America’s 5 November election will determine not just the identity of the next US president but also the pace of change of government in Germany. Victory for former President Donald Trump may hasten the political demise of Social Democratic Party (SPD) Chancellor Olaf Scholz, at the helm of a badly fractured three-party Berlin coalition. Scholz’s close ties to President Joe Biden might make the German leader still more vulnerable to coalition break-up in the next few weeks, an early election next year and replacement as chancellor by Christian Democrat (CDU) opposition leader Friedrich Merz.
Should Biden’s vice president Kamala Harris win the White House, that might give embattled Scholz a further lease of life – even though an election before the coalition’s full term ends next September still looks probable. Speculation has been rife for months over early dissolution of parliament, which is difficult to bring about under German constitutional rules.
But the likelihood has risen further with the leaking on 1 November of a provocatively worded policy paper from Christian Lindner, finance minister and leader of the liberal Free Democrat (FDP) party. The document, containing a stream of proposals inimical to the FDP’s senior coalition partners, the SPD and Greens, calls for tax and spending cuts and a return to free market principles to revitalise Germany’s badly flagging economy.
‘German business model is now definitely at its end’
The document’s emergence coincides with the starkest description so far of the country’s economic predicament from a senior German politician. In a statement on 3 November, Merz said Germany’s heavy dependence on exports made it especially affected by ‘increasing protectionism and market separation across the world set off above all by the US and China’. Key German industries – automobiles, chemicals, steel, construction, electrical and engineering – were all in crisis. ‘The German business model – low-price consumer goods and intermediate products from around the world, cheap oil and gas above all from Russia, high-value exports to the whole world and security guarantees from the US – is now definitely at its end.’
Scholz’s nearly three-year-old coalition is unpopular, divided and ineffective. Its shortcomings have been underlined by heavy losses for government parties in east German regional elections this autumn, persistent disagreements over support for Ukraine in the war against Russia and the longest bout of German economic stagnation since 1945. Planning for the 2025 budget, which the three partners need to decide by the end of November, has been upended by the German constitutional court ruling a year ago, which judged unlawful some crucial elements of coalition financial arithmetic.
Lindner allegedly intended his theses for confidential coalition discussions, but they were leaked to the media in in an apparent attempt by some quarters of the coaltion to engineer a break up. The analysis was immediately branded as ‘neo-liberal’ by SPD officials. Unlike the position in 1982, when the FDP quit a coalition with Chancellor Helmut Schmidt’s SPD to join a partnership with the CDU mid-term, the CDU, its CSU Bavarian sister party and the FDP do not have a majority in parliament, so a straightforward coalition swap is impossible.
The FDP would have to gamble that its chances of surmounting the 5% voting hurdle needed for Bundestag representation would be higher if it forced an early election than if it limped on until September. If Trump wins, the prospect of still greater coalition disarray may be a factor persuading some FDP members of parliament to quit the government ahead of schedule. But it would still be a high-risk gamble, with one former FDP minister calling it akin to ‘committing suicide for fear of dying early’.
Lindner’s proposals for ending tax surcharge
Lindner’s proposals include an immediate cut in and eventual ending of the so-called ‘temporary’ solidarity tax surcharge, which financed the German unification in 1990, as well as a reduction in corporate tax – at present 30% – to 28% next year and 25% after another three years. The finance minister called for complete scrapping of social and consumer protection legislation he sees as adding to corporate regulations and bureaucracy and impeding growth. And he urged significant changes liberalising the labour market, cutting back on a Greens proposal for debt-financed anti-climate change measures and extending Germany’s net-zero timetable.
Scholz reacted to the proposals with typical low-key diligence, tabling immediate talks – which started in the evening of 3 November – with Lindner and Greens leader Robert Habeck ahead of a crucial coalition committee meeting on 6 November. Significant hurdles to an early election remain. Many parliamentarians fear they will lose their seats owing to recent Bundestag reforms, while early elections might increase the popularity of the far-right-wing AfD and the left-wing BSW, particularly prevalent in eastern Germany.
Comparisons with Genscher-Tietmeyer paper of 1982
Comparisons are being drawn with the historic free-market position paper drawn up by FDP Economics Minister Otto Lambsdorff in September 1982, which led to the prompt withdrawal of FDP ministers from Schmidt’s coalition and his replacement on 1 October by CDU Chancellor Helmut Kohl. Schmidt blamed Hans-Dietrich Genscher, the FDP foreign minister and party leader, for the coalition breakdown.
The author of the paper was Hans Tietmeyer, a CDU member, then head of the economic policy section of the economics ministry, who was subsequently promoted to state secretary at the finance ministry and became Bundesbank president between 1993 and 1998.
In a previously unpublished letter to Lambsdorff dated 5 August 1982, Tietmeyer labelled his paper – on ‘policies for overcoming growth weakness and combatting unemployment’ – as ‘nothing new but bringing together a combination of our thoughts up to now’.
He said he was aware of the ‘political difficulties and problems of realising the proposed concept, which is perhaps illusory. However, the position seems so serious that such a concept, even though it might be thought currently unrealistic, should be brought into consideration’. In a passage showing remarkable parallels to 2024, Tietmeyer wrote that ‘nearly all the new economic data point to a further deterioration of the situation’, which was likely to lead to a downward correction of the coming year’s forecast.
David Marsh is Chairman and Chief Executive of OMFIF. Andreas Meyer-Schwickerath is a Berlin-based OMFIF adviser.
Image source: European Parliament