. According to the authorities, the key challenges are: the high cost of energy and of the transition; the limited availability of green energy, notably hydrogen; access to the grid and to H2 and CO2 infrastructure, lengthy permitting procedures, and excessive bureaucracy. The willingness to invest in net-zero industry is also constrained by uncertainty about the development of the ETS price, the demand for CO2 transportation (including transit), the availability of CO2 storage facilities and energy price developments. Many of the present industry decarbonisation measures are in their early stages, with broad-based implementation envisaged for the last third of the decade. To achieve its industry decarbonisation objective, Germany would benefit from credibly setting out the relevant policies, including investment support, to provide credibility and certainty.

A particular challenge to investment in low-

carbon technologies is the lack of clarity for

hybrid projects. The permitting framework is well

developed for single-technology renewable projects (e.g. offshore wind (260)), but less so for hybrid ones combining energy generation with other technologies such as hydrogen production (261). For such projects, overlapping jurisdictions and an unclear division of responsibilities between authorities give rise to procedural deadlocks. Germany would benefit from developing a dedicated permitting standard for offshore hybrid projects in particular, similar to the existing frameworks for offshore wind. Establishing clear administrative responsibilities and providing guidance for integrated renewable hydrogen developments would enable innovation while enhancing legal certainty.

A systematic approach to industrial

decarbonisation is lacking, amidst steadily

decreasing output (262). While industry emissions fell by 3.8% from 2024 to 2025, this was mostly due to lower production in energy-intensive

(260) As also included under the REPowerEU chapter of Germany’s

recovery and resilience plan.

(261) This insight stems from the implementation of projects with support from the Innovation Fund, the EU’s funding programme for the deployment of innovative net-zero and low-carbon technologies.

(262) Destatis, 2026, Production in January 2026.

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industries (263). The sector’s transition depends on electrification, the availability and use of green energy, notably hydrogen, and Carbon, Capture and Storage (CCS) in hard to abate sectors. The Hydrogen Acceleration Act and the amended Carbon Storage Act tackle two crucial legal bottlenecks but momentum to build the necessary environment for the scaled development of electrification and CCS projects is building slowly. Production, transport (core pipeline network), storage and industrial contracts are issues affecting both areas. Integrated solutions are being hindered by lengthy industrial permitting procedures that are fragmented across Länder, technologies, sectors (264), and are sequential rather than parallel. This causes multi-year delays for electrification projects and negatively impacts investment certainty despite available funding.

Reduction of effort sharing emissions

Compliance with effort sharing limits with

domestic measures

Germany’s effort sharing emissions are

projected to be above its target in 2030; previous years’ unused emission allocations

would not suffice to cover the gap for

compliance with the Effort Sharing

Regulation (265). In 2024, GHG emissions from

(263) Umweltbundesamt, 2026, Umweltbundesamt.de.

(264) Many investments do not benefit from the acceleration rules because they fall outside the defined scope or trigger additional approvals (construction law, transport access, site development).

(265) The European effort sharing regulation sectors cover emissions from areas like transport, buildings, agriculture, and waste, with each EU country assigned a binding emission reduction target that is calibrated to reflect its economic capacity and ability to deliver cost-effective reductions. The national GHG emission reduction target is set out in Regulation (EU) 2018/842 (the Effort Sharing Regulation). It applies jointly to buildings (heating and cooling), road transport, agriculture, waste and small industry (known as the effort sharing sectors). The emissions from effort sharing sectors for 2024 are based on approximated inventory data. The final data will be established in 2027 after a comprehensive review. Projections about the impact of current policies (‘with existing measures’, WEM) and additional policies (‘with additional measures’, WAM) as per Germany’s 2025 reporting under Article 17 of Regulation (EU) 2018/1999 (the Governance Regulation). Also see European Commission (2025), Climate Action Progress Report 2025 – Technical Information, Commission staff

Germany’s effort sharing sectors are expected to have been 22.6% below those of 2005. By 2030, current and planned policies and measures are expected to lead to a decrease by 36.8%, leaving a gap of 13.2 percentage points to the 2030 target of −50%. Germany could bridge part of this gap with own unused annual emission allocations from previous years but would also need transfers of allocations from other Member States to comply with the Effort Sharing Regulation. The timely implementation of its additional measures and identification of new ones will remain crucial for Germany to progress towards climate neutrality.

Graph A8.1: Greenhouse gas emissions in the

effort sharing sectors, 2005, 2023, and 2024

Source: European Environment Agency.

Sustainable transport

In 2024, 38% of Germany’s effort sharing

emissions came from road transport, having decreased by only 8% from 2005 levels (266). For Germany, the 2025 country-specific recommendations highlighted challenges for decarbonising the transport sector, including the derelict state of the rail network. Under its recovery and resilience plan, Germany has

working document, Brussels, Chapter 9 (pp. 111ff.), and in particular Tables 25 and 26.

(266) See Graph A8.1, and Table A8.1 at the end of this Annex.

0

50

100

150

200

250

300

350

400

450

500

2005 2023 2024

M tC

O 2

e

Waste

Small industry

Agriculture

Buildings (under ESR)

Domestic transport (excl. aviation)

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invested in further supporting electric mobility. This includes investments in public charging infrastructure and projects for hydrogen and fuel cell applications in transport. In addition, Germany has significantly increased investment and accelerated large-scale renewal under DB InfraGO. Total spending on rail infrastructure was budgeted at around EUR 23.1 billion in 2025, while federal rail infrastructure investment amounted to EUR 18.1 billion (267) – nearly EUR 9 billion more than in 2023. The government has committed EUR 106.5 billion for railway infrastructure up to 2029 (268). Deutsche Bahn reported extensive construction activity, including around 2 173 km of track rebuilt, 2 065 switches renewed, roughly 950 stations modernised and 60 new signal boxes commissioned in 2025, along with expansion of the European Train Control System to 683 km (269). However, performance gaps persist: infrastructure remains heavily utilised, digital deployment is uneven, and punctuality remains low (just above 60% for long-distance services). This shows that modernisation has not yet resolved structural capacity constraints or reliability problems. Legal reforms have focused mainly on governance, funding frameworks and cost regulation and have included reforms to train-path pricing, faster planning and approval procedures, and further organisational unbundling of infrastructure within the Deutsche Bahn group (270).

(267) Integrated Interim Report, Deutsche Bahn, 2025,

https://zbir.deutschebahn.com/2025/en/interim-group- management-report-unaudited/development-of-business- units/db-infrago-business-unit/development-of-the- infrastructure/.

(268) EU Transport News, 2025, https://www.eutransportnews.com/post/german-federal- government-commits-106-5-billion-railway-infrastructure- investment-through-2029.

(269) RailMarket News, 2026, https://railmarket.com/news/infrastructure/45702-germany- s-rail-network-sees-eur19bn-works-in-2025?region=me.

(270) Integrated Interim Report 2025, Deutsche Bahn, https://zbir.deutschebahn.com/2025/en/interim-group- management-report-unaudited/fundamentals/development- of-business-environment/national-environment.

Sustainable industry

Circular economy industry

Germany’s circular economy strategy is

ambitious, but implementation remains uneven, with slow adoption of secondary

materials. The national circular economy strategy

(NCES) (271) adopted at the end of 2024 aims to massively reduce the use of primary raw materials and boost resource efficiency, yet progress remains uneven across sectors. On the one hand, Germany ranks among the EU leaders for recycling rates: 66.9% of municipal waste is recycled (EU average: 48%), 94% of construction and demolition waste is recovered (272) (EU average: 89%) and Germany is fifth for the recycling of plastic packaging (approximately 52% in 2023, which is above the EU average of 42% (273)). Germany also stands out as the European leader in patents related to recycling and secondary raw materials. In 2019, it filed 104 patents. Though this number dropped to 46 in 2020, it is still well above the EU average (274). The pace of innovation in Germany is driven by a surge in patent applications, especially related to the reuse of waste materials, where Germany is the only European country competing with larger economies such as the US (275).

(271) German Federal Ministry for the Environment, Nature

Conservation, Nuclear Safety and Consumer Protection. National Circular Economy Strategy (NCES), 2024, https://www.bundesumweltministerium.de/en/topics/circular- economy/circular-economy-strategy.

(272) Techno-economic and environmental assessment of construction and demolition waste management in the European Union, JRC, 2024, https://build- up.ec.europa.eu/system/files/2024-04/JRC2024-Techno- economic_and_environmental_assessment_of_CDW_manag ement_in_the_EU_Final_with_identifiers_2.pdf.

(273) Eurostat, Packaging waste by waste management operations, https://ec.europa.eu/eurostat/databrowser/view/env_waspac_ _custom_14718907/default/table?lang=en.

(274) Eurostat, Patents related to recycling and secondary raw materials, https://ec.europa.eu/eurostat/databrowser/view/cei_cie020/d efault/table?lang=en&category=cei.cei_cie.

(275) German Patent and Trade Market Office, Patent Offices offer a ’showcase‘ for green innovations 2025, https://www.dpma.de/english/services/public_relations/press_ releases/15october2025/.

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On the other hand, while per capita material consumption has decreased by 24% over the past five years (276) and resource productivity has increased in parallel, by 46.6% between 2019 and 2024 (277), waste generation is still very high. Germany ranks fifth in terms of municipal waste generation per capita (278) and seventh in terms of construction and demolition waste per capita. Secondary material use has grown only marginally in the past 10 years, from 11.7% to 14.8%, underscoring a persistent reliance on primary resources (279).

Furthermore, Germany’s fiscal tools for

circular practices remain underdeveloped,

limiting potential revenue and waste reduction. Total environmental tax revenue is lower than the EU average (1.71% of GDP in 2020; EU average: 2.24%) (280)(281), with taxes on pollution and resources making up a very small

(276) Eurostat, Material footprint,

https://ec.europa.eu/eurostat/databrowser/view/cei_pc020/de fault/table?lang=en.

(277) Germany ranks fifth in terms of municipal waste generation per capita (Eurostat, Generation of municipal waste per capita, https://ec.europa.eu/eurostat/databrowser/view/cei_pc031/de fault/table?lang=en) and seventh in terms of construction and demolition waste per capita (JRC, A report on sustainable management of construction and demolition waste, 2024, https://build-up.ec.europa.eu/en/resources-and- tools/publications/report-sustainable-management- construction-and-demolition-waste).

(278) Eurostat, Generation of municipal waste per capita, https://ec.europa.eu/eurostat/databrowser/view/cei_pc031/de fault/table?lang=en.

The share of municipal waste incineration remains stable at EUR 6.2 billion annually, reflecting a reliance on consumption-driven materials (Eurostat, Municipal Waste by waste management operations, https://ec.europa.eu/eurostat/databrowser/view/env_wasmun/ default/table?lang=en).

(279) Eurostat, circular material use rate, https://ec.europa.eu/eurostat/databrowser/view/env_ac_cur/d efault/table?lang=en&category=env.env_mrp.

(280) European Commission: Directorate-General for Environment, RPA Europe, Conduct in-depth assessments on environmental priorities to support the greening of the European Semester and integration of environmental priorities into the EU’s economic governance framework, 2025.

(281) European Commission, Environmental Implementation Review (2025), Germanycountry report, https://environment.ec.europa.eu/law-and- governance/environmental-implementation-review_en.

share of the total (0.01% (282)). Introducing fiscal instruments like the ‘pay-as-you-throw’ system across municipalities and regions or a CO2 tax on incineration could help reduce the amount of mixed municipal waste (283) and generate additional revenues (284). More specifically, assuming a hypothetical tax on waste incineration of EUR 8.1/Mt in scenario B or EUR 19.5/Mt in a more ambitious scenario A, Germany could achieve a decrease in waste incineration of around 8.3% in scenario B and 20% in scenario A by 2030. Equivalent monetary gains would be estimated at EUR 5.85 million or EUR 12.2 million respectively (Figure 1).

Germany has seen a significant improvement

in waste management. At 1.6%,Germany reported limited landfilling of municipal waste as compared with the EU average (21.3%) in 2024. This was a slight decrease from 2010 (1.3%). The incineration rate decreased to 31.5% between 2010 and 2024 (285). The fact that waste from mechanical biological treatment outputs is landfilled but reported as incinerated implies that the actual landfill rate might be higher than reported. There is no tax on municipal waste incineration in Germany, but there is a ban on

(282) European Commission: Directorate-General for Environment,

Camboni, M., Markandya, A., Tyrer, D., Goonesekera, S. et al., Greening the European Semester – Resource and pollution taxes. Annex 6, Country factsheets, Publications Office of the European Union, 2026, https://data.europa.eu/doi/10.2779/7798318.

(283) An average of 25% less municipal waste can be achieved when a ’pay-as-you-throw’ system is applied, (Dornbusch, H. J., et al., 2020, Vergleichende Analyse von Siedlungsrestabfällen aus repräsentativen Regionen in Deutschland zur Bestimmung des Anteils an Problemstoffen und verwertbaren Materialien – Abschlussbericht, UBA Texte No 113/2020, Umweltbundesamt, Deassau-Rosslau, 2020, https://www.umweltbundesamt.de/sites/default/files/medien/ 479/publikationen/texte_113- 2020_analyse_von_siedlungsrestabfaellen_abschlussbericht .pdf).

(284) EEA, Early warning assessment related to the 2025 targets for municipal waste and packaging waste. https://www.eea.europa.eu/en/analysis/publications/many- eu-member-states/early-warning-assessment-related-to- the-2025-targets-for-municipal-waste-and-packaging- waste/germany.

(285) Eurostat, Municipal waste by waste management operations, https://ec.europa.eu/eurostat/databrowser/view/env_wasmun/ default/table?lang=en.

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landfilling waste with a total organic carbon rate above 3% (286).

Extended producer responsibility schemes

are well developed in Germany. There are six schemes in operation for oils, packaging, paper, tyres, batteries, electronic waste, end-of-life vehicles, plastic fishing gear and single-use plastics (287).

Finally, in order to achieve its circular economy objectives, Germany’s total investment needs amount to EUR 42 billion per year, especially for circular economy measures in the areas of mobility, food and the built environment (288).

Bioeconomy industry

In Germany, bioeconomy value added has

grown slightly more than domestic GDP in

recent years, driven in particular by the food

and beverages and bio-based chemicals and

plastics subsectors. Among the bioeconomy

subsectors, food and beverages is the sector that registered the highest growth in value added (4.5% on average between 2018 and 2023) (289) (290). This growth reflects Germany’s role as a major agri-food processing hub, benefiting from robust domestic demand and strong export activity across the EU. While overall bioeconomy employment has fallen slightly, bio-based chemicals and plastics registered the highest growth in total employment between 2018 and 2023 (2.8%) (291).

(286) EEA, Early warning assessment related to the 2025 targets

for municipal waste and packaging waste, 2025, https://www.eea.europa.eu/en/analysis/publications/many- eu-member-states/early-warning-assessment-related-to- the-2025-targets-for-municipal-waste-and-packaging- waste.

(287) LIFE4EPR mapping tool, https://life4epr.ent.cat/.

(288) European Commission, Environmental Implementation Review (2025), Germanycountry report, https://environment.ec.europa.eu/law-and- governance/environmental-implementation-review_en.

(289) Bioeconomy subsectors: food and beverages; bio-based textiles; wood products and furniture; bio-based chemicals and plastics.

(290) Joint Research Centre, Developments of Economic Growth and Employment in Bioeconomy Sectors across the EU, https://datam.jrc.ec.europa.eu/datam/mashup/BIOECONOMIC S/.

(291) Ibid.

Labour productivity in the bioeconomy –

measured as value added per person employed – stood at 87.9% of the national average and has been growing from 80.5% in 2018 (292).

Furthermore, in Germany, R&D business

expenditure from bioeconomy-relevant

subsectors has grown at a significantly

faster pace than overall R&D business

expenditure (6.9% compared with 3.8% on average between 2018 and 2023) (293). This above-average R&D investment signals growing private sector confidence in bioeconomy innovation and is in line with Germany’s broader national bioeconomy strategy, which emphasises the role of research and digitalisation in accelerating the transition to sustainable, bio- based production systems (294).

Zero-pollution industry

Over the past decade, Germany has made

significant progress in reducing key air pollutants through cleaner energy

production, tighter vehicle emission

standards and improvements in industrial technology. Emissions of several air pollutants

have decreased significantly in Germany since 2005 despite a continued increase in GDP (295).

Despite this progress, Germany continues to

grapple with significant air pollution costs. In 2022, it ranked among Europe’s worst performers, with multiple air quality zones exceeding the ozone targets, and annual damage costs estimated at EUR 192 million for ozone alone (296).

(292) Ibid.

(293) Joint Research Centre, Business expenditure in Research and Development (R&D) in the EU bioeconomy, https://datam.jrc.ec.europa.eu/datam/mashup/BERD_BIOECO NOMY/,.

(294) Federal Government of Germany (2020), National Bioeconomy Strategy, Federal Ministry of Education and Research (BMBF) and Federal Ministry of Food and Agriculture (BMEL), available at: National Bioeconomy Strategy.

(295) European Commission, Environmental Implementation Review (2025), Germanycountry report, https://environment.ec.europa.eu/law-and- governance/environmental-implementation-review_en.

(296) European Commission: Directorate-General for Environment, EMRC, Logika Group and RPA Europe; Update of the costs of not implementing EU environmental law (2025), https://op.europa.eu/en/publication-detail/-

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Meanwhile, the other main air pollutants (ammonia, non-methane volatile organic compounds, sulfur dioxides, NOx and PM2.5) are estimated to create annual costs of as much as EUR 91 billion (297). This underscores the need for further action, particularly in industrial regions and urban transport corridors. The European Environment Agency (EEA) estimates point to 371 years of life lost per 100 000 inhabitants attributable to air pollution due to PM2.5 concentrations that exceed the World Health Organization’s air quality guideline levels (298).

Furthermore, no new taxes on major air

pollutants such as NOx, SO₂ or particulate

matter have been implemented in the same period (299). Introducing a pollution tax system could reduce these pollutants by 7-30%, depending on the tax rate, while generating up to EUR 190 million in revenue by 2030 (300).

Water pollution from industry also remains a

critical challenge. Positive developments for

water pollution in Germany include a 38% reduction in industrial heavy metal releases (cadmium, mercury, nickel and lead) and a 28% drop in total organic carbon emissions to water since 2010, as reported under the Industrial Emissions Directive (301). However, 100% of

/publication/4dead000-263d-11f0-8a44- 01aa75ed71a1/language- en?mc_cid=d30edf72a9&mc_eid=3bdab86db2. The damage cost is calculated in terms of value of a life-year (VOLY).

(297) European Commission: Directorate-General for Environment, IEEP, Green taxation and other economic instruments – Internalising environmental costs to make the polluter pay, 2021, https://environment.ec.europa.eu/publications/green- taxation-and-other-economic-instruments-internalising- environmental-costs-make-polluter-pay_en.

(298) EEA, 2025, Harm to human health from air pollution in Europe: burden of disease status, 2025, https://www.eea.europa.eu/en/analysis/publications/harm-to- human-health-from-air-pollution-burden-of-disease-status- 2025.

(299) European Commission: Directorate-General for Environment, Camboni, M., Markandya, A., Tyrer, D., Goonesekera, S. et al., Greening the European Semester – Resource and pollution taxes. Annex 6, Country factsheets, Publications Office of the European Union, 2026, https://data.europa.eu/doi/10.2779/7798318.

(300) Ibid.

(301) EEA, Water pollutant releases changes from 2010 to 2022 for the EU Member States, 2024,

Germany’s surface water bodies is still failing to achieve good chemical statusdue to the presence of ubiquitous, persistent, bio-accumulative and toxic substances (uPBTs) (302) that often result from past industrial activities. Water pollution by industry imposes direct and indirect costs of EUR 72 million annually (303), not yet sufficiently borne by the polluters.

The total economic cost of industrial

pollution in Germany is EUR 95 billion per year – encompassing healthcare expenses, lost

productivity and environmental degradation (304)(305). Yet, investment still falls short. To meet national and EU targets for pollution prevention and control, Germany would need to spend an additional EUR 9.4 billion per year (about 0.24% of GDP), largely focused on improving air quality – particularly in industrial regions and urban transport corridors (306).

https://www.eea.europa.eu/en/analysis/maps-and- charts/water-pollutant-releases-3.

(302) European Commission. Third River Basin Management Plans Second Flood Hazard and Risk Maps and Second Flood Risk Management Plans Member State: Germany, February 2025, https://op.europa.eu/en/publication-detail/- /publication/3c606531-e394-11ef-be2a- 01aa75ed71a1/language-en.

(303) European Commission: Directorate-General for Environment, IEEP, Green taxation and other economic instruments – Internalising environmental costs to make the polluter pay, 2021, https://environment.ec.europa.eu/publications/green- taxation-and-other-economic-instruments-internalising- environmental-costs-make-polluter-pay_en.

(304) European Commission: Directorate-General for Environment, Camboni, M., Markandya, A., Tyrer, D., Goonesekera, S. et al., Greening the European Semester – Resource and pollution taxes. Annex 6, Country factsheets, Publications Office of the European Union, 2026, https://data.europa.eu/doi/10.2779/7798318.

(305) EEA, The costs to health and the environment from industrial air pollution in Europe – 2024 update, 2024, https://www.eea.europa.eu/en/analysis/publications/the- costs-to-health-and-the-environment-from-industrial-air- pollution-in-europe-2024-update. The costs reported are calculated in terms of value of a statistical life (VSL).

(306) European Commission: Directorate-General for Environment, EMRC, Logika Group and RPA Europe; Update of the costs of not implementing EU environmental law (2025), https://op.europa.eu/en/publication-detail/- /publication/4dead000-263d-11f0-8a44- 01aa75ed71a1/language- en?mc_cid=d30edf72a9&mc_eid=3bdab86db2.

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Table A8.1: Key clean industry and climate mitigation indicators: Germany

Sources and notes: Industry decarbonisation: All data are from Eurostat; data following the UNFCCC Common Reporting Format (CRF) are from the European Environment Agency (EEA), republished by Eurostat. (1) Sectors covered: all divisions of section C - Manufacturing - of the NACE Rev. 2 statistical classification of economic activities, except C19 (manufacture of coke and refined petroleum products). (2) GHG emissions as per UNFCCC Common Reporting Framework (CRF) categories 1.A.2 - fuel combustion in manufacturing in industries and construction (that broadly correspond to the broadly correspond to the NACE sections C - Manufacturing and E - Construction, excluding C-19), and CRF2 - industrial processes and product use. The figures shows the emissions in the 1.A.2 category as a share of the sum of CRF1.A.2. and CRF2 emissions. (3) Sectors covered: CRF 1.A.2 as described above. Gross value added (GVA) data in the denominator aligned in sectoral coverage, in 2020 prices. (4) Sectors covered: NACE section C excluding C19. (5) Nominator: NACE divisions C17, 20, 23, 24; denominator: NACE section C excluding C19 (see above). (6) GVA (denominator) in 2020 prices. Reduction of effort sharing emissions: Data source: European Environment Agency, greenhouse gas data viewer; European Commission, Climate Action Progress Report, 2025. For details, see the footnote in the "Reduction of effort sharing emissions" section. Sustainable road transport: (7) Source: Eurostat; (8) Source: European Alternative Fuels Observatory; (9) Source: Eurostat. For all climate mitigation indicators, the trend arrows compare the latest available data (year t) with the data four years earlier (t-4). Sustainable industry: Bioeconomy value added, employment

and productivity: JRC, Developments of Economic Growth and Employment in Bioeconomy Sectors across the EU. Bioeconomy R&D business expenditure: JRC, Business expenditure in Research and Development (R&D) in the EU bioeconomy. Damage cost for industrial pollution: EEA, The costs to health and the environment from industrial air pollution in Europe, 2024. Water industrial pollutants releases: EEA, Industrial releases of pollutants to water and economic activity in the EU-27, 2024. Water chemical status: WISE, Surface water bodies: Chemical status, 2024 and WISE Groundwater bodies: chemical status, 2024. Other indicators: Eurostat. For circular economy indicators, the trend arrows compare the latest available data (year t) with the data two years earlier (t-2).

Climate mitigation Trend

Industry decarbonisation 2018 2019 2020 2021 2022 2023 2024 2018 2023

GHG emissions intensity of manufacturing production, g/€ (1) 247 243 255 244 218 207 - 330 -

Share of energy-related emissions in industrial GHG emissions (2) 66.2 66.9 67.9 68.2 68.5 69.2 - 55.5 57.9

Energy-related GHG emissions intensity of manufacturing and

construction, g/€ (3) 175.6 174.1 184.9 176.6 158.4 151.3 - 203.9 163.0

Share of electricity and renewables in final energy consumption in

manufacturing, % (4) 39.5 39.4 38.2 38.6 38.9 38.5 41.0 42.8 43.9

Energy intensity of manufacturing, GWh/€ (4) 0.90 0.88 0.95 0.89 0.82 0.78 0.79 1.27 1.05

Share of energy-intensive industries in manufacturing production, % in GVA (5) 14.82 14.61 15.47 14.30 14.71 14.47 - - -

GHG emissions intensity of production in sector [...], g/€ (6)

- paper and paper products (NACE C17) 687 681 711 741 726 639 - 722 619 - chemicals and chemical products (NACE C20) 715 692 677 679 681 641 - - - - other non-metallic mineral products (NACE C23) 1,703 1,743 1,919 1,762 1,665 1,924 - 2,495 2,352 - basic metals (NACE C24) 2,845 2,856 2,859 3,751 3,162 2,735 - 2,842 3,099

Reduction of effort sharing emissions 2018 2019 2020 2021 2022 2023 2024 2018 2023

GHG emission reductions relative to base year, % -16.5 -18.9 -21.4 -22.6

- domestic road transport 6.4 5.7 -5.5 -6.5 -4.4 -6.3 -7.6 -1.4 -5.6 - buildings -24.8 -21.1 -20.8 -22.6 -28.0 -32.6 -34.0 -20.3 -33.5

2005 2021 2022 2023 2024 Target WEM WAM

Effort sharing: GHG emissions, Mt; target, gap, % 484.7 404.9 393.1 380.8 375.3 -50.0% -36.4% -36.8%

Sustainable road transport 2018 2019 2020 2021 2022 2023 2024 2025 2018 2021 New zero-emission vehicles, electricity motor, % (7) 1.05 1.75 6.65 13.58 17.75 18.43 13.51 1.03 8.96

Number of publicly accessible AC/DC charging points (8) - - 41199 57974 83816 120612 159958 200830 446956 n/a

Share of electrified railways, % of total (9) 52.89 53.55 54.02 54.58 54.84 54.85 55.25 55.47 56.49

Sustainable industry Trend EU-27

Circular economy transition 2018 2019 2020 2021 2022 2023 2024 2018 latest data

Material footprint, tonnes per person 15.7 15.5 14.8 15.2 14.6 12.3 11.7 14.8 13.7

Circular material use rate, % 12.1 12.5 12.9 12.3 12.6 14.5 14.8 11.6 12.2

Resource productivity, €/kg 2.8 3.0 3.0 3.1 3.5 4.1 4.4 2.1 3.0

Employees in circular economy 1.7 1.7 1.7 1.7 1.6 1.7 - 2.1 2.0

Patents in circular economy 85.04 117.6 137.6 78.9 12.3 12.0

Recycling rate 67.1 66.7 70.3 71.4 69.6 68.7 66.9 46.40 48.1

Plastic recyling 47% 43% 46% 48% 51% 52% - 41% 42%

Construction and demolition waste (CDW) recovery 93 - 94 88 89

Bioeconomy industry   2018 2019 2020 2021 2022 2023 2024 CAGR 2018-

2023 2018 2023

Value added, million EUR 117,984 127,533 124,745 132,635 156,808 156,732 - 4.8% 642,438 863,436

Employment, total number of people employed 2,141,880 2,165,281 2,096,080 2,099,311 2,128,762 2,124,481 - -0.1% 17,649,040 17,085,642

Productivity

Valued added per worker, thousand EUR 55.1 58.9 59.5 63.2 73.7 73.8 - 5.0% 36.4 50.5

Valued added per worker, % of national average 80.5 84.4 86.3 86.4 93.6 87.9 - 1.5% 62.2 70.7

R&D business expenditure

Total bioeconomy (biomass producing and converting sectors) 3,905 3,941 4,057 5,807 6,421 5,836 6.9% 15,672 23,335

Total R&D business expenditure 72,101 75,830 71,032 75,761 81,809 90,408 - 3.8% 196,587 259,525

Zero pollution industry 2018 2019 2020 2021 2022 2023 2024 2018 2021

Damage cost for industrial pollution 110.2 92.1 84.7 94.6 - - - 414.9 352.7

Water industrial pollutants releases

2021 change

(2010) 2021

change

(2010) 2021

change

(2010) 2021 change (2010)

28,873 -30% 34,541,300 -26% 3,128,000 -31% 1,170,400 -37%

Water chemical status Good - Good (%) - Poor 9744.0 Poor (%) 100%

EU

TOC Phosporus

Germany

Germany

Cd, Hg, Ni, Pb nitrogen

ANNEX 9: AFFORDABLE ENERGY TRANSITION

86

This annex outlines the progress made and

the ongoing challenges faced in increasing

energy affordability, while advancing the transition to net zero. It reflects the

implementation of past energy-related country- specific recommendations.

Germany’s 2025 energy-related country

specific recommendations highlighted the

need to further reduce overall dependency on fossil fuels while facilitating the expansion

of renewable energy. They also called for investment to focus on efficient and integrated energy systems, including by upgrading the electricity network and by ensuring cost-efficient expansion and flexibility to support the integration of renewable energy and to adapt to fluctuating demand and supply so as to meet increased balancing needs. In addition, they recommended accelerating the process of decarbonising the buildings sector.

Germany continues making progress in

renewable energy expansion, particularly in

solar and onshore wind, but the deployment

of renewables in heating and cooling and in

transport was stagnant and the permitting

process is still not fully digitalised. Germany

is expanding its electricity grid, while prioritising cost-efficient expansion in line with system needs. But challenges remain such as grid congestion, scaling up system flexibility or digitalisation of electricity networks, particularly at distribution level, to drive Germany’s clean energy transition.

Energy prices and costs

Despite major government intervention over

the last year to lower household energy bills, both gas and electricity household consumer

prices in Germany remained above the EU

average, while non-household retail gas prices were unchanged and non-household

electricity prices remained above the EU

average.

During the first half of 2025, household

electricity prices in Germany decreased

slightly on 2024, while remaining the highest in the EU, at EUR 0.3835/kWh, and

significantly above the EU average. Household

gas prices increased to EUR 0.1216/kWh, slightly above the EU average. Retail electricity prices for industrial consumers followed similar trends and were again above the EU average. Gas prices for non-household consumers remained stable and in line with the EU average. Importantly, final energy prices in Germany during the first half of 2025 showed a very high electricity-to-gas price ratio. For large businesses, electricity was 3.3 times more expensive than gas during the first half of 2025 with taxes and levies (excluding VAT) accounting for 17% of total electricity bills and 20% of total gas bills (307). Excluding taxes and levies, the electricity-to-gas price ratio would have increased to 3.4. For household consumers, the impact of taxes and levies on the electricity-to-gas price ratio would be virtually non-existent, as they account for 32% of both, electricity and gas prices (308).

In 2026, Germany introduced the following

energy price measures: i) it abolished the gas storage levy for all consumers (EUR 3.4 billion); ii) it reduced grid fees for all consumers (EUR 6.5 billion/year); iii) it reduced tax on electricity to the EU minimum for manufacturing, agriculture and SMEs (EUR 3.0 billion/year); iv) it subsidised the ‘industrial electricity price’ for energy-intensive industry, (EUR 3-5 billion/year until end of 2028); and v) it continued financing taxes and levies on renewables from the federal budget to reduce electricity costs, particularly for households.

(307) It is important to note that the fiscal component of the

industrial electricity bill might change from 2026 onwards as the German government has decided to lower excise duty rates for some energy-intensive industrial sectors and to remove the gas storage levy due to a higher carbon tax on gas.

(308) Analysis based on S1 2025 Eurostat data.

87

Graph A9.1: Electricity and gas prices for

household and non-household consumers, first

half of 2025

(i) For household consumers, the consumption band is DC for electricity and D2 for gas. (ii) For non-household consumers, the consumption band is ID for electricity and I4 for gas. VAT and recoverable charges are not displayed for non-household consumers as these are typically recovered by businesses. This also applies to the ‘% of taxes and levies’, which is shown excluding VAT and recoverable charges for non-household consumers. (iii) ‘Without taxes and levies’ indicates the retail price excluding all taxes and levies. It always includes the energy/supply and network cost components, which are not disaggregated in Eurostat’s six-monthly price dataset. Source: Eurostat

Due to continued reliance on fossil fuels for electricity generation and limited non-fossil

flexibility, wholesale electricity prices in the

German-Luxembourgish bidding zone

averaged 90 EUR/MWh in 2025, exceeding

the EU average of 85 (309). Despite renewables accounting for over 56.4% of electricity generation in Germany in 2025, natural gas maintained its structural role as the dominant marginal price- setter, keeping costs elevated. Average day-ahead electricity prices increased by 15% in 2025amid rising natural gas procurement costs and heightened electricity demand. Short-run marginal costs (310) of natural gas in the EU increased from EUR 96/MWh in 2024 to nearly EUR 103/MWh in 2025. Although daytime electricity prices have fallen in recent years owing to growing incorporation of solar power, Germany remains vulnerable to severe price spikes during peak-

(309) Source: Ember.

(310) Short run marginal costs (SRMC) are the sum of the variable costs associated with producing electricity using hard coal and fossil gas. These are fuel costs, carbon costs and variable operating and maintenance costs. Estimates are provided by Ember.

demand hours. This is because low solar output in the evening and early morning combined with limited non-fossil flexibility require gas fuelled thermal plants to significantly ramp up generation to cover the supply–demand gap. As a result, price spreads(311) in Germany averaged EUR 122/MWh in 2025, up 14% from 2024, nearly matching the EU average.

Graph A9.2: Low-carbon electricity generation vs.

electricity wholesale prices, 2025

Unavailable data for Cyprus and Malta. Wholesale price is given as average of day-ahead electricity prices over 2025. EU-27 average is calculated as consumption-weighted. EU low-carbon share is calculated out of total EU electricity generation. Low-carbon share by country is calculated out of total public electricity generation. Low-carbon includes renewables and nuclear. Source: Eurostat

Flexibility and electricity grids

Germany is making progress in expanding its

electricity grid and intends to prioritise cost-

efficient expansion in line with system needs.

Germany belongs to both the Core (312) and

Hansa (313) capacity calculation regions

(CCRs) (314). The Hansa CCR has high trade capacity overall, while the Core CCR offers lower trade capacity. As of 1 January 2026, EU Member

(311) Spread refers to the difference between the highest and

lowest hourly day-ahead electricity prices in a single day.

(312) Core is the capacity calculation region (CCR) which covers Belgium, Czechia, Germany, France, Croatia, Hungary, the Netherlands, Austria, Poland, Romania, Slovenia, Slovakia (and, once connected, Ireland).

(313) The Hansa CCR includes Denmark, Germany, the Netherlands, Poland and Sweden.

(314) A CCR is a group of countries that calculate cross-border electricity trade flows together.

88

States must ensure that a minimum of 70% of technical cross-border capacity is available for trading. Germany has implemented an action plan to reach the 70% threshold by 31 December 2025. In line with the findings of the bidding zone review report by the European Network of Transmission System Operators for Electricity, Germany has issued a second action plan setting out measures to further reinforce its grid(315) and increase cross-border electricity trading.

Germany is actively engaging with

neighbouring countries to develop new

interconnections. A recent example is its agreement with Denmark to construct the Bornholm Energy Island (European Highway), concluded at the North Sea summit in Hamburg in January 2026. This will be the world’s largest cross-border energy transition project, which is expected to feed 3 GWs of offshore wind energy into the European grid.

As of 2026, Germany’s electricity interconnection level is 9.37%,

demonstrating the continued rapid expansion

of renewable generation which is

outstripping growth in available cross-border

capacity. Germany is continuing to expand its transmission and distribution grid and expects to meet the EU’s target of 15% interconnection capacity by 2030. At present, Germany has 128 ongoing expansion projects covering 16 800 km(316), of which 16% are operational, 31% under construction and 41% in the permitting stage. Germany has made progress on new synchronisation measures, has amended its legislation, specifically the Grid Expansion Acceleration Act (NABEG), and is nationally implementing the revised Renewable Energy Directive (RED III) in the grid sector to accelerate and increase grid expansion and better synchronise this with renewable energy expansion.

In 2023, Germany launched its electricity storage strategy to support the market-

driven expansion of electricity storage. This

strategy addresses issues such as licensing, grid fees and accelerated connection. Germany has the

(315) Source: as per Frauenhofer Institute, Germany curtailed

approximately 6.7TWh, up to September 2025 due to grid bottlenecks.

(316) Netzausbau - Prognose zum Stromnetzausbau.

highest level of non-fossil flexibility deployment in the EU (around 9 GW), followed by Italy (also 9 GW) and Spain (7 GW). The dominant technology is mechanical storage (7 GW). Electrochemical storage, with 2 GW installed capacity, is expected to grow substantially. Almost 9 GW of electrochemical storage projects have been announced, and almost 2 GW are either under construction or have been granted a permit.

Germany’s regulatory framework is a barrier

to demand-side flexibility and storage due to disincentives in the grid fee structure and

problems with grid connections. These disincentives include discounts for large consumers with steady demand (i.e. industry). Germany has launched a working group to address this and has created a roadmap to ramp up dynamic tariffs. An initial proposal setting out new rules has been announced for mid-2026. Demand response and storage can play a part in helping to provide ancillary services and congestion management. Currently, there are long waiting times for storage projects to be connected. Germany is therefore considering adapting its connection rules to better reflect system needs. Aggregators can participate in Germany’s day- ahead and intraday markets.

The first transmission pipeline (measuring 400 km) in Germany’s hydrogen core network

was entered into operation by GASCADE in

2025. Germany is part of various hydrogen

infrastructure projects involving EU Member States and third countries. They include i) the Iberian H2 corridor with Portugal, Spain and France; ii) the Southern H2 corridor with Italy, Austria, Tunisia and Algeria; iii) a hydrogen pipeline with Norway, resumed after its cancelation in 2024, and iv) a cross-border pipeline with Denmark due to become operational in 2030.

In 2024, 99% of households had regulated

fixed-price energy contracts (unchanged since 2023), which limit flexibility and lead

to higher costs for consumers. Although smart

meters are crucial for demand flexibility, Germany’s roll-out has been very slow. As of December 2025, smart meters represented only 5.5% of all meters, and around 23.3% in cases where smart meters are mandatory (317). Germany

(317) Source: Quarterly monitoring of the Bundesnetzagentur.

89

has opted to incentivise roll out, instead of applying sanctions and will table a proposal in this regard in spring 2026. Households are increasingly becoming prosumers. In 2024, 7% of households were prosumers.

In 2024, electricity accounted for 22.8% of final energy consumption (FEC) (below the EU

average of 23.4%), a share which has

remained largely unchanged over the last

decade (318), partly due to an unfavourable

electricity-to-gas price ratio that

disincentivises electrification and cost-

effective decarbonisation. Electricity accounts

for 21.7% and 35.1% of household and industrial FEC respectively (see Annex 8). In the transport sector, the share of FEC accounted for by electricity remains negligible at 3.0%. Further progress in electrification across sectors would help to cost-effectively decarbonise the economy and bring the benefits of affordable renewable generation to consumers.

Renewables and long-term contracts

Germany has made further progress in

facilitating the expansion of renewables

while continuing to reduce its overall

dependency on fossil fuels.

Germany’s legal framework has enabled it to

significantly accelerate the roll-out of

renewable energy installations in the past

two years, with record levels of permitting for wind and grid projects. Challenges

nevertheless remain, with the deployment of renewables in heating and cooling and in transport largely stagnant in 2024 and the permitting process still not fully digitalised.

In 2025, renewables accounted for 56.4% of

the electricity mix (vs an overall EU

renewables share of 44.8%), remaining essentially stable compared to the previous

year (56.3% in 2024, +0.1 percentage

points), due to unusual weather conditions and lower wind levels. Germany had an

(318) The CAGR (compound annual growth rate) was 0.35%

between 2015 and 2024. The minimum/maximum shares were 21.3% and 22.8%, respectively. (Source: Eurostat).

installed capacity of 200 GW of renewables(319) in 2025, including 106 GW of solar (+16.5% compared to 2024), 68.1 GW of onshore wind (+4.6 GW) and 9.7 GW of offshore wind (+0.5 GW). In addition, Germany published a schedule for significant auction volumes for onshore and offshore wind and solar photovoltaic energy on the Union Renewable Development Platform (320) In offshore wind, Germany aims to expand to 30 GW by 2030, 40 GW by 2035 and 70 GW by 2045. Germany will be the largest wind offshore market in the EU.

Graph A9.3: Germany’s installed renewable

capacity vs electricity generation mix

Electricity mix is given as net electricity generation (gross electricity production minus consumption of power stations’ auxiliary services). Electricity produced in pumped hydro plants is excluded from total net electricity production, as it was previously counted as electricity produced from another source. “Other” includes renewable municipal waste, solid biofuels, liquid biofuels, and biogas. Source: IRENA, Eurostat

Germany has Europe’s second largest power

purchase agreement (PPA) market after

Spain, with more than 11 077 GWh/y covered

by PPAs between 2021-2025 based on

publicly announced projects (108 deals in

total). Nevertheless, the capacity under PPAs dropped sharply between 2023 and 2024, from 7 307 GWh to 3 920 GWh, although the number of deals remained stable (36 deals in 2023, 38 in 2024).

In 2024, Germany became the first Member State to launch funding via carbon Contracts

for Difference for SMEs and larger industrial

(319) Renewable capacity statistics 2026.

(320) Member States overview | Union Renewable Development Platform.

90

corporations in order to support and advance

the decarbonisation of industry (321).

Energy efficiency

Germany has made progress in accelerating

the decarbonisation of buildings.

Overall, Germany made moderate progress in

improving energy efficiency but risks

reversing progress through legislation

cementing the dominance of fossil fuels in

residential heating. In 2024, final energy consumption (FEC) decreased by 1.1% to 184.8 Mtoe, as compared to 2023, continuing the downward trend observed since 2019. Germany’s FEC in 2024 is thus slightly aligned with the trajectory to its expected contribution in 2030. A reduction in FEC has been observed in a number of sectors between 2019 and 2024: in industry by 13.1%, mainly due to the economic downturn and reduced industrial output, in services by 13.8%, in transport by 11.5% and in the residential sector by 10%. This overall decline reflects continued efficiency improvements reinforced by recent policy developments.

In 2024, Germany began implementing the Energy Efficiency Act (EnEfG), which for the first time establishes a binding, cross-sectoral framework with concrete energy-saving obligations, notably mandatory energy or environmental management systems and waste-heat utilisation requirements for large enterprises and data centres. At the same time, Germany is investing in energy efficient building renovations under its recovery and resilience plan. Moreover, federal funding for energy efficiency and decarbonisation has been consolidated and expanded under the Climate and Transformation Fund (KTF), providing grants and concessional financing for building renovations, industrial efficiency measures and SMEs.

In 2025, these instruments were brought further into operation, with increased

emphasis on implementation, compliance and

monitoring, alongside continued support for high-efficiency buildings and technologies

(321) BMWK, 2024, Carbon contracts for difference announced,

bmwk.de.

through revamped building renovation

schemes. While recent trends confirm tangible progress across all sectors, sustaining and accelerating such efficiency gains will depend on these measures being effectively rolled out and taken up at scale. Most notably, the government has agreed to revise the Gebäudeenergiegesetz, now renamed the Gebäudemodernisierungsgesetz (Building Modernisation Act), removing earlier requirements for climate-friendly heating and allowing the installation of gas and oil boilers in residential buildings(322). This change risks locking consumers into fossil-fuel based heating systems, exposing them to fluctuating oil and gas prices, and slowing the rollout of heat pumps.

The decline in FEC in the residential sector was mostly driven by changes in heating

behaviour, such as the optimisation of

household temperature settings and other technical savings. Nevertheless, the climate, in

particular colder winters and hotter summers, as well as an expansion of the housing stock, increased energy consumption. Germany’s 11.2% reduction in residential FEC between 2019 and 2024 is not in line with its 2020 long term renovation strategy, which set an objective of a 39% reduction in energy consumption between 2018 and 2030.

Given that buildings are responsible for 40.3% of energy use in Germany, they play

an important role in improving energy

efficiency. Therefore, Germany is encouraged to submit its draft national building renovation plan pursuant to the recast of the Energy Performance of Buildings Directive to ensure a clear and predictable pathway towards an energy-efficient and decarbonised building stock.

Heating and cooling account for 83% of Germany’s residential final energy

consumption, with renewables supplying 17%

of total energy consumed for heating and cooling across all sectors. Over 14 million households rely on gas boilers for heating, while another 5 million households use oil boilers. Approximately 230 000 heat pumps were sold in 2024, a decrease of 48% compared to the previous year, taking Germany’s total stock of heat pumps to around 2 275 000. Electricity in

(322) Source: BMWE.

91

Germany was 3.15 times more expensive than gas during the first half of 2025. This means that end users who choose a heat pump over a gas boiler save energy but end up paying more.

Germany’s district heating systems, e.g. in

Munich, are among the leading examples in

Europe for incorporating energy efficiency

and decarbonisation measures into the district heating and cooling sector. Under its

recovery and resilience plan, Germany is investing in efficient heat networks for district heating, supported to a large extent by renewable energy and waste heat.

Security of supply and diversification

Germany is actively working to diversify

away from Russian gas. Since the end of 2022, Russian gas has been gradually replaced by pipeline gas (from Belgium, the Netherlands and Norway) and LNG (mainly from the US) imported through floating storage regasification units (FSRUs). The state-owned Deutsche Energy Terminal GmbH operates three FSRUs, one in Brunsbüttel and two in Wilhelmshaven. A further FSRU is privately run in Mukran. Moreover, an additional FSRU is set to become operational in Stade in 2026. In 2025, Germany imported a total of 10.1 bcm of LNG, of which the vast majority (92%) came from the US.

Despite making progress in deploying renewables, Germany’s overall energy mix in

2024 was still heavily based on fossil fuels. Oil accounted for 37% of gross inland consumption, natural gas for 26% and coal for 15%. Renewables (including biofuels) accounted for 20% (323). Germany’s reliance on fossil fuels underscores the importance of its ongoing energy transition efforts in order to diversify energy sources and strengthen energy security.

In response to rising energy prices following

the regional crisis in the Middle East,

Germany has coordinated the IEA collective

action to release 400 million barrels of emergency oil reserves, contributing

approximately 2.64 million tonnes, and

implemented measures to limit fuel price

(323) Source: Eurostat. Electricity and heat are excluded from gross

inland consumption to avoid double-counting. The focus is on primary energy sources.

increases to once daily at petrol stations,

with fines up to €100 000 for violations. An additional measure includes a 17-cent reduction in fuel tax. Germany has also strengthened antitrust oversight to combat excessive pricing.

Fossil fuel subsidies

In 2024, environmentally harmful (324) fossil

fuel subsidies without a planned phase-out

before 2030 represented 0.28% of

Germany’s GDP (325). Additionally, Germany’s

Effective Carbon Rate averaged EUR 96.85 per tonne of CO₂ above the EU weighted mean of EUR 84.80 (326)(327).

(324) Explicit fossil fuel subsidies (e.g. direct transfers) and implicit

fossil fuel subsidies (i.e. tax expenditures linked to forgone tax revenues that have an identifiable fiscal impact for the central budget) that support fossil fuel energy production, transmission and/or consumption.

(325) European Commission calculation based on underlying data from the Study on energy subsidies and other government interventions in the EU – 2025 edition, Enerdata.

(326) OECD,2024, Pricing Greenhouse Gas Emissions 2024.

(327) The Effective Carbon Rate is the sum of carbon taxes, ETS permit prices and fuel excise taxes, representing the aggregate effective carbon rate paid on emissions.

ANNEX 10: CLIMATE ADAPTATION, PREPAREDNESS AND ENVIRONMENT

92

Germany has advanced its climate

adaptation policies with the Federal Climate

Adaptation Act but faces challenges on resilience. Vulnerabilities include significant

investment needs for infrastructure and ecosystem restoration; and exposure to heatwaves, wildfires and flooding (particularly in coastal areas). Insurance coverage for natural disasters remains inadequate, posing economic risks. Water scarcity is especially pronounced in northern regions but can be addressed by improving water management and infrastructure investment. Efforts to restore natural habitats are ongoing but are impeded by widespread degradation and funding shortfalls. Effective policy implementation would benefit from strengthened governance coordination and enhanced capacity at sub-national levels to ensure comprehensive climate resilience and adaptation.

Climate adaptation and preparedness

Germany is exposed to climate change

impacts which will require significant

investments in all sectors. See Annex 19 for regional aspects to climate change vulnerability. In 2025, Germany experienced a record dry spring (328), resulting in unusually low Rhine water levels with implications for ecosystems and river transport. Heatwaves have a significant impact on Germany. In summer 2025, severe wildfires in eastern Germany triggered evacuations and required a large-scale emergency response. Copernicus EMS Rapid Mapping was activated (329). Germany had 6 282 heat-related fatalities in 2024 – close to the EU-27 median but well below the mean (330). Furthermore, parts of Germany are in one of the three types of EU regions identified as hotspots most affected by climate risks (i.e. low-lying coastal regions). These areas are

(328) DWD, 2025,

https://www.dwd.de/DE/presse/pressemitteilungen/DE/2025/2 0250415_pm_trockenheit_news.html?nn=16210.

(329) Copernicus Emergency Management Service, 2025, https://storymaps.arcgis.com/stories/66b40f837f0f45aab96 2b636b1dc4eea.

(330)Janoš et al., 2025, Heat-related mortality in Europe during 2024 and health emergency forecasting to reduce preventable deaths, https://www.nature.com/articles/s41591- 025-03954-7. The mean is pulled up by some Member States (e.g. Greece, Croatia, Italy and Romania).

particularly at risk from flooding, erosion and saltwater intrusion aggravated by sea level rise (331). If current levels of coastal protection are not raised, the direct economic damage and social impact from coastal flooding in Germany is projected to rise sharply this century) (332). Available sources estimate that investment needs related to climate adaptation will be significant in the future. A recent study commissioned by DG CLIMA (333) estimates that Germany will need to invest almost EUR 9.6 billion per year up to 2050. This would be equivalent to 0.19% of annual GDP (lower than the EU average of 0.5%). The priority area for investment would be infrastructure retrofitting and reinforcement (more than 50% of the total), followed by ecosystems restorations (around 26%) and food (around 15%).

Germany is continuing with strategy-setting for adaptation and establishing an

implementation model. The Federal Climate Adaptation Act (KAnG) entered into force in 2024. It was accompanied by a comprehensive adaptation strategy (334), including an action plan that outlines over 180 specific measures to address the targets and around 90 further measures and instruments. The plan was developed with input from a climate impact and risk analysis. It identifies 33 measurable goals in order to guard against extreme weather events (e.g. heat, drought, heavy rain and flooding). The Länder are now required to prepare their own adaptation strategies by 2027 and to support

(331)EEA, 2024, European Climate Risk Assessment,

https://www.eea.europa.eu/en/analysis/publications/europea n-climate-risk-assessment.

(332) Nature Communications, 2020, Economic motivation for raising coastal flood defenses in Europe.

(333) European Commission (2026), Assessment of adaptation investment needs, Table 25, https://op.europa.eu/en/publication-detail/- /publication/d2039eac-f742-11f0-b9bc- 01aa75ed71a1/language-en%20(Table%208). The study provides detailed estimates of adaptation investment needs at the level of the EU and individual Member States per type of measure. It relies on a common methodology that makes estimates comparable across the EU. Four accompanying methodological reports provide a detailed description of how the results were estimated to ensure full transparency.

(334) The KWRA, see Climate Adapt, 2021, https://climate- adapt.eea.europa.eu/en/news-archive/climate-impact-and- risk-assessment-2021-for- germany?utm_source=chatgpt.com.

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municipal adaptation concepts (335). In 2025, sub- national progress continued, with Hamburg (336) and Bremen (337) adopting new adaptation strategies and Saxony-Anhalt updating its strategy (338). Monitoring is being carried out through a federal indicator system managed by the Umweltbundesamt (UBA). The 2027 national monitoring report is expected to inform the next update of the adaptation strategy in 2028 (339). Governance and coordination have strengthened, but effective delivery still depends on the capacity of the Länder and municipalities, and funding and staffing constraints are still limiting comprehensive local uptake (particularly in smaller municipalities).

The Covenant of Mayors – referenced in the

EU Adaptation Strategy – provides a

platform for municipal action. The share of

Germany’s population covered by the EU Covenant of Mayors signatories has been slowly increasing but remains one of the lowest in the EU in 2024 (19% vs EU-27: 34%). 36% of German signatories have submitted a sustainable energy and action plan (SECAP) on time (i.e. within two years of their initial commitment to the EU Covenant) and 11% have submitted at least one monitoring report within the recommended timeframe (i.e. within two years of submitting their SECAP) (340). This indicates a growing commitment among German municipalities to increase climate resilience, but it

(335) BMUKN, Federal Climate Adaptation Act, 2024, p.7,

https://www.bundesumweltministerium.de/fileadmin/Daten_B MU/Download_PDF/Gesetze/kang_en_bf.pdf.

(336) Strategie zur Anpassung Hamburgs an den Klimawandel, 2025, https://www.hamburg.de/resource/blob/1023070/d91af2654 23c662f23accb68a6b712b0/d-klimaanpassungsstrategie- data.pdf.

(337) Klimaanpassungsstrategie Bremen, Bremerhaven, 2025, https://www.klimaanpassung.bremen.de/sixcms/media.php/1 3/Klimaanpassungsstrategie_BremenBremerhaven_2025.pd f.

(338) Klimawandel in Sachsen-Anhalt, Monitoringbericht 2025, 2025, https://mwu.sachsen- anhalt.de/fileadmin/Bibliothek/Politik_und_Verwaltung/MWU/ Klimaschutz/Klimawandel- Anpassungstrategie/Klimawandelmonitoringbericht_2025.pd f.

(339) UBA, 2024, https://www.umweltbundesamt.de/themen/neue- deutsche-anpassungsstrategie- soll?utm_source=chatgpt.com.

(340) European Commission, https://eu- mayors.ec.europa.eu/en/key_figures.

also shows that implementation of policies is lagging behind at the local level.

Climate risks have a direct and significant

effect on Germany’s economy, but insurance

coverage is significantly stronger than the EU average. Between 1980 and 2024, Germany recorded EUR 187 billion in economic losses caused by weather and climate-related extreme events. It suffered some of the highest damage in the EU in absolute terms, per capita and per km2 (341). Germany belongs to the group of Member States with the second highest share of natural catastrophes damages in relation to GDP (342), behind south-eastern Member States. Germany has higher-than-average insurance coverage against weather-related and climate- related events in the EU (31% vs EU-27:19% (343)), but the insurance gap remains large. It is not mandatory to have insurance coverage for the two highest risk factors (river and coastal floods). For disaster compensation, Germany has largely relied on ad hoc public relief (e.g. Aufbauhilfe after the 2021 floods). Germany does not have a national insurance scheme in place (344), but such a scheme could help improve insurance coverage and reduce the insurance protection gap (especially for materially exposed households and SMEs). However, policy awareness has grown. The Länder have publicly pushed for mandatory/expanded natural hazard cover alongside dedicated adaptation financing. The private sector has demonstrated some concrete designs

(341)EEA, 2025, Economic losses from weather- and climate- related extremes in Europe, https://www.eea.europa.eu/en/analysis/indicators/economic- losses-from-climate-related.

(342)ECB and EIOPA, 2024, Towards a European system for natural catastrophe risk management, https://www.eiopa.europa.eu/document/download/d8c87070- f602-4bf7-b8d8-726ec0b5c173_en?filename=eiopa-ecb- climate-insurance-protection-gap.pdf. Chart 2. This figure includes earthquakes which happened in 2020-2023.

(343)EEA, 2025, Economic losses from weather- and climate- related extremes in Europe, https://www.eea.europa.eu/en/analysis/indicators/economic- losses-from-climate-related.

(344)ECB and EIOPA, 2024, Towards a European system for natural catastrophe risk management, p. 16, https://www.eiopa.europa.eu/document/download/d8c87070- f602-4bf7-b8d8-726ec0b5c173_en?filename=eiopa-ecb- climate-insurance-protection-gap.pdf.

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(e.g. Elementar from Germany’s insurance association GDV (345)).

Climate-proofing has not been

systematically applied across sectors and

key infrastructure. Germany does not outline clear policies and measures to integrate the climate adaptation imperative into the energy system (346). The national adaptation strategy has identified a low medium-term risk in the energy area and this will be looked at in more detail in the upcoming update of the strategy (2028) (347). On transport, the strategy has a land-based target and a water-based target. The land-based target focuses on reducing the number of incidents due to extreme weather events. With regard to the water-based target, the adaption measures are intended to help reduce the impacts of low-water periods. The vulnerability index of the TEN-T network to climate change has been assessed as the lowest in the EU. This is mainly due to Germany’s high general adaptation preparedness and high transport adaptation preparedness (348). However, the study also cautions that it ‘cannot classify any Member State as ‘non- vulnerable’ (349). Going forward, predominantly coastal floods as well as heatwaves are likely to play an important role in Germany and are associated with the highest expected costs for adaptation. An estimated total of EUR 5.8 billion will need to be invested until mid-century in TEN-T, mostly in railways (EUR 2.6 billion) and maritime ports (EUR 2 billion) (350).

(345)GDV (the German insurance association), Basic protection for all: Insurers present framework for a safeguard system against natural catastrophes, https://www.gdv.de/gdv-en/media/basic- protection-for-all-insurers-present-framework-for-a-safeguard- system-against-natural-catastrophes- 194810?utm_source=chatgpt.com.

(346)Staff working document accompanying the EU-wide assessment of the final updated national energy and climate plans, Delivering the Union’s 2030 energy and climate objectives, NECP assessment, COM (2025/274 final), p. 42.

(347)BMUKN, Climate Adaptation Strategy, p. 28, https://www.bundesumweltministerium.de/en/download/2024 -german-climate-adaptation-strategy.

(348)European Commission, 2024, Support study on the climate adaptation and cross-border investment needs to realise the TEN-T network, Publications Office of the European Union, p. 69. https://data.europa.eu/doi/10.2832/7839720.

(349)Ibid., p. 70.

(350)Ibid., p. 108.

There is scope to tap into nature-based

solutions (NbS) more widely and

systematically. In 2025, Germany recorded the highest number of fires and area burnt since the early 2000s (351). It is becoming increasingly evident that wildfires are no longer confined to the summer months but can occur both earlier and later.Nature-based solutions and prevention play a key role in increasing resilience, but their large- scale and systematic uptake across different sectors remains uneven. NbS are most advanced in river and floodplain restoration (as shown, for example, by the EU-supported LIFE project Living River Lahn (352), which restores natural river dynamics and flood retention capacity). Urban NbS (e.g. green roofs, de-paving and cooling corridors) are increasingly being promoted but remain locally driven. Since 2024, progress has accelerated with the federal action programme for natural climate protection (353). This and the German adaptation strategy (354) are strengthening the policy and funding framework by mainstreaming NbS. However, scaling-up still depends on municipal capacity, land availability and long-term financing.

Water resilience

Germany faces seasonal water scarcity,

particularly in North and North-East

Germany as well as in parts of Bavaria. Spring 2025 was one of the driest periods since weather records began in 1931. Between 1 February 2025 and mid-April 2025, precipitation was 68% below average (355). Agriculture, water utilities and energy production are among the most water-dependent sectors (356). Furthermore,

(351)According to EFFIS, in 2025 the number of fires and the area

burnt were considerably higher than in 2006-2024 (38 fires burning 5 475 ha of forest).

(352)LIFE Public Database. https://webgate.ec.europa.eu/life/publicWebsite/project/LIFE1 4-IPE-DE-000022/living-river-lahn-one-river-many-interests.

(353)BMUKN, Aktionsprogramm Natürlicher Klimaschutz, Link. For more information, see the section within this annex on ‘Sustainable Agriculture and Land Use’.

(354)UBA, 2024, https://www.umweltbundesamt.de/themen/neue- deutsche-anpassungsstrategie-soll?utm_source=chatgpt.com.

(355)Helmholtz Centre for Environmental Research (UFZ), Drought Monitor Germany, https://www.ufz.de/index.php?en=37937.

(356)EEA, 2025, Water abstraction by economic sector, 2000- 2023,

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reduced water levels can restrict cargo capacity and aquaculture production, raising shipping/production costs and consumer prices. The national water exploitation index plus (WEI+) (357) indicates low overall pressure due to abundant renewable freshwater resources. However, large regional disparities persist and the JRC European Drought Risk Atlas shows a very differentiated picture. Northern parts of Germany are especially vulnerable because of factors like sandy soils, lower average precipitation and slow groundwater recharge (358). A recent study (359) shows that Germany is losing more water than it restores and that climate change as well as changing land use patterns are widening the gap. The cost of inaction could amount to at least EUR 20-25 billion annually or EUR 500-625 billion cumulatively by 2050.

Water productivity in Germany (360) stood at EUR 170 per m³ of abstracted water in 2022

(above the EU-27 average of EUR 151 per

m³), reflecting efficient water management

practices, low per capita water consumption

and advanced wastewater treatment

systems. In 2023, public water supply accounted

for 22.2% of freshwater abstraction. Energy production was the largest abstractor, at 50.3% (361). Since 2014, abstraction from fresh surface water has been slowly decreasing (by

https://www.eea.europa.eu/en/analysis/indicators/water- abstraction-by-source-and/water-abstraction-by-economic- sector.

(357)Eurostat, Water Exploitation Index, plus, https://ec.europa.eu/eurostat/databrowser/view/sdg_06_60/d efault/table?lang=en. WEI is a measure of how much water is being used compared with the total renewable freshwater resources available for a given territory and period.

(358)Rossi, et al. (JRC), 2023, European Drought Risk Atlas, Publications Office of the European Union, https://publications.jrc.ec.europa.eu/repository/handle/JRC135 215.

(359)BCG and NABU, 2026, Every Drop Counts – Pathways to Restore Germany’s Water Balance, https://www.bcg.com/publications/2026/every-drop-counts- pathways-to-restore-germanys-water-balance.

(360)Water productivity is a metric that is calculated by dividing GDP (in chain-linked volume) by total water abstraction. It indicates the average economic value (GDP) a Member State creates for each unit of water it takes from nature.

(361)EEA, 2025, Water abstraction by economic sector 2000- 2023, https://www.eea.europa.eu/en/analysis/indicators/water- abstraction-by-source-and/water-abstraction-by-economic- sector.

27%), due to a shift toward less water-intensive technologies. However, in view of the increase in climate-change-induced dry periods and the risk of over-abstractions, Germany could increase and harmonise the use of abstraction permits and fees for all water users nationwide; better monitor the actual abstracted amounts; and harmonise the inconsistent use of exemptions from water fees. The Länder currently set their own charges for water abstraction. 14 of the 16 Länder levy charges for the abstraction, extraction or discharge of groundwater (between EUR 0.15 and EUR 0.31 per m3). The German drinking water network is one of the most efficient in the EU (it loses less than 7% and is on a downward trend) (362).

The good ecological status of Germany’s

surface water bodies (SWBs) improved

slightly between the second and third river

basin management plans (RBMPs), but from

an initially very low level of 8.1% to

9.3% (363). The main pressures remain nutrient

pollution from agriculture and physical alterations. Coastal and transitional waters are particularly affected by pollution (100% fail to achieve good ecological status or potential). The high density of barriers and obstacles (364) on Germany’s rivers and smaller streams impacts the good ecological status of surface water. It isolates and fragments habitats; reduces migration of fish species; and blocks the transport of sediments, thereby increasing the risk of floods. Germany has some of the most fragmented river networks in the EU with about 2 barriers per km of river/stream in Germany (EU-average is about 1 barrier per 1.4 km). The third RBMP (365) states that around 37% of all reported water bodies are significantly

(362)Umweltbundesamt, 2024, Öffentliche Wasserversorgung,

https://www.umweltbundesamt.de/daten/wasser/wasserwirtsc haft/oeffentliche-wasserversorgung#grundwasser-ist- wichtigste-trinkwasserressource.

(363) WISE, Surface water bodies: ecological status or potential, https://water.europa.eu/freshwater/resources/metadata/wfd- dashboards/surface-water-bodies-ecological-status-or- potential-group-table.

(364)AMBER, Adaptive Management of Barriers in European River.

(365)European Commission, 2024, Seventh Implementation Report from the Commission to the Council and the European Parliament on the implementation of the Water Framework Directive (2000/60/EC) and the Floods Directive (2007/60/EC) (Third River Basin Management Plans and Second Flood Risk Management Plans), https://environment.ec.europa.eu/topics/water/water- framework-directive/implementation-reports_en.

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affected by pressures from hydropower and that this impacts ecological status. The impacts include the interruption of the biological and hydromorphological continuity of watercourses (preventing migratory fish of reaching their spawning grounds); direct damage to organisms by hydropower turbines (around 22% of the fish of all ages pass through a turbine die and an even larger percentage is injured); and habitat changes affecting water levels downstream. Furthermore, 35% of Germany’s water bodies are heavily modified water bodies (HMWBs) and 17% are artificial with a lower environmental objective. The designation of HMWBs is largely the result of land drainage for agriculture (66%), urbanisation (28%) and flood protection (19%). Germany’s measures to address the problem include the federal programme ‘Blue Belt Germany’, which funds the implementation of measures on rivers and floodplains and is designed to last 30 years. Every year, around EUR 60 million is made available by the federal government for renaturation of federal waterways and floodplains(366). All German SWBs failed to achieve good chemical status. This is mainly due to ubiquitous persistent, bio- accumulative and toxic substances (uPBTs) emitted during combustion of fossil fuels and industrial use (367). Current analysis indicates that the environmental objectives of the Water Framework Directive (WFD) will not be achieved. These challenges could be better addressed by improving administrative capacity and coordination between different sectors of administrations responsible for different elements of water management. The lack of coordination limits access to high-quality water for industrial and agricultural use and increases water treatment costs.

Germany is basically fully compliant with the

requirements of the Urban Wastewater

Treatment Directive (UWWTD), reaching

99.9% in 2022. This means that the collection, biological treatment with nitrogen and/or

(366)Bundesprogramm Blaues Band Deutschland,

https://www.blaues- band.bund.de/Projektseiten/Blaues_Band/DE/00_Home/home _node.html.

(367)European Commission, staff working document accompanying the Report on the Third River Basin Management Plan for Germany, https://eur- lex.europa.eu/legal- content/EN/TXT/?uri=SWD%3A2025%3A25%3AFIN&qid=173 8746144581.

phosphorus removal of urban wastewater complies with EU legislation. This is above the EU average of 75.9% (368). Annual investment costs for collection systems were EUR 2 641 million in 2020, but current costs are not available. Past annual investment costs for treatment plants were EUR 1 355 million in 2020, but current and projected costs for 2022 are not available (369).

Overall, Germany still needs to invest around EUR 3.7 billion per year (0.1% of GDP), mostly on waste water treatment, in order to meet the various environmental targets set by the Water Framework Directive and the Floods Directive (370).

Nature restoration

Germany’s economy is structurally exposed

to nature loss through its dependency on

ecosystem services (371). About 41% of gross value added (GVA) relies directly on the ecosystem (below the EU average of 44%). However, the entire economy is vulnerable to nature degradation, because all sectors are interlinked through supply and customer connections, potentially leading to cascading effects along value chains.

Germany has exceptionally rich biodiversity,

but habitat degradation is increasingly widespread. About 39% of Germany’s territory is

designated as protected areas – way above the EU average of 26.4% (372),Protected areas include national nature conservation sites, national parks, national nature monuments and landscape protection areas. Many of these do not meet the

(368)Germany | Country profiles on urban waste water treatment |

WISE Freshwater.

(369)Internal documents, Implementation of Directive 91/271/EEC (UWWTD), 2022.

(370)European Commission, 2025, Environmental Implementation Review, Germany country report, https://environment.ec.europa.eu/law-and- governance/environmental-implementation-review_en.

(371)Hirschbuehl et al. (JRC), 2025, The EU economy`s dependency on nature, Vasilakopoulos, P. editor(s), European Commission, https://publications.jrc.ec.europa.eu/repository/handle/JRC14 0304?mode=full.

(372) Eurostat, Protected Areas Indicator, https://ec.europa.eu/eurostat/databrowser/view/env_bio4/de fault/table?lang=en&category=env.env_biodiv.

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Commission’s criteria for the 30% protected area target set out in the EU’s biodiversity strategy (373). It would be beneficial if Germany were to focus on improving the quality of existing designated areas (particularly in terms of effective site management and monitoring). A recent inventory and assessment of biodiversity in Germany (374) indicates that more than half of Germany’s habitat types are in an unfavourable condition. Overall, 60% of the 93 habitat types described have an insufficient or poor conservation status and are on a deteriorating trend. The situation is particularly concerning for grasslands, formerly species-rich arable fields, mires, swamp forests, marshes and springs. More than half of the marine and coastal habitat types of the North and Baltic Seas are at long-term risk. Furthermore, almost a third of all species on the Red Lists are at risk (i.e. they are threatened with extinction or are highly endangered) and about 3% are already considered extinct. Land-use intensification, urban and infrastructure expansion, climate change, pollution and hydrological alteration are the main drivers of this degradation.

Germany is aligning national policy, planning

and on-the-ground river restoration actions

with existing EU water and nature

legislation. It is preparing for the implementation

of the EU Nature Restoration Law, which includes the aim of making at least 25 000 km of rivers in the EU free-flowing by 2030. The network of all rivers and flowing watercourses in Germany is very extensive, with a total length of more than 500 000 km. However, many sections are canalised, straightened or restricted by bank reinforcements. Regional and local river restoration projects (375) are being implemented with the aim of enhancing biodiversity, reconnecting ecosystems and reestablishing natural flows. Germany could mitigate the impact of floods by stepping up its efforts to improve river continuity, ensuring minimum ecological

(373)EEA report, Europe’s Environment 2025,

https://www.eea.europa.eu/en/europe-environment- 2025/countries/germany.

(374)Oekom science, Faktencheck Artenvielfalt, 2024, https://www.feda.bio/wp- content/uploads/2025/01/Faktencheck-Artenvielfalt- Gesamtbericht_hq.pdf.

(375)Bundesamt für Naturschutz, 2025, Auenrenaturierungsprojekte an Flüssen in Deutschland, https://www.bfn.de/daten-und- fakten/auenrenaturierungsprojekte-fluessen-deutschland.

flows, improving the general hydrological situation and increasing fish protection. Free-flowing rivers also generate broader socio-economic benefits (e.g. an enhanced rural landscape, new recreation and tourism opportunities, strengthened local job creation, improved water quality, and better sediment transport that protects deltas and coastal areas against erosion and rising sea levels).Ambitious initiatives like the action plan on nature-based solutions for climate and biodiversity (ANK) (376) and the national water strategy (377) aim to restore ecosystems and adapt infrastructure to climate extremes.

Nature degradation is further amplified by

invasive alien species. 48 were recorded in Germany in 2024, inflicting estimated damage of more than EUR 8 billion up to 2020 (primarily affecting agriculture, fisheries and public health) (378). However, eutrophication (a threat to biodiversity and ecosystem integrity) has partially improved, with the areas at risk declining from 86% to 70% since 2005 (379).

Germany is continuing its climate and

environmental efforts as challenges

intensify, but a biodiversity financing gap persists. Germany facesan estimated

EUR 638 million/year shortfall in funding designed to address conservation priorities. Despite cohesion policy investment of up to EUR 580 million in the current financing period, this shortfall underscores the need for increased investment in habitat restoration (380).

(376)BMUKN, Aktionsprogramm Natürlicher Klimaschutz,

https://www.bundesumweltministerium.de/download/aktionsp rogramm-natuerlicher-klimaschutz-kurzfassung.

(377)BMUKN, Nationale Wasserstrategie, https://www.bundesumweltministerium.de/download/national e-wasserstrategie-2023.

(378)Neobiota, 2021, Economic Cost of invasive alien species across Europe, https://neobiota.pensoft.net/article/58196/. European Commission, 2025, Environmental Implementation Review, Germany Country Report. https://ec.europa.eu/transparency/documents- register/detail?ref=SWD(2025)310&lang=en.

(379)EEA, 2024, Eutrophication caused by atmospheric nitrogen deposition in Europe, https://www.eea.europa.eu/en/analysis/indicators/eutrophicati on-caused-by-atmospheric-nitrogen.

(380)European Commission, 2025, Environmental Implementation Review, Croatia country report, https://environment.ec.europa.eu/law-and- governance/environmental-implementation-review_en.

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Sustainable agriculture and land use

Germany’s carbon removals fall short of the

level of ambition needed to meet its 2030

target for land use, land-use change and forestry (LULUCF). Germany’s LULUCF sector has generated strong emissions since 2018. This worrying trend is primarily attributed to drought- and pest-related forest damage, which results in forests no longer being able to offset high emissions from drained organic soils to the extent previously assumed. To meet its 2030 LULUCF target, additional carbon removals of 3.8 MtCO2-eq are needed (381). The latest available projections show a gap to target of 3.7 MtCO2-eq (382). Additional measures are therefore needed in the land sector in order to reach the 2030 target. In addition to increasing LULUCF net removals, further investment in healthy forests and soils is key to building resilient biobased product value chains and enabling a growing, competitive EU bioeconomy. Continuing improvements in the system for monitoring net removal data and projections will be crucial to supporting timely and effective action in the sector.

Germany is scaling up nature-based measures and monitoring in order to

strengthen LULUCF removals, with delivery

towards 2030 now the key challenge. No further LULUCF-specific legislation is planned and Germany is now focusing on implementation in order to address the weakened LULUCF sink. The federal action plan on nature-based solutions (ANK) (383) is being operationalised through EUR 4.5 billion (384) for peatland rewetting,

(381)National LULUCF targets of the Member States in line with

Regulation (EU) 2023/839, https://eur-lex.europa.eu/legal- content/EN/TXT/PDF/?uri=CELEX:02018R0841-20230511.

(382)European Commission, EU Climate Action Progress Report 2025, https://climate.ec.europa.eu/eu-action/climate- strategies-targets/progress-climate-action/eu-climate-action- progress-report-2025_en.

(383)BMUKN, Aktionsprogramm Natürlicher Klimaschutz, https://www.bundesumweltministerium.de/download/aktionsp rogramm-natuerlicher-klimaschutz-kurzfassung.

(384)BMUKN, Fragen und Antworten zum Aktionsprogramm Natürlicher Klimaschutz, https://www.bundesumweltministerium.de/presse/fragen-und- antworten-faq/fragen-und-antworten-zum-aktionsprogramm- natuerlicher-klimaschutz.

climate-resilient forest management and soil measures (2024-2029). Germany is also upgrading monitoring and reporting systems under the ANK, with the Federal Agency for Nature Conservation playing a coordinative role. Peatland restoration under the national peatland protection strategy is moving into practical roll-out (aim: 5 MtCO2-eq reduction annually from drained peatlands by 2030 (385)). To complement the strategy, Germany has joined the ‘Peatlands Breakthrough’ initiative as a champion country (386).

Germany faces environmental and public

health risks due to persistent agricultural

pollution pressures and rapid transfer of contaminants in groundwater systems. Germany’s functional urban area (FUA) has considerably expanded in recent years. Net land taken each year between 2018 and 2021 accounted for 507 ppm/year of the Germany’s total urban surface. Most land has been taken from arable land. This ongoing ‘land take’ and the associated soil-sealing is reducing ecosystem resilience, decreasing carbon sequestration and impairing flood protection (387).

Water quality is improving very slowly. Under

theEU Nitrates Directive, 50% of Germany’s groundwater monitoring stations recorded average nitrate concentrations in excess of 25 mg/l between 2016 and 2019 (388). Almost 27% were above 50 mg/l, the EU threshold for safe drinking water. These worrying numbers reflect systemic agricultural pressures. Stricter rules on fertilisation that have been put in place to implement a judgment of the CJEU (389) might lead to improvements in the next reporting period. Nitrate

(385)Willenbockel, 2024, Peatland restoration in Germany: A

dynamic general equilibrium analysis, https://www.sciencedirect.com/science/article/pii/S092180092 4000843?utm_source=chatgpt.com#bb0010.

(386)Press release from the Global Peatlands Initiative, https://globalpeatlands.org/germany-joins-peatland- breakthrough-champion-country.

(387)EEA, 2022, Land take and land degradation in functional urban areas, https://www.eea.europa.eu/en/analysis/publications/land- take-and-land-degradation.

(388)EEA, 2025, Nitrate in groundwater in Europe, https://www.eea.europa.eu/en/analysis/indicators/nitrate-in- groundwater-8th-eap.

(389)Judgment of 21 June 2018, European Commission v Federal Republic of Germany, case C-543/16.

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pollution is contributing to the eutrophication of the North and Baltic Seas, declining fish stocks and high costs of removing excess nitrates from drinking water. Effective measures are needed to address excess nitrate deposition, especially in areas with high livestock density. Germany has a livestock density of 0.98 livestock units per hectare in 2020 (390) (above the EU average of 0.75). A 20% reduction in agricultural ammonia emissions between 2018 and 2023 (391) underscores improvement in emission control and Germany is projected to be on track (392) to meet its reduction commitments to be achieved by 2030. However, the fact that nitrate pollution is continuing does indicate gaps in nutrient management strategies.

Pesticide contamination remains a critical

issue. 48% of German surface water bodies (rivers) broke regulatory limits for pesticide residues between 2018 and 2023(393). EU total contaminated area of 27% of surface waters. Pesticides not only threaten aquatic ecosystems and related socio-economic activities (such as fisheries and coastal tourism) but also pose long- term risks to human health through contaminated drinking water and food chains. The level of pesticides contamination in soil is also high. 65% of agricultural soils show pesticides residues above 0.5 mg/kg-1 (394).

(390)Eurostat, Livestock density index.

https://ec.europa.eu/eurostat/databrowser/view/tai09/default/t able?lang=en.

(391)EEA, Air pollutant emissions data viewer (Gothenburg Protocol, Air Convention) 1990-2023. https://www.eea.europa.eu/en/topics/in-depth/air-pollution/air- pollutant-emissions-data-viewer-1990-2023.

(392)EEA, 2025, Magnitude of emission reductions (percentage) required by EU Member States to meet their emission reduction commitments for 2030 onwards, based on 2023 data, https://www.eea.europa.eu/en/analysis/publications/air- pollution-in-europe-2025-reporting-status-under-the- national-emission-reduction-commitments- directive/magnitude-of-emission-reductions-percentage- required-by-eu-member-states-to-meet-their-emission- reduction-commitments-for-2030-onwards-based-on-2023- data.

(393)EEA, 2024, Pesticides in rivers, lakes, and groundwater in Europe, https://www.eea.europa.eu/en/analysis/indicators/pesticides- in-rivers-lakes-and.

(394)Vieira et al. (JRC), 2023, Pesticides residues in European agricultural soils – Results from LUCAS 2018 soil module, Publications Office of the European Union, https://publications.jrc.ec.europa.eu/repository/handle/JRC133 940.

100

Table A10.1:Key Adaptation Indicators

(1) EFFIS (European Forest Fire Information System). https://forest-fire.emergency.copernicus.eu/apps/effis.statistics/estimates. (2) The climate protection gap refers to the share of non-insured economic losses caused by climate-related disasters, based on modelling of the risk from floods, wildfires and windstorms, and on the insurance penetration rate. Scale: 0 (no protection gap) – 4 (very high gap). EIOPA, 2025, Dashboard on insurance protection gap for natural catastrophes. (3) This measures total water consumption as a percentage of the renewable freshwater resources available for a given territory and period. Values above 20% are generally considered water scarcity, while values equal to or greater than 40% indicate severe water scarcity. (4) European Commission, 2024, Seventh Implementation Report from the Commission to the Council and the European Parliament on the implementation of the Water Framework Directive (2000/60/EC) and the Floods Directive (2007/60/EC) (Third River Basin Management Plans and Second Flood Risk Management Plans). (5) Indicator refers to concentrations of nitrate (NO3) in groundwater, measured as milligrams per litre (mg NO3/L). Nitrate can persist in groundwater for a long time and accumulate at a high level through inputs from anthropogenic sources (mainly agriculture). The EU drinking water standard is limited to 50 mgNO3/L to avoid threats to human health. (6) Net removals are expressed in negative figures and net emissions are expressed in positive figures. Reported data are from the 2025 greenhouse gas inventory submission. The 2030 value of net greenhouse gas removals is taken from Regulation (EU) 2023/839 – Annex IIa. Source: Eurostat, EEA and JRC.

Climate adaptation and preparedness: EU-27 2019 2020 2021 2022 2023 2024 latest data

Drought impact on ecosystems 17.72 15.48 0.1 18.17 0.23 - 2.76

[area impacted by drought as % of total] Forest fires burned area (1)

2,006 314 121 4,293 975 826 354,510

[burned area in ha. per year] Economic losses from extreme events 8,513 1,661 40,126 11,314 2,230 5,130 40,452

[EUR million at constant 2022 prices]

Insurance protection gap (2)

- - - 2 2 2 -

[composite score between 0 and 4]

Sub-national climate adaptation action 16 16 17 19 19 19 34

[% of population covered by the EU Covenant of Mayors

for Climate & Energy]

Water resilience: EU-27 2019 2020 2021 2022 2023 2024 latest data

Water Exploitation Index Plus, WEI+ (3) 4.03 4.12 3.81 4.57 3.35 - 4.53

[total water consumption as % of renewable freshwater resources] Water productivity 147 147 160 170 - - 151

[EUR per m 3 ] Water abstraction

Water abstraction by source (% from surface water) 70.69% 69.58% 68.37% 67.05% - -

Water abstraction by sector

Agriculture Electricity

cooling

Manufactu-

ring

Public

water

supply

Mining

and

Quarrying

Constru-

ction

1.86% 50.31% 16.49% 22.20% 4.97% 4.17% Status of water bodies

(4)

[% of water bodies in a good status] Surface water bodies (ecological) - - - - - 9% 38% Groundwater bodies (quantitative) - - - - - 95% 93%

Nature restoration: EU-27 2019 2020 2021 2022 2023 2024 latest data

Ecosystem dependency - - - 41% - - 44%

[% of direct dependency] Protected area 37.8 38.2 38.3 38.3 39.1 26.4

[% of terrestrial protected areas] Invasive alien species (IAS) - - - - - 48 29.2

[number of IAS of Union concern] Damage cost of IAS - - - - 8.12 1.69

[EUR billion] Eutrophication 435 435 295

[AAE of area at risk of euthrophication]

Sustainable agriculture and land use: EU-27 2012-2018 2018-2021 latest data

Yearly net land taken by Member State 493 507 670

[ppm of total urban surface per Member State] Land conversion in functional urban area [% of total land taken from 2018-2021]

Arable land 64%

Complex and mixed cultivation 0%

Forests 8%

Herbaceous vegetation associations 2%

Open spaces with little or no vegetation 0%

Pastures 24%

Permanent crops 1%

Water 1%

Wetlands 0% 2019 2020 2021 2022 2023 2024 latest data

Nitrates in groundwater (5) 22.7 22.5 22.3 22.2 22.2

[mgNO₃/l] Livestock density 0.98 0.91 0.75

(number of livestock units per hectare of utilised agricultural area) Ammonia emissions 93% 93% 93% 93% 93% - 94%

[% of total utilised agricultural area] Pesticide contamination on rivers and lakes water bodies rivers 48% 27%

[% of monitoring sites with pesticides exceeding thresholds, 2018-2023] lakes 0% 18% Pesticide contamination in soil 65% 57%

[% of samples with a concentration over 0.5 mg/Kg⁻¹]

Net greenhouse gas removals from LULUCF (6) 72121.0 76655.9 63087.2 75603.5 68652.8 - -198,421

[ktCO₂-eq]

FAIRNESS

ANNEX 11: LABOUR MARKET

101

Germany continues to face challenges

related to labour supply and ongoing

economic restructuring. Over the past year, employment has remained high but stagnant, unemployment has slightly increased from a low point, and labour shortages have eased. Although economic growth is expected to rebound and could bring modest short-term improvements, the manufacturing sector is experiencing structural changes, leading to a shift in employment away from certain areas; this could lead to regional labour market adjustment needs. An employment shift to public services and the ageing population limited the rise in unemployment in 2025. As the population ages and labour shortages persist, policy measures are underway to boost labour supply, including investments in early childhood education and care and all-day schools, the law on active pensions and the creation of the new Work- and-Stay Agency. However, additional reforms and policies would be beneficial to substantially expand labour supply and manage structural change through improved job-to-job transitions. The 2025 country-specific recommendations for Germany highlighted the need to increase labour supply and tackle the shortage of skilled workers, including by increasing the number of hours worked, strengthening people’s basic, green and digital skills, and attracting and retaining talent from non-EU countries. The recommendations also emphasised the need to promote longer working lives and reducing incentives for early retirement (395).

Employment stagnated, unemployment edged

up in 2025, and a cyclical recovery is

expected to bring only small improvements. Amid economic slowdown, the employment rate remained at 81.1% in 2025, above the EU average (76.1%) and 1.9 pps below the national employment target (83% by 2030). The activity rate continued to rise, increasing by 0.1 pps to 80.3%, well above the EU average (75.7%). The economic downturn led to a 0.4 pps rise in the

(395) CSR 2025.5.(1.-3) 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.

CSR 2025.(1.6) ‘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.’

unemployment rate, to 3.8% in 2025, and a 0.6 pps rise in youth unemployment to 7.1%; however, both remained below the respective EU averages of 6% and 15.2%(396). Long-term unemployment grew slightly, to 1.1%, and the use of short-time work for economic reasons declined (156 000 in February 2026, a decline of 114 000 in a year) (397). Labour hoarding (companies holding on to more staff than they need) has eased though it remains above the EU average. The likelihood to transition from unemployment to employment remains low (398). As labour demand has been softening, employment is forecast to shrink by 0.1% in 2026, before growing again by 0.1% in 2027, reflecting accelerating economic growth(399).

Graph A11.1: Key labour market indicators

Source: Eurostat, LFS [lfsi_emp_a, une_rt_a, lfsi_neet_a, une_ltu_a]

(396) However, youth unemployment shows a marked regional

variation, reaching 9.8% in Berlin and 8.1% in Sachsen- Anhalt in 2024, along with the share of young persons neither in employment nor in education and training (11.3% in Berlin and 9.9% in Schleswig-Holstein).. https://www.oecd.org/en/data/tools/oecd-regions-and-cities- atlas.html.

(397) Bundesagentur für Arbeit (2026): Die Lage am Arbeits- und Ausbildungsmarkt in Deutschland, April 2026.

(398) Ifo Employment Barometer, April 2026.

(399) European Commission, Spring Forecast for Germany, 2026.

75

80

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Long-term unemployment rate 15-74 (lhs)

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Young persons neither in employment nor in education and training (NEET) rate 15-29 (lhs)

102

Labour shortages have eased but continue to

pose challenges to production and

investment. Amid weak economic growth, the job vacancy rate stood at 2.6% in Q4-2025, above the EU average (2.0%). Still, this is a significant drop from its post-pandemic peak (4.5% in Q2-2022). Vacancy rates are highest in construction (5.1%) and in professional, scientific and technical activities and administrative and support service activities (4%), and lowest in industry (1.6%) and real estate activities (1.9%). A relatively large share of firms in services report that labour shortages are a factor limiting their production (20.6% in Q2-2026), above the EU average (19.5%) (400). In 2025, 73% of firms identified the availability of skilled labour as a barrier to investment (401). Looking ahead, demographic ageing is expected to keep the labour market tight.

The manufacturing sector is experiencing

structural change, leading to a shift in

employment away from certain areas.

Restructuring in manufacturing is driven by increasing competitive pressures from technological catch-up and industrial policies in China and Southeast Asia, the twin transitions, demographic change and skills shortages. This challenge has been compounded recently by heightened uncertainty, geopolitical tensions and US tariffs. Between 2021 and 2025, the number of people employed in manufacturing declined by 219 000, from 7.47 million to 7.25 million. The number of new job openings, start-ups and investments also stagnated in manufacturing (402). Furthermore, Germany is also strongly affected by industrial challenges (403). Displaced manufacturing workers tend to have higher qualifications and currently exhibit high job-to-job mobility, reducing their risk of falling into long-term unemployment (404). However, if restructuring trends intensify, these may not hold up and stronger support may be warranted. Expenditure

(400) Source: European Business and Consumer Surveys.

(401) EIB (2025): EIB Investment Survey – Germany Overview.

(402) Anger, S. et al. (2025): Zentrale Befunde zu aktuellen Arbeitsmarktthemen 2025, IAB.

(403) Heikkonen, H. - Listl, N. – Reuter, A. (2025): Mapping the impact of industrial decline on European regions. European Commission, Single Market Economic Briefs, No. 16.

(404) Duell, N. – Sold, K. (2026): Workers displaced from manufacturing: their trajectories and public policies to support them. Report of the European Centre of Expertise (ECE) in the field of employment and labour market policies.

on activation measures has fallen markedly in the last couple of decades, from 1% of GDP in 2003 to 0.3% in 2013 and to 0.2% in 2024 (0.4% in the EU). The duration of short-time work in industry can be extended to up to two years until the end of 2026 (405), but despite this possibility the take- up of short-time work fell. Training during short- time work could help mitigate this trade-off. ‘Transfer short-time work’ schemes support displaced workers with active policy measures to find new jobs, while ‘regional labour market hubs’ (406) coordinate job rotation between employers and provide career guidance and support for upskilling and reskilling. However, these instruments are small in scale and have yet to be evaluated.

While regional labour market disparities are

moderate, structural change in the labour

market is likely to affect regions unevenly.

Employment rates range from around 85.1% in Oberbayern and 84.3% in Bayern and Schwaben to 74.7% in Bremen. Unemployment is highest in large cities such as Berlin (5.5%), Leipzig (5.2%), Bremen (5.1%) and Hamburg (5.3%) and lowest in southern and western federal states. Urban labour markets benefit from a dynamic service sector and a younger, better qualified workforce, but also exhibit higher unemployment due to greater labour turnover and a relatively large share of low- qualified workers. Northern regions and large cities (Bremen, Hamburg and Berlin) appear resilient to current transformation trends. By contrast, Saarland, Rheinland-Pfalz, parts of Nordrhein- Westfalen (the Ruhr region), Niedersachsen, and Eastern regions such as Thüringen, Sachsen-Anhalt and Brandenburg, are undergoing pronounced structural shifts, with limited capacity to absorb displaced labour, as reflected in higher unemployment rates. Mecklenburg-Vorpommern is characterised by limited structural dynamism alongside weak employment growth (407). A key impediment to growth is limited labour market mobility due to lack of affordable housing in growth poles and sticky rental markets (see Annex 16).

(405) https://www.recht.bund.de/bgbl/1/2025/338/VO.html.

(406) DGB (2024): Arbeitsmarkt - Drehscheiben.

(407) German Council of Economic Experts (2025): Spring Report 2025, Chapter 4 – Structural Change in Germany: Productivity, regional aspects and the labour market.

103

Constraints on the labour supply of women

might influence the high part-time and

marginal employment and contribute to gender gaps in income and pensions. Germany

has one of the highest female employment rates in the EU (77.7% vs EU: 71.3% in 2025) but also exhibits one of the largest gender gaps in part- time employment (37.1 pps vs EU: 19.7 pps in 2025). Women are over-represented in marginal part-time jobs (Minijobs), accounting for 63% in 2024, which come with very limited coverage for insurance-based social security benefits. These factors contribute to a relatively high gender pension gap (24.2% in 2025). 20% of women working part-time indicate a preference to work more hours, on average an extra 11 hours per week (408). Obstacles to work more include the lack of quality early childhood education and care with long opening hours, where the supply gap is estimated to be 300 000 places (409). There are also provision gaps in full-day schools where a quarter of schools signal that they will not be able to offer all first-graders a place in autumn 2026, despite this is a legal right (410). There is also a need to create 264 000 places between now and autumn 2029 (411) (see Annex 13). In addition, a lack of long-term care solutions reduces the labour supply: 30% of women and 9% of men worked part-time in 2025 because of caring for children or adults in need of care. Gender employment and pay gaps are more pronounced among people with a migrant background and are largest for refugees.

Labour supply among older people could be

increased by delaying labour market exit and

by encouraging employment beyond the statutory retirement age. Employment of older

workers has increased in recent years, reflecting the gradual increase in the statutory retirement age and rising education levels. Nevertheless, the average effective age of labour market exit remains below the statutory retirement age, by 2.4

(408) Anger, S. et al. (2025): Zentrale Befunde zu aktuellen

Arbeitsmarktthemen 2025, IAB.

(409) Geis-Thöne, W. (2025): Kinderbetreuung: 300.000 Kitaplätze für unter Dreijährige fehlen. iwkoeln.de.

(410) VBE (2026), Rechtanspruch schützt vor Qualitätsdiskussion nicht. vbe.de.

(411) BMBFSFJ (2025), Dritter Bericht der Bundesregierung zum Ausbaustand der ganztägigen Bildungs- und Betreuungsangebote für Grundschulkinder nach §24a SGB VIII. bmbfsfj.bund.de.

years for women and 2.1 years for men. Later retirement is more common in western Germany and in cities (412). Early withdrawal from the labour market is driven by health constraints, caregiving or job-related issues. Early retirement is relatively advantageous financially: pension benefit reductions for early retirement for individuals with at least 35 working years are much lower than in other countries (413). Only 14.3% of people who receive a pension go back to work within the first six months of retirement, which is lower than the OECD average of 22.4% (414).

A large proportion of persons with

disabilities are employed in sheltered

workshops, working without employee status or entitlement to the national minimum

wage (415). The disability employment gap is 22 pps (against the EU average of 24 pps). A third of young persons with disabilities were neither in employment nor in education or training (31% in 2023).

Immigration from non-EU countries, along

with better integration of people with a

migrant background, could be beneficial for

labour supply amid demographic change. The number of working-age people (20-64) is projected to decline by 4 million in the decade until 2035 due to an ageing population. Net migration fell from 430 000 in 2024 to 222 000 in 2025. At the same time, between 2024 and 2025, there was a 7.7% increase in visas issued for employment purposes and the employment of non-EU nationals increased by 3.4%. The employment rate of non-EU nationals (63.2%) lags behind that of German nationals and EU mobile citizens (83.9% and 81.3%, respectively) (416). According to the OECD, increasing labour force participation among women, older people and

(412) IAB (2025): Ältere gehen im Westen später in Rente als im

Osten und auf dem Land früher als in Städten.

(413) If retiring before the statutory retirement age, benefits in Germany are reduced by 3.6% for each year under the statutory retirement age. This is low by international standards.(OECD (2025): Pensions at a Glance. oecd.org.

(414) Walwei, U. (2024): Ältere Arbeitskräfte im demografischen Wandel: Beschäftigungspotenziale im internationalen Vergleich. IAB-Forschungsbericht 14/2024.

(415) European Semester 2025-2026 Country fiche on disability equality: Germany.

(416) CSR 2025.(5.3): ‘better attracting and retaining talent from non-EU countries.’

104

people with a migrant background could increase annual GDP per capita growth in Germany by 0.3 pps (417).

Real wages have broadly recovered, with

strong increases in the minimum wage. Wage growth reached 5.1% in 2024 and 5% in 2025. Real wages grew by 2.6% in 2024 and 2.2% in 2025. These increases follow a contraction in 2022 and a weak recovery in 2023, with rapid disinflation contributing to the current rebound. Negotiated wages, excluding one-off payments, rose by 4.7% and 3.6% year-on-year in Q3- and Q4-2025 (418), before the energy price increase in 2026, partly reflecting pressures in manufacturing. The statutory minimum wage increased by 41.5% between January 2022 and January 2026, a rise of around 17% in real terms.

Recent measures aim to strengthen

collective bargaining coverage. Trade union

density remains at 14.1%, having declined from nearly 35% in the early 1980s (419). Collective bargaining coverage is at around 50%, down 26 pps since 1998 (420). A recently adopted law (Tariftreuegesetz) will only allow public contracts and concessions to be awarded to companies that offer employees working conditions that are in line with collective agreements. A national plan to promote collective bargaining, as required by the EU Directive on Adequate Minimum Wages, is to be submitted by Germany.

The low-wage sector is large, driven by

incentives in social benefits and by marginal part-time employment. The share of low-wage earners fell from 22.5% in 2014 to 19% in 2022, yet it remains considerably higher than the EU average (14.7% in 2022). The prevalence of low wages is particularly high among young people (affecting 32.7% under the age of 30) and the low-qualified (45.1%). Wage compression at the bottom of the wage distribution partly reflects minimum wage increases (421). While the wage-

(417) OECD (2025): Employment Outlook – Germany.

(418) Bundesbank (2026): Monthly Report, April 2026 – Statistical Annex. bundesbank.de.

(419) OECD ICTWSS database.

(420) Destatis: Tarifbindung von Arbeitnehmern.

(421) Duell (2026): Low-wage earners among the young and low qualified. Report of the ECE in the field of employment and labour market policies.

benefit gap has widened in recent years, some disincentives to seek better-paid jobs persist, linked to social benefits (422). Marginal part-time employment (Minijobs) also contributes to low- wage employment (these are jobs that do not provide access to full insurance-based social security benefits, training, jobs with more hours, and better pay and working conditions). More broadly, the persistence of low-wage employment reflects fewer opportunities for upward mobility in the sectors and contractual arrangements where low pay is prevalent (423).

Germany is taking measures to tackle labour

market challenges, but there is scope for

further efforts. To support the labour supply of women, the country is investing EUR 4 billion in 2025-2026 in infrastructure and quality early childhood education and care. This includes funding for language learning and care for children from disadvantaged backgrounds (424) and the expansion of all-day schooling. To support employment after retirement, Germany has lifted the ban on consecutive fixed-term employment contracts for those over the statutory retirement age. Moreover, the new law on active pensions allows those over the statutory retirement age to earn up to EUR 2 000 EUR tax-free per month. To encourage longer working lives, jobs and working conditions adapted to older workers could be supported, along with access to training and reduced incentives for early retirement. Other measures such as overtime bonuses provide incentives for additional working hours (425). Reforms to taxation, health insurance and marginal part-time employment could incentivise women to work more hours. Other incentives could include flexible work options and better access to long-term care. Women with a migrant background could be further assisted through language training, easier recognition of qualifications and by supporting work integration social enterprises, that

(422) Blömer, M. et al. (2024): ‘Lohnt‘ sich Arbeit noch?

Lohnabstand und Arbeitsanreize im Jahr 2024, Ifo Schnelldienst, 1/2024.

(423) Duell (2026): Low-wage earners among the young and low qualified. Report of the ECE in the field of employment and labour market policies.

(424) Eurydice (2025): Germany: National reforms in early childhood education and care.

(425) CSR 2025. (5.1): ‘Increase labour supply and tackle the shortage of skilled workers, notably by increasing hours worked.’

105

provide targeted assistance to vulnerable individuals. Germany aims to facilitate skilled immigration with a new Work-and-Stay Agency and intends to improve employment opportunities for refugees by reducing their employment ban to a maximum of three months. The latter reform is planned for 2028. To support the redeployment of displaced workers on a larger scale, it could be beneficial to provide comprehensive packages of counselling, placement and training, and when needed, temporary and targeted hiring and wage subsidies. Further policies could be beneficial to support regional labour mobility. Collective bargaining could be further supported with measures to fight the circumvention of collective bargaining obligations. This would make subsidies conditional on collective bargaining agreements and provide more flexibility in working hours in exchange for collective bargaining coverage.

ANNEX 12: SOCIAL POLICIES

106

Germany has a relatively well-developed

welfare system, but considerable challenges

related to poverty and inequality remain. Despite its comprehensive welfare system, the country faces persistent pressures from rising housing costs, poverty, particularly among children and non-EU-born people, and high wealth inequality, all of which continue to strain social cohesion. The 2025 country-specific recommendations called on Germany to safeguard the long-term sustainability of the pension system without compromising pension adequacy(426).

Poverty and the risk of social exclusion

persist, mainly due to rising living costs. In 2025, 21.2% of the population were at risk of poverty or social exclusion (AROPE), which is slightly above the EU average. The severe material and social deprivation rate remains slighly below the EU average in 2025 (5.6% vs EU 6.3%), reflecting sustained pressure on household incomes from rising living costs. Key drivers of poverty include rising housing (see Annex 16), energy, and living costs. Regional differences persist, with the highest AROPE rates recorded in Bremen (35.4%) and Trier (25.8%), with eight other regions exceeding 24% and the national average. In 2025, cities (24.9%) were more affected than rural areas (17%).

Severe material and social deprivation

affected 5.6% of the population in 2025. This is slightly below the EU average. Deprivation worsened between 2021 and 2023 due to increases in the cost of living, particularly for energy and transport, exacerbated by Russia’s war of aggression against Ukraine. Although there have been some recent improvements, they have not been sufficient to offset the deterioration between 2021 and 2023. Among people living below the poverty threshold, improvements have only been observed in some areas, such as payment arrears, the ability to afford a nutritious meal every two days and the ability to cope with unexpected expenses (427).

(426) CSR 2025.1.5 ‘Improve the quality of public finances by

containing transfers from the federal budget to the pension system and reviewing the efficiency of public spending.’

CSR 2025.1.6 ‘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.’

(427) Paritätischer Wohlfahrtsverband (2025): Armutsbericht.

Low work intensity increased further,

reaching 10.3%, this being well above the EU

average (7.9%). Germany’s 2030 national target is to reduce the number of people living in households with very low work intensity by 1.2 million, including 300 000 children, thereby contributing to reducing poverty and social exclusion. In 2025, 6.4 million individuals were affected, compared with 5.2 million in 2020, the reference year used to assess progress on Germany’s 2030 poverty-reduction target. The European Social Fund Plus (ESF+) contributes to this goal by allocating EUR 2.16 billion to social inclusion and EUR 0.24 billion to social innovation, with 5.8% of ESF+ funding dedicated to combating child poverty (428). A comprehensive approach could help address the multiple dimensions of poverty and achieve the national anti-poverty target.

Graph A12.1: At-risk-of-poverty rate and its

components

Source: Eurostat, EU-SILC [ilc_peps01n, ilc_li02, ilc_mdsd11, ilc_lvhl11n]

Child poverty has eased slightly but remains

a concern. Germany aims to reduce child poverty by ensuring that parents are employed. By 2030, it

(428) The total amount of ESF+ funding is EUR 6.5 billion for the

2021-2027 period. Investment in education and training amounts to around EUR 2.04 billion. ESF+ supports labour market measures with EUR 1.83 billion, while 36.9 million EUR have been allocated to support the Strategic Technologies for Europe Platform (STEP). 13.8% of ESF+ funding is dedicated to youth employment measures. These investments also contribute to reducing poverty.

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107

seeks to reduce the number of children living in low work intensity households by 300 000 relative to the 2020 level of 3 144 000. The AROPE rate for children declined from its peak in 2022 (24.4%) to 23.5% in 2025, remaining below the EU average (24.3%), but having increased slightly since 2024 (22.9%). However, the absolute number of children at risk of poverty or social exclusion remains higher than in 2020, similarly to the number of children living in very low work intensity households. Children with a migrant background are disproportionately affected. These trends hinder progress towards the national 2030 target. Germany is implementing the European Child Guarantee through its 2023 action plan, which could help address regional shortages in early childhood education and care and improve educational inclusion. This is important because educational outcomes are still strongly linked to parental socio-economic background. Despite progress in areas such as access to out-of-school activities and housing, gaps remain in ensuring that children in need have access to key services such as early childhood education and care, support to prevent early school leaving and quality alternative care (see Annex 13). Additional funding and policy initiatives aligned with the Child Guarantee at state and municipal levels could improve implementation outcomes.

Some groups face significantly higher risks

of poverty and social exclusion. In 2025, 39.3% of people born outside the EU were at risk of poverty or social exclusion (compared with 17.1% for the native-born population), highlighting significant disparities relating to migration background. This results in a gap slightly above the EU average (22.2 percentage points (pps), compared with 21.3 pps at EU level). Refugees make up a substantial proportion of this group and often face significant constraints, including interrupted education and limited language skills, which hinder their integration into society and, for adults, restrict access to the labour market. Single parents and people living alone continue to face the highest poverty risks, with AROPE rates of 44.3% and 35.2% respectively, while young adults (18–24) and older people (65 and over) are also disproportionately affected. Employment status remains a key determinant: unemployed and inactive individuals face an especially high risk of poverty and social exclusion, with unemployed people in Germany being 16.1 pp. more likely to be at risk than in the EU (82.4% in Germany and 66.3% in the EU). Some progress has been made

in reducing in-work poverty, with recent increases in the minimum wage (Annex 11).

Older people, particularly women, are

exposed to poverty risks. In 2025, 21% of people aged 65 and over were at risk of poverty or social exclusion, which was the same as the average for the total population and higher than the EU average (18.8%). Women (22.8%) are more affected than men (18.7%), reflecting persistent gender inequalities in careers and pension entitlements. On average, women’s pensions are around 24.2% lower than men’s (429). Accordingly, among people aged 75 and over, the poverty or social exclusion risk faced by women exceeds that faced by men by 5.7 pp. Over 730 000 pensioners rely on social assistance (430), representing about 4% of the elderly population – double the figure recorded in 2005. However, this is still less than half the proportion of the general population who rely on social assistance.(431) Persons with severe disabilities face particularly high risks: 40.1% were at risk of poverty or social exclusion in 2025, which is above the EU average of 37.2%, and almost 23 pps higher than for persons without disabilities. Rrecent and planned pension reforms can contribute to future pension adequacy. However, their impact may be undermined if parts of private pension savings are not protected during unemployment. Improving financial literacy could support retirement planning (see Annex 6).

The share of the population reporting an

inability to keep their homes adequately

warm has declined, at 5.7% in 2025, remaining 3.1 pps below the EU average, with the rate falling again after an increase in 2022 and 2023. The upcoming introduction of the EU emissions trading system for buildings and road transport (ETS2) is projected to increase households heating costs at a rate similar to the EU average. From 2026, the Social Climate Fund is expected to help mitigate this impact through targeted energy efficiency investments. Transport affordability poses a particular challenge for low-income households. In

2025, 6.6% of German households were unable to afford a car, which is above the EU average of 5.5%. Among households at risk of poverty, the

(429) Destatis (2026), Im Fokus: Rente. destatis.de.

(430) Destatis (2025), 4,1 % mehr Empfängerinnen und Empfänger von Grundsicherung im Alter und bei Erwerbsminderung Ende 2024. destatis.de.

(431) BMAS (2024), Grundsicherung im Alter. bmas.de.

108

percentage was significantly higher (22.3% vs EU average: 16.5%). According to the 2024 EU SILC ad hoc module on access to services, 24.4% of the population reported not using public transport because of schedule issues (EU average: 13.3%), while 8% cited financial reasons (EU average: 3.4%). The NUTS2 regions of Niederbayern, Lüneburg and Trier, where approximately 13% of the population is at risk of poverty, have particularly poor public transport services (432). Transport fuel costs are projected to increase moderately due to ETS2, which could put additional pressure on households that rely on private car travel. Strengthening the affordability and availability of public transport will therefore be essential. In areas with limited access, target- group specific support could focus on zero- emission vehicle options.

The reform of social assistance could improve administrative effectiveness and

work incentives, but it may also have

unintended consequences for some groups.

The transition from the existing minimum income scheme (Bürgergeld) to a new minimum income guarantee (neue Grundsicherung) signals a shift towards stricter conditions and an emphasis on labour market integration, based on expanded sanctioning powers for job centres. Measures such as enhanced monitoring, tighter housing-cost rules and faster placement are intended to strengthen accountability and reduce long-term benefit dependence, potentially improving administrative effectiveness and engagement with employment services. However, the reform could also entail risks that need to be addressed. Income-reducing sanctions could disproportionately affect dependent children, while housing benefit-related sanctions could destabilise families and exacerbate stigma in tight rental markets. Individuals with mental health issues, addiction problems or limited German literacy skills may also be disproportionately penalised. Moreover, an exclusive focus on rapid job placement may come at the expense of necessary skills development and vocational training, potentially perpetuating precarious or unstable employment.

Rising social security costs underscore the

need to enhance system and spending

efficiency. Social security contributions are

among the highest in the EU and have risen

(432) Data from Commission’s Transport Poverty Hub.

further (433), with further increases expected due to demographic ageing. Transfers from the budget to social security have also increased, posing a risk of crowding out investment expenditure. (See also Annexes 2, 3, 11 and 15).

There is scope to reform Germany’s complex social welfare system, as recommended by

the Welfare State Commission. Established in

August 2025, the Welfare State Commission (Sozialstaatskommission), aimed to address the inefficiencies of a system comprising more than 170 benefit schemes administered by around 30 different agencies. In its final report, published in January 2026, the Commission sets out 26 recommendations to make the system simpler, more transparent and fairer. The report recommends harmonising existing welfare structures to create a more integrated framework that brings together the minimum income scheme (Bürgergeld, to become Grundsicherung), housing benefits (Wohngeld) and child allowance (Kinderzuschlag). It also proposes creating a central digital portal across federal, state and municipal levels, enabling simplified applications, secure data-sharing across authorities, simplified procedures and greater use of automatic benefit disbursement (for example, automatic payment of child benefits following birth). The Commission also recommends reducing benefit deductions for earned income to strengthen incentives for continued or extended employment. The report also calls for a comprehensive simplification of legislation and administrative procedures. (434)

High wealth inequality has an adverse impact

on social fairness, cohesion and mobility. In Q3-2025, Germany had one of the highest Gini coefficients – a common measure of wealth inequality – in the euro area, at 0.76 (euro area average: 0.72(435). The wealthiest 10% accounted for 59.6% of the country’s net wealth, and the top 5% for 46%, some of the highest levels in the euro area. Income inequality, as measured by the

(433) For statutory healthcare, the average supplemental

contribution increased from 1.6% in 2023 to around 2.5% in 2025 and 2.9% in 2026. For long-term care, the contribution rate increased from 3.05% in 2022 to 3.4% in 2023 and then to 3.6% in 2025.

(434) BMAS, 2026, Empfehlungen der Kommission zur Sozialstaatsreform, bmas.de.

(435) ECB, 2026, Distributional Wealth Accounts and HFCS survey, data.ecb.europa.

109

S80/S20 ratio, stood at 4.7 in 2025, close to the EU average (4.62). Furthermore, the revenue share from property and wealth taxation remains below the EU average (see Annex 3). This taxation structure exacerbates wealth inequality. Rebalancing the tax mix could ease pressure on labour and make the tax system less distortive.

Social mobility has declined substantially in recent decades. Intergenerational income

mobility has declined substantially over time in Germany, particularly for cohorts born from the late 1970s onwards. Parental income now plays an increasingly decisive role in determining children’s educational attainment and subsequent earnings. This decline in mobility has coincided with a marked rise in income inequality, leading researchers to describe the combination of rising inequality and falling income mobility as a ‘toxic mix’(436).

Germany’s long-term care system performs

comparatively well in terms of adequacy and affordability. The system has been based on

compulsory long-term care insurance since 1995 and combines extensive cash benefits with in-kind services. In 2022, public expenditure on long-term care in Germany accounted for around 1.9% of GDP, above the EU average (1.7%). A relatively high proportion is devoted to cash benefits (36.7% vs 25% overall in the EU), reflecting the system’s strong support for family-based care. This is confirmed by the fact that the share allocated to residential care is also high (40.2%), although it is lower that the EU average of 46.2%. Germany performs relatively well in terms of the affordability of care(437). For people aged 65 and over with moderate care needs, public social protection covers 100% of home care costs (EU: 62%), resulting in zero out-of-pocket expenditure (EU: 43% of the median income). For those with severe needs, public coverage reaches 76% for home care and 83% for residential care, both above the EU averages. For care recipients with low needs coverage is 38% which is below the EU average of 57%(438). Social economy organisations

(436) Baarck, J., Bode, M., Peichl A. (2025): Rising Inequality,

Declining Mobility: The Evolution of Intergenerational Mobility in Germany. CESifo Working Paper No. 12058. ifo.de.

(437) EU Monitoring Framework on the Council Recommendation on access to affordable high-quality long-term care.ec.europa.eu.

(438) The OECD model’s assumptions on care needs, formal service use, benefit rules and out-of-pocket/private co-

(including Wohlfahrtsverbände) play a key role delivering care services in Germany. However, according to the federal–state working groups on care and financing (Versorgung and Finanzierung, within the Zukunftspakt Pflege)(439), Germany’s current long-term care insurance system faces increasing pressures from demographic change, rising costs, fragmented responsibilities and bureaucratic complexity, and therefore requires structural simplification, stronger prevention and rehabilitation measures, improved coordination, and more sustainable financing to remain viable and socially equitable in the long term.

payments, are designed to support cross-country comparability rather than reproduce national expenditure accounts.

(439) BMG (2025): Eckpunkte für eine nachhaltige Struktur und Finanzierungreform, bmg.de.

ANNEX 13: EDUCATION AND SKILLS

110

Germany’s education and training system is

facing widening skills and equity gaps as

well as rising rates of low qualified young people, leading to human capital losses and

skills shortages. Persistent unmet demand for early childhood education and care (ECEC) is a drag on labour force participation. Declining basic skills and increasing numbers of early school leavers exacerbate socio-economic disparities and hinder labour-market entry. Although adult learning rates are high overall, limited funding and flexibility of training opportunities, as well as insufficiently targeted outreach towards low- skilled and unemployed learners currently restrict greater adult participation in training, particularly in strategic economic sectors. The 2025 country- specific recommendations (CSRs) for Germany highlighted the need to improve the availability and quality of ECEC and whole-day schools, and to strengthen basic, green and digital skills to improve education outcomes (440).

Demand for ECEC remains partly unmet,

reducing workforce participation. In 2025,

26.2% of children under three attended ECEC (EU average: 40.5%), far below the 2030 national target of 40.4%. Participation is higher among advantaged children (28.3%) compared to disadvantaged ones (13.8%). The gap between parental need and ECEC participation for under- three-year-olds was 16.2% in western Germany in 2024, and 7% in the east (441) (see also Annex 11). Staff shortages persist. By 2030, western Germany might require 51 200 to 88 400 additional ECEC staff, while eastern Germany anticipates a surplus by 2035 (442). Among children between three years old and school age, ECEC participation is relatively high (95.3% vs an EU average of 94.6% in 2023).

(440) CSR 2025.5.2: ‘strengthening basic, green and digital skills‘;

CSR 2025.5.4: ‘Improve education outcomes, including by promoting excellence and providing targeted support to disadvantaged groups.’;

CSR 2025.5.5: ‘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.’

(441) BMBFSFJ (2025). Kindertagesbetreuung Kompakt. Ausbaustand und Bedarf 2024, p. 22.

(442) Meiner-Teubner, Ch. et al. (2024). Plätze. Personal. Finanzen. Teil 1, p. 21. he

Germany is making efforts to expand ECEC

capacity and improve quality, but some key

measures have not been launched yet. To enhance ECEC quality, the federal government is funding the ‘Third Act for Further Development of Quality and Participation in Child Day Care’ and measures under the Special Fund for Infrastructure and Climate Neutrality (EUR 940 million planned in 2026). The Startchancen-Kitas programme announced in the 2025 coalition agreement, aiming to invest in ECEC in disadvantaged areas and in language learning, has not been launched yet (443). The coalition agreement also proposes mandatory diagnostics of German language proficiency for four-year-olds, with corresponding support measures in collaboration with the Länder, but details have not been announced yet. Currently, language assessments vary significantly between Länder, with only seven Länder conducting comprehensive language assessments before school enrolment; seven others target specific groups and two do not perform comprehensive assessments (444). Language assessments support the early detection of learning difficulties to help children acquire basic skills.

Graph A13.1: Early leavers from education and

training, of those aged 18-24

Source: Eurostat (edat_lfse_14)

(443) Koalitionsvertrag zwischen CDU, CSU und SPD, 21.

Legislaturperiode.

(444) Autor:innengruppe Bildungsberichterstattung (2024). Bildung in Deutschland 2024, p. 121.

10.1 10.1 10.3

12.3 13. 13.1

0

2

4

6

8

10

12

14

2015 2017 2019 2021 2023 2025

%

DE EU

111

Early school leaving rates are high and

increasing, particularly affecting individuals

born outside of Germany and those with disabilities. In 2025, 13.1% of 18-24-year-olds

had no or low qualifications, meaning lower secondary education at most (EU average: 9.1%). Early leaving from education and training has increased since 2021, compared to a downward trend across the EU on average. Rates are higher than the EU average across all groups, although there are significant discrepancies between them. German natives have an early leaving rate of 10% (EU average: 7.7%). At 32.1%, the rate is higher for individuals born in other EU countries (EU average: 18.9%), compared to 26.8% for those born outside the EU (EU average: 20.8%). For individuals with some disabilities, the rate was 22.2% in 2024 (EU average: 17.1%), while those with severe disabilities had a rate of 52.7% (EU average: 44.2%). Regionally, Bremen, Berlin, Schleswig-Holstein, Saarland, Rhineland-Palatinate and Lower Saxony face an early leaving rate above 14%, while only Bavaria and Saxony report rates below 12% (445).

Over the last decade, the increase in

underachievement in basic skills has

hindered human capital development and

widened socio-economic disparities. Between a

quarter and a third of 15-year-olds underperform in mathematics, reading and science (446). While the share of top performers remains above the EU average, the decline is more pronounced than the EU average, with mathematics seeing the largest drop: -4.7% between 2018 and 2022 (EU average: -3.1%). 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. To address these challenges, the federal government, in collaboration with the Länder, is implementing several initiatives. The Startchancen programme launched in the 2024/2025 school year, funded with EUR 20 billion over 10 years, aims to bridge socio-economic gaps, targeting a 50% reduction in

(445) Statistische Ämter des Bundes und der Länder (2025).

Internationale Bildungsindikatoren im Ländervergleich 2025, p. 41.

(446) OECD, 2022 PISA.

underachievement in mathematics and German at participating schools. The programme aims to cover around 4 000 schools and around 10% of students. As the programme is in the early stages of implementation, results are not yet available. Germany has one of the earliest and most stringent systems for separating educational pathways, at around the age of 10. Delaying tracking, making assignment to tracks more inclusive and further increasing permeability between pathways could improve educational outcomes of weaker performers, without deteriorating outcomes of better performing pupils (447).

Germany is facing teacher shortages and

anticipates that the legal entitlement to all-

day primary school care will be only partly fulfilled. The Standing Conference of the Ministers of Education and Cultural Affairs (KMK) forecasts a shortage of 49 000 teachers by 2035, including a deficit of 43 000 in lower secondary schools (448). To address teacher shortages, Germany has taken measures such as improving the preparatory service, attracting ‘career changers’ (Quereinsteiger) and encouraging retired teachers to return to the classroom (449). The KMK and the Länder have launched initiatives to attract more teachers as short-term solutions, without structural reforms of mainstream initial teacher education (450). Such solutions include qualifications for single-subject teachers, dual teacher training programmes and master’s programmes for career changers. From the 2026/2027 school year, all primary school children will have a legal entitlement to all-day care, initially applying to every child in the first year of school. The federal government anticipates a shortage of 30 000 to 65 000 places at the time

(447) McNamara, S., & Klein, T. (2025). Folgen (zu) früher

Leistungsdifferenzierung: Lehren aus Ungarn für das deutsche Schulsystem. Wirtschaftsdienst, 105(9), 671-678. Wirtschaftsdienst.de.

(448) KMK (2024). Lehrkräfteeinstellungsbedarf und -angebot in der Bundesrepublik Deutschland 2024-2035 – Zusammengefasste Modellrechnungen der Länder.

(449) KMK (2022). Gemeinsame Leitlinien der Länder zur Deckung des Lehrkräftebedarfs.

(450) KMK (2024). Maßnahmen zur Gewinnung zusätzlicher Lehrkräfte und zur strukturellen Ergänzung der Lehrkräftebildung.

112

the entitlement comes into effect (451). All-day schooling not only facilitates greater labour- market participation among caregivers but also provides learning opportunities that particularly benefit disadvantaged students.

Germany is behind the EU average in terms of public investment in education relative to

GDP. In 2023, public expenditure on education

was below the EU average in terms of both the share of total expenditure (9.2% vs 9.6%) and the share of GDP (4.5% vs 4.7%). However, the costs of vocational training as part of the dual system are primarily covered by private stakeholders. Municipalities identified an investment gap of EUR 67 billion in schools in 2024 (452). The German Council of Economic Experts, in its 2025/2026 report, identifies substantial investment needs in general education. It recommends establishing a permanent public infrastructure fund with minimum investment quotas for education set at Länder level, for example as expenditure per pupil (453).

Skills shortages affect all skills levels in Germany. There is a strong demand for skilled

professionals with vocational education and training (VET) and higher education qualifications, including in science, technology, engineering and mathematics (STEM) fields. By 2030, over half (54%) of Germany’s job openings will need medium-level qualifications (12 percentage points higher than the EU average), and demand will increase for jobs requiring higher qualifications (including engineers and healthcare specialists) (454). Shortages are especially widespread in Bavaria and Rhineland-Palatinate, in particular in manufacturing and healthcare professions. High demand for IT and scientific professionals is particularly pronounced in southern and eastern Germany (455). Measures that can help manage the decline of employment in manufacturing linked to restructuring (see Annex 11) include promoting targeted upskilling and

(451) Bundesregierung (2025), Dritter Bericht zum Ausbaustand

der ganztägigen Bildungs- und Betreuungsangebote für Grundschulkinder.

(452) KfW (2025), Kommunalpanel. kfw.de.

(453) Sachverständigenrat, 2025, Jahresgutachten 2025/26, sachverstaendigenrat-wirtschaft.de.

(454) CEDEFOP (2023): Skills forecast Germany.

(455) Bundesagentur für Arbeit (2024): Fachkräfteradar.

reskilling, updating vocational training, adapting curricula and increasing investment in new net- zero technologies in VET schools and training centres. Better access to upskilling and reskilling for under-represented groups in adult learning, including people with a migrant background, can improve the availability of skills for shortage occupations. In 2023, Germany hosted the highest number of migrants in the EU in absolute terms (12.3 million), including 27% of all Ukrainian refugees that fled to the EU. In 2024, 30% of these migrants were overqualified, mostly women (456), widening the migrant gender pay gap (30%) (457). Measures that can help to better match qualifications with jobs include providing adequate language training, facilitating skills validation and recognition, streamlining migration procedures (458), and offering more flexible upskilling and reskilling opportunities. The European Social Fund Plus (ESF+) co-funded the Network IQ project, which offers counselling for skills validation and recognition. Whereas national skills intelligence forecasts produced by the BA and BIBB(459) support policymaking, stronger coordination between the regional and the national methodologies for employment forecasting could improve comparability and cross-regional analysis.

While employment in information and

communications technology (ICT) and green

jobs grew more than brown skills hiring (460), reforms are not targeted enough to meet the

skills demands of the twin (green and digital)

transition. The employment share in energy-

intensive industries, primarily vehicle manufacturing, was comparatively high in 2024 (4.8%), but has been declining recently (see Annex 11). Yet, worker participation in training within these industries remains below the EU average, and several occupations crucial to the energy transition face shortages, such as renewable energy technology, plumbing, heating, and roofing (461). While the share of ICT specialists in total

(456) DG EMPL (2025), ESDE Quarterly review 2025.

(457) IQ Fachstelle Einwanderung und Integration (2025): Migrant (Gender) Pay Day: Bis wann arbeiten Migrant*innen „umsonst“?.

(458) Bertelsmann (2023): Studie Ausländerbehörden zwischen Anspruch und Alltag.

(459) BA (Federal Employment Agency) and BIBB (Bundesinstitut für Berufsbildung).

(460) IAB (2025): Firms in the green transition - IAB-Forum.

(461) BA (2025): The green transition of the labour market.

113

employment (5.3%) is around the EU average (5.0%), companies in Germany have more difficulties to fill ICT vacancies than their EU peers (8.7% of enterprises reported hard-to-fill vacancies for ICT specialist roles vs an EU average of 5.5% in 2024). Young people’s interest in green-skills apprenticeships has grown. The number of filled green-skills positions increased by 14% between 2013 and 2021, suggesting that ‘greening’ VET enhances its appeal, except in regions facing structural transition (462). The Skills and Training Radar also highlights twin-transition positions with limited substitution options and insufficient VET training capacity (463).

Digital skills are improving gradually but

remain uneven, with persistent gaps by

educational attainment. In 2025, 59.6% of adults had at least basic digital skills, nearly reaching the EU average of 60.4%. Rural areas remain slightly below the EU average (51.9% vs 52.8%). Educational attainment plays a key role: 77.4% of highly educated adults have at least basic digital skills (EU average: 82.3%), but only 35.4% of those with low or no education do (EU average: 37.6%) (464). Among eighth graders, 41% lacked basic digital skills in 2023 (465). Recent action has more strongly focused on digital education (e.g. the December 2025 ‘Digitalpakt Schule 2.0’ initiative paved the way for EUR 5 billion of federal and Länder support for digital education in 2026-2030). 13% of the ‘Digitalpakt 1.0’ funds were allocated to VET schools and their pupils account for around 20% of the total number of pupils across all types of schools (466), while the 2025 country-specific recommendation covers digital skills of the working population (467). The Recovery and

(462) IAB (2024): Vocational training: Occupations with green skills

are in high demand - IAB-Forum.

(463) BIBB / Berufe- und Kompetenzradar.

(464) Eurostat, Table ISOC_SK_DSKL_I21: Individuals' level of digital skills.

(465) IEA, 2023, ICILS.

(466) BMBF: Fortschrittsbericht DigitalPakt Schule 2023–2024; Destatis: Allgemeinbildende und Berufliche Schulen – Schnellmeldung Schülerinnen und Schüler. Schuljahr 2025- 26.

DIHK (2023): Schulische Bildung verbessern - Fachkräfte für die Wirtschaft sichern.

(467) CSR 2025.5.2: ‘strengthening basic, green and digital skills’.

Resilience Facility also supports digital education investments.

The VET system is strong but faces

challenges in skills gaps, labour-market

relevance and access to training, particularly affecting vulnerable groups. Work-based learning reached 93% in 2025 (EU average: 66%) and the employment rate for VET stood at 91,5 % in 2025, compared to an EU average of 80,2%. The Vocational Education Excellence Initiative (2022) promotes modern training methods through digitalisation and increasing international mobility and partnerships in VET. However, declining basic skills and equity issues in the German school system undermine success in accessing in-company apprenticeships after mandatory school, and hence quality jobs later, also in strategic sectors in high demand. In 2024/2025, only 43% of 444 000 applicants were able to secure a position (ISCED 5), the lowest in 25 years, while 38% became unemployed. Only 33% of foreign applicants were successful, against 46% of German nationals. Hamburg, Berlin, Schleswig-Holstein, Brandenburg and North Rhine- Westphalia reported the most unplaced applicants (468). In specific cases, the Act to Strengthen Vocational Training and Skills covers part of the wage and training costs through subsidies from the public employment service. The act includes a training guarantee that offers intra- regional mobility grants, covering the first year of in-company training for targeted unplaced applicants. However, in 2025, demand exceeded the 7 000 subsidised placements (469). The ESF+ co-funds inter-company apprenticeship training (Überbetriebliche Lehrlingsunterweisung, ÜLU) and learning workshops (Bildungs/Jugend-werkstätten). Career counselling, psycho-social support (470) and support to basic skills for pupils in upper secondary VET could help address equity gaps.

STEM education is relatively popular, but its full potential for competitiveness is not yet

used. Germany has a comprehensive STEM strategy from ECEC to higher education, and enrolment in tertiary STEM programmes is significantly higher than in the EU on average

(468) Bundesagentur für Arbeit (2025): AM-kompakt-Situation-

Ausbildungsmarkt.pdf p. 15.

(469) Bundesagentur für Arbeit (2025): AM-kompakt-Situation- Ausbildungsmarkt.pdf.

(470) Monitor Bildung und psychische Gesundheit BiPsy-Monitor.

114

(35.5% vs 26.9% in 2023). However, this needs to be seen in the context of an overall lower tertiary educational attainment rate (40.9% vs an EU average of 44.8% in 2025), with regional disparities (see Annex 19). In addition, women remain under-represented: they make up only 29.7% of STEM students at tertiary level (EU average: 32.2%), with especially low rates in ICT and engineering. The number of international STEM students has risen significantly in recent years, while an even higher rate of international STEM students staying in Germany after graduation could contribute to higher growth rates and have a net positive impact on public finances (471). In 2024, 33.3% of students in medium-level VET programmes pursued STEM fields, slightly below the EU average of 36.6%. In VET STEM programmes, female enrolment was 10.0% (EU average: 15.9%), with particularly low rates in Brandenburg (9.4%), North Rhine-Westphalia (9.6%) and Saarland (9.7%) (472).

Participation in adult learning exceeds the

EU average, but more flexibility, funding and

targeted outreach could help tackle labour

shortages and structural change. Overall, adult

learning participation (53.7%) surpassed the EU average (39.5%) in 2022. Yet, in 2023, company training was still below pre-pandemic levels (473). Increased public–private partnerships and stronger social partner involvement in adult learning and strategic sectors could improve outcomes. Training participation is lower among those with low qualifications (30%) and unemployed people (31.7%) than among those with medium (49.9%) or high (71.5%) qualifications and employed people (58.4%) (474). The country also shows larger literacy gaps by education, income and family background than the respective OECD averages – and the widest of all PIAAC countries (475). Work- capable beneficiaries receiving basic income support are mainly 25-49-year-olds (53%), without a vocational diploma (68%) and are often

(471) Geis-Thöne et al. (2025), Volkswirtschaftliche Effekte der

Zuwanderung über die Hochschulen.

(472) BMBFSFJ- Anteil von Frauen und Männern in beruflichen Ausbildungen zu MINT-Berufen - Open Data Portal.

(473) IAB (2025): Forschungsbericht.

(474) Bilger, F. & Koubek, E. (2024). Weiterbildungsverhalten in Deutschland 2022. Ergebnisse des Adult Education Survey – AES-Trendbericht).

(475) Network of Experts in Adult Learning (2025) Country report on basic skills, p. 11-12.

foreign nationals (over 50%) (476). Measures to address these issues could include providing psycho-social support and increased basic skills training, especially for parents and single parents, including financial education and extended language courses when needed. It is key to ensure labour-market relevance of skills in cooperation with social partners, and to expand partial qualifications and on-the-job training. In the area of lifelong learning there is room to support skills portability, validation and transparency by expanding micro-credentials and badges (477) as validation procedures are currently too expensive for vulnerable groups (478). Implementing individual learning accounts could boost adult learning in line with labour-market needs. The government has not yet announced the successor of ‘Alpha Decade’, the main national measure to boost basic skills among adults. Further targeted support for firms investing heavily in training and the twin transition could help address the perceived underinvestment in training (479).

(476) PD Dr. Joachim Wolff (IAB, 2025) calculations on data of the

Bundesagentur für Arbeit.

(477) DIE (2025): Microcredentials und Badges – Herausforderungen und Lösungsansätze für digitale Lernnachweise in der Erwachsenen- und Weiterbildung.

(478) Validierungsverfahren: Berufliche Kompetenzen zertifizieren lassen - IHK Südlicher Oberrhein.

(479) IAB (2025): IAB-LinkedIn-Branchenwechsel-Radar.

ANNEX 14: SOCIAL SCOREBOARD

115

Table A14.1:Social Scoreboard for Germany

Update of 4 May 2026. Members States are categorised based on the Social Scoreboard according to a methodology agreed with the EMCO and SPC Committees. Please consult the Annex of the Joint Employment Report 2026 for details on the methodology (https://employment-social-affairs.ec.europa.eu/joint-employment-report-2026_en). Source: Eurostat

53.7

13.1

59.6

9.5

6.8

4.68

81.1

3.8

1.1

116.2

21.2

23.5

34.0

23.0

11.2

26.2

1.0

Critical situation To watch Weak but

improving

Good but to

monitor On average

Dynamic labour markets

and fair working conditions

Social protection and

inclusion

Share of individuals who have basic or above basic overall digital skills

(% of the population aged 16-74, 2025)

Impact of social transfers (other than pensions) on poverty reduction

(% reduction of AROP, 2025)

Children aged less than 3 years in formal childcare

(% of the under 3-years-old population, 2025)

Self-reported unmet need for medical care

(% of the population aged 16+, 2025)

Disability employment gap

(percentage points, population aged 20-64, 2025)

Housing cost overburden

(% of the total population, 2025)

Adult participation in learning (during the last 12 months, excl. guided on

the job training, % of the population aged 25-64, 2022)

Equal opportunities and

access to the labour market

Best performersBetter than average

Early leavers from education and training

(% of  the population aged 18-24, 2025)

Young people not in employment, education or training

(% of the population aged 15-29, 2025)

Gender employment gap

(percentage points, population aged 20-64, 2025)

Income quintile ratio

(S80/S20, 2025)

At risk of poverty or social exclusion (AROPE) rate 

(% of the total population, 2025)

Employment rate

(% of the population aged 20-64, 2025)

Unemployment rate

(% of the active population aged 15-74, 2025)

Long term unemployment

(% of the active population aged 15-74, 2025)

Gross disposable household income (GDHI) per capita growth

(index, 2008=100, 2024)

At risk of poverty or social exclusion (AROPE) rate for children

(% of the population aged 0-17, 2025)

ANNEX 15: HEALTH AND HEALTH SYSTEMS

116

Germany’s health system faces challenges

which negatively affect the health of its

population, social fairness and productivity. Population ageing, combined with lifestyle-related risk factors - especially among lower-educated groups - contribute to growing morbidity and disability. Germany figures among the EU countries with the highest hospital admission rates for selected chronic conditions, in particular congestive heart failure, reflecting weak care coordination and over-reliance on inpatient care. It puts increasing pressure on the healthcare system. In response, Germany is advancing broad reforms to improve efficiency, reduce hospitalisations, and strengthen outpatient care.

Graph A15.1: Life expectancy at birth, years

Source: Eurostat (indicator: demo_mlexpec)

Life expectancy at birth in Germany stands

just below the EU average, with stable

treatable mortality, despite some

fluctuations in recent years (see Graph A15.1).

Germany performs relatively well in preventing deaths from treatable conditions, with rates remaining stable over the past decade, indicating an effective healthcare system despite limited improvements. Diseases of the circulatory system (cardiovascular diseases CVDs) are the leading cause of death - with rates slightly above the EU average in 2023. CVD death rates are followed by cancer, with large disparities between regions. Taken together CVDs and cancer accounted for 56% of all deaths in 2023. The suicide rate is also slightly above the EU average, showing limited improvements in the last decade

Germany's population is rapidly ageing, with

implications for healthcare (see Annex 2). In

2024, 22% of the German population were aged 65 and over, a share projected to rise to 28% by 2050. CVDs and cancer are both the leading causes of death in Germany and the leading

causes of morbidity and disability. There were over 1 million estimated new cases of CVDs in 2021. Ischaemic heart disease is the most common CVD, with an estimated 441 000 new cases each year in Germany, representing 36% of all new cases. Germany’s 30-day hospital mortality rate stood at 8 deaths per 100 patients due to heart attacks in 2023, which is higher than the EU average. By contrast, the 30-day hospital mortality rate for ischaemic stroke was 7 per 100, which is below the EU average, suggesting the presence of effective acute care structures, such as specialised stroke units and standardised treatment pathways.

Graph A15.2: Treatable mortality

Age-standardised death rate - mortality that could be avoided through optimal quality healthcare. Source: Eurostat (indicator: hlth_cd_apr)

Preventable mortality was just above the EU

average in 2023. The share of healthcare spending allocated to prevention fell sharply in 2023 despite being still above the EU average (4.8% vs 3.7%) (480). About 530 000 new cases of cancer were expected to be diagnosed in Germany in 2022, and almost 4.9 million people were living with the condition in 2020 according to European Cancer Information System (ECIS) (481) estimates. The high prevalence rate highlights the importance of focusing on the quality of life of cancer patients, living longer. Germany has implemented and expanded population-based national screening programmes for breast, colorectal and cervical cancer. A national lung cancer screening programme for high-risk groups aged 50-75 was introduced as a service covered by statutory health insurance on 1 April 2026. These initiatives

(480) OECD/European Observatory on Health Systems and Policies

(2025), Country Health Profile 2025: Germany. State of Health in the EU.

(481) ECIS - European Cancer Information System | ECIS - European Cancer Information System.

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are closely aligned with the Europe’s Beating Cancer Plan and are supported by Germany’s National Cancer Plan and National Decade Against Cancer, both of which aim – among other things - to further develop early detection, promote outreach and introduce innovations. Germany participates in several joint actions funded by EU4Health, aimed at preventing cancer and other non-communicable diseases (482), while also developing networks for better care (483), including European Reference Networks (ERNs) for rare and complex diseases.

Preventable mortality in Germany is closely linked to lifestyle behavioural risk factors,

especially for people with lower levels of

education. Alcohol consumption among adults

remains slightly higher than the EU average in 2022. The proportion of 15-year-olds who reported having been drunk more than once in their life shows a more concerning trend, with an increase from 25% in 2014 to 31% in 2022, which stood much higher than the EU average. The share of obesity is slightly above the EU average. Poor nutrition is a main driver of rising trends in people being overweight and obese. Only around 55% of Germans report consuming vegetables daily (EU average 60%), while the consumption of fruit is the same as the EU average. As in other countries,

(482) JA PreventNCD - Reducing Europe's cancer and NCD burden

through coordinated strategies on health determinants.

(483) JANE-2; EUnetCCC JA - The European Comprehensive Cancer Centre Network.

many behavioural risk factors in Germany are more common among people with lower education levels. People with lower levels of education were almost 70% more likely to be obese (484). The share of adults smoking daily in Germany has fallen over the past decade – from 21% in 2013 to 15% in 2021, which is below the EU average of 19%. However, smoking among 15-year-olds has increased, with 17% reporting that they had smoked in the past month in 2022, up from 15% in 2018. This figure is now equal to the EU average. The regular use of vaping products among young adults is higher than the EU average (4.8% vs 2.7%). In response and as highlighted in the medium-term fiscal and structural plan (MTFSP), the federal government will draw up a proposal to review and update the existing tobacco duty framework. Furthermore, in May 2024 the Federal Government of Germany introduced its National Suicide Prevention Strategy Germany 2024, outlining measures and recommendations to strengthen suicide prevention, with a focus on health literacy and empowerment, psychosocial counselling and support, and improved networking and coordination.

A large share of Germany’s health spending is earmarked for inpatient care. With health spending per capita among the highest in the EU, the system remains strongly hospital-focused. Inpatient care accounted for 27% of spending in

(484) Country Health Profile 2025: Germany – see earlier

Footnote.

Table A15.1:Key health indicators

*The EU average is weighted for all indicators except for doctors and nurses per 1 000 population, for which the EU simple average is used based on 2023 data (or latest available). Doctors’ density data refer to practising doctors in all countries except Greece, Portugal (licensed to practise) and Slovakia (professionally active). Density of nurses: data refer to practising nurses (EU recognised qualification) in most countries except Portugal (licensed to practice) and Slovakia (professionally active). Latest data update on nurses for Belgium and Sweden: 2022; for France: 2021; for Luxembourg: 2017. ** latest available 10-year trend: ratio 2023/2014 or 2024/2013; a factor of 2.00 means that it has doubled in 10 years. ***‘Available hospital beds’ covers somatic care, not psychiatric care. Source: Eurostat

2020 2021 2022 2023 2024 10-year

change**

EU average*

(latest year)

Cancer mortality per 100 000 population 240.3 235.7 237.3 234.8 n.a. 0.93 233.1 (2023)

Mortality due to circulatory diseases per 100 000 population 348.3 345.1 361.5 349.7 n.a. 0.87 313.0 (2023)

Current expenditure on health, purchasing power standards, per capita 4 790 5 198 5 432 5 414 5 796 1.50 3834.9 (2023)

Public share of health expenditure, % of current health expenditure 85.8 85.9 86.7 85.9 86.3 1.02 80.6 (2023)

Spending on prevention, % of current health expenditure 3.6 7.2 8.4 4.8 n.a. 1.45 3.7 (2023)

Available hospital beds per 100 000 population*** 652 645 640 633 n.a. 0.93 440 (2023)

Doctors per 1 000 population* 4.5 4.5 4.6 4.7 n.a. 1.16 4.3 (2023)*

Nurses per 1 000 population* 12.0 12.0 12.1 12.2 n.a. 1.17 7.6 (2023)*

Mortality at working age (20-64 years), % of total mortality 13.5 13.7 13.0 13.0 12.8 0.87 14.3 (2023)

Consumption of antibiotics in the community and hospital sectors,

defined daily doses per 1 000 inhabitants n.a. n.a. n.a. 13.3 13.8 n.a. 20.3 (2024)

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2023, ahead of outpatient care (25%, compared with 28.4% in the EU). Public funding remains the largest share of current health spending, reaching 86% in 2023, above the EU average of 80%. However, according to the 2025 Eurofound living and working in the EU survey, unmet needs for mental healthcare in Germany was on an upward trend between 2021 and 2024, remaining well above the EU average. In 2024, 10% of adults reported unmet mental healthcare needs, an increase compared with 4% in 2021, which highlights the potential longer-term effects of the COVID-19 pandemic, along with other social, economic and psychological stresses (485).

Germany continues to face structural

challenges in primary and integrated care. Following recent reform efforts, the focus has now shifted to their implementation. Germany continues to report a high number of hospital beds (633 per 100 000 people in 2023, well above the EU average). The country reports among the highest rate of hospital admissions in the EU for specific ambulatory care sensitive conditions that can typically be managed effectively in outpatient settings. Almost half of these cases were linked to congestive heart failure (47%) (486). These persistently higher avoidable admission rates point to structural challenges in primary and integrated care. A fundamental challenge stems from the lack of coordination between outpatient and inpatient care, which often causes patients to be admitted to hospitals despite their conditions being treatable in the outpatient setting. Recent and upcoming reforms, which are also included in the MTFSP, aim to address these challenges by (i) prioritising a primary care practitioner system; (ii) ensuring closer coordination across care providers; and (iii) avoiding unnecessary referrals of patients with chronic conditions to emergency units or hospital wards.

Germany is advancing reforms to improve

efficiency, reduce inpatient cases and ensure

cost-effectiveness and quality. The current hospital reform focusses on modernising service delivery while strengthening outpatient care to better meet future demands. As part of the reform, a new hospital reimbursement system

(485) Country Health Profile 2025: Germany – see earlier

Footnote.

(486) Country Health Profile 2025: Germany – see earlier Footnote.

aims to remove incentives for unnecessary medical procedures by partially replacing DRG- based payments with flat (service-based) payments at the level of hospitals according to their assigned service groups. A transformation fund of up to EUR 50 billion will support hospital restructuring from 2026 to 2035. In parallel, a reform commission has been tasked to propose recommendations on the financing of statutory health insurance (487). A first set of short-term recommendations has been adapted as part of a proposed law which makes changes to both revenue-raising and expenditure policies, with the aim to stabilize contribution rates as of 2027. The reform commission will present recommendations for more comprehensive structural reforms by the end of 2026.

Antibiotic consumption (in hospital and the community) in Germany rebounded sharply

after COVID-19 pandemic. Consumption reached 13.8 defined daily doses per 1 000 population per day in 2024 - just above 2019 levels. More efforts would be needed to meet the 2030 recommended national target (488), which could come about following Germany’s revision of its national strategy in 2024. The current German Antimicrobial Resistance Strategy defines national and international goals to be achieved in the fight against antibiotic resistance, presented in six areas. The strategy is supplemented by an action plan describing the initial priority measures in each field to achieve set goals.

Germany's healthcare workforce is ageing,

with high numbers of nursing graduates but

comparatively low numbers of medical

graduates. The country has a large workforce of

practising nurses and physicians, and with a growing proportion aged 55 and over is increasingly reliant on foreign doctors. The country has 40% of all foreign doctors coming from EU countries and 60% from non-EU countries and in parallel a growing outflow of doctors (489). Some geographical disparities remain in the availability of general practitioners. The number of medical graduates in Germany has remained relatively

(487) FinanzKommission Gesundheit, Federal Ministry of Health.

(488) National target set by the Council Recommendation on stepping up EU actions to combat antimicrobial resistance in a One Health approach, 2023/C 220/01.

(489) OECD/European Commission (2024), Health at a Glance: Europe 2024: State of Health in the EU Cycle.

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stable, but increasing healthcare demand outstrips supply. Although Germany trains an above- average number of nursing graduates compared with the average across the EU, the supply remains below expected future demand. This means that further measures will be needed to strengthen nursing training and secure a skilled nursing workforce.

The opportunities offered by e-health,

especially for hard-to-reach areas, are not yet fully embraced in Germany. Investments to

boost the digital transformation of Germany’s health sector are being implemented under its national recovery and resilience plan (RRP). Measures focus on (i) strengthening public health services, including by rolling out a nationwide IT system for infection prevention and control; and (ii) future-proofing hospitals by improving digital infrastructure, emergency capacities, telemedicine capacities, robotics integration and cybersecurity measures. Further funding for digital health comes from the 2021-2027 cohesion policy funds. The share of people accessing their personal health records online and of those using online health services (excluding phone) instead of in-person consultations further increased in Germany in 2024 compared with 2022. However, they stand far below the EU average, in particular when it comes to the use of electronic health records. The low level recorded reflects the historically slow roll out of electronic patient records, lack of awareness among patients and sluggish participation by doctors. The level of digital literacy in the country is slightly below the EU average (59.5% of individuals with at least basic digital skills in 2023 vs an EU average of 60.4% (see Annex 13). Germany’s digitalisation strategy for healthcare, published in 2023 shows the need to develop electronic patient records further so that patients can access them via a secure health platform. The nationwide roll out of the ePA began in April 2025, making it available to those covered by the Statutory Health Insurance (SHI).

Germany’s pharmaceutical sector has

experienced strong growth since the COVID-

19 pandemic, with a marked acceleration

from 2021 onward. Employment in the pharmaceutical sector has sharply risen (+30% increase from 2019 to 2022), positioning Germany well above the EU average and asserting its leadership in this field. However, despite the

number of patents (490) granted in 2024 remained well above the EU average, the figure declined in 2025. Meanwhile, Germany's medical imaging capacity remains stable, indicative of a robust diagnostic infrastructure. In parallel, Germany's strength in research is reinforced by its volume of clinical trials (9.12 per million population). However, in the last few years such trials have observed a slow downward trend, mirroring the trend observed across the EU (491).

(490) European Patent Office: Statistics & Trends Centre | epo.org.

(491) US National Library of Medicine, https://clinicaltrials.gov.

ANNEX 16: HOUSING

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High costs and standards with cumbersome

procedures, highlighted in the 2025 country-

specific recommendation, aggravate supply shortages, especially in growth regions,

driving up prices and rents. To ensure insurability, construction projects have to adhere to common market practice, going well beyond legal minimum standards. This increases costs significantly. Transactional taxes and additional costs, like notary fees, are also high compared with the rest of the EU. Cumbersome and lengthy procedures for land-use planning and permitting, as well as limited digitalisation, result in costly delays. Against this background, the 2025 country- specific recommendations called for improving ‘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.’ While first steps to tackle some of these problems are underway, implementation and uptake are not yet known.

High house prices and rents for new rental

contracts limit personal and labour mobility,

partly due to policy measures. High prices of

construction materials, shortages of skilled labour and scarcity of land have driven up construction costs. Since 2005, house prices and rents for new contracts have increased significantly more than inflation and income. However, average rents have increased less than inflation and income. As a result, personal and labour mobility are hampered, weighing on economic growth. The underlying reasons include policy measures that make investing in rental units less attractive, for example by limiting rents and rent increases, resulting in the real rents of existing contracts falling. Given the high share of tenants and the need for private capital to cover the housing gap, the sector’s attractiveness for private investment is key.

Funding is being increased to start reversing

the decade-long decline in social housing

stock while misoccupancy could be reduced.

The stock of social housing has been declining significantly over the last years and there is considerable misoccupancy (492). Federal funding is

(492) Misoccupancy refers to people living in social housing whose

circumstances have improved to the extent that they are no longer eligible for that housing. See German Council of Economic Experts, 2024, Annual Report 2024/2025, sachverstaendigenrat.de.

now being stepped up, but social policies remain mainly based on housing allowances despite their weaknesses.

Housing market developments

High prices and rents reflect low housing

supply, exacerbating housing shortages. Housing construction has decreased by more than 20% in real terms since 2020 (see Graph A16.1.). This has exacerbated housing shortages and significantly dampened GDP growth. The decline reflects high construction costs and increased interest rates. In 2024, Germany had the highest price level for housing construction in the EU, at 147% of the EU average (see Graph A16.2). In 2025, 238 400 housing permits were issued, 10.8% more than a year earlier, but still 37% below the 2021 level, signalling low construction activity. The share of unoccupied dwellings was 7.7% in 2021, the second lowest in the EU after the Netherlands (4.1%).

Graph A16.1: House supply indicators in DE since

2005

Source: Eurostat

The German construction sector continues to

face severe labour shortages (493). Both the job vacancy rate in the construction sector and the percentage of construction managers indicating that labour shortages are a factor limiting their business declined (to 3.9% in Q3 2025 and to

(493) BauInfoConsult, 2025, Jahresanalyse Deutschland

2025/2026 – ‘Fachkräftemangel und Baukosten prägen 2025 und 2026‘.

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27.4% in January 2026, respectively). However, three out of four manufacturers and a large share of companies in the building sector consider the acute lack of skilled workers to be the central issue slowing down projects, driving up costs and limiting the urgently needed expansion of housing and infrastructure (494). At the same time, the sector struggles with precarious working conditions that make recruitment a challenge. Physically demanding labour, combined with comparatively unattractive wages and frequent use of subcontracting chains, creates risks of exploitation, wage dumping or violations of minimum standards, affecting migrant workers in particular.

Graph A16.2: Price level for residential

construction, % compared to the EU average

Source: Eurostat [prc_ppp_ind_1]

Estimates of the housing shortage differ. While most experts agree that the 252 000 housing units completed in 2024 are insufficient, estimates of the housing shortage differ considerably. On the high end, the Pestel Institut identified a shortage of 1.4 million affordable housing units at the end of 2024 (495). The Commission estimates the additional housing investment need for 2025-2035 at about 80 000 dwellings annually, with two thirds in metropolitan regions (496). The need for new housing is very uneven across Germany, concentrated in areas

(494) DIHK-Fachkräftereport 2025/2026.

(495) Pestel Institut, 2026, Sozialer Wohn-Monitor 2026. Wohnungsmarktsituation, Wohnungsbedarfe, sozialer Wohnungsbau. mieterbund.de.

(496) Balouktsi et al., 2026, Housing investment needs in the EU. JRC Technical Report 144419.

such as urban centres with a growing population (497).

Rents for existing contracts have declined in

real terms, but people signing new contracts

face increasingly higher prices and lower rental affordability. Rental price developments are particularly important for Germany, as the country has the highest share of tenants in the EU, with 52.8% of people living in a household that rents its home, against the EU average of 31.6% in 2024 (see Table ). As a result of rental price control arrangements such as the Kappungsgrenze, rental prices of existing contracts increased by only 18.6% between 2013 and 2024, i.e. much lower than inflation (30.1%) and disposable income (44.8%) (498). At the same time, prices for new rental contracts increased by 50.8% in Germany as a whole and by 76.3% in the seven biggest cities, reflecting strong demand in the face of restricted supply. High rents of new contracts in key regions weigh on rental affordability for a large share of the population, in particular those facing vulnerable situations (see below). In addition, the resulting gap between existing and new rental prices leads to a ‘lock-in effect’, creating a disincentive for people with existing contracts to move out, reducing housing and ultimately labour mobility (499).

After a temporary fall, house prices have started to increase again, weighing on

purchase affordability. Between 2012 and 2022, nominal house prices increased by 80% (see Graph A16.3), significantly outpacing inflation and income growth, thereby reducing purchase affordability, and leading to overvaluation (based on the standard European Commission methodology). This overvaluation declined in 2022-2024, as prices fell by 10% amid a sharp increase in mortgage rates. However, higher rates also reduced households’ borrowing capacity, and house prices remain relatively high, especially in urban centres. Price growth gradually resumed and, in 2025, house prices were 3.2% above their level a year earlier, supported by gradually

(497) BBSR, 2025, BBSR-Wohnungsbedarfsprognose. BBSR-

Analysen KOMPAKT 16/2025. bbsr.bund.de.

(498) Adjusted gross disposable income of households per capita in percentage points.

(499) Falck, O., Krause, S., & Zamorski, P., 2025, Mieten– Wachstumshemmnis und sozialer Sprengstoff in deutschen Großstädten?. ifo Schnelldienst, 78(10), 04-16. Ifo.de.

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declining mortgage interest rates and slowly- recovering real household incomes amid structurally staggered housing supply, which may weight on purchase affordability going forward.

Graph A16.3: House prices, rents and price-to-

income evolution in DE and EU27 since 2005 yes

Source: Eurostat

Structural policies

Housing investment remains constrained by

regulatory complexity and limited land

availability. Reflecting these challenges, the

2025 country-specific recommendations called on Germany to simplify regulation and procedures, review rental law and mobilise additional building land, with the concurrent aim of tackling housing affordability challenges (for regional aspects on housing affordability see Annex 18). In response, several measures were adopted in 2025, most notably the Act to Accelerate Housing Construction and to Secure Housing, which entered into force on 30 October 2025. The ’construction turbo’ (Bau- Turbo) introduces a package of measures aimed at expanding housing supply and easing major bottlenecks, but key aspects for making it an effective tool remain unclear (see below).

The limited availability of building land and

lengthy planning procedures are major

obstacles to expanding housing supply. Land-use planning processes in Germany are complex and time-consuming, taking on average four to nine years, which stands in contrast to the

urgent housing needs in many regions (500). To make additional building land available, the construction turbo introduces a temporary exemption until 2030 that allows deviations from planning law for housing projects. With municipal approval, projects can be authorised within three months without prior changes to land-use plans, covering new construction, extensions and repurposing. This has the potential to ease supply constraints in urban areas. However, its effectiveness will critically depend on uptake at municipal level, as local consent remains mandatory (501). In addition to the temporary exemption, the construction turbo also amends the Federal Building Code to facilitate housing construction, including allowing residential development beyond existing land-use plans and in areas without such plans or outside designated construction zones.

High construction costs are driven by

complex building regulations and demanding

technical standards. Beyond land scarcity, Germany’s legal and contractual framework typically requires builders to meet costly technical and comfort standards, often exceeding what is legally necessary. These standards are widely applied to avoid legal disputes and ensure insurability, but they raise costs and slow down construction. To address this, the housing type E; approach proposes a new legal basis allowing contracting parties to agree on simpler, needs-based standards and to deviate from non-essential rules, based on the experience of Hamburg, which suggests that the building cost per square metre can be cut by a third (502). A concept paper was published in November 2025, but the timeline for implementation remains unclear (503). The uptake in practice will depend on the concrete formulations e.g. if the housing type E is defined as a temporary deviation from normal practice or as new legal standard. Lastly, building law is fragmented across federal, state and municipal levels, with regional differences in requirements and procedures that further increase

(500) BBSR, 2025, Verfahrensbeschleunigung der Bauleitplanung,

bbsr.bund.de.

(501) ZIA, 2025, Stellungnahme Bau-Turbo, bundestag.de; BFW, 2025, Stellungnahme Bau-Turbo, bundestag.de.

(502) bezahlbarbauen.hamburg.de.

(503) BMJV/BMWSB, 2025: Gebäudetyp E, Gemeinsame Eckpunkte, bmjv.de.

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costs and hinder innovation, including modular and serial construction methods.

Rent control does not address the underlying

causes of housing affordability challenges. The federal government has prolonged the rent price brake (Mietpreisbremse) until the end of 2029. It limits rents for new leases in tight housing markets to no more than 10% above the local comparable rent, with exemptions for new buildings and extensively modernised dwellings. The rent increase within existing contracts is limited to 15% in three years in tight housing markets (Kappungsgrenze). Evaluations show that the rent price brake has been effective in curbing the increase in rents paid for regulated dwellings (504). At the same time, rent control comes with adverse effects, such as reduced mobility of tenants, and may further increase rents in the unregulated new-build segment. The rental law has therefore not been made more investment friendly, as recommended by the country-specific recommendation. Parallel to the controlled segment effectively covering mainly the renting of unfurnished housing, there has been an increasing share of furnished apartments offered, with considerably higher rent increases (505). In April 2026 the German government made the rental regulation even more restrictive including by regulating further renting of furnished units and imposing that landlords need to cover part of heating costs for certain installations, further weighing on incentives to offer and invest in rental units. The effect on housing affordability is therefore mixed (506). If rent control is too restrictive, it can weaken private investment incentives in the housing sector and hinder the efficient use of available housing (507).

Further possibilities to accelerate

construction and reduce housing costs

remain. The coalition agreement mentions that

(504) DIW, 2018, Mietpreisbremse ist besser als ihr Ruf, aber nicht

die Lösung des Wohnungsmarktproblems, diw.de.

(505) BBSR, 2026, Rental housing segments – significance and impact on the rental housing markets. bbsr.bund.de.

(506) Baye &Dinger, 2023, Investment incentives of rent controls and gentrification – Evidence from German micro data, uni- osnabrueck.de.

(507) German Council of Economic Experts, 2024, Wohnen in Deutschland: Knappheiten beheben und Zugang erleichtern, svr-wirtschaft.de; DIW, 2022, Rent Control Effects through the Lens of Empirical Research, diw.de.

the construction turbo will be followed by a fundamental reform of the Federal Building Code to accelerate construction. Important levers include the digitalisation of land-use plans and further simplification and digitalisation of building permitting. To make additional building land available, improving links to suburban areas could expand enable the use of available land and housing outside cities (508). Lastly, there is room for improving taxation and regulation on housing transactions. Incentives to use available building land could be improved, by shifting taxation from transactions to recurrent taxation. Housing transaction costs, including notary and registration fees, acquisition tax and potentially agent fees, are high in international comparison(509).

Vulnerable groups

Housing cost overburden, while declining

overall, has increased for parts of the

population. In 2025, 11.2% of the population

lived in households spending more than 40% of their disposable income on housing (see Table )(510). Older people are particularly affected (13.8%, compared with 8.5% in the EU), while close to one in three individuals in the lowest income quintile faces housing cost overburden (31.5% compared to 26% in the EU). Middle- income households are not shielded either. 7% spend more than 40% of their income on housing, more than double the EU average of 3.3%. Single- person households (22.6%, EU:20.1%) and people with disabilities (14.3%, EU: 9.9%) are also disproportionately exposed. Rising housing costs are especially challenging for students living away from home, who spent on average 53% of their

(508) Projektteam STAWAL, 2024, Stadtstruktur,

Wohnstandortwahl und Alltagsmobilität. Neue Befunde für die Stadt- und Verkehrsentwicklung. Berlin und Dortmund. zukunft-nachhaltige-mobilitaet.de ; Henger, R. et alM (2019), Mobilität und Wohnen – neue Perspektiven für die Stadtentwicklung. iwkoeln.de.

(509) German Council of Economic Experts, 2024, Annual Report 2024/2025, sachverstaendigenrat.de; Cousin, G., Frayne, C., Dias, V. M., & Vašíček, B., 2025, Housing in the European Union: Market Developments, Underlying Drivers, and Policies. European Economy, Discussion Paper 228. europa.eu.

(510)The overburden rate should be read together with the tenure structure (homeowner, tenants), that may differ across country and regions.

124

disposable income on housing in 2024 (511), more than twice the share of the population as a whole (24.5%).

Housing-related expenses represent a major

driver of poverty and social exclusion. In 2025, 34.9% of individuals at risk of poverty also experienced housing cost overburden. In addition, 4.5% of the population reported arrears on utility bills, an increase of 1.2 percentage points compared with 2020 (512).

While the stock of social housing has

significantly declined, public funding is being

stepped up. Social housing fulfils an important

supply function for households whose access to the regular housing market is difficult, such as single parents, large families and immigrants. A strategic expansion of publicly funded housing could also exert downward pressure on rents in the private sector (513). Over the past two decades, the number of social rental housing units in Germany has fallen from approximately 2.5 million in 2000 to around 1 million in 2024. This decline in social housing units is partly due to expiring time-limited social binding (Sozialbindung), which obliges landlords to rent at below-market rates and only to eligible households, in return for subsidies. The duration of this binding varies by federal state and funding programme but typically lasts around 15– 25 years. In 2024 around 80% of the newly subsidized rental units come with a social binding of at least 30 years. Projections of the German Council of Economic Experts show that an average of 40 000 units will lose their social housing status every year up until 2035 (514). Between 2020 and 2024, around 41 000 to 62 000 units per year were newly designated as social housing. However, as a similar number lost that status when restrictions expired, the total number only increased in 2023 and 2024 (515). In addition, estimates from individual federal states suggest

(511) Destatis, 2025, Studierendenhaushalte geben im Schnitt 53

% des Einkommens für Wohnkosten aus, destatis.de

(512) Der Paritätische, 2025, Bericht zu Wohnarmut, der- paritaetische.de.

(513) OECD/European Union, 2025, Social Economy in Europe: Contributing to Competitiveness and Prosperity, Local Economic and Employment Development (LEED), oecd.org.

(514) German Council of Economic Experts, 2024, Annual Report 2024/2025, sachverstaendigenrat.de.

(515) Bundestag, 2025, Kleine Anfrage, Drucksache 21/3231. bundestag.de.

that between 10% and 30% of subsidised dwellings are occupied by households that are no longer entitled to social housing. As announced by the Minister for Housing, a misoccupancy levy (Fehlbelegungsabgabe) could be charged for tenants whose income exceeds the eligibility threshold, as is done already in some of the federal states (516), to help ensure that social housing units are distributed to those in need, for as long as social housing units remain scarce. Avoiding high administration costs and segregation are important considerations for implementation. The federal government has increased funding from around EUR 1 billion in 2020 to EUR 4 billion in 2026. At the same time, the low level of new construction is not due to funding constraints alone; several bottlenecks limit delivery. Construction costs have risen sharply due to the higher prices of materials, energy standards and labour shortages.

Housing allowances are an important

element of social policies, but only partly

substitute the provision of social housing. In

Germany, more than 11 million tenant households are entitled to a housing eligibility certificate (Wohnberechtigungsschein) – and thus to social housing (517). While public expenditure on housing support has risen, much of this increase has taken the form of subject-based subsidies, such as housing allowances (Wohngeld), which were received by 1.2 million households at the end of 2024. These payments provide significant short- term relief but may also contribute to persistently high or even rising rents when supply constraints remain unaddressed.

Homelessness is rising and remains a

significant challenge. Despite the government’s

objective to end homelessness by 2030 (formulated in the national action plan against homelessness, which seeks to combat homelessness through expanded affordable housing, stronger prevention measures, improved support services and closer cooperation between federal, state and local governments as well as civil society actors (518)), around 47 000 people

(516) This is used in Hessen for tenants whose incomes exceed the

threshold for social housing eligibility by more than 20%.

(517) dgfm, 2023, Forderungen vom Bündnis Soziales Wohnen www,dgfm.de.

(518) bmwsb, 2024, Nationaler Aktionsplan zur Überwindung der Wohnungslosigkeit, www.bmwsb.de.

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were sleeping rough in 2024, with a further 439 500 in emergency accommodation and over 60 000 staying involuntarily with relatives or friends (519). Broader estimates suggest that more than one million people may be affected when insecure housing situations are included, reflecting the combined effects of poverty, high housing costs and shortages of affordable and social housing (520).

(519) bmwsb, 2024, Wohnungslosenbericht der Bundesregierung

bmwsb.bund.de/.

(520) BAG Wohnungslosenhilfe, 2024, Mehr als eine Million wohnungslose Menschen in Deutschland, www.bagw.de.

Table A16.1:Housing affordability selected indicators

Source: Eurostat and European Commission calculations. The overburden rate should be read together with the tenure structure (homeowner, tenants), that may differ across country and regions.

HORIZONTAL

ANNEX 17: SUSTAINABLE DEVELOPMENT GOALS

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This annex assesses Germany’s progress on

the sustainable development goals (SDGs) along the dimensions of competitiveness,

sustainability, social fairness and

macroeconomic stability. The 17 SDGs and their related indicators provide a policy framework under the UN’s 2030 Agenda for Sustainable Development. The aim is to end all forms of poverty, fight inequalities and tackle climate change and the environmental crisis, while ensuring that no one is left behind. The EU and its Member States are committed to this historic global framework agreement and to playing an active role in maximising progress on the SDGs. The graph below is based on the EU SDG indicator set developed to monitor progress on the SDGs in the EU.

Germany performs well and is further

improving on SDGs on competitiveness

(SDGs 8 and 9). However, Germany is

performing below the EU average on SDG 4

(Quality education), hampering growth and

competitiveness. Germany performs above the EU average on SDG 8 (Decent work and economic growth) and on SDG 9 (Industry, innovation and infrastructure). With 3.13% of GDP allocated to R&D in 2024, Germany has some of the highest R&D spending in the EU. The proportion of R&D personnel in the active population rose from 1.78% in 2019 to 1.98% in 2024 (EU: 1.59% in 2024). Regarding infrastructure, however, only 77.4% of households had high-speed internet connection in 2024 (EU: 82.5%). The share of low- achieving 15-year-olds in mathematics increased strongly from 21.1% in 2018 to 29.5% in 2022. A rising number of young people leave education early (10.3% in 2019, vs 13.1% in 2025), well above the EU average (9.1% in 2025). Adult participation in learning in the past four weeks (9.3%) was below the EU average (EU: 13.7% in 2025). The German recovery and resilience plan (RRP) targets bottlenecks for digitalising the administration and the economy, for instance by

Graph A17.1: Progress towards the SDGs in Germany

For a detailed progress assessment towards the various SDGs, see the annual Eurostat report ‘Sustainable development in the European Union’; for extensive data on the short-term SDG progress of EU countries, see Key findings – Sustainable development indicators; for an interactive visualization of SDG progress of EU countries, see SDG country overview. A high status does not mean that a country is close to reaching a specific SDG, but signals that it is doing better than the EU on average. The progress score is an absolute measure based on the indicator trends over the past five or six years. The calculation does not take into account any target values, as most EU policy targets are only valid for the aggregate EU level. Depending on data availability for each goal, not all 17 SDGs are shown for each country. Source: Eurostat, latest update of 29 April 2026. Data refer mainly to the period 2019-2024 or 2019-2025. Data on SDGs may vary across the report and its annexes due to different cut-off dates.

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supporting digitalising vehicle supplier companies. It also helps address upskilling and reskilling needs, including for digital skills.

While Germany performs well on several

SDGs related to sustainability (SDGs 6, 9, 11,

14, 15), though improving, it still needs to

catch up with the EU average on zero hunger

(SDG 2), responsible consumption and production (SDG 12) as well as on affordable

and clean energy (SDG 7) and climate action

(SDG 13). It performs well on sustainable agricultural production and has reduced agriculture’s environmental impact. It has reduced nitrate levels in groundwater (SDG 6) and the use and risk of chemical pesticides (SDG 2), although both remain above the EU average, and has achieved reductions in premature deaths due to fine particulate matter (SDG 11). It has also made some progress on energy consumption indicators, including increasing the percentage of renewable energy in gross final energy consumption (SDG 7) from 17.3% in 2019 to 22.5% in 2024. Nevertheless, this is still below the EU average (25.2%). On SDG 13 (Climate action), net greenhouse gas emissions decreased from 10.1 tonnes per capita in 2019 to 8.5 tonnes in 2024, although they still remain above the EU average (6.5 tonnes). Average CO2 emissions per km from new passenger cars fell considerably between 2019 and 2024 (SDG 12; 159 g in 2019 vs 117.1 g in 2024) but are above the EU average (107.9 g). Various measures in Germany’s RRP that support the use of renewable hydrogen in industry, and the transport sector will help reduce greenhouse gas emissions and increase the share of renewable energy.

Germany is performing well on some SDG

indicators related to social fairness (SDGs 1,

3, 8). However, it still needs to catch up with

the EU average on quality education (SDG 4),

gender equality (SDG 5), affordable and clean energy (SDG 7) and reducing

inequalities (SDG 10). Germany generally

performs better than the EU average in areas linked to poverty, health and decent jobs and growth. On health (SDG 3), road traffic deaths and fatal accidents at work have declined and are proportionally below their level in the rest of the EU. At the same time, 20.8% of the adult population was obese in 2025, up from 19% in 2019 and above the EU average of 16.3% (in 2025). While the overall share of people at risk of

poverty or social exclusion (SDG 1) is aligned with the EU average, there is a significant urban-rural gap (SDG 10). On gender equality (SDG 5), the unadjusted gender pay gap is particularly high in Germany (15.6%, vs 11.1% in the EU in 2024) and the gender gap for being outside the labour force due to caring responsibilities and wanting to work is far above the EU average. There is also room for improvement on integrating non-EU citizens into education and training and the labour market (SDG 10). Germany performs worse than the EU average on EU/non-EU citizenship gaps for early school leaving (19.4 pps vs 16.8 pps in the EU in 2025), as well as on the percentage of young people not in education, employment or training (13.3 pps vs 10.2 pps in the EU in 2025) and on the employment rate (20.6 pps, vs 11.8 pps in the EU in 2025). Tertiary educational attainment (SDG 4), although improving, remained below the EU average in 2025 (40.9%; EU: 44.8%). The German RRP promotes apprenticeships and helps improve educational outcomes for students with a learning backlog, often from disadvantaged backgrounds.

Germany is performing well on SDG

indicators related to macroeconomic stability

(SDGs 8, 16, 17) and has further improved its

performance. It performs well on SDG 16 (Peace, justice and strong institutions), showing a stable and secure environment for pursuing economic activities, and on SDG 8 (Decent work and economic growth). The country further increased its employment rate from 79.7% in 2019 to 81.1% in 2025 (vs EU 76.1%). The percentage of young people not in education, employment or training increased to 9.5% in 2025, but remains below the EU average (11%), and long-term unemployment is low (1.1% vs EU 1.9% in 2025). In contrast, at 20.3% of GDP in 2025, Germany’s investment share remained below the EU average of 21.7% of GDP. The German RRP includes reforms to speed up public investment and tackle investment bottlenecks to unlock private investment and reduce the savings-investment imbalance.

As the SDGs form an overarching framework, any links to relevant SDGs are either explained or depicted with icons in the other annexes.

ANNEX 18: COMPETITIVE REGIONS

128

Regional development trends

Sluggish economic growth in northern and

western regions has resulted in a narrowing

of internal disparities in Germany. Germany’s GDP per head (in purchasing power standard, PPS) stayed above the EU average between 2004 and 2024, with the 16 regions (NUTS 1) following rather distinct trajectories. Over the last two decades, the most advanced and industrialised economies of the western and northern parts of the country have experienced GDP per head growth lower than the less developed regions of the central and eastern part of Germany. Hamburg and Bremen have recorded lower GDP per head growth over the last two decades (0.6% and 0.2% annually respectively), as has Nordrhein-Westfalen (0.7%), the most populated region and home to the industrial Ruhr region. This decline mostly took place in the last decade. By contrast, most regions in the eastern part were able to slightly converge towards the EU average. However, this convergence seems to have stalled in recent years amid general slow growth of the German economy. Between 2014 and 2024, almost two- thirds of German NUTS 2 regions (24 out of 38) had an average GDP per head growth ranked among the bottom 20% of EU regions. Despite slightly better economic performance, most eastern regions, apart from Berlin, continue to lag behind, with GDP per head ranging from 82% to 97% of the EU average.

Even though still significant, disparities in

productivity between eastern and western

regions have narrowed over the last decade

(2014-2024). Productivity growth was the highest in eastern regions, with Mecklenburg- Vorpommern standing out at 1.3%, followed by Sachsen, Sachsen-Anhalt, Schleswig-Holstein, Berlin, Brandenburg and Thüringen, all recording growth of 0.6–0.7%. By contrast, annual productivity growth was negative in Nordrhein- Westfalen, Hessen, Bremen and Saarland, all in the western part of the country. Productivity remains significantly higher in the western and southern part in 2024, with rates above 110% of the EU average (Hamburg stands out at 131%). In the eastern regions (except Berlin), it is below the EU average.

Map A18.1: GDP per head compared with the EU

average.

(1) 2021-2023 average GDP per head in purchasing power standard compared with the EU average. Source: Commission calculations based on Eurostat 16 July 2025 data.

Key challenges for regional competitiveness

Overall, R&D spending remains significantly

lower than the EU average in eastern regions

and some other parts of the country, which is

reflected in patent applications. In 2023, gross

domestic expenditure on R&D (GERD) was lowest in Niederbayern, Weser-Ems, Lüneburg, Koblenz and Münster (0.7-1.16% of GDP), whilst business enterprise R&D expenditure (BERD) was less than 0.5% of GDP in Mecklenburg-Vorpommern, Sachsen-Anhalt, Brandenburg, Weser-Ems and Münster. R&D activity is heavily concentrated in the western and southern regions. The strongest performers include Braunschweig, Oberbayern, Karlsruhe, Rheinhessen-Pfalz and Stuttgart (5.3- 7.8% of GDP GERD; 4–7.4% of GDP BERD), driven by strong industrial clusters. Similarly, Oberbayern and Stuttgart had a high number of patent applications per million people in 2020-2022 (549 and 499 applications, respectively), ranking them among the EU’s leading innovation regions. In less developed areas, less than 50 patents per million people were filed.

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In moderate innovator regions (521) R&D performance has largely stagnated: in

Münster, Kassel, Trier, Niederbayern and Mecklenburg-Vorpommern, the regional innovation index values show a decline over the last three years, whereas Saarland, Sachsen-Anhalt, Chemnitz scored minimal advances. Although

(521) Classification of European Commission, 2025, Regional

Innovation Scoreboard.

regional smart specialisation strategies (522) and national frameworks (e.g. High-Tech Agenda) (see Annex 4) provide good strategic frameworks, they often fail to address structural improvements of

(522) Smart specialisation strategies are strategic, territorially

based frameworks for innovation and industrial policy that help Member States and regions identify and leverage their unique comparative advantages to address structural challenges, foster economic transformation and enhance competitiveness.

Table A18.1:Main development trends, challenges and the concentration of resources

Source: European Commission based on Eurostat data; categories of regions based on Map 18.1

Main development trends

Transition regions

(population 21.83

million)

According to available data from 2021-2023, the following regions fulfil the criteria to be

transition regions: Brandenburg, Mecklenburg-Vorpommern, Lüneburg, Münster, Koblenz,

Trier, Dresden, Chemnitz, Leipzig, Sachsen-Anhalt, Schleswig-Holstein and Thüringen. In

Münster, Koblenz, Leipzig, and Schleswig-Holstein GDP per head value has fallen below

the EU average of 100%. Still, it is Mecklenburg-Vorpommern, Lüneburg, Trier, Chemnitz,

Sachsen-Anhalt, and Thüringen that have a GDP per head value less than 90% of EU

average. Brandenburg, Dresden, Münster, Koblenz, Leipzig, Schleswig-Holstein are closer

to the EUaverage. Among the transition regions, western Trier and eastern Chemnitz had

the lowest real GDPgrowth between 2014 and 2023. Koblenzand Trier in thewest had the

lowest real GDPper head growth in the same period. The new western transition regions

Münster and Koblenz show low real productivity growth per hour worked compared to all

other German transition regions.

More developed regions

(population 61.63

million)

With GDPper head at or above 120%of the EU average, the more developed regions are

Stuttgart, Karlsruhe, Tübingen, Oberbayern, Oberpfalz, Mittelfranken, Berlin, Bremen,

Hamburg, Darmstadt, Braunschweig, Köln. Theseheavily industrialised regions aregrowth

centres for the German economy. However, as some of these regions have strong

automotivesectors, competitivepressure is increasing(fromChinesecompetition, energy

prices, green transformation) and there is a worrying trend of these more developed

regions falling behind.

Specific territories

Access to basic services varies considerablybetween rural and urban areas. People living

in rural areas with a lowpopulation density face longer travel times to healthcareservices.

Demographic changewill most likelyaffect theavailabilityof healthcarestaff in the future.

In most rural areas, children's access to primary school is worse than the EU average.

Rural households and businesses suffer from poor broadband connectivity. The transition

away from lignite miningand lignite-based energy production (and, to a lesser extent, the

processing of fossil fuels), has triggered socio-economic challenges and investment

needs specific to just transition territories. Germany's coastal areas show marked

differences in the importance of the blue economy as an economic driver: Mecklenburg-

Vorpommern relies heavily on tourism and fisheries, increasing its vulnerability to

environmental pressures and declining Baltic fisheries stocks, while Schleswig-Holstein

hosts a diversified sector, including aquaculture and maritime SMEs. Niedersachsen

leads in absolute terms with ports, maritime transport and offshore energy, and Hamburg

is a major port and logistics hub, generating spillover effects across coastal regions.

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the R&D ecosystems. Even where there are strong public research institutions, the translation of research results into economic growth is limited (523). This is often due to: (i) insufficient commercialisation of research results; (ii) limited funding for technology transfer; (iii) a lack of international talent and staff; and (iv) a lack of curricula addressing entrepreneurship education for young people (524) (see Annex 4 and country- specific recommendation on commercialisation). Furthermore, moderate innovators mainly support generic productive investments in SMEs, and they do not systematically use their smart specialisation strategies as a guiding framework for these investments. SMEs in these regions also struggle to integrate into strategic value chains with higher added value (525).

Start-up activity is uneven across the country. In 2025, the highest numbers of newly

established start-ups were in Bayern (785), Nordrhein-Westfalen (658) and Berlin (619) (see Annex 4). By contrast, very few start-ups were created in Sachsen-Anhalt (33), Thüringen (27), Mecklenburg-Vorpommern (17) in the east and in western Saarland (22) and Bremen (19) (526). One major reason for these differences is private capital financing, which is focused on established industrial hubs. Additionally, the process of starting a business is not yet sufficiently digitalised. Firms outside these hubs perceive higher risks and face more limited access to both equity and debt funding, further exacerbating capital bottlenecks in eastern and structurally weaker regions (527) (see Annex 6).

Strong competition from non-EU countries

and decarbonisation are major challenges for

the high-value industrial hubs, which are

located mostly in western and southern

regions. The highest shares of employment in energy-intensive industries are in Rheinhessen-

(523) Bundesministerium für Bildung und Forschung, 2024,

Bundesbericht Forschung und Innovation, bundesbericht- forschung-innovation.de.

(524) Deutsche Industrie- und Handelskammer, 2025, DIHK-Report Unternehmensnachfolge 2025, dihk.de.

(525) European Commission, 2022, Regional Competitiveness Index.

(526) Start-up Verband, 2025, Next Generation Startup- Neugründungen in Deutschland, startupverband.de.

(527) EIB, 2024, Investment Report 2023–24: Transforming for competitiveness, data.europa.eu.

Pfalz, Düsseldorf, Sachsen-Anhalt, Köln and Arnsberg (528). These regions are therefore particularly exposed to high energy costs and pressure from global competition (see Annex 5). The automotive industry, a major pillar of the German economy with its dense supplier networks (529), accounts for a significant share of manufacturing employment in Oberbayern, Niederbayern, Stuttgart, Bremen and Braunschweig. It accounts for 16-19% in Chemnitz, Saarland, Kassel and Leipzig (Map A19.3). This industry is exposed to competitive pressure from China, high transition costs to electric mobility and falling profits (see Annex 5). Considering these challenges, there is more scope for accelerating the shift to electric vehicle and battery production.

Map A18.2: Automotive sector: share in total

employment in industry, 2023 (%)

Source: Eurostat

Greenhouse gas emissions per capita in 2024 remain very high in the just transition

regions (530), in particular in Sachsen-Anhalt

(528) Employment share of energy-intensive industries (C17, C20,

C23, C24) of total employment in industry. Source: DG REGIO estimations and calculations based on Eurostat and JRC (ARDECO) data, 2023.

(529) Germany accounts for around one third of all automotive employment in the EU and almost 60% of total EU wages in the sector. Source: DG REGIO estimations and calculations based on Eurostat and JRC (ARDECO) data, 2023.

(530) Just transition regions at NUTS 2 level, as first outlined in Germany’s territorial just transition plans.

131

and Brandenburg. Emissions in these two

regions reached levels of around 16-18 tCO2eq, and the other six just transition regions (Düsseldorf, Köln, Münster, Chemnitz, Leipzig and Dresden) also scored significantly above the EU average.Additionally, green employment (531) in all the just transition regions is below the EU average (15%), except Düsseldorf and Köln. Despite the challenges facing these regions, they have opportunities to diversify their economies and benefit from spillovers from stronger growth centres (532).

There is significant room for further developing renewable energy generation,

especially in the south, and to make buildings

more energy efficient, particularly in the

western and northern parts of the country. Renewable energy generation is concentrated in northern and eastern regions for wind (Schleswig- Holstein, Brandenburg, Sachsen-Anhalt) and in southern regions for solar PV (Oberbayern, Niederbayern, Tübingen). This distribution is not aligned with the south’s energy needs and impacts hydrogen production, with the largest planned green hydrogen projects being in the northern regions of Niedersachsen, Hamburg, and Nordrhein-Westfalen (533) (see Annex 8). Despite improvements, energy efficiency in buildings could be further incentivised, especially in the northern and western regions (see Annex 9) where more than 50% fall into or below energy class E (534).

Germany is increasingly vulnerable to the

impacts of climate change, with the

economic impact varying across regions (see Annex 10). Water resilience (see Annex 10) and

air quality (see Annex 8) show regional differences. Water pollution is particularly challenging, with over-fertilisation in the Baltic Sea and North Sea. Furthermore, groundwater use

(531) Representing jobs contributing to environmental

sustainability; Regional Competitive Environmental Sustainability indicator, publications.jrc.ec.europa.eu.

(532) Rodríguez-Pose & Bartalucci, 2024, The green transition and its potential territorial discontents, doi.org.

(533) Institute of Energy Economics at the University of Cologne, 2026, ewi.uni-koeln.de ; Leibniz-Institut für Länderkunde, 2024, nationalatlas.de.

(534) Analysis of housing offers and energy efficiency classes A to H (EPBD 2024); CBRE Germany, 2025, CBRE Analyse zeigt: Der aktuelle Wohnungsbestand in Deutschland entspricht im Durchschnitt der Energieeffizienzklasse D, assetphysics.com.

varies considerably among regions, with northern and southern regions extracting the largest volumes of groundwater (535). This is of concern as over two thirds of drinking water needs are met by groundwater. The impact of climate change on groundwater is projected to be greater by the end of the century, particularly in the north and the east (536). Germany’s blue economy could benefit from a shift to stricter nutrient control, ecosystem- based management, and climate-robust water and groundwater governance, especially in the North Sea and Baltic Sea basins.

Eastern regions are particularly affected by

demographic decline and an ageing

population. On demographic trends, most eastern regions (Chemnitz, Sachsen-Anhalt, Thüringen, Mecklenburg-Vorpommern, Brandenburg and Dresden) rank among the 20% weakest regions in the EU. Natural population growth has only been positive in Berlin and Hamburg. The working-age population (20-64) has also been shrinking rapidly, by 1.2-1.6% annually (2015-2024) in Mecklenburg-Vorpommern, Thüringen, Sachsen- Anhalt and Chemnitz. With young people (0-20 years) accounting for only around 17% of the population, these areas face mounting pressure to maintain their workforce, which is a major bottleneck to their growth potential and economic performance in the long term. In several eastern regions, one quarter to one third of residents are aged 65 or older: Mecklenburg-Vorpommern and Brandenburg have seen the largest increases in the group (by around 2 percentage points in 2024) (see Annex 15).

School accessibility is limited in many rural areas. Long commuting times require provision of

complex bus systems. Limited access can hinder children from attending upper secondary school, affecting their future education and career prospects (537). The share of children with a primary school within a 15-minute walk is below the EU average (34%) in rural areas of all regions

(535) Lütkemeier, R., Kuhn, D., 2025, Grundwasserstress in

Deutschland.

(536) OECD, 2023, Environmental Performance Reviews: Germany 2023, oecd.org.

(537) Mean car journey time in minutes was highest in low population areas and lowest in cities in 2016, measuring the accessibility of various educational facilities (including the nearest primary schools, lower secondary school and upper secondary school); Equivalence report, 2024, bundeswirtschaftsministerium.de.

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except Freiburg, Karlsruhe, Stuttgart, Tübingen, Münster, Bremen and Rheinhessen-Pfalz. In rural parts of some eastern and western regions, it is even less than 25%. This is a major obstacle to attracting and keeping young people in these areas and to the right to stay.

Digital connectivity is problematic, including

in several rural areas. The coverage of very high-capacity networks (VHCN) in rural areas is below the EU average (see Annex 5). Fixed network speeds in Germany reach 140 Mb/s in cities (EU 206 Mb/s), 125 Mb/s in towns and suburbs (EU 156 Mb/s), and only 100 Mb/s in rural areas (EU 145 Mb/s). A similar pattern is observed for mobile networks, where rural areas continue to experience significantly slower speeds than the EU average (538). The digital transformation of

(538) Rural Observatory, observatory.rural-vision.europa.eu.

businesses varies across regions and between cities and rural regions (539). Eastern regions (Berlin, Brandenburg, Mecklenburg-Vorpommern, Sachsen, Sachsen-Anhalt and Thüringen) lag behind in using digital products and adopting digital processes whilst northern areas (Bremen, Hamburg, Niedersachsen and Schleswig-Holstein) struggle with digital business models. Barriers include a lack of digital skills, limited awareness of digital transformation benefits, underdeveloped support ecosystems and insufficient data management skills (540).

(539) BMWK, 2024, Digitalisierung der Wirtschaft in Deutschland,

iwkoeln.de.

(540) Eger, T., Scheufen, M., 2024, Data Sharing in Deutschland, wirtschaftsdienst.eu.

Table A18.2:Key regional indicators (at NUTS 1 level) for Germany

Dark green – the indicator is at least 120% of the EU average. Light green – the indicator is at least 100% but less than 120% of the EU average. Yellow – the indicator is at least 90% but less than 100% of the EU average. Light red – the indicator is at least 75% but less than 90% of the EU average. Dark red – the indicator is less than 75% of the EU average. This colour scale applies to 'positive' indicators, where higher values are favourable. For 'negative' indicators, where higher values are unfavourable, the colours are reversed. Source: Eurostat and JRC

GDP per head

(PPS, index)

Growth in

natural

population

Real GDP per

head growth

Productivity:

GDP (PPS) per

hour worked

(index)

Population aged

25-34 with high

educational

attainment

R&D expenditure

R&D expenditure

in business

enterprise sector

(BERD)

GVA in industry

ICT patent

applications to

the EPO - avg 3

years

EU27=100

Average annual

change per 1000

residents

Average annual

% change EU27=100

% of population

aged 25-34 % of GDP % of GDP % of total GVA Number-count

2024 2015-2024 2014-2024 2023 2025 2023 2023 2023 avg.2020-2022

EU 100 -1.7 1.4 100 44.8 2.24 1.51 19.3 93

Germany 116 -2.7 0.6 124 40.9 3.13 2.16 24.5 344

Baden-Württemberg 131 -0.8 0.4 136 44.4 5.63 4.86 34.2 601

Bayern 135 -1.2 0.6 136 46.1 3.37 2.60 27.5 1126

Berlin 127 0.4 1.9 122 55.3 3.04 1.12 9.0 146

Brandenburg 86 -6.1 0.7 110 31.8 1.49 0.30 22.4 23

Bremen 132 -1.9 -0.4 123 39.9 2.80 0.85 24.1 8.5

Hamburg 196 0.9 0.7 151 48.7 2.62 1.68 13.9 22

Hessen 132 -1.7 0.3 133 40.7 2.98 2.20 18.5 203

Mecklenburg-Vorpommern 88 -6.6 1.6 103 29.4 1.37 0.18 17.8 0.6

Niedersachsen 107 -3.3 0.7 120 37.4 2.72 1.87 26.3 108

Nordrhein-Westfalen 109 -2.7 0.2 120 37.4 2.26 1.33 22.0 242

Rheinland-Pfalz 100 -3.1 0.3 122 37.4 3.53 2.95 26.5 64

Saarland 95 -6.0 -0.7 112 29.6 1.62 0.49 28.3 5.6

Sachsen 90 -6.1 0.9 102 39.9 2.25 0.65 23.8 66

Sachsen-Anhalt 83 -8.3 1.0 104 28.9 1.45 0.32 26.6 15

Schleswig-Holstein 97 -4.2 1.0 112 32.4 1.53 0.63 20.2 21

Thüringen 83 -6.8 0.6 99 35.6 2.58 1.12 27.6 32

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Housing affordability, reflected in the price-

to-income ratio (541), is a particular challenge

in southern regions. Similarly, house purchase capacity (542) in parts of Oberbayern is less than 35%. Here strong labour markets are colliding with limited affordable housing supply (543), which could negatively affect these region’s competitiveness and attractiveness, exacerbating their industrial transformation challenges. Furthermore, the housing cost overburden rate (544) in 2024 was highest in Weser-Ems, Schleswig-Holstein and Rheinhessen-Pfalz (545). By contrast, this rate was at 8% or less in not only eastern Chemnitz and Mecklenburg-Vorpommern but also southern Oberfranken (Map A18A19.3). This is partly due to stagnant markets and vacant buildings resulting from population decline, for example in rural parts of eastern Thüringen and western Saarland (546), and complex permitting procedures for construction negatively impacting housing availability (see Annex 16). These issues underscore the need to implement the ‘construction accelerator’ (Bau-Turbo) effectively at regional and municipal levels.

There are widening disparities in

administrative capacity between larger cities

and economically stronger regions on one

side and economically weaker eastern

regions on the other.Challenges include: (i) human resource shortages; (ii) gaps in digital and technical capabilities; (iii) performance management; (iv) public procurement; and (v) outdated administrative processes. There are already more than 100 000 unfilled positions in municipalities due to a lack of qualified applicants,

(541) The indicator measures, at NUTS 3 level, the ratio between

the (average) housing price for 100 square metres and the (average) income (GDP) per capita.

(542) The indicator measures square metres that can be purchased via mortgage using a third of disposable income.

(543) Sides, L., 2025, What is driving European cities’ housing affordability challenge?, oxfordeconomics.com.

(544) The housing cost overburden rate is the percentage of the population living in households where the total housing costs (‘net’ of housing allowances) represent more than 40% of disposable income (‘net’ of housing allowances).

(545) These NUTS 2 regions rank among the lowest quintile in the EU, where more than 12% of the population spent over 40% of their disposable income on housing.

(546) SPD-Fraktion Saarland, 2022, Aktionsprogramm für mehr bezahlbaren Wohnraum im Saarland, spd-fraktion-saar.de; vtw, 2025, Daten und Fakten der Wohnungswirtschaft in Thüringen 2025, vtw.de.

and without further digitalisation, this number is estimated to grow to 230 000 by 2030. This will be exacerbated by the expected retirement of almost one third of current local government employees (500 000 people out of around 1.65 million) by 2030 (547).

Map A18.3: Housing cost overburden (% of

population), 2024

Source: Eurostat. The overburden rate should be read together with the tenure structure (homeowner, tenants), that may differ across country and regions.

Administrative quality varies across regions.

Larger cities and economically strong regions have more robust administrations. By contrast, economically weaker eastern regions often have the lowest capacity. In these regions, increasing inter-municipal cooperation, including sharing services, experts and staff, is becoming necessary (548). Demographic constraints in eastern and rural western regions may result in further staff shortages and unmet recruitment needs.

The limited capacity of smaller municipalities

exacerbates the urban-rural divide in attracting economic activity. Bureaucratic obstacles, long permitting processes and inadequate digitalisation (see Annexes 5 and 7) hinder the development of the regional business

(547) DStGB, 2025, Demografie: Schleichenden Blackout der

öffentlichen Verwaltung abwenden, dstgb.de.

(548) DStGB , 2025, Demografie: Schleichenden Blackout der öffentlichen Verwaltung abwenden, dstgb.de.

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environment. There are clear urban-rural discrepancies. Larger cities, such as München and Hamburg, use sophisticated zoning tools while smaller rural municipalities face capacity limitations and outdated planning methods (549). Certain Metropolitan Regions (‘Metropolregionen’) have institutionalised cooperation in spatial governance (550). The efficiency of regional and municipal authorities in managing industrial, environmental and spatial planning licences varies considerably, whilst public support services for companies (e.g. digital one-stop-shops, e- permitting systems) are often inefficient (551).

The transfer of responsibilities to local

authorities lacks a corresponding increase in

funding. This hinders public investments, creating an infrastructure backlog, and limits competitiveness. Municipalities perform many tasks delegated by federal or regional laws, for example, administering social benefits, managing schools and childcare or enforcing building regulations on behalf of higher levels. In recent years, local governments have often complained about receiving new or expanded duties without a corresponding increase in financial resources. This is further exacerbated by a lack of coordination and targeting of existing funding streams, such as tax-sharing, fiscal equalisation between the Länder (‘Länderfinanzausgleich’) and federal grants for e.g. transport, housing, education (552). Municipalities could partly compensate for new duties by pooling resources and adopting online service bundles developed in other municipalities under the Online Access act.

(549) Hoyler, M., Freytag, T., & Mager, C., Advantageous, 2006,

Fragmentation? Reimagining Metropolitan Governance and Spatial Planning in Rhine-Main, jstor.org; Jehling, M., & Hecht, R., 2022, Do land policies make a difference? A data-driven approach to trace effects on urban form in France and Germany, researchgate.net.

(550) OECD, 2024, Coordinating spatial planning and investment across state and local boundaries in the Hamburg Metropolitan Region, oecd.org ; Yan, S., & Growe, A., 2022, Regional Planning, Land-Use Management, and Governance in German Metropolitan Regions—The Case of Rhine–Neckar, doi.org.

(551) Nationaler Normenkontrollrat, 2025, Bündelung im Föderalstaat. Zeitgemäße Aufgabenorganisation für eine leistungsfähige und resiliente Verwaltung, normenkontrollrat.bund.de.

(552) Grundke, R., & Sunel, E., (no date), Germany: Fostering regional development in times of structural change – ECOSCOPE, oecdecoscope.blog; OECD, 2025, Economic Surveys: Germany 2025, oecd.org.

ANNEX 19: TRANSPORT

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This Transport Annex presents the state of play, and the challenges Germany faces with the implementation of the trans-European transport network (TEN-T), the European railway traffic management system (ERTMS) and the roll-out of Sustainable Aviation Fuels (SAF).

Five European transport corridors cross Germany (Rhine – Danube, Scandinavian –

Mediterranean, North Sea – Baltic, North Sea

– Rhine-Mediterranean). The German TEN-T rail

network is 15 117 km long (9 367 of which are on the core network). The TEN-T road network is 11 580 km long (6 452 of which on the core network). Germany has 4 173 km of TEN-T inland waterways, 24 TEN-T airports (including 11 core airports), 108 TEN-T ports (including 23 core ports) and 78 urban nodes (553).

Germany’s rail network faces significant

modernisation challenges. Given its central

location in the European transport network, these pose a challenge for the whole European transport system.

The ERTMS is essential to digitalising the railways and to modernising and

harmonising railway operations across

Europe. The ERTMS ensures the safety of rail

networks by providing a unified signalling system that significantly reduces the risk of accidents. It also provides interoperability between national rail systems, improving cross-border train movements. It is important to strengthen relationships with neighbouring countries to create a level playing field for railway undertakings operating across borders. Finally, the ERTMS enhances network capacity and operational efficiency, increasing the competitiveness of the rail sector.

ERTMS was operational on only 3% of the

total TEN-T rail network in Germany by the

end 2024 (554) and only on specific and disperse line sections. To meet its national plan’s ERTMS roll-out target by 2035, Germany aims to deploy the ERTMS on a further 6 103 km.

(553) TENtec Information System, according to Reg. 2024/1679.

(554) Based on ERTMS – Third work plan of the European coordinator Matthias Ruete.

However, a plan for the decommissioning of the legacy signalling systems is lacking. Due to its size and location, Germany could be a game changer in terms of ERTMS deployment in Europe.

Infrastructure bottlenecks in heavily used German corridor sections are causing

capacity restrictions, particularly in the

hinterland of Hamburg, between Berlin and the Rhine/Ruhr area as well as on the lines

towards Frankfurt am Main. Furthermore,

capacity bottlenecks are occurring in the surroundings of major urban nodes.

In northern Germany, the priority sections

complete the European transport corridors between Scandinavia and the Mediterranean

as well as between the North Sea and the

Baltic Sea. The railway lines between Hamburg/Bremen and Hannover face significant capacity constraints, hampering rail freight transports towards the North Sea ports. Also, in view of the expected additional passenger and freight volumes, especially in the Hamburg area, following the opening of the Fehmarn Belt fixed link to Denmark and Sweden. Furthermore, the line between Berlin and Hannover and towards the Netherlands and Belgium faces capacity constraints, impeding faster passenger services and an increased number and length of freight trains.

In central and southern Germany, the line

between Erfurt/Fulda and Frankfurt am Main

is where three European transport corridors meet. It is experiencing a major lack in capacity

and relatively low line speeds hampering north- south and east-west connectivity. South of Frankfurt, the line from Karlsruhe to Basel is essential for transports between the North Sea and Italian ports via Switzerland but lacks capacity.

The modernisation of Germany’s railway

infrastructure faces significant challenges. Renovation prices have risen rapidly as the demand for construction works exceeds the capacity of the construction industry, including shortages of skilled workers. Digitalisation has been delayed due to funding gaps, outdated infrastructure and staff shortages. Railway projects tend to face timing challenges as the

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planning and permitting process is often lengthy slowing down the construction works.

As yet there is no joint German-Danish

model on how to efficiently operate railway

traffic on the Fehmarnbelt cross-border section, covering traffic management,

maintenance and operations in line with the

rules of the single European railway area.

Harmonising technical and operational rules with the minimisation of national rules in line with the EU directives on rail interoperability and safety remains critical to ensure seamless cross-border rail transport.

Germany has a strong industrial base to

produce sustainable aviation fuels (SAF), with over 15 projects currently in development to produce hydrogen-based aviation fuels (eSAF). It is home to the only eSAF pilot plant in the EU that has reached Final Investment Decision, but the remaining ones are not commercialised, and most projects are only pilot or demonstration facilities (555). As an active member of the eSAF Early Movers Coalition, mobilising national funding for a double-sided auction mechanism in 2026-2028 is required for the deployment of those eSAF projects.

(555) ReFuelEU Aviation Annual Technical Report 2025 -– 2024 in

review.

Table A19.1:ERTMS deployment in Germany.

Source: Based on ERTMS – Third work plan of the European Coordinator Matthias Ruete.

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Map A19.1: TEN-T Cross-Border & National Priority Sections in Germany.