After a very tight electoral race, Germany is entering what looks like a long period of coalition negotiations. All the outcomes that the outcome will be, it is unlikely to be a positive one for Germany’s approach to European affairs.
The first German election of the post-Merkel era saw Merkel’s party scoring so poorly as to lose what had historically been Merkel’s own seat. Yet, CDU’s candidate chancellor Armin Laschet refused to concede victory to his opponent, SPD’s Olaf Scholz, arguing that no party can derive a clear mandate to govern from the result. Germany therefore enters what looks likely to be a prolonged period of coalition negotiations.
As we discussed in a previous post, the three coalitions that remain most likely based on electoral results are (i) a Traffic Light coalition of the SPD, the Greens and the FDP; (ii) a Jamaica coalition of the CDU, the Greens and the FDP; and (iii) a re-edition of the 2017 Grand Coalition bringing together the CDU and the SPD. Both Scholz and Laschet have so far ruled out option (iii), and the incentive to abide by this pledge is stronger this time than it was in 2017: both the SPD and the CDU would be better off being the senior partner in either a Traffic Light or a Jamaica coalition rather than entering a Grand Coalition as de facto equals. A Jamaica coalition, on the other hand, would be unnatural as it would be headed by the only party that is clearly a loser in this election – whereas a Traffic Light coalition is the only option that brings together parties that can all claim to be winners. As such, we think it remains the most likely option – but it’s feasibility hinges on the FDP, which becomes kingmaker.
As we discussed previously, the electoral platform of the FDP would make it a more natural ally to the CDU/CSU than to the SPD and Greens. Divergences are most evident on economic and fiscal policy, an area that FDP’s leader Christian Lindner would like to take control on as Finance Minister in any coalition the FDP were to enter. On the fiscal side, FDP opposes any weakening of the debt brake in the German constitution (Schuldenbremse) and advocates for a return to of the debt-to-GDP ratio to 60% as quickly as possible.
At the same time, the FDP can hardly afford to walk out on yet another opportunity to be in government as it did in 2017 – when it killed the talks to build a Jamaica coalition with the (then more powerful) CDU and the (then less powerful) Greens. Hence, a face-saving compromise on domestic fiscal policy is likely to be found by formally complying with the debt brake while increasing public investment (likely green investment) through off-balance sheet investment vehicles. Squaring the circle on taxation may instead require all parties to make more significant sacrifices, as the FDP is opposed to raising income taxes on the rich and to any wealth tax, while these are cornerstones of both the Greens’ and the SPD’s electoral programs.
Key Domestic Policy Issues for Germany’s four Largest Parties
|Public Debt||– No weakening the debt brake – Quickly revert to 60%||– No mention of debt brake |
– No post-COVID austerity, use all ‘constitutionally possible leeway for borrowing’
|Keep the debt brake but reform to enable more investment||– No weakening of debt brake |
– Quickly revert to 60%
|Investment||– Public R&D investment of 3.5% of GDP by 2025 |
– Strengthen climate for private investment (e.g. Through streamlining procedures)
|– Public R&D investment of 3.5% of GDP by 2025 |
– The State as a ‘strategic investor’: federal investment of at least 50bn per year
– Relief for heavily indebted municipalities and East DE housing associations
|Additional public investment of 50bn per year in this decade||Public & private investment at 25% of GDP by 2025|
|Taxation||– No tax hike |
– No wealth tax
– No increase in inheritance tax
– Abolish solidarity surcharge
– Increase family tax breaks and children allowances
– 25% corporate profit tax rate
|– Lower income tax for ‘the majority’, hike for top 5% |
– Keep and extend solidarity surcharge for top earners
– In favour of wealth tax (uniform 1% on ‘high assets’)
– Reform inheritance tax with effective minimum for ‘corporate heirs’ and ‘asset holding family foundations’
|– Increase income tax allowance on lower middle-income groups|
– Increase marginal rate for income tax to 45% above 100k and 48k above 200k
– Wealth tax (1% over 2 million) Introduce citizenship-based tax liability (like in the US)
– 25% corporate tax rate
|– Reduce tax burden for employees below 40% |
– Shift top tax bracket to income above 90k
– Abolish solidarity surcharge
|Labour / Welfare||Increase retirement age to 67 years old in 2030||– Strengthen and expand the scope of collective bargaining agreements – Minimum wage raised to 12€, same wage for temporary and permanent workers|
– Expand social security provisions on mini jobs
|Secure pension level at 48%||Non-insurance benefits to be financed through the budget|
|Climate||– Carbon neutral by 2045 |
– Cut GHG emissions by 65% by 2030 compared to 1990
– Phase out coal by 2038
– Extend European ETS to include mobility and heating
– Abolish renewable electricity surcharge (EEG) Increase tax deductions for investment in energy efficiency
|– Carbon neutral by 2045 |
– Cut GHG emissions by 65% by 2030 compared to 1990, 88% by 2040
– Abolish renewable electricity surcharge (EEG) by 2025, financed by federal budget
– Buildings’ CO2 price to be borne by landlords
– Cut subsidies for activities environmentally harmful
|– Carbon neutral in 20 years |
– Cut GHG emissions 70% by 2030
– 100% renewable energy by 2035
– Phase out coal by 2030
– CO2 price at 60/ton euro from 2023 for industry and electricity
– Lowering EEG surcharge and climate bonus fund
– Anchor ‘CO2 brake’ in Basic Law
– No combustion engine cars sold by 2030 onwards
|– Carbon neutrality by 2050 |
– Abolish EEG surcharge
On the domestic front, the fiscal policy stance of a Traffic Light coalition is therefore likely to be less conservative than in the pre-COVID period, but not to deviate completely from the course. Where the constraint exerted by the FDP on an otherwise progressive Chancellor Scholz will be more visible, however, will be in the remit of European fiscal and economic integration.
Key European Policy Issues for Germany’s four Largest Parties
|EU Fiscal Rules||Reinstate SGP rules with no softening Less discretion, stricter conditionality in EDP||SGP to be reformed into a ‘Sustainability Pact’ to promote investment||SGP to be reformed to support investment||Reform SGP to increase penalties for infringement|
|NGEU||Temporary one/off||Should become a ‘lasting process’ of integration||Turn it into a permanent investment fund||Temporary one/off|
|EMU Architecture||No debt Mutualization Complete BU and CMU No liability pooling EDIS Sovereign insolvency framework for EA states||– EU should evolve into a ‘real fiscal, economic and social union’ |
– Complete BU and CMU
– In favour of new EU Own Resources
– In favour of EZ permanent unemployment reinsurance
|– Strengthen EU budget with own resources |
– Turn ESM into an EU Monetary Fund (EMF) allowed to issue unconditional ST credit lines
– Complete BU w. EDIS
|No EDIS |
– Sovereign insolvency framework for EA states
– Turn ESM into EMF
– No debt mutualization
|EU Digital Taxation||In favour||In favour||In favour||Own resources are illegal|
|EU CCTB||In favour||In favour of a minimum global tax||In favour|
|EU FTT||In favour||In favour||In favour||Own resources are illegal|
The FDP holds a very conservative position on European fiscal integration. Like the CDU/CSU, the FDP opposes the idea of turning Next Generation EU (NGEU) into a permanent federal spending facility, it opposes any kind of debt mutualization (including through a European Deposit Insurance Scheme), and it supports the creation of a sovereign insolvency framework for EA members states. Like the CDU/CSU, the FDP supports the reinstatement of the Stability and Growth Pact as it was before the COVID-19 crisis but also calls for increasing the penalties for infringements. Unlike the Union, however, FDP goes as far as to oppose any kind of tax levied at the EU level, arguing that EU own resources are illegal.
In light of the FDP’s extreme position, my concern is that the need to keep together a somewhat un-natural coalition on domestic policy will considerably reduce Scholz’s room for maneuver on European policy. In a Traffic Light coalition scenario, the FDP will have to make important concessions on domestic fiscal stance but is likely to ask in exchange for Scholz not to take a very progressive position on European fiscal integration. While the FDP might be convinced to support more investment at the EU level, especially if focused on green and digital, it would certainly oppose any softening of the SGP and likely curtail attempts to turn the one-off Next Generation EU into some form of quasi-federal permanent tool embedded in the EU budget through increased own resources.
With France set to enter its own phase of electoral campaigning soon, and Scholz unlikely to take any strong position on SGP reform as long as a government coalition is not formed in Germany, the European Commission will be in a tricky position when deciding what kind of fiscal guidance to issue ahead of the next EU Semester cycle. Any crossing of the FDP’s red line on the SGP may in fact derail the formation of a progressive coalition in Germany and have negative implications for the outcome of the crucial re-discussion of the SGP that will be tabled in 2023.
While it is still early to draw any solid conclusion on what the orientation of the incoming German government will be on European affairs, there is a risk that the first election of the post-Merkel era may have marked the beginning of a period of German disengagement.