A new German government in the making? Conservatives and Social Democrats agree on coalition deal

A Brief Update from Instinctif Partners, Berlin

The coalition talks which started on 26 January between Conservatives (CDU/CSU) and Social Democrats (SPD) ended on 7 February in surprisingly short time. Both parties agreed on a coalition deal. But excitement in Berlin continues to be high. While Merkel’s CDU appears weakened, the SPD has secured a strong deal in the distribution of ministries. For now, a new government remains in the limbo until the SPD members have given their approval.

Despite the agreement on a new coalition deal, debates among Conservatives and among Social Democrats remain hot. The CDU laments they have secured a bad deal with the distribution of ministries that they will head under a new Grand Coalition. Based on the coalition agreement, the Conservatives will head the ministries of health (CDU), economics (including energy; CDU), agriculture (including food; CDU) and transport (including digital infrastructure; CSU). The SPD, in turn, out of six ministries in sum it will take the three influential ministries of finance, labour, and the foreign office, as well as the environment ministry. This is indeed an impressive negotiation outcome, given the historically low result of the SPD in the 2017 election. Nonetheless, Social Democrats are torn internally about who will take which post and the party leadership is in transition.

With excitement high in both camps, Chancellor Merkel remains – once again- the only haven of peace in stormy seas. Despite critics in her own Party, Merkel remains a solid rock in German politics and at least for now, no one within her Party seems able to seriously challenge her position. At the same time, the likely allocation of ministries to CDU politicians gives little new insight as to who could be Merkel’s successor in a 2021 election.

While debates rage on the personnel of a new Grand Coalition (and beyond), policy should not be completely forgotten.

Our assessment of main outcomes of the coalition agreement for key industry sectors:

Health: No overhaul of the health insurance system; new legislation on e-health. The dual structure of German health insurance (private and state health insurance) will remain in place, but contributions to state health insurance are to be financed equally by employers and employees. Counter to a ruling of the Court of the European Union, mail orders for prescription drugs will be banned. A second e-health law is to be adopted with action including the introduction of an electronic patient record. The current ban on remote medical treatment is to be re-assessed. The introduction of new e-health apps is to be facilitated. Further action in the area of e-health can be expected within national action plans.

Food: New food labels announced. A state-administered food label for animal welfare is to be introduced, applying to meat and meat products. For sugar, fat and salt in ready meals a national reduction strategy is to be elaborated in cooperation with affected parties. The coalition agreement does, however, not mention the introduction of bans, taxes or specific labels for sugar, fat or salt.

Energy & Environment: Little to no new legislation announced. Climate targets for 2020 (40% reduction of greenhouse gases relative to 1990) have been given up, but ambitions are to meet reduction objectives as closely as possible. Climate targets for 2030 and 2040 remain in place. Germany is to establish LNG infrastructure. Coal-fired power generation is to be phased out. Renewables shall provide 65% of the national electricity demand by 2030.

IT/Digital: The commitment to net neutrality is emphasized. Action outlined in the agreement focuses mostly on building up nation-wide high-speed (fibre-optics broadband) internet infrastructure by 2025.

Financial markets: No new national financial market regulation announced. Germany wants to increase its attractiveness to fintechs by cutting down red tape. Criteria for the systemic relevance of hedge funds and shadow banks are to be elaborated at European or international level. Systemically relevant institutes are to be subject to regulation and supervision.

Housing: Different measures are announced to increase availability and affordability of housing space. Tenants’ rights are to be strengthened with regard to rent increases after renovation works. The rental price brake remains in place, but is to be reviewed at a later point.

New Grand Coalition remains a cliff-hanger

440’000 Social Democrats have been called upon to approve (or reject) the coalition agreement in a member vote between 20 February and 2 March. This means a new government could be installed at the earliest in a parliamentary week between 12 and 15 March. Even if an approval remains a close call, signals are strong that the Social Democratic member base will say ‘yes’ to a new Grand Coalition. At this stage, most people in Berlin (and Germany) want a new government and there is little to gain for both Conservatives and Social Democrats from a continued limbo.

For the time being, it is important that a new German government can take up its work soon. Otherwise, discussions and debates will linger. With this in mind, Merkel’s approach of de-emotionalisation may just be what the country needs right now!

Bernd Buschhausen

For more insights, connect with Instinctif Partners Berlin!