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GERMANY: “Traffic light” perspectives for European and fiscal issues

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The preparatory talks of recent days have led to the launch of exploratory negotiations for a “traffic light” coalition of the Social Democrats (SPD) with the Greens and the center-right Liberals (FDP). These are still not detailed coalition talks; nevertheless, this format is intended to prepare the ground for the former. No parallel talks will be held with parting Chancellor Angela Merkel's Christian alliance (CDU/CSU). This, in turn, increases the internal pressures on Armin Laschet to resign from the CDU leadership following a dismal campaign.

A structured format has been agreed for the three days of meetings next week, with prearranged schedules and regular breaks to allow the three partners to take stock of the talks. This is intended to ensure that potential problems are being identified early, rather than culminating in a late collapse of the talks as in the 2017 “Jamaica” negotiations. To the same end, another goal is to prevent late-night talks – the format typical of Merkel's 16 years at the chancellery (and in the European Council).

The next rounds of talks will be held all day on 11 October and until mid-day on 12 October. After that, designated chancellor Olaf Scholz will travel to Washington for two days of IMF meetings in his current function as finance minister. All partners will then assess the progress made after another all- day meeting on 15 October. It is still unclear whether this will already lead to the start of formal, much more detailed coalition talks. Still, it might be possible, given public perceptions that the “traffic light” coalition will be agreed, and amid ongoing CDU/CSU infighting.

Finally, all three parties have agreed to lead the talks in strict confidentiality, although it remains to be seen whether leaks can be prevented entirely. This might make it harder to gauge the eventual policy program. But in terms of red lines, it is already clear that Scholz cannot give up on his personal promise to raise the hourly minimum wage to EUR 12. The Greens will require a faster way towards net zero. At the same time, tax rises will remain very difficult to accept for the FDP.

As discussed in the past, therefore, the overall logic of the coalition talks will be that the Greens want green investment; the SPD needs to ensure that this transformation happens in a socially balanced way, while the FDP wants to combine it with balanced budgets and no tax hikes. To free up the required fiscal means, the SPD and the Greens will have to push hard for FDP concessions – this will be much more important than progress on other issues that might be watched in Brussels and the markets, for instance, banking union.

Some of the required spending might be generated by a publicly backed investment fund. This is also where the EU dimension might come into play. On the one hand, Berlin could insist on returning to largely unchanged deficit rules in the EU – notwithstanding their practically relaxed interpretation of recent years. In return, Germany could agree to make the pandemic recovery fund – negotiated by Scholz personally – permanent, including the required “own resources.” The fund could be yet another means for boosting German green investment from outside the national budget.

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GERMANY: “Traffic light” perspectives for European and fiscal issues

The preparatory talks of recent days have led to the launch of exploratory negotiations for a “traffic light” coalition of the Social Democrats (SPD)