Bye bye Mutti: Priorities for Germany’s coalition government

Bye bye Mutti: Priorities for Germany’s coalition government
Key takeaways
The coalition government has set itself ambitious energy transition plans but the concurrent phasing down of coal and nuclear power presents challenges.
While the financial industry is not a key focus at this stage, the general tone indicates the desire for greater harmonization of regulation on an EU level.
The coalition’s majority does not extend to the second chamber; it will need to compromise with other parties to achieve its legislative agenda.

The new German coalition government led by Chancellor Olaf Scholz looks set to take office in early December. The ‘traffic light coalition’ of Social Democrats, Greens and Liberal Party replaces Angela Merkel’s conservative-led government. With ‘Mutti’ (mother) stepping aside after 16 years, what are the priorities for the coalition?

The COVID-19 pandemic is, of course, the most pressing short-term issue for the new government. The coalition’s other prominent goal, as outlined in its treaty, is climate policy.

While there are coalitions of Social Democrats, Greens and the Liberal Party at a local level, it’s the first time they have partnered in federal government. Differences in their programs and opinions remain, but all three parties agree on aiming to stay together past the next election period, given the many long-term projects ahead. Co-leader of the Greens, Robert Habeck will lead a ministry responsible for both the economy and climate change.

Figure 1. Share of energy sources in Germany, H1 2021 (%)

Source: Bundesverband der Energie-und Wasserwirtschaft
Data as of 31 June 2021

A key component of the coalition’s climate-related objectives is the envisioned 2030 goal of phasing-out coal and increase renewables’ contribution to the energy mix to 80% from 40%. The concurrent nuclear phase-out — agreed under Merkel — will remain, which will present challenges.

The intended increase of pricing for carbon emissions is on hold; so as not to worsen the current energy price issues. The new government stresses that its climate policy and the interest of the economy are not contradictory (and they are supported by key industries to take strong actions against climate change).

Debt brake concerns

Another focus of the new government is to upgrade digital infrastructure, along with the long overdue improvement within the public administration and educational systems.

A major criticism of the coalition’s climate change and digitalisation policies from opponents centres on how these measures will be funded, especially due to the “debt brake” that will apply in 2023 again, which requires a balanced budget.

Christian Lindner, leader of the Liberal Party, stresses the importance of prudent budget planning, so it will be worth monitoring whether this turns out as to be a point of conflict within the coalition, or if they find a way to finance the various policies. 

What about financial services?

No change is expected on the country’s strong pro-European position, and further the coalition treaty indicates that the close cooperation with France not only remains a main pillar of the foreign policy but may be even more in focus to push common positions within the EU, first and foremost to aim at a greater “strategic sovereignty” of the European Union.

But regarding the fiscal rules of the union, the coalition treaty states that it is open to discuss the reform the EU Stability and Growth Pact, which can be interpreted as a willingness to also discuss some form of fiscal solidarity as well as backing the “European reinsurance for national deposit guarantee schemes” to further support the banking union.

While the financial industry is not a key focus of the new government at this stage, the general tone of the treaty indicates the desire for greater harmonization of regulation on an EU level rather than a national gold-plating. Neither the prohibition of commissions nor the financial transaction tax (both mentioned in the election campaign) are mentioned in the treaty. Overall, the treaty was received positively by the industry and its associations.

Brexit, Bundestag, and social policies

We can expect continuity in foreign policy, with Annalena Baerbock, co-leader of the Greens, set to become foreign secretary. The new government also clearly stated that it won’t except any changes to the Brexit-Deal with the UK, and urges Brussels to take countermeasures, should the UK breach the agreement. The coalition also plans to focus on the trans-Atlantic alliance with the United States. 

The new government has a clear majority in the Bundestag, but many laws also need to pass the Bundesrat, the second chamber, where the 16 states are represented. The parties of the new government don’t have a majority here. That lies with the Conservatives, so there’ll need to be compromise among all parties for some initiatives to pass the legislative process.

Finally, there are several societal aspects the new government will look to address. These include the upgrade of the nationwide digital infrastructure, and overdue improvement within the public administration and educational system.

Not only that, but they’ll look to develop social policies around promoting equal pay and strengthening laws to protect women and children from violence. Fighting sexism; scrapping certain restrictions on abortions; initiatives to help families to balance work and childcare and the right to vote at the age of 16 all form part of the agenda. They’ll also aim to make it easier for foreigners to not just to become a German citizens, but to hold dual citizenship.

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