What lies ahead for Germany’s post-Merkel political economy?

Whether in life, business or politics, Germans are – by and large – culturally averse to risk and uncertainty. That makes this year's federal election a rare, egregious, exception. With just over a week to go, there are two kinds of people in Berlin: those who admit having no idea what government Germany will get next – and liars.

For the first time in 15 years, the centre-left Social Democratic Party (SPD) is leading polls, with 25-26 per cent support, while the centre-right Christian Democratic Union (CDU) is trailing by 2-4 percentage points. Whoever finishes first on the evening of September 26th will set the direction on what follows in exploratory talks, eventual coalition and subsequent policy.

A wild card is the departure of Angela Merkel after four terms meaning, for the first time, no incumbent is running for re-election.

Despite the SPD momentum with its lead candidate Olaf Scholz, however, it's not at all certain that the outgoing federal finance minister will be Germany's next chancellor.

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Instead Scholz, like his CDU rival Armin Laschet, has one final week to hit on the winning mix of continuity and change most palatable to German voters on three key topics: climate protection, welfare pensions and economic policy.

Even with every sixth voter still undecided and everything to play for, this election will dictate the political and economic agenda across the continent and beyond.

With weeks – even months – of coalition talks looming in Berlin after polls close, there is already a palpable mood of future nostalgia for the 16-year Merkel era.

The final Merkel years, catalysed by the pandemic, have seen Berlin widen its gaze from an obsession with balanced budgets

Some term it a second Wirtschaftswunder or economic miracle era. At 6 per cent, unemployment is half that what it was when she took office in 2005; meanwhile her government’s fast-acting, pragmatic economic policies helped Europe’s largest economy recover fast – twice – from existential shocks.

The financial crisis of 2009 triggered a 6 per cent contraction in GDP that year, followed immediately by a 4 per cent leap. Germany avoided recession during the euro crisis while last year’s pandemic slump of nearly 5 per cent will, according to forecasts, flip into growth of between 2 and 3 per cent – squeezed by worldwide materials shortages.

Backward infrastructure

Still, many German economists say all is not well in Germany. They view the fourth Merkel term – her CDU’s third grand coalition with the SPD – as a time of stasis and slippage in the country’s competitiveness.

All election promises on tax and pension reform acknowledge, some more explicitly than others, key points of Merkel-era neglect. There is widespread agreement, too, that key areas of Germany’s physical and digital infrastructure are hopelessly backward and were exposed as such in the pandemic.

While the main parties emphasise their differences on the policy trail – the SPD is pushing a €12 minimum wage and rent controls; the Greens want companies to make a great green leap forward – a closer look at policy offerings reveals how much overlap there is.

On tax and pension reform, the left/right debate is most obvious while, on infrastructure and investment at national and EU level, the differences are more over how to finance domestic investment.

The CDU and liberal Free Democratic Party favour ending a pandemic-era suspension of the so-called “debt brake”. This limits German governments’ ability to pile up debt by requiring an annual budget deficit below 0.35 per cent of GDP.

While the brake is a priority for the FDP, the CDU is vague on its timeline. The Greens want ambitious reform of the debt rulebook while the SPD, though open to change, are fudging on the detail.

At EU level, the CDU and FDP oppose any ideas of a fiscal union and want a return to euro zone fiscal rules; the SPD and Greens propose a more flexible stability pact for euro members, adding sustainability measures. While a centre-left SPD-Green alliance is more open to the idea of the EU raising its own resources, the CDU/FDP insist pandemic era moves in this direction were a one-off.

For all the debate, many German economists view all this more as shadow-boxing than real deep, unbridgeable policy differences – given each party is, for now at least, theoretically a future coalition partner of the others.

‘Destroy prosperity’

Playing catch-up in polls, CDU lead candidate Laschet has warned voters that any centre-left government without his party’s involvement would “destroy prosperity”. But even he has softened CDU positions on once divisive issues. Whereas Germany’s green debate was once split down jobs or climate lines, disastrous summer floods have shifted the CDU leader to speak the language of the Greens and the SPD. This week he proposed interest-free loans for homeowners to install roof-top solar panels and called for Germany to be “a climate-neutral industrial country that secures the jobs we have, creates new jobs and do this all in a socially cohesive way”.

This campaign’s political and economic debates have been far less emotive than the early Merkel years. Even the pandemic-induced spike in German inflation – traditionally a neuralgic point of German debate, given historical trauma – has prompted a few flutters of concern in the media, but no panic. Efforts by the far-right Alternative für Deutschland (AfD) to push the issue have run out of steam. It emerged a decade ago in a heated debate over euro-crisis bond-buying, when Germany was often an outlier in emotive euro zone economic discourse. Today, a new generation of economists and media commentators have nudged Berlin’s politicians towards Europe’s economic mainstream.

The final Merkel years, catalysed by the pandemic, have seen Berlin widen its gaze from an obsession with balanced budgets, the so-called “black zero”.

Regardless of the next Berlin administration, Irish officials expect the post-Brexit boom in bilateral trade to continue

The post-election “debt brake” battle ground will take place in a country where support measures to fight against Covid-19 have shoved Germany’s debt-to-GDP ratio above 70 per cent this year, from just under 60 per cent in 2019.

How to pay down some of that debt while financing investment plans will be the big debate of any new government.

"There's far more differentiation in economic thinking and no longer nearly as much ordoliberal, black-and-white thinking," said Dr Ferdinand Fichtner, professor for macroeconomics and economic policy at Berlin's Academy of Applied Sciences (HTW).

Despite huge European expectations of the German vote, Fichtner says not even a Chancellor Scholz – an SPD centrist – is likely to depart too far from Merkel on key policy.

Fiscal integration

“Scholz is still Scholz and I don’t see Scholz giving too much away,” he said.

Financial analysts agree, with ING's Carsten Brzeski predicting evolution rather than revolution in Berlin's engagement with Brussels and its EU partners.

A CDU-Green government would be less energetic than a SPD-Green coalition in making the European Recovery Fund a permanent feature while pushing for closer fiscal integration.

“The big German push for more euro zone fiscal stimulus will come with a ‘Germany first’ investment agenda and some trickling through effects for the rest of the euro zone, rather than a ‘euro first’ push,” suggests Brzeski.

Regardless of the next Berlin administration, Irish officials and government agencies expect the post-Brexit boom in bilateral trade to continue.

Last week, Tánaiste Leo Varadkar ended a three-day European trade tour in Germany, Ireland's third trading partner in goods and services, accounting for 11 per cent of Irish exports, totalling about €25 billion annually.

Add Germany as the second-largest provider of foreign direct investment (FDI), the relationship will be a key part of Ireland’s export-lead recovery plan.

"Ireland has strong and embedded trade links with Germany and we intend to further strengthen these," said Varadkar in Berlin. "After Brexit, our two countries are closer than ever."

For Manus Rooney, Enterprise Ireland's country manager for Germany, there is a night-and-day difference in the bilateral business relationship compared to a decade ago.

“The big difference is the appetite of clients to put resources on the ground here, when they come to the market they have really done their homework,” he said. “What always struck me about Germany is its boring consistency of being stable and robust. If you want to rebuild your business post-Covid there is no better place than Germany.”