Scholz Faces Multiple Hurdles to Forge Working German Government
(Bloomberg) -- Olaf Scholz will take a step toward succeeding Angela Merkel as German chancellor when his Social Democratic party starts exploratory coalition talks with the Greens and the pro-business Free Democrats on Thursday.
After winning a narrow election victory over Merkel’s conservatives, Scholz needs the other two parties to secure a majority in the German parliament. It would be an unprecedented combination, and the three groups will need to overcome contrasting positions in key areas like climate and finance. Haggling could last for months.
With the SPD and the Greens natural partners, getting the FDP on side will be the tougher job for Scholz. The liberals have said they won’t tolerate a shift to the left and reaffirmed their opposition to tax increases and loosening budget rules, but they are sounding open to a deal.
“It’s time to find ways that an alliance can work and not draw new red lines,” Volker Wissing, the FDP’s general secretary, said Thursday on Deutschlandfunk radio. “It’s a difficult task, but it’s not insurmountable.”
Here’s a look at the key issues facing the parties that are best-placed to lead Europe’s largest economy:
Finding an agreement on how to raise money to modernize Europe’s largest economy will be difficult. The SPD and Greens want to increase the burden on the wealthy, while the Free Democrats are seeking cuts for companies and high earners and have vowed not to raise taxes — a promise that Wissing reiterated on Thursday.
Although it sees no broad leeway for tax cuts, the SPD pledges relief for people with low and middle incomes. The Greens reject tax cuts and propose an increase in the personal top rate to 48% from 42%, as well as levies on capital gains and wealth — this would hit the FDP’s constituency hard.
Bottom Line: Entrenched positions will need to soften for there to be a breakthrough that all sides could live with.
Controlling Germany’s purse strings is critical. FDP Chairman Christian Lindner has clearly indicated he wants to be the next finance minister, and that’s not his only demand.
The liberals want the government to return to constitutional borrowing restrictions as soon as possible. Wissing reaffirmed that the party will oppose calls from the Greens to loosen the so-called debt brake to allow for more investment to help German industry transition to climate-friendly technologies. The SPD also takes a looser approach to spending.
While the positions look diametrically opposed, there could be common ground. An off-balance sheet instrument such as a government-backed fund could keep the official budget in check, while securing more cash to fight climate change.
Bottom Line: Fiscal policy is a sticky issue, but there might be room for creative compromise.
The Greens surged to become Germany’s third-strongest force with a vow to take fighting climate change seriously. The party is targeting carbon neutrality within two decades and won’t be willing to compromise much. Their program calls for a 10-year, 500 billion-euro ($580 billion) investment program and stringent regulation to force German industry to lower emissions.
The SPD seeks carbon neutrality for electricity production by 2040 ahead of a broader neutrality goal for 2045. Measures in place to reduce the country’s carbon footprint should go hand-in-hand with employment creation and support for communities facing job losses because of the energy shift.
During the campaign, the FDP attacked the Greens as the “party of prohibitions” and opposes their proposal to ban conventional vehicles from 2030. The Free Democrats want to incentivize innovation and oppose additional regulatory burdens on German industry.
Bottom Line: The issue is critical to German voters, so there’s pressure to make progress. But it will be difficult to get the Greens and the FDP aligned.
Making housing more affordable was one of Scholz’s key pledges, and Berlin’s referendum to authorize the expropriation of large landlords shows just how angry many Germans are over rising rents.
The SPD and Greens aim to accelerate and expand construction of affordable housing. The two parties back some form of rent control, while the FDP — which helped overturn a rent freeze in Berlin — would push back strongly against such regulation. It would instead focus on building more to combat the housing shortage.
Bottom Line: Easing the housing squeeze is critical for the SPD, and the FDP will support giving housing construction a major boost.
Rejecting Merkel-era austerity, the SPD wants to move forward with a common EU investment policy financed by the bloc’s own revenue sources. The Greens want the EU’s bailout fund to become a European Monetary Fund to provide unconditional credit.
Although the FDP backs the idea of an “EMF,” it takes a more cautious view toward the bloc’s finances and wants a full re-implementation of restrictions on member-state debt and deficits after the pandemic.
Bottom Line: Europe can become a difficult issue, but it’s unlikely to cause coalition talks to collapse.
Scholz’s Social Democrats want to reduce risk in the German banking sector, so that tax-payer bailouts won’t be needed in the future. As finance minister, that initiative included promoting the idea of a German banking champion.
The Greens’ focus would also be on strengthening regulation to prevent fraud and manipulation.
The FDP aims to promote a strong European banking market characterized by competition and a wide variety of business models. It could push for the government to offload its stake in Commerzbank AG.
Bottom Line: The parties could find a way to move ahead with consolidation in the German banking sector.
Raising the minimum wage to 12 euros — it’s currently at 9.60 euros and is due to rise to 10.45 euros from July 2022 — was one of Scholz’s main campaign pitches. The Greens are also on board.
The FDP, which represents business interests, opposes the move and instead wants to make low-paid work more flexible.
Bottom Line: Raising Germany’s minimum wage is non-negotiable for Scholz and is unlikely to be the issue that would make the FDP walk away.
©2021 Bloomberg L.P.