In memory of Dr. Andreas Höfert

Germany’s toothless GroKo deal

| Tags: Andreas Höfert

It took 31 days before coalition negotiations started after the German general elections, and another 35 days – with an end spurt of 17 hours – to hammer out a coalition agreement between the major German parties, Chancellor Angela Merkel’s conservative CDU/CSU and the left-leaning Social Democrats (SPD). But the grand coalition (Grosse Koalition, short “GroKo” in German) that is likely to rule Germany for the next four years finally took shape on 27 November.

There is one last hurdle though, a militant vote of the SPD on 14 December to approve its involvement in the GroKo before a new government can be formed. While it is not our central scenario, the remote chance that this militant vote could derail the GroKo process would again open speculation about other possible outcomes for Germany: a CDU/CSU and Green coalition, an SPD, Green and former communist coalition, a CDU/CSU minority government or even new general elections. However, for the CDU/CSU and especially for the SPD, the most rational behavior, and thus in our view the most likely, is to stick with the current coalition agreement.
At first glance this agreement labeled “To shape Germany’s future” seems impressive. At a hefty 185 pages, it took most observers of German politics time to find the central features, especially the one related to the economy in general and the euro crisis in particular. Regarding the economy, the introduction of a minimum wage and the prospects of the fiscal policy over the legislature period are worth mentioning.
The minimum wage agreed upon and to be introduced in Germany over a two-year period from 2015 to 2017 will be 8.50 euros per hour. It is less than the minimum wage in France (9.50 euros), Belgium (9.11), the Netherlands (9.03) or even Ireland (8.65). Hence it will not hamper German competitiveness compared with European peers as some European politicians had hoped. Moreover wages are only one side of competitiveness. A recent study estimates average labor costs in Germany of 31 euros per hour, as compared with just 15.60 euros in Greece and 11.70 euros in Portugal. Nonetheless, Greece and Portugal are considered less competitive than Germany.
The minimum wage in the GroKo agreement is also clearly below many minimum wages agreed to in Germany by employers’ and employees’ organizations on a sector-by-sector level. The minimum wage in the German construction sector for example is 10.25 euros per hour (for unqualified workers in the Eastern part of Germany). So some very low-income workers will indeed see their wage rise with this introduction, but I doubt that it will boost consumption and domestic demand in Germany.
The fiscal policy part of the coalition agreement is much disequilibrated. It is precise when it comes to spending – new programs and initiatives amount to EUR 25bn – but it remains vague about financing this additional spending. It can be summarized as the usual politicians’ wishful thinking of “more spending without increasing taxes, while at the same time reducing debt,” which is only possible if growth is present. No one doubts that Germany is currently the Eurozone’s growth juggernaut, but whether Germany can remain such over the next couple of years is worth asking.
As for Europe and the euro crisis, the GroKo agreement again trots out the Merkel doctrine. Crisis countries should go on reasserting order in their public finances by saving. They can expect help in the form of credit only if they abide by their programs. For the time being each country is responsible for its own banks. Mutualization of debt among the Eurozone countries or debt relief remains taboo.
In sum the GroKo agreement shows much less bite than could have been expected; it will certainly not leave a lasting impression in solving the euro crisis.