After a decade of strong export-led growth, the COVID-19 pandemic, Russia's war of aggression against Ukraine and rising trade tensions have hit the German economy and emphasised the need to accelerate structural reforms. The recent reform of fiscal rules will allow to raise spending to improve defence capacity and address a large infrastructure backlog. To ensure medium-term fiscal sustainability, this should be combined with raising spending efficiency, reallocating spending and broadening the tax base. Addressing rising spending pressures due to population ageing will require reforming the pension, health and long-term care systems. Simplifying and harmonising public procurement and infrastructure planning and approval procedures should be complemented with improving the capacity of the public administration to ensure a timely and efficient implementation of public investment projects. To ensure that increasing domestic demand is matched by supply, it is key to address skilled labour shortages and reduce high administrative burdens and regulatory barriers to competition, which have weighed on business dynamism, innovation and productivity growth. Fostering regional development requires better coordination of placed-based with industrial, infrastructure and innovation policies as well as improving the financial and administrative capacity of municipalities.
