Germany's new government has a promising first step

440
3
Germany's new government has a promising first step

Germany's Social Democratic Party SPD top candidate for chancellor Olaf Scholz, free democratic party SPD leader Robert Habeck and Annalena Baerbock, co-leaders of the SPD Norbert Walter-Borjans and Saskia Esken, arrive to give statements following a meeting for exploratory talks for a possible new coalition in Berlin, Germany, October 15th, 2021. The three German leadership of the next government met Friday in Berlin and agreed a roadmap to form an ambitious new government that included no tax increases, the minimum wage and commitments on infrastructure spending. What are some economists' assessments of the outline. The outcome of exploratory talks shows the parties' enormous willingness to approach each other and respect each other's most important concerns.

It seems that this coalition can work together in a spirit of trust. I'm particularly positive about the spirit of optimism in social policy.

The substantial additional investments planned by the coalition will require massive increases in spending. A large part can be managed within the limits of debt brake. Much depends, however, on how much government allows itself to be attracted into subsidizing climate transition in industry. The draft agreement is a promising first step as it contains many ambitious measures and forward-looking targets. It is characterized by a great balance of social goals, economic security and international responsibility.

However, devil is in the details. It must be clarified how the coalition can make the planned investments without tax increases or breaching the debt brake. The question of how to support private investment also needs answers.

The coalition negotiations will be about fleshing these promises and avoiding lazy compromises. As expected, each of the three parties focussed on the policy areas important to them.

It is still uncertain how the coalition will handle the planned investments without raising taxes or increasing the deficit. The coalition talks will not be a walk in the park, especially since the free-market FDP ticks differently than the Greens and Social Democrats. This is a confidential compromise and a good integrated package that was agreed promptly during constructive discussions.

All parties were able to push through prestigious economic policy projects. The SPD gets the basic minimum wage of 12 euros, the Greens got the basic child benefit and citizen's income, and the FDP shares pension.

To finance investments and tax reliefs, the coalition wants to give climate-damaging subsidies the government can no longer do without. But foreseeable future will not be enough. That's why the coalition will have to make maximum use of the debt brake. It is not clear yet on how it will do this. It's too early to say if it will be a great success or not. It is really a step in the right direction. The paper is a clear attempt to bridge the footprint of all three parties and, in some cases, to incorporate major ideological differences. The draft agreement consists of the enhancement of the debt brake, the obligation to provide funds for private and public investment within existing rules, and a spending review. Overall, a good package.