Finance Ministry Germany's 'Europe ministry' gets a new occupant

If SPD members endorse a coalition pact this weekend, Olaf Scholz will become Germany's finance minister. But the government's second-most powerful role bears risks as well as opportunities.
A seat of real power, past and present.

If all goes according to plan – and that's still a big if – Germany’s next finance minister will come from the center-left Social Democrats. For the SPD, the appointment of Olaf Scholz, the current mayor of Hamburg, was a major win in coalition negotiations, but for Angela Merkel’s center-right Christian Democrats, or CDU, the loss of a key position they consider theirs by right was a bitter pill to swallow.

Mr. Scholz will wield serious power. The finance ministry – housed in the massive gray block that was once home to the Nazi aviation ministry and then the ministerial council of the East German communist state – writes Germany’s tax laws and has ultimate control of the €330 billion ($405 billion) federal budget.

It also plays a vital role in determining Germany’s European policy. Over the last eight years, almost exclusively under Wolfgang Schäuble of the CDU, the policies hammered out within its walls have been crucial to the fate of the euro zone.

Abroad, Mr. Schäuble was sometimes dubbed “Dr. No,” a stern enforcer of fiscal rectitude on the debt-ridden economies of Southern Europe. At home, he was a more popular figure. As well as famously achieving a balanced budget and a lower debt-to-GDP ratio (see chart below), a booming German economy meant Mr. Schäuble could eventually loosen the purse strings and spend relatively freely.

From the 1970s onward, the finance ministry increasingly became Germany's ministry for Europe.

Mr. Scholz will hope to emulate that popularity, but the office could turn out a poison chalice, particularly for a rising politician who harbors hopes of running for chancellor some day. Historically, finance ministers, who have a veto on all major spending decisions, have been resented as often as they have been loved.

Even the extent of their power has not been constant. In the 1950s, the economics ministry arguably played a more crucial role in Germany’s post-war economic miracle. But over the decades, a succession of finance ministers have gradually strengthened the powers of their office.

In the early 1970s, the ministry took over decision-making on money and credit. “From that moment on, the finance ministry was no longer just a domestic ministry – it increasingly became Germany’s ministry for Europe too,” says Theo Waigel, conservative finance minister under Helmut Kohl in the 1990s.

The gradual takeover of European policy by the ministry continued in the late 1990s, when a power struggle within the cabinet led to the transfer of a key economic policy unit to prepare for monetary union. Since then, “the foreign office has basically had no role in European policy. The finance ministry is the real ministry for Europe,” says Hans Eichel, an SPD finance minister in the early 2000s.

Since the 1970s, the ministry has also run Germany’s relations with the World Bank and International Monetary Fund. Later, it took responsibility for the G20 summit of heads of state and central bankers, an increasingly important forum since the 2008 financial crisis. Mr. Scholz’s first trip abroad as a minister is expected to be to a G20 meeting in Buenos Aires later this month.

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Mr. Scholz has been keen to stress his party’s fiscal responsibility. “The SPD stands for solid finances,” he said recently. But Germany’s extraordinary run of economic success cannot last forever, and if Mr. Scholz is unlucky, it could end abruptly, giving him far less leeway than his predecessor.

Even without an economic downturn, the incoming coalition has already made many expensive promises. Economists estimate that, under good conditions, the new government may have an extra €46 billion to spend over the next four years. But their new promises already add up to around €90 billion, so something will have to give – and Mr. Scholz will have to enforce it.

Another key issue for Mr. Scholz will be his relations with Ms. Merkel: Should he focus on cooperation or confrontation? The SPD, currently polling near historic lows, will be keen to create political distance from the chancellor, but at the same time, must maintain government unity and coherence. This delicate relationship will be complicated by Mr. Scholz’s own ambitions. He will not want to be made a scapegoat for unpopular fiscal measures.

Many in his own party think Mr. Scholz will stick closely to Mr. Schäuble’s policies. “He is not someone with big plans for tax reforms; he puts more store on smooth-running government,” said one party colleague. In a European context, he is unlikely to write blank checks to be paid by the German taxpayer, not least because of the impact on his own popularity, as well as that of his party.

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt's financial policy coverage and is deputy managing editor of Handelsblatt's Berlin office. This article was adapted into English by Brían Hanrahan. To contact the authors: [email protected], [email protected]