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A German Anti-Establishment Victory Could Fuel Fiscal Activism

Summary:
A little-noticed skirmish between left-leaning and left-of-center factions over the future leadership of Germany’s Social Democratic Party (Sozialdemokratische Partei Deutschlands or SPD) at the end of November 2019 could lead to a quick collapse of Chancellor Angela Merkel’s government. More likely, however, the battle, which was won by the more left-oriented anti-establishment side, is likely to push Germany toward more activist fiscal and environmental policies—hopeful news for the economic future of Europe. The internal fight among Social Democrats, the junior partner in Chancellor Merkel’s government, ended with the defeat of the party’s establishment wing and its candidates for party leadership, Finance Minister Olaf Scholz and co-chair Klara Geywitz. Instead, a small majority voted

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A little-noticed skirmish between left-leaning and left-of-center factions over the future leadership of Germany’s Social Democratic Party (Sozialdemokratische Partei Deutschlands or SPD) at the end of November 2019 could lead to a quick collapse of Chancellor Angela Merkel’s government. More likely, however, the battle, which was won by the more left-oriented anti-establishment side, is likely to push Germany toward more activist fiscal and environmental policies—hopeful news for the economic future of Europe.

The internal fight among Social Democrats, the junior partner in Chancellor Merkel’s government, ended with the defeat of the party’s establishment wing and its candidates for party leadership, Finance Minister Olaf Scholz and co-chair Klara Geywitz. Instead, a small majority voted for the left-leaning candidate duo of Saskia Esken and Norbert Walter-Borjans to head the party.

The new SPD leadership appears ready to endorse activist but pragmatic economic policies—a far higher carbon price than the €10 per ton recently agreed by the German coalition partners, or a €500 billion boost to public investments akin to what was recently endorsed by the German employers’ association and labor unions. These actions would effectively end Germany’s tightly controlled balanced budgets.

If these developments amount to political insurrection, Germany and Europe’s economic policymakers need more of it. The defeated candidate for party leadership, Finance Minister Scholz, had resisted any reform of Germany’s rigid balanced budget requirements (known as Black Zero because it opposes even minor deficit spending). Hence a clearer, more progressive SPD political profile is probably good for both the SPD and Germany.

Any change is likely to be subtle, because senior party officials in multiparty governing coalitions have less clout than leaders of two-party states, as they are often not also senior government officials. Moreover, the left-leaning candidates won with only 53 percent of the vote, in an election where voter participation was low (only 54 percent), bestowing no clear democratic mandate on them to face political fights against other elected members of their party and elected political opponents.

Esken and Walter-Borjans are thus not going to single-handedly force the SPD to leave the German coalition led by Merkel. Doing so would go against the wishes of many current SPD government ministers, members of parliament, and state-level party leaders. Their political prospects would be uncertain in an early election, and German voters may well punish the SPD for imposing it on them by leaving the coalition government. The same dynamic is at play in the German center-right Christian Democratic Union (CDU) party, where Merkel’s successor as party leader, the current Defense Minister Annegret Kramp-Karrenbauer, will resist SPD political demands as she tries to shore up her own leadership credentials within the party. On the other hand, Merkel is insisting that she and her coalition serve out the remainder of her term in office until 2021. Strong political forces, therefore, are aligned in Germany to see the current German coalition continue in office.

Starting in mid-2020, Germany will take over the rotating presidency of the European Union, assuming responsibility for the European Union’s next budget, which will probably contain an ambitious new climate initiative. SPD and CDU elites are not likely to want Merkel’s experienced hand to be missing in that crucial process shaping the European Union’s agenda well into the 2020s. An early German election would likely also scupper parliamentary passage of the recent German climate package agreed by the two parties and hence force both into an electoral contest with the Green Party with precious little to show for their government’s environmental agenda.

It is possible that Merkel will complete her time as chancellor heading a minority government, if the SPD ultimately departs the coalition. More likely though, the SPD and CDU will reach a compromise and continue their coalition and shift German economic policy in a promising direction.

Jacob Funk Kirkegaard
Jacob Funk Kirkegaard, senior fellow, has been associated with the Institute since 2002. Before joining the Institute, he worked with the Danish Ministry of Defense, the United Nations in Iraq, and in the private financial sector. He is a graduate of the Danish Army's Special School of Intelligence and Linguistics with the rank of first lieutenant; the University of Aarhus in Aarhus, Denmark; the Columbia University in New York; and received his PhD from Johns Hopkins University, School of Advanced International Studies.

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