While the election campaign was overshadowed by the floods and the fourth wave of coronavirus, three issues were conspicuous by their absence: fiscal policy, climate protection and the future of pensions.
For Nadia Gharbi, senior economist at Pictet Wealth Management, the polls point to a three-way coalition. A Jamaica-style coalition between the conservative CDU, the Greens and the liberal FDP, as well as a traffic-light coalition between the centre-left SPD, the Greens and the FDP are both possible. “This could mean prolonged coalition talks and a less ambitious government programme,” she said, recalling that it took six months in 2017 to form the current grand coalition government of Christian Democrats (CDU/CSU) and Social Democrats (SPD). There are many differences of opinion on the key issues of climate targets and national and European fiscal policy.
We believe that fiscal policy could go in an expansionary direction, but to what extent will depend on the composition of the next government.
The first question is the attitude to fiscal policy. “We believe that fiscal policy could go in an expansionary direction, but to what extent will depend on the composition of the next government.”
The centre-right parties (CDU/CSU and FDP) want to reinstate the debt brake principle and the pre-pandemic 60% debt-to-GDP ratio as soon as possible. The Greens, on the other hand, want to reform the debt brake in order to facilitate investment spending and, at the same time, propose an additional public investment of €50bn per year over ten years. It should be noted that a two-thirds majority in parliament is needed to modify the constitutional debt brake, a majority that seems impossible to achieve, in Gharbi’s view. On the revenue side, the CDU/CSU and the FDP prefer tax cuts to tax increases, while the Greens and the SPD propose tax increases for the highest income bracket and the introduction of a wealth tax.
All these “internal” political differences are reflected at the European level. All parties agree on the need to reform the rules of the Stability and Growth Pact (SGP), but not in the same direction. The centre-right parties (CDU/CSU and FDP) do not want a relaxation of the budgetary rules and rule out turning the EU’s recovery package, Next Generation EU, into a permanent budgetary tool. The Greens and SPD are more in favour of relaxing the rules so as not to jeopardise the recovery. The European Commission, which is due to report on fiscal policy reform by the end of the year, cannot ignore the outcome of the 26 September elections.
When you read the election programmes of the major parties, you tend to think that a big bang is in the offing.
The issue of climate protection is central to the programmes, notes Tobias Burggraf, portfolio manager at Ethenea Independent Investors. “When you read the election programmes of the major parties, you tend to think that a big bang is in the offing, particularly with regard to climate protection.” The Greens want an “energy revolution” by massively developing renewable energy sources, imposing tougher sanctions on fossil fuels and creating a climate ministry with veto power. The FDP wants to be a “model and pioneer in climate protection”, but is counting on the market to solve the problem through a reform of the emissions trading scheme. “In the case of the two major parties,” says Burggraf, “the CDU/CSU and the SPD, there are many unanswered questions regarding climate protection. Of course, the commitments made in the Paris climate agreement must be met and greenhouse gas neutrality must be achieved by 2045, but concrete measures and targets barely appear in either programme, less so in the CDU/CSU than in the SPD.”
The idea that the government can balance its budgets seems absurd.
The great absentee of the campaign is the question of the evolution of social spending, according to Bert Flossbach, co-founder of Flossbach von Storch, an investment fund firm. In 2021, this spending will reach the “historic” level of 33.6% of GDP, says Flossbach, “which means that the government is spending more than a third of total economic output, or around €1,200 billion, on social benefits”. This is in line with the federal government’s target of a social benefit ratio of 32% by 2025. Increased spending on pensions and health insurance is the main reason for the upward trend in social budgets. If the ratio of contributors to pensioners currently allows the German economy to absorb the shock of the retiring baby boomers, then “this is the result of an ideal combination of strong economic growth, falling unemployment, a large increase in the percentage of working women and a large proportion of the (still) employed baby boomers.”
“If there are no cuts in pension benefits or large increases in contribution rates,” Flossbach continues, “on the understanding that it is virtually impossible for politicians to cut benefits or raise the retirement age, recent federal subsidies of €101.8 billion will have to increase substantially.” By 2045, if things remain as they are, that would be half of the federal budget that would have to be allocated to pensions. “Given this general information, the idea that the government can balance its budgets seems absurd,” says Flossbach, who is not surprised that “almost every party in the election campaign avoids this subject like the plague. Anyone who doubts the ability of pay-as-you-go financing to guarantee pension security will not be able to score any points with the increasingly important group of older voters.”
However, he believes that pensions could be even more important than climate protection in the elections in four years’ time and “will probably dominate the election campaign in 2029”.
This article was originally published in Paperjam. It has been translated and edited for Delano.