Andreas Charalambous *
This article analyzes key aspects of the new government's economic program in the Federal Republic of Germany. The agreement reached on the government program is a key point for Germany and the potential impact on economic policy-making at EU level is significant.
The article is based on a presentation to the Cyprus Society for Economic Studies (EKOM) in October 2021, by Dr. Christian Odendahl, economist at the Center for European Reform, as well as various other sources.
General notes
The new government consists of a coalition of three political parties, the Social Democratic Party (SK), the Greens (P) and the Liberal Party (FC), which are characterized by substantial differences in their economic philosophy. The philosophy of SK is based on a center-left platform, with strong social elements, of P in ecological issues and of FC with emphasis on private initiative and fiscal discipline.
The consultations between these three different parties took place in a positive atmosphere, with absolute confidentiality, without leaks to the media, while the extensive 700-page agreement was reached in an unusually fast time.
The program is not based on a single denominator but instead is a synthesis of the priorities of the participating political parties. The so-called “red” lines were set aside with compromise proposals, in favor of a positively oriented agreement, which is of a politically binding nature.
The current situation
Germany is a resilient economy, reflected in the ability of the public sector to finance its needs at negative interest rates and in the current account surplus in the balance of payments, which reflects the savings and financial position of the households.
However, weaknesses in the field of digitization and technology are identified, which threaten the competitive position of traditional industries, such as the automotive industry, as well as the administration, as was evident in the management of the recent health crisis.
Furthermore, the negative effects of intensifying climate change are particularly sensitive issues for the economy and society.
Key axes – priorities
The key message of the agreed program is “boldness for progress”, which prioritizes addressing future challenges in a country designated as a status quo country.
Key areas include (j) ongoing health pandemic management, (ii) Europe and geopolitical issues (iii) economy, financial conditions, industry, technology and transport (iv) climate change (v) home affairs, employment, pensions, social issues, education, etc. (vi) administration.
In terms of health status, a key measure is the strengthening of the advisory scientific team, which acquires a bi-scientific character, covers all relevant specialties and reports directly to the Chancellor. The appointed Minister of Health is considered an excellent academic and technocrat, he is very popular and known to the general public for the courage with which he expressed and expresses his positions on the dangers of the pandemic, without caring about political expediencies. Various red lines related to the issue of vaccination obligation have been crossed while the government is committed to a very aggressive vaccination program.
A more flexible and consensual approach by Germany to European affairs is evident from the agreed program, while cooperation with France, in the direction of a further deepening, is expected to become closer. On broader geopolitical issues, the new German government is projected to become somewhat more assertive towards China and Russia as well as Turkey (which is particularly interested in Cyprus), with an emphasis on political issues such as human rights. This will not mean abandoning Germany's traditionally cautious approach, which reflects its particular interests as an export economy and promotes gradual and consensual changes to the status quo.
Technology is gaining significant priority in the economic field, mainly through the upgrading of a state-owned Development Bank (KFW), which is set to become an innovation and technology promotion agency, with the mission of channeling financing on favorable terms.
The program for the fight against climate change is very ambitious (which is of particular interest to the P), with the adoption of more ambitious pollution reduction targets and planned additional investments in renewable sources and the expansion of the public transport network, including railways, etc. . At the same time the regulatory framework will become much stricter e.g. in terms of specifications in construction while high taxes will be imposed on produced and imported products, which burden the environment. It must be seen with certainty that the new German government will make a great effort to reach an agreement at European and possibly wider level to further burden the production of polluting products, with catalytic negative implications for all countries (including Cyprus) if not adapt to the requirements of climate change agreements.
In social matters (of particular interest to the CC) a significant increase in the minimum wage to 12 euros per hour is foreseen, and the maintenance of the current level of pensions, without raising the retirement age (to 68 years), despite the projected disadvantages for sustainability demographic developments. An innovation is the intention to introduce a provision on the basis of which part of the pension will be financed by a fund that will be invested in shares (called “equity share pension”).
In terms of fiscal policy, the agreement reached, which was particularly difficult given the diametrically opposed policy positions, includes maintaining the constitutionally defined strict debt brake and avoiding tax increases, as the Φ and in contrast to program positions of SK and P. However, reference is made to find ways to finance the ambitious investment program for the green economy and investments, thus satisfying program positions of SK and P.
A similar approach is envisaged in the European fiscal framework, ie maintaining the existing strict and restrictive framework, while exhausting its flexibility to help adapt the heavily indebted countries of the South to the post-pandemic era.
The issue of international cooperation on taxation, with the imposition of a minimum tax rate and country-based taxation (activity based taxation) in order to combat tax evasion for the benefit of countries with favorable tax regimes is very high in the priorities of the new government.
Impact on Europe
The agreement finds a very positive response among the vast majority of economists and European member states. It is considered to be an important background for promoting similar reforms and priorities in the EU and the euro area.
Some criticisms focus on the financing of the ambitious investment and reform program. It is considered difficult to secure adequate funding without more radical changes in the fiscal framework and / or tax increases.
This criticism applies even more to the eurozone. Without a radical change in the framework of the Stability and Growth Pact, it is considered difficult to achieve a smooth adjustment of the economically vulnerable countries of the South while promoting reforms and investment.
* Economist, former director of Financial Stability, Ministry of Finance
The article is also published on the Blog of the Cyprus Economic Studies Society (cypruseconomicsociety.org)
