Olaf Scholz brings winds of change to Germany

The winners of Germany’s September election have reached a coalition agreement that marks a significant change in political direction of Europe’s largest economy after 16 years of Christian Democratic-led coalitions under Angela Merkel. It signals a change of pace: the coalition agreement shows that the social democratic SPD, the Greens, and the liberal FDP are aiming higher than their lowest common denominator.

The three parties have common values in two important areas. One is social liberalism, expressed in a series of commitments ranging from more permissive drugs policy to easier access to citizenship. The other is a strong commitment to much more public and private investment in a decarbonised and digital economy.

If the incoming “traffic light coalition” makes good on its ambitions, it could inject a dose of much-needed dynamism into both German and European policymaking, and do so in line with the green and digital priorities adopted by the EU and most of its member states. But successful coalition talks do not guarantee an easy cohabitation in office.

On the face of it, the investment needed to restructure the German economy could be stifled by the maintenance of constitutional borrowing limits and a promise not to raise the overall tax burden. These were demanded by the FDP, whose leader Christian Lindner will hold the purse strings as finance minister. The other two parties have secured commitments to social spending, further tying up fiscal resources.

But an understanding has clearly been reached to make it easier for the government to borrow to invest, including special funds outside the main budget, more resources for the state investment bank, and a re-evaluation of the technical calculations of the fiscal rules.

Flexibility can be hoped for at the European level too. As the SPD’s Olaf Scholz moves from the finance ministry to the chancellery as chief of a traffic light government, he brings with him experience of the EU’s thorniest economic and financial reforms. The agreement envisions an EU-wide reinsurance scheme for deposit guarantees, and is open to reforms of the bloc’s stability and growth pact “to strengthen its effectiveness in the face of the challenges of the time”.

The advantage of Germany’s long-winded coalition talks is that much of the difficult bargaining has now been done. But it remains to be seen how much will survive the challenges of office, not least an alarming fourth wave of Covid-19 infections and deaths that is sweeping across the country.

There are real incompatibilities between the three parties’ electorates, in particular the FDP and the other two. Clever ways to get around the spirit of the fiscal rules may alienate liberal voters. Green and liberal foreign policy thinking is visible in a programme whose tone on Russia, China, and the rule of law is sharper than what the rest of Europe had learnt to expect from Berlin under Merkel. But in practice they will face resistance from the SPD, which was after all part of the outgoing government. Inevitably some voters will feel betrayed.

Merkel’s political longevity and style often produced foot-dragging when both domestic and EU-level challenges required a willingness to push change. The election showed her CDU party looking tired from a long period in government; it can benefit from a spell in opposition. If the promise of renewal that this programme offers is for real, German politics, the country’s economy, and Europe could all benefit.