Insight
Six questions on Germany’s new coalition agreement by Sophia Besch, Noah Gordon and Christian Odendahl 26 November 2021
The German coalition agreement contains sensible commitments on security policy, an ambitious agenda on climate, new-found boldness on China and openness to use fiscal policy more aggressively, at home and in Europe. Germany’s ‘traffic light’ coalition parties – the Social Democrats (SPD), the Greens and the Free Democrats (FDP) – presented their coalition agreement yesterday, after surprisingly swift, calm and secretive negotiations. It is a document mostly aimed at the domestic audience, but there were important European issues at stake, too. And while the election campaign was mostly inward-looking, the coalition treaty suggests that the new German government wants to act as a responsible European partner. The following six questions on fiscal policy, climate and defence policy were often asked ahead of the coalition talks, and the agreement does provide some answers. Will the new government loosen the purse strings? The coalition agreement contains bold investment plans, including on climate, and a more progressive welfare agenda that will not be cheap. So the coalition negotiators spent a good part of the past weeks trying to find clever ways to circumvent the self-imposed limits of Germany’s fiscal rules. And they succeeded, to a degree. The next government plans to use the balance sheets of public entities to increase spending such that it falls outside the rules, such as equity injections into Germany’s state-owned rail company Deutsche Bahn (DB) and the federal agency Bima, which owns and manages federal land and buildings. The traffic light parties also intend to use the public investment bank KfW to subsidise private investment on climate change. There will also be technical tweaks to the repayment schedule of COVID-related public debt and to the calculation of how big the deficit is allowed to be throughout the economic cycle. But with these measures alone, the incoming government would fail to fund its bold agenda. So the coalition negotiators have added another controversial way to generate more fiscal space: to channel unused funds from the COVID pandemic emergency debt towards investments on climate and the digital transformation of the economy. That is a sleight of hand: the emergency carve-out from the rules is not supposed to be used for something other than mitigating the economic impact of the CER INSIGHT: Six questions on Germany’s new coalition agreement 26 NOVEMBER 2021
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