The mood was very different yesterday when the negotiators of the future German coalition (referred to as traffic light coalition, in line with the parties’ colours red, yellow and green) presented their coalition
agreement than in early 2018 when the last government presented its programme. Back then, the renewal of the ‘grand coalition’ of Christian and Social Democrats was seen as second-best solution, after a Jamaica coalition (black, yellow and green)
failed in negotiations. Lots of novelties this time around: a social democratic chancellor after 16 years of Angela Merkel (Christian Democrat) and one who few gave any chances just half a year ago; a female foreign minister for the first time in
German history and a FDP minister of finance (for the first time in almost 60 years). It is the latter that has been of most concern for many economists inside and outside Germany and rightly so, even though given a social democratic chancellor
and a green ‘super-minister’ of economy and climate change, one wonders how powerful Christian Lindner will be. The FDP (I try to avoid calling them liberals, as this description is too generic for a rather small party, with lots of
liberals across the German party spectrum) wants to return to the fiscal policy rules and constitutional debt brake as soon as possible, which would imply a strong fiscal brake on the German (and ultimately European) recovery process; it is more, one can easily
envision a scenario where such fiscal tightening will lead to a similar situation as in the early 2010s, not exactly the most glorious hour of economic policy making in Europe (to put it mildly). It certainly is not in line with the new government’s
investment plans, which implies some playing around with the rules (through trust funds and special budgets); it will certainly be interesting to see the 2022 budget and the actual squaring of the circle. At the same time, there are signals of flexibility
with European fiscal rules. And there is an explicit recognition that the ECB can only fulfil its mandate of price stability if fiscal policy plays its rule; this phrase can obviously be interpreted in many different ways but if clearly shows recognition that
fiscal and monetary policy can no longer be regarded as completely independent from each other. And the establishment of some form of European deposit insurance (at least through a reinsurance scheme) is mentioned. So, positive signals even though
a government without the FDP would have sent even stronger ones, one can assume. A sidenote for Brexit observers: clear support for the Northern Ireland Protocol and the principle that pacta sunt servanda; on the other hand, no mentioning of the German
car industry in this specific circumstance to ride to the UK’s support, as has been awaited for so long by Brexiters 😀).
One final interesting note is that
the SPD will get to nominate the next president of the Bundesbank, which suggests not only a simple change of guards in Frankfurt, but maybe also a
new style and new role for the Bundesbank president within the ECB governing council. Given that the FDP secured the Ministry of Finance, this development is no surprise.