The evolving dynamics in Germany

Published : 19 Oct 2021 09:10 PM | Updated : 21 Oct 2021 02:36 PM

One mo­nth has nearly passed since the 2021 German federal election was held on 26 September 2021 to elect the members of their 20th Parliament which is also known as the Bundestag. Angela Merkel, the incumbent Chancellor of Germany chose not to run in this election. This is the first time in postwar history that an incumbent Chancellor has not sought re-election. This will mark the start of a new era for Europe's largest economy. The outgoing government will however remain in office as acting government until it is replaced by a new government.

Germany's centre-left Social Democrats (SPD) have narrowly won the country's federal elections, beating the party of outgoing Chancellor Angela Merkel, according to preliminary results. The SPD secured 25.7% of the vote, while the ruling conservative CDU/CSU bloc gained 24.1%. The Greens achieved the best result in their party's history, coming in third with 14.8% of the ballot. The far-right Alternative for Germany, which no one else wants to work with, saw its vote share declining to about 10.6 percent – about 2 percentage points less than in 2017 when it first entered the German Parliament.

Consequently, putting together the next coalition government for Europe’s biggest economy has become a complicated process. Merkel will remain as a caretaker leader until a new government is in place. The electoral system typically produces coalition governments but post-World War II Germany has never previously seen a winning party take less than 31 percent of the vote – or the Union bloc scoring less than that.

This aspect is interesting as the formation of a government could take weeks or months to play out. Nevertheless, it is being assumed by many analysts that when the dust settles, the new Chancellor could be the left-leaning Social Democratic Party's Olaf Scholz, who steered Germany's economy through the pandemic as Finance Minister in a coalition with Merkel. 

Scholz's SPD and the Greens could partner with the pro-business Free Democratic Party, gaining enough power to shift the country's economic agenda to the left. Taxation and spending could then increase as political leaders double down on digitization and policy related to climate variability. There is also a feeling that in such a situation rising government debt may take a back seat. Carsten Brzeski, ING's global head of macro research has in this regard commented that "Greens and liberals in a coalition would bring the freshest innovative forces that we have had in a while in a German government".

Global financial institutions have however observed that the eventual outcome of post-election jockeying among the parties is far from certain. They are as such advising investors to prepare for two potential results: a coalition of the SPD, Green Party and the FDP, or coalition between Merkel's center-right Christian Democratic Union and the Greens and FDP. The former option would mark a move to the left, but would be less dramatic than an alliance between the SPD, Greens and hard-left Die Linke.

This result could produce more ambitious efforts to redistribute wealth and levy taxes. It may be recalled here that Germany enshrined a so-called "debt brake" in its constitution in 2009, thereby severely limiting public borrowing after the financial crisis with few exceptions.

It may be noted here that because of the pandemic, debt rules have been  suspended until 2023 in Germany. That allowed German borrowing to jump, with the country's debt-to-GDP ratio climbing sharply to 70% in 2020. Though such a ratio is less in comparison with the United States, where debt is now projected to exceed the annual GDP, Germany's centrist parties have been eager to get the country's public finances back under control. The Greens, meanwhile, want more permanent easing of debt rules.

It also needs to be mentioned that the Ifo index, which tracks that country's business climate has noted that for the third month in a row in September, according to data released on 24 September, slower growth in China, snarled supply chains and surging gas prices appear to have taken a toll. This pullback could add to pressure on the country's new leaders to scrap Germany's strict fiscal rules so they can keep spending on the domestic economy.

Analysts have noted that climate change dominated party programmes and televised debates more than any other issue during and before the election. Just before the election, more than 100,000 protesters joined a ‘Fridays for Future’ demonstration outside the German parliament building in Berlin, where activist Greta Thunberg told crowds that “no political party is doing even close to enough” to avoid climate disaster. The Green Party has called for a 70% cut in greenhouse gas emissions from 1990 levels by 2030, compared to the current government goal of 65%. It also wants coal plants shuttered by the end of this decade, rather than by 2038, and for new cars to be emissions-free by that point, too.

This could set up a clash with Germany's most powerful businesses. A left-leaning government in Germany could also lead to an increase in taxes for the wealthiest Germans, with the SPD proposing a new wealth tax on the super-rich.

It is also being expected that Germany's new leaders will find other ways to increase spending to address the climate crisis, an issue that has gained even greater prominence after the severe floods that hit the country in July. There is common agreement among all Parties that there is a need to tackle climate change. It is also being presumed that the new government will create a special investment vehicle to circumvent the debt brake, allowing money to flow to green initiatives.

Nevertheless, it is also agreed that whichever combination takes charge they will have to manage the German ongoing recovery from the coronavirus pandemic and also other climate related issues. In this regard, strategists have pointed out that Germany's economy is on track to grow by 2.9% this year and 4.6% next year after contracting by 4.9% in 2020, according to the latest projections from the Organization for Economic Cooperation and Development.

European analysts have also drawn attention to a few other attention-grabbing points. They are- 

(a)The generational split- the traditional parties of the centre left and centre right came out ahead overall, but if one takes a look at the age data, an interesting trend has emerged. Voters under the age of 30 have preferred the Greens on the left (22%) and the libertarian FDP (20%) on the right by a wide margin. In contrast, those over the age of 60 have voted for the centre left (35%) and centre right (34%). Only 9% went for the Greens and 8% for the FDP. However as most of the German electorate is older, the Parties of the left and right came out ahead.

(b) Schleswig, at last, is back in play after this German election. The party representing the Danish and Friesian minority in Germany has made it into Parliament for the first time in about 70 years. The SSW (its German name means the Voters' Union of South Schleswig) will hold a single seat. It gained 0.1% of the overall vote, but is exempt from the normal 5% threshold for representation in the Bundestag because it represents a national minority.

(C) As well as the federal election, there was also a referendum in Berlin on expropriations to create more social housing. About 56% voted in favour of taking the properties of major landlords (more than 3,000 housing units) into public ownership, while 39% were opposed. Rising rents, it may be noted, have been a flashpoint in Berlin because rents have gone up in general by 42% in the five years to 2020. Mayor-elect Franziska Giffey has said that she is opposed to expropriations but the referendum result needs to be respected, and

(d) As a sign of just how well the Social Democrats have done, it may be observed that they have even taken Angela Merkel's old constituency. She had held the seat in Mecklenburg-West Pomerania from 1990, the first federal election after German reunification. There was also a symbolic defeat for Armin Laschet, her successor as the centre-right candidate for Chancellor. After a controversial election campaign, he failed to win a seat in his home state of North Rhine Westphalia. That however does not mean that he is completely out of the German Parliament because he might still be able to be part of the Bundestag on a prescribed list seat.

The first female to be Chancellor of Germany in 2005, Angela Merkel gradually became Germany’s second-longest serving Chancellor in its history. It may be mentioned in this regard that Helmut J.M. Kohl of CDU, a mentor of Merkel, served earlier as Chancellor for the longest period- from 1982 to 1998- (for a while of West Germany and  then of reunified Germany). This has also brought into focus the fact that if a new German Chancellor is not agreed to by the end of 2021 and Merkel continues as the Caretaker Chancellor beyond Christmas- then, she would become the longest serving Chancellor in German history- overtaking Kohl.

Merkel has been widely seen as a steady pair of hands in the face of challenges including the financial crisis of 2007-2008, Britain's exit from the European Union, and, most recently, the Covid-19 pandemic. She has been a driving force for European cohesion and maintenance of close ties with the United States and China. 

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Now, with her departure, a period of unaccustomed uncertainty beckons for Germany, the EU and the wider world, although shifts in Germany's international policy are unlikely to be dramatic.

The poker game now being played in Germany is being watched with interest abroad as well as at home. Germany after all is the EU's richest country and all the allies of that country and its trade partners value its political stability. That also includes Bangladesh.

Muhammad Zamir, a former Ambassador, is an analyst specialized in foreign affairs, right to information and good governance.