Competing Berlin economic players stretch Scholz’s big tent

Threat of German policy incoherence with global ramifications

The three-party German coalition is a big tent. Nowhere is that more true than with Chancellor Olaf Scholz’s economic team. The normally low-key Social Democratic Party (SPD) leader has been hitting the headlines with high-pressure diplomacy over Ukraine. Behind the scenes, the economic policy tent has been getting more stretched and disorderly. It is now full to bursting with competing figures from the SPD and its partners, the Greens and the liberal Free Democratic Party.

The good news is that Berlin is replete with vibrant policy-makers intent on resolving Germany’s and Europe’s economic problems. The bad news is that Scholz’s administration may be heading towards internal contradictions and infighting. If that happens, the new government is unlikely to find constructive solutions that advance either the country or continent.

A sign of possible trouble ahead has come from the decision by Christian Lindner, the FDP finance minister, to appoint as personal economic adviser Lars Feld, a well-known free-market economist.  Until February 2021, Feld – head of the Walter Eucken institute, a crucible of German rules-based ‘ordoliberal’ thinking – chaired the government’s council of economic advisers. Lindner’s decision is a warning signal to Scholz, who as finance minister in Angela Merkel’s previous coalition indicated displeasure with Feld by refusing to nominate him a year ago for a fresh term heading the advisory council.

Feld will remain an independent figure with no formal affiliation to the ministry, so it’s unclear who might take over the civil service position as the ministry’s chief economist.

Jörg Kukies, the energetic former Goldman Sachs executive (and SPD member) who was Scholz’s finance ministry state secretary for international economics, took over before Christmas a new role as European, economics and energy supremo at the chancellery. But the importance of his post has been mitigated by well-publicised promotions for other high-profile personalities.

Sven Giegold, a former Green European parliament deputy with a firebrand reputation for his advocacy of taxes on financial transactions and assault on fossil fuels, has become a key state secretary in Green Vice-Chancellor Robert Habeck’s economics ministry. Giegold is leading a petition against alleged European commission ‘greenwashing’ through its decision to designate nuclear and gas as climate-friendly technologies.

Florian Toncar, a well-regarded lawyer strongly supporting balanced budgets and Bundesbank-style anti-inflation monetary policies, has become Lindner’s number two, as one of the finance ministry’s parliamentary state secretaries.

Jennifer Morgan, an American citizen who has been co-leader of Greenpeace International since 2016, is taking a new role as special envoy for climate under Annalena Baerbock, the Green foreign minister. She will become a state secretary once she acquires German citizenship.

Scholz’s November 2021 coalition agreement skilfully papered over policy cracks. It advocated more investment for infrastructure and countering climate change, as well as commitment to the restrictive ‘Schuldenbremse’ fiscal brake. But tensions are evident. The Greens emphasise increasing climate investments. The FDP underlines Germany’s traditional commitment to sound money. The SPD takes an intermediate stance: Scholz is committed to fiscal prudence but realises Germany has large fiscal manoeuvring room to support climate, infrastructure and digitalisation projects.

Germany will try to balance competing objectives by using off-budget manoeuvres to work around the Schuldenbremse. Overcoming Germany’s challenges has global ramifications. The country needs to modernise its export-dependent economy and realise growth potential. Germany has long been export-dependent. But global growth is slowing and many German industries – such as car manufacturing – need to adjust to changing consumption patterns.

Equally characteristically, Germany displays endemic high saving and low investment. Higher public investment would promote a much-needed fall in Germany’s exorbitant current account surpluses, which absorb demand from the rest of the world. On the international front, Germany needs to back a major rewriting of European fiscal rules, help drive completion of European banking union and extend further its helping hand to the Mediterranean region.

All these objectives could be stymied by government squabbles. Personnel wrangles will be a litmus test of coalition cohesion. There are, however, glimmers of hope. Feld and Marcel Fratzscher, a prime German standard-bearer of left-leaning economics, who heads Berlin’s DIW economics institute, wrote a joint article in Die Zeit newspaper in October on financing future growth.

As one sign of unexpected capacity for compromise, they argue for ‘transformation policy’ – combining public investment (partly using off-balance sheet funds) and private capital while respecting sound financial principles and the debt brake. ‘The balancing act is difficult – but possible,’ the authors wrote – aptly summarising the need for trade-offs in the coalition’s overall economic approach.

David Marsh is Chairman and Mark Sobel is US Chairman of OMFIF.

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