What would happen if Germany turned left?

What would happen if Germany turned left?

(CNN) – Angela Merkel He is about to step down as chancellor of Germany after 16 years, ushering in a new era for Europe’s largest economy.

consequences Sunday elections It is difficult to predict, and it may take weeks or months to form a government. But when the dust has settled, opinion polls suggest the new chancellor could be Olaf Scholz of the left-leaning Social Democrats (SPD), who has led the German economy through the pandemic as finance minister in a coalition with Merkel. Meanwhile, the Greens could double their seats in Parliament.

Schulz’s SPD could partner with the Greens with the pro-business Free Democratic Party (FDP), and gain enough power to shift the country’s economic agenda to the left. Taxes and spending may rise as political leaders double down on digitization and climate policy While concern about the increase in public debt may recede.

“The Greens and Liberals in the alliance will bring the latest innovative forces that we have long had in a German government,” said Karsten Brzeski, global head of macro research at ING.

Olaf Schultz, from the Social Democratic Party (SPD).

Spend more, worry later?

Global banks say the final outcome of the post-election competition between parties is by no means certain, while advising investors to prepare for two possible outcomes: a coalition of the SPD, the Greens and the FDP, or a slim victory for the centre-right Merkel’s Christian Democratic Union (CDU). , led by Armin Laschet, who may also have to cooperate with the Green Party and the Free Democratic Party.

The first option would mark a shift to the left, but it would be less dramatic than an alliance between the SPD, the Greens and the hard-left D-Link party. This finding, which could lead to more ambitious efforts to redistribute wealth and collect taxes, has been underestimated by analysts, and is likely to surprise investors.

Regardless of which group takes charge, they must manage the ongoing recovery from the coronavirus pandemic. The German economy is on track to grow by 2.9% this year and 4.6% after that, after contracting 4.9% in 2020, according to the latest forecasts from the Organization for Economic Co-operation and Development.

However, recent data suggests that the momentum may be losing steam. The Ifo index, which tracks the country’s business climate, fell for the third consecutive month in September, according to data released on Friday. Slower growth in China, closed supply chains and higher gas prices may have a significant impact.

This setback may increase pressure on the country’s new leaders to remove the notoriously strict German tax rules and continue spending on the national economy.

The state enshrined a so-called “debt curb” in the constitution in 2009, which severely limited public indebtedness after the financial crisis, with few exceptions. Because of the pandemic, borrowing rules have been suspended until 2023. This has allowed German borrowing to skyrocket, and the country’s debt-to-GDP ratio has risen sharply to 70% in 2020.

Although this percentage pales in comparison to the United States, where debt is expected to exceed annual GDP, German centrist parties have been eager to regain control of the country’s public finances. The Greens, for their part, want a more permanent loosening of the borrowing rules.

UBS strategists Dean Turner and Maximilian Konkel believe the debt brake – which has become a key tenet of German fiscal conservatism – is likely to be preserved because reversing it would require a two-thirds majority in parliament.

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However, they hope that the new German leaders will find other ways to increase spending to deal with the climate crisis, an issue that has taken on greater importance after the devastating crisis. flood that affected the country in July.

“The only area of ​​common agreement for all parties is the need to address climate change,” Turner and Konkel wrote in a recent research note. And whatever alliance emerges, keep it up, investment in climate policy will “increase”.

Tackling the climate crisis

Brzeski hopes that the next government coalition, regardless of its composition, will create a special investment mechanism to bypass the debt brake, allowing money to flow towards green initiatives.

However, with a more liberal coalition government in place, some deadlines could be brought forward.

“Probably [los Verdes] “Push for an acceleration of the green transformation of the German economy as a prerequisite for government entry,” Goldman Sachs said in a recent note to clients.

The Green Party has called for a 70% reduction in greenhouse gas emissions from 1990 levels, by 2030, compared to the current government target of 65%. He also wants the coal plants to be closed by the end of this decade, rather than 2038, and for new cars to be zero-emissions by that time as well.

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This could lead to a confrontation with the most powerful companies in Germany. In its latest strategic update, Volkswagen said it wants 50% of sales to come from electric vehicles by 2030, and increase to nearly 100% by 2040.

The degree of state intervention can generate friction between coalition members.

“The biggest debate will be how to change people’s behavior,” Brzeski said. “Do you do it through incentives and educate people, or do you do it [aumentando] Prices and costs? “

A left-wing government in Germany could also mean higher taxes on the richest Germans, with the SPD proposing a new wealth tax on the super-rich.

But banks stress that it is still not entirely clear how the election will play out, and that a more conservative CDU could prevail, keeping Germany firmer on its current fiscal and economic trajectory.

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