Germany entered 2018 without having found a new government, a situation that not only cast a cloud over many of the country’s policy goals but also threatened its role on the international stage and raised questions about how long the Chancellor would stay in her job. As coalition talks finally draw to a close and Angela Merkel embarks on her fourth term, Gemma Kent explores some of the key issues facing the new government of Europe’s largest economy.

 

More than four months since last September’s federal elections, which resulted in Merkel’s conservatives winning the lowest share of the vote since 1949 and the Social Democratic Party (SPD) achieving its worst result since the Second World War, Germany’s two main parties have finally clinched a deal. At the time of writing, the lengthy negotiations have ceased, pending approval by the SPD’s 464,000 members in a postal ballot, which would see the party joining another ‘grand coalition’ with the CDU/CSU – thereby bringing an unprecedented period of political uncertainty to an end.

 

Grand coalitions – supposed to be the exception in Germany – have governed the country for eight of the past 12 years, yet the latest deal will likely be welcome news to Germany’s international allies and investors, which are looking to the country for stability during a turbulent time for Europe. While European integration and reform rank highly among the major issues facing Merkel’s new government, Germany must also address rising long-term challenges like demographic change, the environment, and the need for investment in infrastructure, digital networks and a more sophisticated power grid.

 

Flex appeal

 

On account of its strong dependence on exports, Germany was among the countries hit hardest by the 2008 global financial crisis, but unlike most other nations it emerged quickly and stronger than before. In its continuing role as Europe’s economic powerhouse, the German economy grew 2.2 per cent last year – the highest rate since 2011 – and a ninth consecutive year of growth is forecast for 2018. A recent report by Germany’s Council of Economic Experts (GCEE) predicts GDP will grow a further 2.2 per cent this year, citing strong private consumption, private and public investment – particularly in equipment and R&D – and the steady recovery of the eurozone as a whole, benefiting Germany’s export-oriented economy.

 

The GCEE report also recommended adjustments to economic policy in order to prepare for future challenges and make Germany’s growth more sustainable, including a further loosening of regulations hindering innovation and accelerated movement into digital change, and improved labour laws to further enhance work-life balance. The latter has become increasingly important given the country’s close to record-low rates of unemployment, which hit 5.4 per cent in January – the lowest since reunification. 

 

Indeed, after a 10-year period in which employers have reaped the benefits of economic growth while wages have grown by an average of only 0.81 per cent, the balance of power has shifted gradually from bosses to employees. For the first time in over three decades, members of Germany’s largest union IG Metall recently staged a series of 24-hour ‘warning strikes’, which reportedly cost carmakers, automotive suppliers and engineering firms like Daimler, BMW, Porsche, Airbus and Bosch almost e200 million in lost revenues. The dispute ended quickly when IG Metall and employers in the southwestern Baden-Württemberg state agreed on a deal giving employees the chance to work a 28-hour week for up to two years to care for their families, together with a pay increase. The deal covers almost one million workers in Baden-Württemberg, although both sides have recommended extending it to IG Metall’s 3.9 million workers nationwide. The agreement could also be used as an example for other sectors where workers have demanded more flexible working hours, such as construction and telecommunications.

 

A weak link

 

In addition to investing in its workforce, many analysts believe the long-term competitiveness of Europe’s largest economy also depends on its willingness to invest in infrastructure – as opposed to using funds to reduce deficits and build up surpluses. Statistics cited in the Financial Times show that investment as a percentage of GDP fell from nearly five per cent in 1970 to an all-time low of 1.9 per cent in 2005, which has since stabilised at about two per cent, and economists are calling on the next government to change that. According to Henrik Scheller, a researcher at the German Institute for Urbanism (DIFU), the backlog of public investments in basic hard infrastructure – including bridge maintenance, road improvements, and adequate schools and kindergartens – stood at an estimated e126 billion in 2016. Not included in that figure are additional investments that may be beneficial, such as a nationwide network of fast recharging stations for electric vehicles, improved electricity transmission infrastructure, or a national network of broadband cables.

 

Indeed, investment in the country’s outdated power grid – lines in some parts of the country are more than 80 years old – is a crucial element of preparing for the e-car revolution. Battery-powered vehicles currently account for less than one per cent of the 46 million cars on German roads, but by 2035 one in three cars in Germany may be electric, and experts are warning of potential power outages. “Even from an e-car proportion of 30 per cent, there will be large-scale power outages unless countermeasures are taken,” caution consultancy Oliver Wyman and Munich Technical University in a new study, which estimates Germany will have to invest up to e11bn in the next 15 years to prepare the grid for e-mobility.

 

Meanwhile a report released last December by Tom Krebs and Martin Scheffel – experts at the Universities of Mannheim and Cologne – argues that major new public investments would “strengthen the growth potential of the German economy”, resulting in a “significant increase in aggregate economic production” in the long term. For the next legislative period, until 2021, the report recommended an annual increase of e3bn for digital infrastructure spending and e2bn for transportation infrastructure, together with a gradual increase in spending on social housing.

 

Although there is certainly no doubt Germany can afford to cough up for the recommended infrastructural improvements – with its budget surplus of e45bn – a recent spate of bungled projects has marred the nation’s reputation for engineering proficiency. Berlin’s new e6bn airport is already 10 years behind schedule and still without an opening date, while the redesign of Stuttgart’s railway station remains stalled more than a decade after work on the project commenced. Commentators have blamed such failures on poor planning and project management, which also figured in major hiccups for a number of big military projects.

 

Losing credibility

 

Despite championing itself as a climate leader, Germany has also suffered setbacks with respect to its environmental policy and the lowering of carbon dioxide emissions. Indeed, 2017 saw the country’s progress in emissions reductions stagnate for a third consecutive year because more oil and gas were used in transport, heating and industry, while coal and lignite have been filling the void that emerged as a result of Angela Merkel’s decision to phase out nuclear power following the 2011 Fukushima disaster. Eight reactors now supply 13 per cent of Germany’s energy – compared to a quarter before the shutdown – but some experts are advising against the continued closure of nuclear capacity, especially given its ability to bridge the clean-energy gap to renewables build-out. 

 

According to the European Climate Leadership Report 2017, Measuring the Metrics that Matter, by Energy for Humanity, 10GW of lignite capacity could be shut down if the remaining 10GW of nuclear capacity would remain online for a certain period of time, which would lead to the reduction of 75 million tonnes of carbon dioxide per year as of 2022 – more than 20 per cent of all electricity-related emissions. “Exiting coal is the single most important climate and energy policy objective of all – and probably also the one that is still challenged the most,” observes Tina Löffelsend, head of environmental NGO BUND’s international energy and climate policy division.

 

With its self-imposed target of lowering emissions by 40 per cent from 1990 levels by 2020 now out of reach, Germany’s new government is focusing on a 2030 goal to cut emissions by 55 per cent. “If [the target] is not met, the electricity market will remain extremely inefficient and send the wrong signals,” states Claudia Kemfert, energy economist at the German Institute for Economic Research (DIW). “Germany loses economic opportunities as well as credibility and its reputation on a political level,” she adds.

 

Entering a new phase

 

The arrival of 2018 brought some positive news from the German energy sector, however, when 100 per cent of the country’s power use was covered by renewables for the first time. According to Berlin-based non-profit Clean Energy Wire, on New Year’s Day at around six o’clock in the morning a combination of strong winds and low demand following the previous evening’s festivities meant that wind power alone accounted for about 85 per cent of Germany’s electricity consumption, while hydropower and biomass installations provided the rest. “This means we are entering a new phase,” said Felix Matthes, research co-ordinator at the Institute for Applied Ecology. “Renewables have finally left their niche.”

 

Certainly, Germany continues to achieve green energy milestones regardless of its lack of progress on emissions reductions. Energy think tank Agora Energiewende reports that a large increase of wind power generation pushed Germany’s renewable share of total power use to a record 36.1 per cent in 2017 – an increase of 3.8 percentage points over 2016 – and with the government’s 2020 target already met, a new goal to raise renewables’ share of power generation to 65 per cent by 2030 was agreed during the latest coalition negotiations. 

 

The target poses fresh technical challenges and soaring costs that could affect grid technology companies like Siemens and ABB, while the prospect of rising power demand as heating and transport have to switch from fossil fuels to reduce emissions has led to calls for a new approach to support investment in the sector. “Concrete measures must follow fast to harness the potential for greenhouse gas reductions and for the modernisation of our energy industry,” notes Peter Röttgen, managing director of the German Renewable Energy Foundation. “The renewables sector will judge the coalition by whether or not this promise will be kept for all sectors.”