When Germany’s future “traffic light” coalition members presented their programme for government, drafted in a month of remarkably leak-free negotiations, Christmas, it seemed, had come early for all.
After the 16-year Merkel era of relative economic stability, where balanced budgets had priority over spending and investment, the Covid-19 pandemic has scrambled everything in Germany.
Chancellor Angela Merkel is retiring after four terms and her Christian Democratic Union (CDU) is heading for the opposition benches. The future is open for the European Union's most powerful member state and an untested alliance led by the centre-left Social Democratic Party (SPD).
In a warehouse rented for the presentation of his first coalition agreement, chancellor-elect Olaf Scholz said he had delivered on his SPD's key election promises: a €12 minimum wage, higher child allowance and an undertaking to keep pensions stable.
The Greens announced a huge state investment programme to transform Europe's largest economy to meet climate goals, in particular a push to double renewable energy production within the decade.
The coalition's third partner, the liberal Free Democratic Party (FDP), held to many of its key red lines in talks: no tax hikes and a return in 2023 to tight fiscal rules suspended in the pandemic.
As the speeches dragged on, however, journalists studying the 177-page document began to ask whether they had stumbled on Germany’s biggest jam-for-all factory. A massive investment in the economy and infrastructure, more welfare and housing – including 100,000 subsidised units annually – and somehow no tax increases?
Financing
Given this coalition will legalise the sale of cannabis, how many taxed joints will Germans have to smoke in licensed stores to raise enough revenue for Berlin’s new political ambitions?
Questions about the coalition’s finance plans got nowhere at the programme launch.
“We’ve decided that this will be a decade of investment,” said Scholz, launching his second term before his first had begun, but providing no answers.
His future deputy chancellor, Green party co-leader Robert Habeck, fended off a similar question on the finances of his new "super ministry" in charge of the Germany economy and climate.
"We know what we want and we know exactly how to pay for it," he said, without explaining how. Few in Berlin doubt that the times are changing – particularly on fiscal and economic matters – but by how much?
Under CDU finance minister Wolfgang Schäuble, Berlin created a “debt brake” that obliged politicians to prioritise balanced budgets over everything else.
Successive budgets reduced debt with a mix of repayments and refinancing – but ignored the temptations to borrow large quantities of essentially free money that crisis-weary investors are prepared to pay for the security of German sovereign bonds.
As minister for finance, the SPD’s Scholz continued that approach and, on his watch, public debt had just dropped below 60 per cent of GDP last year when the Covid-19 pandemic struck.
Within weeks, shedding his Schäuble tribute act to adopt a Dirty Harry stance, Scholz pulled out what he called “the bazooka” – €1.4 trillion in loans, grants and tax breaks to cushion the shock for Germany firms.
By current measure, Germany has taken on an additional €370 billion of debt, pushing the debt-to-GDP rate back out to 75 per cent – the point at which some EU neighbours started their emergency pandemic borrowing.
Though gripped by a record fourth wave of Covid-19, Germany’s key economic indicators offer the new coalition room for hope – and manoeuvre.
In October official growth forecasts were cut to 2.6 per cent for this year, down nearly a full percentage point, as supply problems compound other pandemic difficulties. But things should improve as the traffic-light coalition begins work next year, with growth forecasts up half a percentage point on previous estimates to 4.1 per cent.
Tax forecasts suggest the coalition will have an extra €10 billion to play with in the coming electoral term – though that won’t go far considering the new spending plans.
Creative accounting
That is why, at home and around Europe, all eyes are shifting to the hawkish FDP leader Christian Lindner, Germany's new federal finance minister.
Along with Scholz, the 42-year-old will have the last word on how expansive Berlin’s traffic-light coalition will be. With an eye on his own voter base – doctors, lawyers, business owners – Lindner blocked tax increases and has ensured the debt brake, suspended in the pandemic, will be reactivated in 2023.
In Der Spiegel, Lindner described his role in Berlin as encouraging a “push for renewal from public finances, on the one hand, but also by activating above all private capital”.
To realise competing political goals from from his Green and SPD partners in Berlin, a golden age of creative accounting looms.
According to reports, proposed investment in energy and climate projects will no longer count towards the debt brake, pandemic loan repayments will be stretched from 20 to 30 years and any unused borrowings will repurposed for green transformation projects.
For German economist Lars Feld, a member of an advisory board to the federal government, the real challenge for the new government is not a lack of money. “It’s Germany’s restrictive legal framework, for firms and the state, meaning investments happen late or not at all,” he said.
“The traffic-light coalition has prioritised changes to speed up legal procedures here – but in areas where federal states are often responsible for management and implementation.”
Of the three coalition parties, the Greens are particularly anxious that their climate proposals don’t get trapped in an endless game of competence ping-pong between Berlin and 16 state capitals.
To expedite planning, the new coalition has redefined renewable energy as being in the national interest. With Germany’s last nuclear plant closing in 2022, the clock is ticking on the coalition’s ambitious energy goals – not just for new wind farms in northern Germany but also the electricity “autobahns” needed to carry the energy they produce to industrial regions in the south.
The ink on Berlin’s coalition deal is still wet, but Lindner has already begun dampening expectations around Europe that the next German government will depart radically from the Merkel line.
For instance, Paris is leading a push reform of the stability pact – the euro-zone deficit rulebook – to exclude climate and investment projects from euro-member deficit calculations. Berlin officials, though, say they have less interest in repeating at EU level what is planned at home.
Lindner warned that, though Berlin is not interested in being austerity police, nor would it “follow the advice of those who want to undermine the stability pact”. At most, say well-informed sources, a Scholz administration could revise fiscal rules to allow euro members who have passed the mark of 60 per cent of GDP to stretch out their repayments.
And what of a second push under way to transform the NextGenerationEU fund, agreed to by Chancellor Merkel as a pandemic one-off emergency programme, into a permanent budget for Brussels? Prof Feld predicts that this is "not on the cards in this legislative period".
“We have the NextGenerationEU fund with considerable means for climate and investment that needs to be activated first,” he said. “A revision is not necessary at the moment.”
In Germany, palpable goodwill and curiosity towards the new traffic-light coalition could evaporate soon given a series of immediate challenges – even beyond the pandemic. Above all is how historical experience has made Germans hypersensitive to inflation.
Now at a 30-year high, and likely to hit 6 per cent soon, European Central Bank president Christine Lagarde assured Germans this week that inflation would "calm down next year".
Some in Germany fear, though, that the promised €12 minimum wage – effectively a pay increase for 10 million workers – will trigger a wave of inflationary pay demands in other sectors, too.
Economist Ferdinand Fichtner, of Berlin's University of Applied Sciences, argues that the introduction of the €10 minimum wage in 2015 suggests such fears are unfounded. "The €12 minimum wage will no doubt lead to price rises in certain individual sectors but, based on the 2015 experience, the influence will be temporary," said Prof Fichtner.
Bundesbank
Tackling the inflation rate, and managing expectations of Germany's euro-zone neighbours, are two of the major tasks sitting in the in-tray of the next Bundesbank president, headed for the last decade by Dr Jens Weidmann, a hawkish former economic adviser to Chancellor Merkel.
He has fought a lonely battle at ECB board meetings, protesting about its crisis measures and easy-money policies.
After September’s election, and seeing the looming change of government in Berlin, he announced his resignation as Bundesbank president by year-end.
A decision on his successor is expected in the coming days. All the names on the shortlist are closer to SPD/Scholz's economic thinking: Joachim Nagel, a former Bundesbank board member now at the Bank for International Settlements; Bundesbank vice-president Claudia Buch; and Isabel Schnabel, a member of the ECB's executive board.
The last named may have damaged her chances for suggesting in a television interview that she considered inflation, in the medium term at least, “more on the low side”.
After days covering the impact of inflation price rises on low-earning Germans, the Bild tabloid’s response was swift and brutal: “All German savers should shudder at this woman.”
With enough on his hands during a runaway fourth wave of Covid-19, Scholz moved quickly to give an exclusive, damage-limitation interview to Bild.
“We should not be aiming for high inflation like we have today,” he said. If inflation doesn’t settle next year in line with forecasts, Germany’s next chancellor said, “we have to do something”.
Even before he is sworn in next week as chancellor, Olaf Scholz is expected to do quite a lot of something.
