An economic outlook on the new German government

Author: Joost Haddinga                                                                                                                                                                          Date: February 18, 2022

Business as usual or a step into a new progressive future?

The era of Angela Merkel (CDU) as a leading politician in both Germany and Europe has officially ended with her handing over the position of chancellor to Olaf Scholz (SPD). Now the question arises what will change in Germany, whether this change will have any influence on Europe or Germany’s economic relation or whether anything will in the end remain as it was under Merkel for the past 16 years.

Everyone born after 2000 has not consciously experienced another German leader than Angela Merkel who ruled for four election periods – or 16 years – from 2005 to 2021 and hence shaped a complete German generation in times of various crises and adversities all over Europe. Not for nothing she was highly recognized as one of the world’s most powerful and consistent leaders and she greatly boosted the German image in Europe and around the world. Nevertheless, no one rules endlessly and now, after her successor Armin Laschet was defeated in this year’s federal election, for the first time in German history after World War II a government of three parties has been formed under the leadership of the social democrats (SPD): The ‘Ampel’ (eng. Traffic light) coalition comprising SPD, DIE GRÜNEN (Greens) and FDP (Liberals) has proposed to lead change and to make way for urgently needed reforms to get on track with digitalization and innovation, to tackle bureaucracy and to become a leader in fighting climate change. Although the parties disagree on certain topics, they still found a way to strive together towards a better future for both Germany and Europe.

Their main goals involve making manufacturing climate neutral in Germany, filling social and economic gaps by benefiting families and the poor while also making large investments in infrastructure and climate-friendly technologies in agriculture. By doing so, the government might partially step away permanently from their austerity measures which were implemented after the Euro crisis and keep relying more on debt financing even after COVID-19. Another main aim of the coalition is progress: By implementing a partial funding of pensions by investments on capital markets the social system shall be reformed and by funding infrastructure projects (5G etc.) and increasing the possibilities for founders and start-ups, they want to transform Germany into a yet again productive leading country in which both people and companies can thrive and shape the future.

Europe and the membership in western trade alliances remain very important for Germany as well as the relation to their major neighbors and trade partners. However, it will be interesting to see how they adjust their politics with regards to Russia and China in the light of human rights violations. Although minister of foreign affairs Baerbock wants to be harsh against them, it is questionable how far this will benefit Germany since China especially is a major trading partner. On the other hand, especially towards the US and western Europe the relations are forthright and positive and can lead to even further cooperation and more trade in the future.

In the end it still remains questionable how much of their progressive agenda will be put into place eventually, with Olaf Scholz not having shown to be a visionary so far while serving under Merkel and Germany still being burdened heavily by the consequences of COVID-19 on suppliers and production. It will further be interesting to see whether a government of three parties will be able to hold together or whether ideological arguments will lead to an end of their coalition due to their different views on certain topics. Nonetheless, Germany has now gained a valuable chance to put off the dust acquired under Merkel and to lead the way – in a different way – through the next decade with new faces and personality on the forefront of geopolitics.

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