It’s not quite white smoke yet. But the written conclusions to preliminary coalition talks between Germany’s Social Democrats, liberals and Greens make it seem all but certain that the three will soon form a “traffic light coalition”. That makes the document compulsory reading for those wanting to understand how the end of the dominance of Angela Merkel and her CDU party at home will affect Europe’s economy.
On the surface, it is easy for a European observer to feel disappointed. A commitment to work “within the framework of the constitutional debt brake” sounds like unwillingness to take off Germany’s self-imposed straitjacket on spending. Over the past 20 years, German restraint has produced destabilising capital exports, delayed Europe’s post-2009 recovery and led to under-investment at home and unprofitable investments abroad.
This apparent continuity is echoed in the approach to European policy. The report adopts SPD leader Olaf Scholz’s “if it ain’t broke, don’t fix it” stance on the EU’s fiscal rules. It is an awfully hidebound signal to send just as Brussels reopens the debate on fiscal reform.
Other important areas for the European economy are entirely neglected. Neither the EU banking union (to encourage cross-border banking) nor the capital markets union (to make corporates use bond and equity financing) receive a mention. Progress on both projects is largely stalled for lack of EU political agreement.
Such paralysis is bad for Europe, but also for Germany. At both domestic and European levels, the status quo presents obstacles to the big ambitions the putative coalition has agreed on. Their document states: “We want to make the 2020s a decade of investments for the future. We therefore aim for a policy that markedly raises both private and public investments.” That is the right goal, especially as the investment boom is intended for badly needed decarbonisation and digitisation.
But success in investing in a greener, more digital Germany will depend on other EU countries feeling able to do the same. One, let alone two, structural revolutions are much harder to pull off for any economy deeply integrated with others if they do not move in the same direction at a similar speed.
Both banking union and capital markets union are essential to lift the quality of private capital investment across Europe, the need for which has rarely been greater. For a new German government to ignore this would be a wasted opportunity amounting to self-harm.
Above all, the coalition ambitions will require more investment-friendly fiscal governance at home and in the EU. The partners promise no big tax rises. Given Germany’s “debt brake” constraint on borrowing it is not clear how they will finance “markedly” greater public investment, or incentives for private investment — for which their document contains many excellent ideas. The promise to free up funds by cutting “superfluous” and “climate-unfriendly” subsidies and spending is unconvincing, given the gap between recent investment rates and what is required. The vow to reduce planning bureaucracy is welcome, but it would be naive to think it relieves the need for additional funds.
The dilemma — how to mobilise ambitious investments within rules that discourage it — is the same nationally and in the EU. If the incoming government does not want to be stymied from the start, it should seek similar solutions at both levels. Keeping the debt brake entails finding ingenuous ways to finance investment off the main public balance sheet, through specially designed institutions. It could also involve reinterpreting its technical workings: a strong case can be made that current methods take an overly austere view of Germany’s productive capacity.
If the new government, and the liberals in particular, cannot accept such moves as being “within the framework” of the brake, their government will never succeed. But if they can, they should be able to show the same imagination for EU rules. After all, Scholz’s view seems perfectly compatible with reinterpreting those in a much more investment-friendly way, as Brussels may yet choose to do.
It is too soon to despair that a change in Berlin means little change in Brussels. It will surely help the banking and capital markets union to have a German chancellor who worked on both as finance minister. It will smooth the way for reinterpreting EU fiscal rules if a German government has already done the same at home. But for that to happen, all coalition partners have to take their opportunity to support drastic improvements in EU economic policy — for Germany’s own benefit.