Germany will help shape the EU green drive

The new German government got together with apparent enthusiasm for power and for the compromises to achieve it. Keeping together a coalition of Greens, the SPD and Free Democrats will not be easy.

| 5 min read

The Free Democrats want prudent finances, lower borrowing and less inflation. They traditionally want the state to do less and the private sector to do more. Meanwhile, the Greens are keen to accelerate the drive to net zero, whilst both the SPD and the Greens favour a more active state with higher spending and state investment.

The disposition of ministries builds these tensions into the architecture of the departments and the cabinet. The Greens have control of the main departments designed to take Germany more quickly to net zero. From the Green party, Robert Habeck runs the Economy and Climate Ministry, Steffi Lemke the Environment and Nature Conservation Ministry and Cem Ozdemir the Agriculture Ministry. They do, however, must deal with Christian Lindner of the Free Democrats at Finance to secure government financial support for their plans, and must persuade pro motorist Free Democrat Volker Wissing at Transport for accelerated changes to travel modes.

The SPD in overall control

Meanwhile, the SPD as the largest party of the three has overall control with Olaf Scholz as Chancellor, with the Health Minister, the Interior Minister and others in support. Karl Lauterbach at Health is a friend of the Chancellor and a hawk over lockdown and combatting the virus. The SPD has adopted a faster road to net zero as a principal strategy and has some sympathy with the Greens wish to spend more on public investment and tolerate a higher level of borrowing. This is tempered by the reality of conservative Germany wanting prudent public finances and low inflation and reflected in the choice of Finance Minister.

Just as under the late years of Angela Merkel, the needs and wishes of the internal combustion engine German motor industry do not figure prominently despite the substantial fall in output from previous levels. German car output hit a high of 583,000 in March 2011 and has averaged 437,000 a month since 1999. November this year saw it climb back to 307,000 after five months below 250,000, so it still well below pre-pandemic levels. The fall is usually attributed to supply chain and pandemic problems, but there are also now issues about the speed of German transition away from its successful diesel cars into popular electric vehicles.

The Green Agriculture Minister, who does not eat meat himself, will want reductions in agricultural methane and carbon dioxide.

The new government is pledged to end nuclear power generation this year. 2022 has dawned with three of the six nuclear stations closing and may end with the closure of the others. It has also been argued to bring forward the closure of all remaining coal power stations by 2030 instead of the Merkel government’s more relaxed 2038 timetable.

This means the closure of many coal mines as well and the cancellation of further coal investment. The green revolution will speed up with more wind power being built and more work on battery storage, electric vehicles and changes to heating systems. The Green Agriculture Minister, who does not eat meat himself, will want reductions in agricultural methane and carbon dioxide with consequences for the scale and methods of animal husbandry in Germany. Mr Wissing may have seen off the plans for speed limits on main routes but will be expected to assist walking and cycling and the shift to electric vehicles.

Inflation a major issue for Germany

Germany is spooked by the current high rate of inflation, which is still near to 6%. The country is likely to be more of a voice for less monetary accommodation and for a resumption of the debt and deficit disciplines for the EU as a whole.

The German economy has been the largest and the leading force in the Eurozone for some time, but now faces substantial headwinds from the green agenda making traditional industry more difficult. The way to net zero will force big change on the all-important motor industry, which is encountering new competitors in the field of electric vehicles.

Germany lacks stock market reach and breadth in the fashionable technology and tech-oriented consumer discretionary spaces.

The German stock market was one of the poorer EU performers last year and only delivered half the return of the S&P 500. Germany lacks stock market reach and breadth in the fashionable technology and tech-oriented consumer discretionary spaces and must confront costly changes in traditional industries as energy sources are switched. Going over to more expensive energy is a worry for steel, ceramics, chemicals and other energy intensive industries, facing competition from an emerging world and China less constrained by the move away from fossil fuels.

This year should see further economic recovery as the pandemic wanes, but it will also see the structural issues besetting the German economy and stock market profile intensify as the new government shows more impatience with fossil fuel ways of doing things.

An early deal with Russia over importing more gas would assist in relieving energy pressures whilst highlighting a strategic dependence on a risky way of keeping the lights on and the factories turning. The acceptance of gas as a transition fuel will help a bit as Germany battles to keep power for industry and feedstock for chemicals affordable and competitive. More of the stimulus from EU policies will be paid to the southern states led by Italy, where there is more scope for post pandemic recovery.

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Germany will help shape the EU green drive

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