Germany’s New Federal Government – An Initial Assessment

On December 8th, 2021, the members of the Bundestag elected Olaf Scholz as the ninth Chancellor of the Federal Republic of Germany. It marks the end of an era after 16 years of Angela Merkel in the chancellery and the start of a new phase. Whether this new phase will also once be called an era remains to be seen.

Scholz, a Social Democrat and until recently Federal Minister of Finance in Merkel’s administration, heads a three-party governing coalition consisting of the Social Democrats (SPD), the Greens and the liberal Free Democrats (FDP). Based on the traditional party colors, this is widely referred to as the traffic light coalition (Ampel).

The formation of the new government follows the elections on September 26th, in which the SPD narrowly prevailed over the center-right CDU/CSU (25.7% vs. 24.1% of the popular vote). The CDU/CSU suffered heavy losses and slid into a serious leadership crisis that has not been resolved to this day. The election victory, combined with the internal fracturing of the CDU, cleared the way for coalition negotiations led by the SPD. The talks with the Greens and the FDP were held in October and November in an apparently very disciplined manner and resulted in a 177-page coalition agreement entitled “Daring More Progress – Alliance for Freedom, Justice, and Sustainability”.

The SPD, the Greens and the FDP are making big promises. They want to make the country more equitable, revolutionize energy and climate policy, and invest a lot of money to do so. Theirs is a narrative of departure and fundamental change. It will be interesting to see what happens when these promises collide with reality.

A coalition between these three parties is a novelty at the federal level and has also rarely been tried at the state level. This is no surprise, given the clear differences between the three partners. The priorities in their values and programs – social equality (SPD), ecological change (Greens), individual freedom and a free-market economy (FDP) – have grown historically and are clearly recognizable and in part at odds with each other.

These differences translate into significant divides in terms of specific policy questions, especially between the Greens and the FDP. This applies above all to general ideas on regulatory policy and the role of the state in society. There are also strong differences in the policy areas of the labor market, the budget, Europe and climate protection, to name just a few fields.

A three-color coalition government is likely to require more complex negotiation processes than the former “Grand Coalition” between the CDU/CSU and the SPD. Although there were also ongoing conflicts over content and decision-making authority (a.k.a. power politics) in the previous coalition, the political spectrum assembled in the new coalition is undoubtedly broader, and the SPD’s as well as the Greens’ internal discord between broadly centrist and more radical left-wing positions could erupt again at any time. The FDP, meanwhile, will be busy convincing its voter base that it is okay to govern with two left-of-center parties.

It is also questionable whether the SPD will be able to tell a lasting story of change and transformation, given that it has been in government for 19 of the past 23 years.

The state of the opposition is a big unknown at the moment. While the far-left Die Linke has been reduced to a merely marginal force (-4.3% to now 4.9%), the populist right AfD also performed poorly (-2.3% to now 10.3%) and is caught up in an internal conflict between traditional conservatives and far-right hardliners.

The biggest question, of course, is the future of the CDU/CSU. The first step is for the CDU to end its leadership crisis by electing a new party leader – a result is expected in the coming weeks. After that, it will be important for the strongest opposition party to find new unity as quickly as possible in order to be able to put pressure on the new federal government.

Olaf Scholz, 63, has served as Deputy Chancellor and Federal Minister of Finance of the Federal Republic of Germany since 2018. His previous political positions include, among others, First Mayor of Hamburg (2011-18), Federal Minister of Labor and Social Affairs (2007-09), and SPD Secretary General (2002-2004).

Scholz is a proven centrist whose relationship with the SPD’s influential left-wing is anything but intimate. However, to the surprise of many observers, he managed to secure the SPD’s unity during the campaign and thus win the election – a success that few had thought possible just two months before the election.

For the moment, he has the party clearly behind him, as evidenced among other things by the impressive 98.8 % with which the SPD delegates approved the coalition agreement.

Going forward, one of his main challenges will arguably be to secure not only the discipline of the coalition with the Greens and the FDP, but also the continued support of the left-leaning sections of the SPD.

Scholz’s political and leadership style resembles Angela Merkel’s in many respects: striving for balance, calm, and super-rational. Commentators have referred to Scholz as lacking charisma and being almost robotically on message.

In the federal cabinet, the SPD will head seven of the sixteen ministries, the Greens five and the FDP four. The cabinet is a mix of familiar faces and a few surprises, including ministers no one had on their mind. Here’s a look at some of the key ministries:

The most spectacular personnel development is arguably the appointment of Robert Habeck (Greens) as the new Minister for Economic Affairs and Climate Protection. Habeck also carries the (unofficial) title of Vice-Chancellor. His ministry’s newly created comprehensive portfolio represents a paradigm shift: His task will be to reconcile the interests of the economy on the one hand and climate protection on the other, which have so far usually been understood as mutually opposing. This puts Habeck and his portfolio at the center of future German policy. His task is nothing less than to drive the transformation of one of the world’s strongest industrial powers into a “net-zero” future without jeopardizing the strength of the German economy.

The Foreign Ministry is headed by Annalena Baerbock, who played an altogether disappointing role in the election campaign as the Green Party’s candidate for chancellor – at times in the spring it had seemed possible that she might succeed. Not surprisingly, human rights issues play a major role in the Greens’ foreign policy ideas. Baerbock has taken a clearly critical stance toward Russia and China, and the foreign policy community is eagerly awaiting to find out what impact this positioning will have on the new German government’s future foreign policy.

Christian Lindner, the FDP’s strongman, will head the Finance Ministry, a job he has long flirted with. Control of the budget gives him a powerful position, and he will do his best to use it in the interest of fiscal discipline – a goal that from the outset suggests strong conflicts with the ecological and social policy goals of his coalition partners as well as with some of Germany’s southern European partners.

Although many stakeholders had called for a separate ministry for digital transformation, this was not implemented. Instead, the responsibilities for digital policy are being concentrated in the Ministry of Transport and Digital Affairs. It is to be headed by Volker Wissing, Secretary General of the FDP. This appointment was somewhat of a surprise, as the Greens were generally considered to be eyeing this ministry in light of the role of sustainable transport in their climate policy vision.

Unsurprisingly, the SPD focused on securing a number of ministries with which it can pursue its traditional social policy priorities. These include the Ministry of Labor and Social Affairs (Hubertus Heil), Health (Karl Lauterbach), Housing and Construction (Klara Geywitz) as well as Economic Cooperation and Development (Svenja Schulze).

In two surprise moves, Scholz nominated former Minister of Justice Christine Lambrecht as Minister of Defense and Nancy Faeser, until then almost unknown outside of her home state of Hesse, as Minister of the Interior.

Other portfolios:

Head of the Chancellery: Wolfgang Schmidt (SPD)

Family Affairs: Anne Spiegel (Greens)

Environment: Steffi Lemke (Greens)

Agriculture: Cem Özdemir (Greens)

Justice: Marco Buschmann (FDP)

Research and Education: Bettina Stark-Watzinger (FDP)

Under the title “Daring More Progress – Alliance for Freedom, Justice, and Sustainability”, the 177-page coalition agreement presents the intended milestones for the new Federal Government’s political work over the next four years. However, it is important to understand that while the document forms the basis for the work of the new coalition, there is plenty of room for maneuvering and many things are not set in stone.

The core part of the coalition agreement is climate policy, which is intended to lead Germany to climate neutrality by 2045. This is a gigantic cross-cutting task that will affect the entire economy and industrial policy and that will also have a massive impact on many other policy areas. Commentators have called the ambitions a “revolutionary program”. Pages after pages of the document deal with climate policy in one form or another. If implemented as envisioned, this can clearly be called a fundamental transformation of Europe’s largest economy.

In the election campaign and coalition talks, the Greens had lobbied to create a separate Climate Ministry with veto powers over all policy proposals. The fact that this has been transformed into a mandatory “climate check” for new legislative drafts puts the tall demands in perspective. The Greens have announced that they intend to reject legislation with negative climate impacts in the cabinet but in real life that may prove to be complicated.

In the following, we provide a top-line overview of the central statements of the coalition agreement, with particular attention to topics that are especially important from the point of view of business.

Modernization Of the State, Digital Transformation

The term “digital” appears 226 times in the coalition agreement (more frequently even than the word “climate”) and the fact that the very first chapter of the document deals with digital transformation demonstrates the high priority with which the new government intends to pursue the issue. A special focus is put on the modernization of the state itself: The creation of a more digital and agile administration is clearly defined as one of the new government’s key areas of action.

• Provide nationwide coverage with fiber optics (“fiber-to-the-home”) and the most up-to-date mobile communications standard.

• Acceleration of the use of digital technologies to speed up administrative procedures and reduce bureaucracy, e. g. in planning and approval procedures, tax administration and legal proceedings.

• Creation of a digital legislative portal to increase the transparency of legislative processes.

• Expansion of intensive public participation as early as possible in order to speed up administrative procedures (e. g. approval of infrastructure projects).

• Secure digital sovereignty, among other things through the right to interoperability and portability as well as relying on open standards, open-source and European ecosystems, e. g. in 5G or AI.

• Examine the possibility of digital execution in any legislative process (“Digital Check”).

• Revision of various digital legal frameworks (including Telemedia Act, TMG and Network Enforcement Act, NetzDG) based on European guidelines.

Energy & Climate

Following election campaigns from all major parties that put climate protection on top of the agenda, the policy goals laid out in the coalition contract were expected to be ambitious. They are. And turning them around will not only be a politically but also socially challenging task.

• Climate protection to become a cross-cutting task demanding all government portfolios to assess the climate impact of any legislation and its compatibility with the national climate protection goals (“climate check”). Compliance with climate targets to be monitored annually.

• Climate protection law to be revised in 2022.

• Adherence to nuclear phase-out (2022).

• Coal phase-out (currently scheduled for 2038) to be brought forward, “ideally” to 2030.

• Massive expansion of renewable energies (80 % of estimated gross electricity demand of 680-750 TWh in 2030 to come from renewables).-Mandatory solar installations for new commercial buildings, recommended for residential buildings, target for the expansion of photovoltaics of approx. 200 GW by 2030.

  • Mandatory solar installations for new commercial buildings, recommended for residential buildings, target for the expansion of photovoltaics of approx. 200 GW by 2030.

  • 2 % of Germany’s onshore surface to be dedicated to wind power expansion. Repowering to be made easier. Increase of offshore wind capacities to at least 30 GW in 2030, 40 GW in 2035 and 70 GW in 2045.

• Recognition of the role of natural gas as “essential for the transition period”. No date set for a natural gas phase-out. New gas plants to be built “H2-ready”. Operating licenses for energy infrastructure (power plants or gas pipelines) beyond 2045 shall allow only non-fossil fuels.

• Support for the establishment of a European Union for Green Hydrogen. Goal for Germany to become lead market for H2 technologies by 2030, update of the national H2 Implicit acceptance of non-green hydrogen (“In the interest of a rapid market ramp-up…”).

• Creation of support instruments to achieve the climate targets, e. g. carbon contracts for difference (CCfD).

• Initiative to set up an international climate club open to all countries with a joint CO2 price and a common CO2 border adjustment mechanism.

Mobility

NGOs have harshly criticized the coalition agreement for lacking a coherent strategy for Germany to catch up in its lagging transition to clean mobility. However, commentators have also pointed out that the vague targets could give minister Volker Wissing, who has acknowledged that “enormous changes” are necessary, the flexibility to implement them.

• Emissions, combustion engines: By 2035 (or earlier) only CO2-neutral vehicles or vehicles that run on e-fuels may be newly registered; adoption of an ambitious and implementable EURO 7 emissions standard; introduction of a CO2 differentiation in the truck toll.

• Ambition for Germany to become lead market for e-mobility with the goal of 15 million fully electric cars and 1 million public charging stations by 2030.

• Ambition to become center of innovation for autonomous driving; regulatory framework to be developed, including liability and data sovereignty issues (Mobility Data Law).

• Prioritization of investments in railroad over road transport, goal to increase rail freight to 25 percent by 2030. Increase of public transport capacities.

• Review of treatment of diesel vehicles in the motor vehicle tax.

• No general speed limit on the Autobahn.

Health

The coalition agreement refrains from tackling fundamental reforms of the healthcare system, such as the citizens’ insurance scheme traditionally favored by the SPD and the Greens. However, it does address a number of key issues in this critical sector, such as the financial imbalance of social insurance, working conditions, the lagging digital transformation, and cross-sectoral care.

• Bonuses to the tune of one billion euros and improved working conditions for employees in the nursing sector, as well as accelerated recognition of foreign professional qualifications to counter the shortage of skilled nurses.

• “Dynamic” federal subsidies to ease the financial burden on statutory health insurance funds.

• Reducing the free pricing of drugs as per the German Medicines Market Reorganisation Act (AMNOG) from 12 to 7 months, limiting manufacturers’ freedom to set prices.

• Strengthening the supply of medicines and vaccines by way of incentives for companies to relocate production to Germany and Europe.

• Reform of the Federal Joint Committee (G-BA), which decides on the additional benefit assessments that are required for every new drug in Germany, in order to speed up decisions by the healthcare self-administration to the benefit of patients.

• Continuing the digital transformation of healthcare by promoting telehealth and e-medicine as well as accelerating the introduction of electronic patient records and prescriptions.

• Strengthening outpatient care and improving access to healthcare in rural areas.

• Allowing the controlled distribution of cannabis.

Finance and Budget

One of the central questions was how the coalition partners would balance unprecedented investments in decarbonization, industrial transformation, and digitization with financial solidity.

• Debt brake (a balanced budget provision anchored in the constitution) remains unchanged and will be complied with again from 2023 onwards (2022 as an emergency situation due to the pandemic).

• Coalition commits to the European Stability and Growth Pact(SGP) but plans to further develop it with a focus on growth, debt sustainability, and green investments. Furthermore, the SGP should be simplified, and its enforcement strengthened.

• Introduction of “super depreciations”, incentivizing investment by creating the possibility to deduct costs for climate protection and digital assets from taxable income.

• No mention of a wealth tax, no increase in inheritance tax, no abolition of the solidarity surcharge, or a reform of the income tax scale.

• All expenditures to be reviewed and reprioritized to gain additional budgetary leeway, spending cuts and reduction of superfluous and environmentally damaging subsidies.

• To realize additional investments in climate protection, digitization, education and research, and infrastructure, the coalition will utilize entities outside the federal budget. They will extend the funding instruments of the KfW (Credit Institute for Reconstruction), fortify the infrastructure division of Deutsche Bahn AG and the Institute for Federal Real Estate (BlmA), and create a Climate and Transformation Fund (KTF).

Foreign Affairs

The coalition agreement suggests a more robust foreign and security policy and a more critical stance vis-à-vis Russia and China, while enhancing the transatlantic partnership as well as cooperation with Central and Eastern Europe as well as the Indo-Pacific region.

• Strong commitment to a “value-based” foreign policy (peace, freedom, human rights, democracy, rule of law, sustainability) as well as a consistent climate policy and climate justice in the sense of the European Green Deal, the 2030 Agenda and the Paris Climate Agreement.

• Strong commitment to the European Union(“basis for our peace, prosperity and freedom”), support for reforms and the further development of the EU “into a federal European state”.

• Reduction of European dependency in strategic areas (energy supply, health, raw materials, digital technology).

• Renewal and intensification of the transatlantic partnership (“a central pillar of our international activities”), including joint efforts to reform the WTO.

• Pledge to spend 3 % of GDP on international action (including NATO commitments).

• Confirmation of close partnership with the UK including foreign and security policy.

• Continued support for Ukraine and deepening of the energy partnership.

• Commitment to “substantial and stable” relations with Russia, readiness for “constructive dialog”, including cooperation on future issues (e. g. hydrogen, health) and global challenges (climate, environment).

• Recognition of a “systemic rivalry” with China; development of a China strategy within the framework of the joint EU-China policy.

• Procurement of a follow-up system for the Tornado combat aircraft; armed UAVs to be allowed subject to conditions.

Construction & Housing

Instead of leaving the responsibility for this sector at the Ministry of the Interior, the new government is creating a new Ministry for Construction and Housing. This is a nod to the German housing crisis. The ministry will be tasked with tackling the issue of affordable housing, clear the investment backlog in public infrastructure, and bring the sector on the path to climate neutrality.

• Construction of 400,000 new homes per year, including 100,000 publicly subsidized homes, to provide affordable housing in urban areas.

• Energy efficiency standards for buildings to be revised in order to support climate goals.

• Introduction of a digital building resource passport. Building information modeling (BIM) to make planning processes more efficient, cost-effective and transparent and navigate the sector towards a circular economy.

• Promote climate-friendly building materials and construction methods; a national strategy for wood construction, lightweight construction, and securing raw materials is to be developed.

Agriculture and Food

Many of the targets for the sector set out in the agreement remain non-binding. Reactions ranged from praise for the important signals for a long-overdue transformation of agricultural policy to criticism of a lack of vision on how to make the agricultural system fit for a more sustainable future.

• Reduce the use of pesticides, increase the share of organically farmed land to 30 % by 2030.

• Improve animal welfare by implementing a market-based financial compensation system; introduce a mandatory animal welfare label.

• Phase-out Glyphosaten by end of 2023.

• Advertising ban for food high in sugar, fat or salt if children under 14 are targeted.

Consumer Protection

The agreement defines a path toward an even safer and more sustainable life for consumers. It addresses problems people face in their everyday lives – legally and financially. Consumer organizations have, however, already criticized that the goals set out are not specific enough to bring lasting positive change.

• Make “sustainability by design” a standard for consumer products (implement a right to repair and mandatory security updates).

• Facilitate withdrawal from online contracts and purchases (commitment on EU level for a mandatory withdrawal button).

• Increase protection from dubious doorstep selling.

• Introduce a confirmation step for verbal contracts made via telephone.

There are signs that the environment for lobbyists and interest representatives may be changing. For one thing, many contacts that have grown over the years have largely lost their value as a result of the CDU/CSU leaving the Federal Government after 16 years. The new coalition partners showed enormous discipline during the coalition negotiations – there were hardly any leaks, a big difference to the past, and this could be interpreted as a sign that the doors are less wide open for lobbyists than in the past.

The emergence of many new young MPs, especially from the Greens and the SPD, seems particularly relevant in this context. Many of them are much closer to environmental and social movements than to business interests. The public “naming and shaming” of initial contact efforts by some lobbyists by some of these MPs may signal a significantly more critical and reserved overall attitude toward (business) lobbyists in parliament and government.

Moreover, a new lobbyists act comes into force in January 2022 with the intention to regulate the representation of interests more strongly. According to the coalition agreement, the regulation will be tightened further. The act has been debated and fought over for years and been criticized for many good reasons, but it should in any case be seen as a signal that interest representation – especially that of business – is and will be under ever closer scrutiny.

Whether these changes will actually lead to more transparency in the representation of interests – as some stakeholders claim – or should rather be categorized as cheap populism will only become clear in the coming years.

The incoming coalition is under intense scrutiny as to how stable it will prove to be. Commentators and political stakeholders have outbid each other in identifying fault lines – internally within each of the three parties, as well as between the partners, and in the context of the great challenges ahead.

The current pandemic situation will be a first major test of resilience. COVID case numbers are rising, the German state has so far not succeeded in tackling the crisis in a fully satisfactory way and extremist movements have been fueled by it. The coalition will need to manage this issue more effectively to avoid even further social disruption.

The coalition partners’ ability and willingness to compromise will be critical. Even before the coalition contract was signed, there were voices within the parties that discussed parting ways after four years again. Despite the outward show of harmony, there are significant groups in each of the three parties that view the Ampel coalition with great skepticism.

The sheer scale of the goals defined by the coalition leaders – in particular with regard to setting the course for achieving climate neutrality in little more than 20 years – may already hold the core of a future rupture. Germany is a prosperous country whose people have a lot to lose. Already, the narrative of the great transformation is perceived by a significant portion of the population – especially beyond the post-materialist urban centers – as a threat rather than a promise. It is to be expected that this proportion will increase analogously to the increasing transformation pressures with unpleasant side effects (rising energy prices, to name just one example). Unless, of course, the coalition succeeds in developing a positive narrative that reaches and excites people …

Apart from such psychological considerations and also apart from the question of whether a social and economic transformation of this magnitude is practically and technically feasible in such a short period of time, the devil lurks in the details: Financing the ambitious goals laid out in the coalition contract will undoubtedly cause fights. Greens and left-leaning Social Democrats on the one side and Liberals on the other are traditionally at odds over their approach to tax and debt. Christian Lindner’s taking the position of Finance Minister in combination with Robert Habeck’s responsibility for driving (and enabling, i. e. paying for) the transformation may prove to become an ongoing stumbling block on the way ahead.