Merkel's Coalition Backs Pension Pledge Seen as Populism Barrier

(Bloomberg) -- Chancellor Angela Merkel’s government agreed to lock in German pension levels through 2025, settling a dispute in her three-party coalition with a batch of measures expected to spur consumer spending.

With Germany’s economy showing solid momentum, Merkel’s coalition is framing the package partly as an antidote to populism that attracts voters who feel left behind in Europe’s biggest economy. The measures include a cut in the payroll tax that helps fund jobless insurance, reflecting the country’s balanced budget and lowest unemployment in a quarter-century.

The package, approved by Merkel’s cabinet on Wednesday after two late-night meetings by coalition leaders within days, fulfills a pledge in the coalition agenda her Christian Democrat-led bloc crafted last spring with the Social Democrats after both sides fell to historic electoral lows.

Germany’s coalition is “adding more pro-cyclical fiscal stimulus to the economy,” Carsten Brzeski, chief economist at ING in Frankfurt, said in a note. “While from a political point of view such pro-cyclical fiscal policies are highly understandable, a similar or even higher ambition level regarding long-term structural investments would probably benefit the economy even more.”

Specter of Trump

Combined with 10 billion euros ($11.7 billion) in annual tax relief agreed by the government in June, the measures amount to a fiscal stimulus of about 0.4 percent of gross domestic product, Brzeski said.

Less than a year after a national election last September, the buildup to Merkel’s first major legislative initiative after the summer break was a chance for the SPD, her junior coalition partner, to heighten its profile.

“Stable pensions will prevent a German Trump,” Finance Minister Olaf Scholz, a Social Democrat, told Bild am Sonntag newspaper last week.

While the Social Democrats backed off a demand to lock in the level of publicly guaranteed retirement benefits until 2040, Finance Minister Olaf Scholz said the SPD would keep the proposal on the table and criticized Merkel’s Christian Democrats for boosting defense spending.

“I’m outraged that politicians who increase defense spending by 40 billion euros a year complain loudly when it’s about smaller amounts for pensions,” Scholz was quoted as telling Stern magazine in an interview published Wednesday. Voters should see that “you can have stable pensions with the SPD, but not with the others,” he said.

Poll Slump

Four national polls released over the past week suggest support for Merkel’s CDU-CSU bloc is between 28 percent and 30 percent, compared with a maximum of 18 percent for the SPD. The anti-immigration Alternative for Germany, or AfD, polled as high as 17 percent.

The CDU-CSU’s support fell to the lowest since 1949 in the last election and the SPD declined to its lowest since World War II. The AfD took 12.6 percent in September, lifting a far-right party into the German parliament for the first time since the immediate aftermath of World War II.

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