October 19, 2021


GERMANY: More substance, less lingo is needed as coalition talks begin

BY Carsten Nickel

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( 5 mins)
  • The center-right Liberals (FDP) were the last party to agree to formal coalition talks on 18 October, but it is not yet clear on which exact date these will begin this week.
  • The conclusions of the exploratory talks point to the climate transition as the center of political ambition, while tax and welfare policies will largely remain unchanged.
  • The strength of the “progressive core” of FDP and Greens is reflected by at times heavy marketing lingo yet to be substantiated, especially on green investment.

Given fundamental differences between the three parties regarding tax and welfare policies, the future coalition partners have met in the middle, that is, they have agreed to largely retain the status quo. In these areas, Germany will continue to live off the landmark reforms enacted under the country’s most recent social democratic chancellor, Gerhard Schroeder, in the early 2000s. His government’s labor market, pension and fiscal reforms had already allowed Chancellor Angela Merkel to govern for 16 years without major additional initiatives at home.

Tax and welfare continuity

In line with this, the introduction of a vaguely defined “citizens’ income” is the only major commitment to change in domestic welfare policy. Even this, however, looks largely like a rebranding exercise. It allows the Greens and the FDP to claim that their entry into the new government means change, while it enables the Social Democrats (SPD) to rid themselves of the toxic “Hartz IV” brand of Schroeder’s reforms. These had alienated the party from much of its lower-income base. The minimum wage is to be lifted to EUR 12 as promised by the SPD and designated chancellor Olaf Scholz personally. However, this is described as a one-off move in 2022 in the exploratory talks conclusions (which should make for tricky conversations in the new government if inflationary pressures persist).

Apart from this, continuity is the name of the game on the domestic revenue and welfare front. Pension levels will remain unchanged, as the paper rules out hikes as well as cuts. It does, however, envisage some work towards a capital-based pension pillar. The main tax rates (income, corporate, VAT) will remain steady. This also goes for the traditional double structure of public and private health insurance; as expected, the Greens were never too serious about backing longstanding SPD calls for a unitary citizens’ insurance that would also encompass top earners. The coalition partners also commit to returning to the debt brake and refrain from a speed limit on Autobahn highways.

Climate ambition

A speed limit would have been another means in the one area where the coalition partners promise large-scale change: the climate transition. So far, the political focus on climate is mostly reflected in high-level commitments – which is not surprising, as the paper sums up what were merely exploratory talks so far. Given the centrality which all three partners assign to the green transition, however, this area will need much further fleshing out in the detailed coalition talks now ahead.

So far, there are overall commitments to a “path of 1.5 degrees” (of maximum global warming as envisaged under the Paris agreement) and to bringing the exit from coal-based power generation forward from 2038, “ideally” to 2030. The partners also vaguely promise to make solar panels on roofs of private houses “the rule,” while this will simply become binding for commercial buildings. Allowing new registrations exclusively for CO2 neutral cars by 2035 is an easy win, as the European Commission has already proposed this. Likewise, the commitment to quickly phasing out the EEG renewables surcharge was already consensus among all major parties. In contrast, the envisaged acceleration and digitalization of planning procedures will require major horse-trading with the countries’ powerful regional states (and even municipal authorities) of a scale last attempted by Schroeder (who ultimately had to sacrifice his chancellorship for his reform agenda).

Investment, fiscal path and the EU

In line with the overall project of a green social market economy, the three parties have agreed to raise R&D spending to 3.5% of GDP, while building 400,000 new apartments annually, one quarter of which as social housing (an SPD promise as central as lifting the minimum wage). There is talk of a points-based system for the immigration of skilled workers as well as the promise – as vague as is typical for this area – of an “offensive” in support of the social care sector and its personnel.

Those areas where the new government is serious about investment, however, is where the European dimension might matter. As expected, the three parties have positioned themselves rather inflexibly towards stability and growth pact reform but might be more willing to consider a permanent role for the pandemic recovery fund. After all, respective EU funding could help with financing the green transformation – from outside the national budget for which debt-brake continuity has been agreed. Overall, for the future coalition partners to deliver on their at times lofty language about a new beginning for the country, they will, as of this week, have to provide much more substance, especially on the green transition they so clearly want to focus on.

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