The bigger the choice, the harder it is to choose – what does “greener” mean for Germany?
The debate on charting the course that Germany will take after September 26 is likely to dominate the political summer. Which constellation of parties will work things out and pull together after the elections could make all the difference for Germany’s electorate and economy.
The next government will be green(er)
The Green Party’s high-flying days are over for the time being. Nevertheless, in the election polls for the German Bundestag elections on 26 September, they are still comfortably in second place with scores of around 20% and clearly ahead of the SPD. The Green upswing of the last year can be explained by a certain desire on the part of voters for change after 16 years of Angela Merkel and her administration’s often hapless handling of the pandemic in recent months, as well as by the conservatives’ chaotic “nomination process for chancellor candidates,” which revealed disunity within the party. But it doesn’t all owe to the shortcomings of the current governing parties alone. The Green Party, which has consistently been polling above 15% for over two years now in surveys asking which party Germans would vote for if the Bundestag elections were held next Sunday, is additionally benefiting from a generally growing “green consciousness” in Europe that is especially pronounced in Germany. Even if the CDU/CSU continues to recover from its dip in May in the polls, which appears realistic in view of an continuing pickup in economic activity and significantly receding COVID-19 case counts, one thing is already certain today: the Greens will play a pivotal role in German’s next federal government. The latest poll numbers indicate that a black-green coalition is the likeliest to form the next government, but a black-green-yellow (“Jamaica”) or green-red-yellow (“traffic light”) coalition would also be quite possible from today’s perspective.
The Greens are gaining popularity among voters…
…at the expense of Christian Democrats
Poll on which party Germans would vote for if the Bundestag elections were held next Sunday
Sources: infratest-dimap, Kaiser Partner Privatbank
Since the next German government appears destined to be green(er), it’s particularly worthwhile to take a look at the Green Party’s policy platform. This envisages, among other things, the following key points:
- Climate: The Greens naturally are especially ambitious here. Their platform envisages a 70% reduction in Germany’s CO2emissions from the 1990 level by 2030, which far exceeds the currently planned 55% cutback. To reach that target, subsidies for fossil fuels are to be eliminated, Germany’s exit from coal is to be moved up to 2030 (instead of 2038), and internal combustion cars are to be banned from 2030 onward. Wind and solar energy, in contrast, are to play an even bigger role (dedication of 2% of Germany’s land area to wind power production and installation of solar panels on every new roof) in order to produce all electricity from renewable energy by as early as 2030. A faster increase in the CO2 emissions tax to an ultimately higher level than previously planned is also envisaged.
- Investments (in the future): The Greens want to sharply increase government spending. An extra EUR 50 billion per year (or 1.5% of Germany’s annual gross domestic product) is to be spent over the next decade on climate-neutral infrastructure, digital transformation, research and development, and education.
- Taxes: The increased government spending is to be financed in part through a hike in taxes. Income taxes are to be raised to a top marginal rate of 45% on incomes above EUR 100,000 p.a. and to 48% on incomes above EUR 250,000 p.a. In addition, a 1% wealth tax on personal net assets in excess of EUR 2 million is to be instituted. The Green’s platform also envisages a 25% corporate tax rate without exceptions and a digital tax on big internet companies.
- Debt brake: Estimates give reason to expect that these tax hikes would only marginally boost annual tax revenues. Instead of relying on higher government revenue, the Greens are counting on softening Germany’s “debt brake,” which has limited the federal government’s structural deficit to 0.35% of GDP since 2016. A “golden rule” is to be instituted that exempts future borrowing for public investment from the debt brake, thus allowing for larger budget deficits.
- European policy: The Greens want to further strengthen European integration (and financial solidarity). To do that, they are proposing a bigger EU budget equipped with its own sources of revenue (from plastics, digital and financial transaction taxes) and recommend permanently integrating the reconstruction fund into the EU budget. In addition, the European Stability Mechanism (ESM) is to be converted into a European Monetary Fund (EMF) that would unconditionally grant short-term credit lines to EU member states. The Greens also intend to accelerate the creation of a European banking union (including deposit insurance).
Possible scenarios range from green-tinted…
Expressed in colors, the very likely involvement of the Green Party in the next government can be summarized as a “green, black and double red” outlook for Germany: the country’s economic and environmental policies will become even greener, a balanced federal budget will recede into the far distance, and deficits will become a permanent fixture while income and wealth will be taxed more heavily. How deeply these different hues will tint actual government policies from next year onward and the extent to which they may shape future economic and societal developments in Germany hinge particularly on which constellation of parties is capable of working out their differences and pulling together after the elections. An overly strong lurch to the left would arguably be avoided if the government ends up being formed by a black-green coalition or finds itself in a Jamaica or traffic-light formation. In these three potential governing coalitions, for which, based on the current state of knowledge, we estimate a rough 85% probability that one of them will prevail, the bourgeois liberal partners would presumably ensure the pursuit of mainly realpolitik. Moreover, the chancellor candidates from the Greens and the Social Democrats are both much more pragmatic than their respective parties’ platforms are. Baerbock (or Olaf Scholz) could thus explain to the more leftist wings of their respective bases that more leftism cannot be ramrodded through with the coalition partner.
Stability is over
(Economic) policy uncertainty is trending upward
Economic Policy Uncertainty Index for Germany
Sources: Baker, Bloom and Davis (www.policyuncertainty.com), Kaiser Partner Privatbank
…to the risk of green-red-red
The real economic risk for Germany, on the other hand, could come from a green-red-red coalition. Under such a coalition, the less pragmatic wings of the Social Democratic and Green parties, under incitement from the Left Party, could exert more influence over policies than their party leaders may like, because the party platform of the leftists reads like a threatening screed, and not just from the standpoint of entrepreneurs. (Economically) liberal sprits and wealthy individuals also feel under fire by the Left Party’s manifesto. The Left Party, for instance, wants to introduce a “tax on the rich” (60% on incomes above EUR 260,000 and 75% on incomes above EUR 1 million) and wants to reimpose income taxes on capital gains. It also aims to raise inheritance taxes and to finally introduce the financial transaction tax that has been discussed in Europe for years. And if that weren’t enough, the Left Party’s wealth tax plans go far beyond the Greens’ ideas: the wealth tax would rise to a top rate of up to 5% on net assets of up to EUR 50 million. In addition, the Left Party’s platform includes a progressive one-time wealth levy of 10% to 30% payable in installments over 20 years.
Sure, experience shows that many (leftist) proposals put forth in the runup to elections are just paper tigers and hardly realistic. A potential wealth levy also raises concerns about its constitutionality. Yet one shouldn’t lose sight of the fact that the German government apparatus is a “consensus machine” of sorts. Key policy decisions can seldom be enacted unilaterally by the Bundestag, but must also be approved by the Bundesrat, where big tax hikes on high earners and the wealthy are bound to encounter stiff resistance from conservatives and liberals. Transferring greater (fiscal) policymaking powers from the German to the European parliament – which would be needed, for example, to transform the ESM into an EMF or to establish a joint Eurozone budget – would actually even require an amendment to Germany’s constitution and would thus necessitate ratification by a two-thirds majority in both the Bundestag and the Bundesrat.
Higher welfare spending and the resulting decrease in employment would make it all the more difficult to raise the money needed for the green transition.
Nevertheless, a green-red-red color scheme, which cannot be entirely ruled out today, would tend to be harmful to Germany’s attractiveness as a place to live and do business. It’s no coincidence that Germany has been able to draw on an abundance of resources in the midst of the pandemic. In fact, Germany is still benefiting from the labor-market and social reforms instituted in the years 2003 through 2005, which turned Germany from the “sick man of Europe” into the continent’s growth engine. Employment subject to social insurance contributions has risen by 28% since its nadir in 2006. This has translated into higher tax and social insurance contribution revenue and has enabled Germany to run a federal budget surplus in recent years without any overly harsh austerity measures. If leftist influence prevails and, for instance, the employment market is regulated more stringently, Hartz IV rules are eased further and additional welfare spending is implemented, this could result in a significant increase in social insurance contributions and non-wage labor costs. This would then definitively jeopardize Germany’s competitive advantage, which has already been eroding in recent years. In the worst case, sustained sluggish growth and an exodus of businesses would loom. Higher welfare spending and the resulting decrease in employment would ultimately also make it all the more difficult to raise the money needed for the green transition.