This article was originally published on January 31, 2018, and republished without changes in May 2018.
More than four months since Germans voted in a federal election, they’re still waiting for a new government. That’s a post-war first. No one can say with any certainty whether the political deadlock will end with another “grand coalition” between Angela Merkel’s conservative party alliance and the center-left Social Democrats, with a minority government (another first), or even with new elections (yet another first).
For the grand coalition to continue, Ms. Merkel’s Christian Democratic Union (CDU), her Bavarian sister party, the Christian Social Union (CSU), and the Social Democratic Party (SPD) will first have to agree to it. Then, Martin Schulz, the beleaguered leader of the SPD, must win approval for the deal from his party members, more than 440,000 of them, who get to vote by mail. How they will vote is anybody's guess.
The list of issues the parties have already flagged in their provisional blueprint is 29 pages long. Most points are small-beer or relevant only domestically. But four issues could shape the wider world: Europe, domestic spending, migrants and defense.
Europe über alles
All three parties are pro-Europe and favor more integration, but differ over how much more. The SPD's Mr. Schulz, who used to be president of the European Parliament, would love to create a “United States of Europe.” Ms. Merkel isn’t ready to go that far. But she does support most of the EU reforms proposed by French President Emmanuel Macron. His ideas are to create a euro-zone budget and finance minister, and to transform the European Stability Mechanism (ESM) - a bailout fund - into a European Monetary Fund.
Ms. Merkel's Bavarianpartner, CSU leader Horst Seehofer, is more critical of a mighty Brussels, as demonstrated by his recent party-congress invitation to Hungary’s populist prime minister Viktor Orban. Still, the three leaders appear to have agreed that the era of austerity in Europe must end. Greek Prime Minster Alexis Tsipras, who bore the biggest brunt of German’s frugality, should be happy. Whether German taxpayers will be as excited is another story.
What to expect: a consensus on big spending for Europe
Aufwiedersehen Austerity, bienvenue Big Spender
The three parties will probably agree to spend more in other ways, too. Europe’s biggest economy is booming. Growth accelerated in 2017 to the fastest pace in six years. Unemployment, at 3.6 percent, is at the lowest level since reunification in 1990, and the budget surplus rose to 1.2 percent of gross domestic product last year. Even if the parties resolve to keep the budget balanced, they will still have room -- €46 billion ($57 billion), or around 0.3 percent of GDP, over four years -- either to cut taxes or to boost spending.
So Ms. Merkel can hardly say no to Mr. Schulz’s demands for more spending on infrastructure and social programs, and for relieving taxpayers, especially low and middle-income households. They’re considering earmarking €36 billion of the surplus for investments, subsidies and transfers and the remaining €10 billion for tax cuts.
The SPD wants to increase taxes on the wealthy, something the CDU-CSU bloc opposes. The CSU is calling for cuts in corporate tax rates, given the recent US decision to lower taxes for businesses and similar moves afoot in Britain and France.
What to expect: a lively debate ending in agreement over lowering taxes and increasing spending, despite the looming demographics of an aging population.
Refugees yes, but how many?
If there’s one issue that could blow up the negotiations, it’s how to deal with the influx of migrants. When the chancellor opened the borders in 2015, more than 1.1 million people fleeing war or poverty poured in. It was the highest net immigration recorded since the war. Housing and integrating them have proven challenging and costly – more than €40 billion over the past two years.
Peeved at Ms. Merkel’s open-door asylum policy, many Germans have defected to the Alternative for Germany, a populist and anti-immigrant party. Their anger led to the conservatives’ worst election results since the war. Spooked by the AfD’s popularity, the Bavarian CSU wants to stem the flow of migrants and cut benefits.
In the exploratory talks so far, the conservatives pushed through a tentative agreement to cap refugee numbers at between 180,000 and 220,000 per year, and to let only 1,000 family members a month join their relatives who are already in Germany.
The Social Democrats have since challenged that compromise, and now want to let in more family members. Mr. Schulz talks vaguely about a “1,000+ regulation.” Whether that’s enough for the SPD's leftists remains to be seen. The parties also remain at odds over a new and comprehensive immigration law, which is considered long overdue.
What to expect: a major fight, and the possibility that the talks even fail over this point.
Defensive about defense
The military budget is another sticking point. Ms. Merkel’s conservatives want defense spending to reach NATO’s target of 2 percent of national output by 2024. Germany is still far from that goal, with current defense spending at about 1.2 percent. Over the past several years, spending has risen to €36.6 billion in 2017. For the SPD, that’s enough to maintain an army of 180,000 soldiers.
The Social Democrats also point out that the country's booming economy is making the 2-percent target ever harder to hit. Rather than the projected rise to 1.26 percent of GDP, strong economic growth kept last year’s defense budget stuck at 1.13 percent (because the denominator grew faster than the numerator). A spending increase of €5.4 billion would still leave the budget stuck at 1.15 percent of GDP in 2021, based on current growth forecasts.
How the conservatives intend to convince the Social Democrats to aim for the 2-percent target is a mystery. But they will try. Defense spending is a priority for US President Donald Trump, who claims that European countries, and Germany specifically, aren’t spending enough on their security.
The three parties have also been wrangling over Germany’s role in supplying weapons to troops in foreign conflicts. The Social Democrats have long been pushing for tighter restrictions to countries fueling the conflict in Yemen, and got a plan to ban arms sales to that region into the preliminary document. But don't expect Ms. Merkel’s conservatives to throttle sales much. Germany’s is the world’s fifth-largest arms exporter; many jobs depend on the sector.
What to expect: defense spending could be a mine field.
John Blau is a senior editor with Handelsblatt Global. To contact the author: [email protected]