We took three main takeaways from the stunning upset victory this weekend by two previously unknown and relatively inexperienced regional politicians as new co-chairs to lead Germany’s struggling Social Democrats, the weak link, junior partner in Chancellor Angela Merkel’s Grand Coalition government:
*** First, in terms of a timeline, the SPD’s new co-chair leaders, Norbert Walter-Borjans and Saskia Esken, still need to be formally voted in at this weekend’s party conference in Berlin. That is likely to be followed by several weeks or more of negotiations between the SPD and the Christian Democrats to revisit the March 2018 coalition agreement, despite the insistence of CDU chairperson Annegret Kramp-Karrenbauer to the contrary. But while there is almost no chance of an immediate collapse of the Grand Coalition, the pressures within both the SPD and the CDU are so strong, we think, that Chancellor Merkel’s current government is unlikely to survive much into the new year. ***
*** Second, while the Grand Coalition could possibly limp through to September 2021, or a narrow CDU/Christian Social Union minority government could run for a while if the Grand Coalition indeed collapses, we believe new federal elections are likely next year before Germany assumes the European Council presidency in July. The CDU/CSU leadership may come to be less fearful of elections next year, as the Alternative for Deutschland becomes increasingly mired in a funding scandal, and more to the point, the Green Party is very likely to demand new elections to consolidate their electoral gains before joining a more stable, four-party coalition with the CDU/CSU and Free Democrats. ***
*** And third, while it is early days to be sure, we think there is very likely to be a boost to German spending next year and in 2021, even if modest. Despite Berlin’s defiant insistence there is no case for deficit-financed spending in Germany, our sense is that the demand to loosen the “black zero” fiscal policies so central to Walter-Borjans and Esken’s winning leadership campaign enjoys a far wider support across the main political parties than assumed. Indeed, “black zero” is less an ideological constraint than a pragmatic calculation, the timing and eventual scale to a softer “guiding principle” in the interpretation of the fiscal brake driven to a large extent by the eventual impact of Brexit on the German economy. ***
Moving beyond “Black Zero”
The incoming SPD co-leaders, Norbert Walter-Borjans, a 67 year old former state minister from North Rhine Westphalia who was about to retire and known mostly for his work against tax evasion, and Saskia Esken, a little known 58 year old Bundestag deputy from Baden-Württemberg, still need to be officially endorsed as the co-leaders in a formal vote by the SPD’s Bundestag deputies and party officials on the opening day of the party national conference in Berlin this weekend.
Both made no secret of their desire to leave the Grand Coalition in their leadership campaign in order to return the SPD to its lost working class, left-leaning roots, and Walter-Borjans said the new leadership’s first priority will be “to define a clear position vis-à-vis our coalition partner.”
That is likely to include a list of demands for changes to the March 2018 coalition agreement if the SPD is to remain in the government, among them a boost in the minimum wage, accelerated spending on environmental protection measures, and a commitment to spend as much as a half trillion euros over a ten-year period on infrastructure.
Clearly central and on the table in the CDU/CSU negotiations with the SPD will be a substantial loosening if not jettisoning of the “black zero” or budget balance of the Merkel government these last few years.
The 2020 budget had the last of the readings and final tweaks by the Bundestag on Friday, and will soon be declared into law before year-end, regardless of the immediate noise and ultimate fate of the governing Grand Coalition. The budget next year will more or less stay in balance, lifting federal spending by an extremely modest 1.1% or €5.6 billion Euros to €362 billion, including some €42 billion for badly needed and very political popular investment in infrastructure.
But despite the protests over giving ground on a balanced budget, our sense is that the SPD demands for a loosening of the fiscal brake is more popularly supported by the pubic and across the parties than assumed. The Greens, for one, have already called for a looser interpretation of the fiscal brake written into the German constitution after the political backlash over a €50 billion deficit in the aftermath of the 2009 recession.
The political demands to repair aging infrastructure and for a boost to the minimum wage cut across party lines as even though the economy has recovered since the 2009 recession, there has been little to no trickle down to the middle and working classes, which along with the migrant crisis, has fueled the rise of the AfD and the swing of the SPD rank and file back to the left.
Our sense of the political debate in Berlin is that the discussion over the “black zero” policies is less about an ideological commitment to fiscal austerity than it is a question of its timing, scale, and commitment to eventual revenue offsets.
And more specifically, the fate of the Brexit negotiations and whether the process becomes disorderly with a more damaging impact on the German economy is clearly going to be a driving factor to whether and when Berlin moves towards a softer “guiding principle“ in the interpretation of the fiscal brake. For now, some €30 billion is being considered as a potential fiscal boost if the economy should seriously falter.
We think, then, there will be a modest, at minimum, boost to German spending in 2020 and 2021 that will be achieved by working with the “exceptions” around the fiscal brake, without changes to the constitution itself, namely through a work around in offsetting the increase in near term debt through future revenue measures “in the next growth period.”
“Not a Therapy Service”
Both the CDU and CSU have planned for Board meetings for December 9 to discuss the outcome of the SPD convention, and their opening counter-offer is not likely to be very receptive. “We are not a therapy service for the parties in government,” CDU party chairman Annegret Kramp-Karrenbauer, or AKK, quipped the day after the SPD leadership election results, “we want to govern on the basis of what was agreed. We are focusing on that and not on the mental state of any coalition partner.”
Aside from rising to the bait of the barbs by AKK, Walter-Borjans and Esken, who is said to be more restless to leave the Grand Coalition, will need to tread cautiously anyway during the party conference, being especially careful not lose the trust of the SPD Bundestag deputies and party officials; if truth be told, they were almost all opposed to them, in almost an exact echo of Jeremy Corbyn’s difficulties with the elected Labour Party members of Parliament after a newly enfranchised rank and file voted overwhelmingly to the left.
The entire SPD party machinery in Berlin is likewise very aware of the perks and power that come in being in rather than outside the ruling government. Scholz in particular is said to have built the finance ministry into an effective “shadow government” with a deep reach into the other government ministries on the grounds of allocating funding and keeping an eye on their respective budgets.
That power will not be easy to abandon, and in general, we think the more conservative sentiments of the party delegates will make an abrupt exit from the Grand Coalition the least likely near-term scenario.
Not surprisingly, going into the party conference, NoWaBo, as he has been dubbed, has already vowed there will be no rush to judgment on staying in or out, or on fiscal policy, and that he will be “open to negotiations.”
And for all AKK’s defiant bravado, CDU negotiations are in fact all but inevitable, and not only with the SPD co-chairs, but the leadership of the other main political parties.
Positioning for maximum leverage against the SPD negotiations in the coming weeks will also mean reaching out to the ascendant Greens and the smaller Free Democrats, in case the alternative is groping for a new coalition government. Indeed, only a minority government will allow a period of no negotiations for the CDU/CSU, and even then, it would be likely to be short-lived and only putting off the inevitable negotiations.