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German Election Brief: What’s next for business?

Europe’s biggest economy held federal elections on Sept. 26 and the result is already changing rituals and the political power structure in Germany’s rather stable post-war landscape. Both the far-right and the far-left lost voters to the middle. Almost two-thirds of voters did not favour one of the two big parties, the Conservatives and the Social Democrats, with the latter nonetheless narrowly coming out on top, and the Conservatives, Chancellor Merkel’s party, dropping 8% compared to the previous election. While both parties governing by forming a ‘grand coalition’ is not a realistic option for the future, two smaller ones will be the kingmakers; the Green Party and the LibDems will decide upon the country’s next government in two possible 3-party coalitions and they have swiftly launched negotiation talks among themselves, a first in post-war history.

How the political landscape shifted

Germany has long sustained a three-party system with centre-right Christian Democrats (CDU), its Bavarian sister CSU, centre-left Social Democrats (SPD), and the smaller LibDems (FDP) helping to establish two-party coalitions. In the 1980s the Green party arrived, becoming a junior partner in an SPD-led government (1998-2005); it is now a fundamental part of Germany’s political establishment. In this year’s election, its continuing success has led to the Green’s first credible shot in competing for the chancellorship, an opportunity that did not materialise as of last Sunday. Yet, with long-time Chancellor Merkel having moved the Conservatives to the centre, sometimes centre-left, her party has increasingly looked and felt like their Social Democratic competitor. Consequently, many voters felt that only Greens and LibDems would bring about the necessary changes in relevant policy areas.

 

Green Party and LibDems taking centre stage

German parties’ colour codes inspire potential coalitions’ names: for example, a ‘Jamaica’ coalition, with yellow Liberals, black Conservatives, and the Greens. While attractive for LibDems given their fiscal policies, the Conservatives’ weakness makes the ‘traffic light coalition’ (SPD, FDP, Greens) more likely. The two options will need Greens and LibDems, who both claim to represent Germany’s progressive centre. Their positions differ sharply in areas such as the state’s role, tax, and energy policies. Yet, shared priorities might prevail, with a boost for new tech, reducing bureaucratic burdens for the private sector and kickstarting the overdue digitisation of Germany’s public sector and infrastructure.

Regarding taxes, while timing differs, both parties support ‘super write-offs’, with companies investing in climate-friendly technologies to get deductions. Investment in public infrastructure, another contested issue, could be reconciled by a compromise: financing transmission networks, charging infrastructure for e-mobility, fibre-optic cables, and public transport from a sovereign wealth fund rather than exploiting state budgets. Controlling the state budget remains vital for the LibDems who, in contrast to the Greens, vehemently support preserving a government budget ‘debt brake’.

The Green Party’s stance is unwavering regarding climate protection policies: this is its core project; everything else comes second. LibDems and Greens agree on ETS being an important instrument in turning economies greener, with a high CO2 price also solving another potential bone of content, Germany’s continued phase-out from coal-fired electricity and further increasing the use of wind and solar power. While many of Germany’s top CEOs remain sceptical about introducing greener energies technology due to costs, the influential automotive sector has fallen into step, suggesting concrete targets for more ambitious climate policies.

Foreign policy absent from the elections – well then?

Foreign policy has played a startlingly small role in the election campaign. With its single-minded focus on climate change, the Green Party, not ruling out tax raises and even more public sector debt, is more likely to adopt a flexible approach on budgetary policy at an EU-level. Both Conservatives and LibDems have pledged against tax raises; both pursue a conservative budgetary policy and will definitely continue this approach on an EU level. The Franco-German relationship will continue to be prioritised to develop further and hold together the EU. The countries differ on energy policies, e.g., German Social Democrats need France to institutionalise international climate policies.

One can expect any new German government to support the Carbon Border Adjustment Mechanism (CBAM) and protect German industry, locally rooted R&D and manufacturing, and the German health sector. As to handling ‘Big Tech’, another push on the international level is expected, with the Greens pledging to curb the power of platform companies and ‘monopolistic structures’. The Greens also advocate for an ambitious implementation of the DMA at a European level and look to establish a European digital supervisory authority under the umbrella of an independent European cartel authority.

Change is in the air

Though it remains to be seen who will finally govern Germany, one thing seems clear: many Germans feel simply carrying on with minor policy adjustments is not an option. They voted to tackle changes in several policy areas.

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