By Cameron Fulton

Germany at present

Germany over the past two decades has typically remained at the forefront of both EU and global politics, with their unerring spearhead undoubtedly its stalwart leader, Angela Merkel. Domestically, its economic performance has been stable in comparison to neighbours and globally.

But this year has not been typical for Germany as the country moves its domestic policy with the times. Elections, progressed by an ever-growing climate crisis, saw the emergence of younger voters fed up with Merkel’s traditionalist approach. Shorter-term issues such as floods and energy crises only fuelled this discontent, propelling Olaf Scholz to the top of the tree in German politics, resulting in his official declaration as Chancellor last month.

Mr. Scholz, in 2017, was at a political low: losing to left-wing unknowns in the Social Democratic Party (SPD) contest and thus stumbling at the first block of the election cycle. However, this failed to deter the Hamburg native. He held positions of vice-chancellor and finance minister within a year, as part of the country’s coalition. More recently he was praised for his work in stimulating the German economy during the COVID outbreak. He ensured the EU leader received a ‘ka-boom’ within its markets, restoring confidence and protecting workers during the uncertainty that ripped through the global economy. Such policy abled the country to remain afloat relative to its main European players. His deterministic, and centrist-left, approach finally gained him SPD leadership in August 2020. By November 2021, he was chancellor.

His tasks from this point, however – despite his credentials, patience, and remarkable ascension – remain monumental.

His predecessor

To begin, his predecessor’s efforts will be difficult to emulate. Merkel, an icon of German and European politics for around two decades, left centre-stage, announcing her intention to step aside twelve months before the election. And whilst the successor she endorsed failed, smearing her farewell, her legacy will remain unprecedented. She will be etched as the EU’s captain, steering the bloc through crisis after crisis, in the history books. However, the effect of her leadership being completely positive is debatable: broken promises in monetary policy during the financial crisis, the bailout and argued default of the Greek economy and the migrant crisis are all examples of black marks on her time at the helm.

More recently, the Christian Democratic Union (CDU), Merkel’s party, also began to flounder domestically as it faced growing opposition. This was evident in her majority being trimmed away in 2017. Though her tenure caused economic gain and injected confidence into German markets, Merkel’s legacy will be pained by recent failures in migrant policy, energy development and more recently an anti-vaccination movement.

Whether Merkel would have been able to clinch another term will never be known. Certainly, the CDU’s candidate for the election, Armin Laschet, did succumb to controversy that Mrs. Merkel herself would never have done across her scrutinised two decades. He became affiliated with backward policy, failing to clinch the support of younger voters. However, evidence of discontent cannot be put squarely on Mr. Laschet.

Whatever the consequence of debate about Merkel and her legacy, the bottom line is Germany requires a rebuild. CDU policy was seemingly beginning to lose its winning streak both pre and post COVID. Decades of consistent growth and freer markets have caused a reliance upon old ways, that must now be reset.

Vaccination Programme

Germany’s vaccination policy has been up and down, more recently struggling with anti-vaxxer movements, wreaking havoc across the country. Scholz begins his tenure facing a fourth wave of the pandemic, and seemingly an ocean of issues with the country’s vaccination programme.

Infection rates are beginning to tsunami, with hospitals once more fearing overflow. However, such rates are the norm across Europe, with Omicron taking grip alongside the persistency of the Delta variant. What concerns Mr. Scholz most is the underlying issue of an unvaccinated minority hindering the country’s ability to break free of restrictions. Social tensions are also beginning to boil, with a regional health minister’s home being torched in December.

Scholz’s reaction has so far been definite: absolute support for the country’s vaccination campaign. This has been propelled by his hashtag campaign ‘#WirwollenKarl’, which translates to ‘we want Karl’ Lauterback, the SPD’s health minister who had remained the consistent and often controversial face of the pandemic and vaccination programme in Germany. Mandatory vaccinations have also been suggested by the Chancellor, similar to European counterparts like Austria. Istead, the country is approaching in a similar vein to France: strongly advising but not explicitly forcing take up of vaccines and thus appreciating the democratic will of its population – to an extent.

Risk of recession?

One of the key indicators of whether this ‘democratic choice’ holds is the economy’s health. German industry has been hampered by the pandemic through multiple factors, one being staff shortages. An unvaccinated population only lengthens this issue. Adversely, potential exclusion of unvaccinated workers would limit the labour pool in the short term, forcing a decrease in output. In the long run, exclusion would incentivise vaccination, though to what extent anti-vaxxers are willing to fight for their cause will provide measure for the effect.

German industry is also facing a slump in orders both abroad and domestically. Consumer confidence remains cautious – falling to February levels, in which the economy was in lockdown, in the run-up to Christmas. Social restrictions implemented have caused this, lulling productivity and economic growth. The central bank has itself added fuel to the fire, by slashing expected rates of growth for 2022.

Markets worldwide have faced disruption across the pandemic, Germany being one of them. The disruption will likely snowball into the new year for Germany, with supply bottlenecks within multiple facets: from microchips to automobile parts. Furthermore, such supply shortages have caused inflationary pressures, with inflation rising to 6% at the year-end.

Such inflation has affected the entirety of the continent, with soaring energy prices being the driving force. There has been a 27.4% rise in energy prices from 2020; although, other basket goods such as food and services also rose faster than the targeted 2% for 2021. The European Central Bank is facing pressure to reverse COVID monetary packages and begin a contraction to combat. This will likely depress economic recovery from the pandemic in the short run.

The ECB has attempted to quell doubts over its monetary policy to ensure confidence remains afloat, stating that short-term supply issues will fade into the coming year, and that it intends to remain monetarily loose. However, as inflation persists, pressure is mounting for the central bank to act.

Domestically, fears of hyperinflation are beginning to ring in the ears. The government have promised subsidies for those worst off to counteract the rising energy prices going into the new year, alleviating short-term issues of poverty, although the end of such inflationary pressure is not in sight.

Bleeding consumer confidence, supply bottlenecks and 30-year-record inflation all add up to a growing economic predicament for Germany and a potential recession. Fiscally, Scholz has announced his plan of war, which is perhaps greener than expected.

Germany’s new green age

Scholz failed to win by majority, though this was never likely. Thus, he was forced into what has been termed a ‘traffic light coalition’ between the SPD, Greens and Liberals. Although differing in ideals and targets, they were able to agree to set new government ambitions – and the ‘Green’ effect was clear.

Vast revamping of its pursuit for net-zero emissions, and subsequent accordance with the Paris agreement, has seen Mr Scholz’s government accelerate promises to end coal usage by 8 years – 2030 being the new target. Petrol and diesel cars are set to be phased out by the end of the decade whilst coal and nuclear power stations are to be closed. Though positive for the environment, and a far cry from the promises of other global powers, the question is now one of sustainability. Though these huge carbon emitters are being kicked to the curb, what is left to replace energy supply and transport links?

With already steepening energy prices, limiting the current supply will only further intensify upward pressure. Without a substitute, the economy may face what is being termed an ‘electricity gap’.

Such ambitious attempts to kickstart a green economy will require mass government spending, which the coalition may find difficult to cough up with once the pandemic subsides. COVID alleviation of constitutional caps on borrowing, known as the ‘debt brake’, has allowed both Merkel and Scholz to build up a budget deficit to combat sluggish growth over the past two years. However, this has led to an egregious pile of debt for the government to clean up in the long term. Such environmental promises will be costly, and as such debt caps are reinstated, Scholz may see his plans scuppered.

The government has multiple options to contend with the strict debt limits. The Greens have regularly argued for the relaxing of such laws, though this is atypical of the conservative, traditional low-inflation empirically German approach. Markets would also not be best pleased. The likelier option of Scholz is to perform some financial hoo-doo, finding loopholes in the ‘debt brake’ to ensure that the extensive spending does not fall foul. This has been suggested through the state-owned development bank, the KfW, to provide the funding as a middleman between government and the market. It would be an advantageous approach for its state-guaranteed loans have been exempted from official debt figures, committing €70bn to the economy throughout the pandemic. Recapitalisation and movement toward greener investments from the KfW could be Scholz’s solution. However, such an approach would be questioned by opposition, and likely end up in court.

The ‘debt brake’ remains halted moving into 2022, so expect a final splurge from the Scholz coalition. The question remains, however, how they can find a solution long-term to spending restrictions and the expected ‘electricity gap’ in the next decade or so.

Germany: still leader of the EU?

With Merkel’s exit comes political uncertainty of the power Germany holds in international relations. She was the figurehead of the EU for decades; and though Scholz has already strong relations to President Joe Biden for instance, he must contend with the looming legacy of Merkel.

His first task coming into the new year will certainly be the growing tension with Russia. Merkel herself had to contend with the Crimea conflict, and it looks set that her successor will also similarly have to face a Russian invasion of Ukraine.

Putin has always been keen to ensure the safety of his sphere of influence, removing possible intervention from western forces. This has seen on occasion an expansion of territory, which is the fear in Ukraine. Although, mass warfare and confrontation of the west is atypical. Indeed, though the situation is on the verge of boiling over, a violent conflict remains doubtful; even if American accusations of 175,000 strong forces converging to the border do tell otherwise. Scholz will back his American counterpart – but whether the leaders are perfectly in lock-step is the question looming in 2022.

For, another area of interest with Russia is the persistent quarrel over energy, which has hiked prices this winter. German energy regulators suspended certification of the Nord-2 pipeline, headed by Russian energy company Gazprom, in November due to issues over its German subsidiary branch. The pipeline will become one of the main supplies of energy not just to Germany but Europe. Whilst the legal battle remains deadlocked, winter prices will continue to remain heightened, if not rise further, moving into the new year. Intervention is necessary.

The Greens wish to cut ties, moving toward the sustainable energies proposed in the government plans. Although, this fails to solve the immediate crisis and will only cause an energy gap that could have dire short-term consequences for inflation and growth. The SPD realise this and are keen to negotiate, but depending on the potential political manoeuvre mentioned above, dealing with Russia could anger its allies and people.

Conclusion

Germany faces a new era: promising green energy and emergence from the pandemic. However, a sluggish economy with energy prices fuelling inflation alongside government promises limited by spending caps will be causing more than a few headaches in the Bundestag. Scholz won the battle of the election, but this year he begins a war: politically, economically and against the natural comparisons with his predecessor and her undoubted legacy.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.