Kuhhandel Is Go!

Probably best to start with the broccoli. Manager magazine reckons the fix is in, and the circle between FDP spießigkeit and Green ambitions is to be squared by hugely increasing the scope of the German government’s development bank KfW’s balance sheet. This organization is owned by the government but is arms-length enough to be “Maastrichtkonform”, although its quite explicit state guarantee means it can raise funds at a hair over bund rates. Of course if you’re genuinely opposed to public debts or state intervention in the economy, this sort of deal-structure trick shouldn’t make any difference, but as it turns out, the letter of the Stability and Growth Pact accounting framework is what the FDP chooses to take its stand on. In that light, this comment of Christian Lindner’s is positively hilarious:

“Dafür braucht man nicht einen Euro höhere Schulden, nicht einen Euro höhere Steuern, sondern es ist nur ein unternehmerisches Agieren des Staates, um Dinge möglich zu machen.”

Not a euro more debt, not a euro more tax, but an enterpreneurial intervention by the state to make things happen. Suddenly the FDP chief sounds like Mariana Mazzucatto has taken over his brain. What are they putting in that delicious fudge? Manager goes on to note that the finance ministry under Scholz has been quietly working on plans to make much more use of the KfW’s balance sheet for some time, and that although the Greens would prefer to amend the constitution and get rid of the balanced budget clause (so-called “debt brake”) they’re also cool with the KfW solution. In fact, their party foundation wonks have done the full Blue Peter “Here’s one I made earlier!”, pulling a proposal they previously worked up out of the oven. And the SPD, for its part, got none other than Jens Sudekum to take a look – for it is he.

Annalena Baerbock makes an excellent fist of selling the plan here, saying that any business would borrow money to replace a failing machine tool, while the Green parliamentary leader notes that the KfW is not the only arms-length capital budget available – there’s also Deutsche Bahn’s own budget and, rather oddly for a Green unless he’s thinking of some truly spicy financial trickery, the Autobahn company. 22 coalition working groups are in place and I note that Kevin Kühnert has been catapulted into real power, as he is chairing the one on construction projects and housing.

Bada bing, bada boom, even if Adam Tooze points out that rather as with German unity, there are both internal and external aspects to the problem. The KfW might be able to deliver enough fudge to fix the internal ones, but a FDP finance minister is still a worrying proposition for the rest of Europe via his role in ECOFIN and the Eurogroup.

Whether it happens like that or not comes down to the horse-trading – or cattle-dealing, to use the German simile – over jobs in the coalition. With a financial fix in place, this can now get going in deadly earnest.

Albert Funk says that there are certain stylized facts about German coalitions. For example, the Finance and Economic Affairs portfolios don’t usually end up in the hands of the same party – this policy area is too big and too important for a coalition partner to accept being shut out completely, so it has to be split up. On the other hand, the party that gets the Chancellor’s office usually also takes the keys of state power, Interior and Defence, while the other party usually gets Foreign Affairs, although the International Development job is often traded back. When the CDU/CSU is in government, this often means that it goes to the CSU as a way of giving them a share of the diplomatic limelight. Crucially, though, there’s no way of splitting up Finance itself. He argues that if the FDP and the Greens both want to make Finance a veto issue, the SPD could pull its own veto, keep it, and give the Greens an Environment++ super-ministry, with the FDP getting a souped up Economic Affairs++ with special responsibility for the digital agenda, while the Greens also get Foreign Affairs and the FDP – interestingly – Interior, which they might like both for civil libertarian reasons and because it has a lot of power over the civil service.

It’s an idea, but so far the really spicy cattle-dealing has been over the dignified parts of the constitution rather than the executive ministries, things like the speaker of parliament and the federal presidency.

The current president, the SPD’s Frank-Walter Steinmeier, would like to be elected for another term. Meanwhile, his party would also like to elect one of its own as speaker to replace Wolfgang Schäuble. It’s important to note here that the speakership has power over what happens in parliament while the presidency doesn’t really, so the SPD will care more about the speaker than the president, even though it obviously likes owning the formally highest office in the state. The SPD has a candidate, too, its parliamentary leader Rolf Mützenich, but if he was to get the speakership the three highest offices would all be held by men. But there’s a problem – the FDP wants to re-elect Steinmeier, and if the presidency became open, the Greens wouldn’t mind having a crack at it, as they are well aware that they’re the only respectable party never to hold it, that their colleagues in Austria got Alexander van der Bellen elected, and it wasn’t that long ago that they weren’t considered respectable. Also, they have a surplus of dignitaries for the likely availability of coalition ministries that they need to get rid of.

After various thuds and screams from the parliamentary offices, the SPD faction chose a woman instead, Bärbel Bas, which would make it possible for Steinmeier to run again, but this has knock-on effects as the Greens are still, somewhat uncharacteristically, in the cattle market, Mützenich now needs to be placed, and so on and so forth. Meanwhile, the CDU is struggling to place its sudden glut of hasbeens in suitably dignified jobs, as it’s now been reduced to filling jobs like deputy speaker.

It’s all a bit gamey but, on the other hand, it’s an absolute model of democracy compared to yet another round of byzantine intrigue, gross corruption, and authoritarian scheming in Austria. The two political cultures are different worlds.

The Nasty Side

So we did the wonk bit and the corporate finance tricks in this post, what about the dirty power politics?

One thing the leaked heads-of-terms doesn’t talk about at all is personal politics. Who’s up? Who’s down? Who’s getting which job? That’s all been left for the formal phase and probably to the final frenzy at that. It’s possible, though, to think through some of the issues ahead of time, especially as they’re strongly linked to the whole question of how to reconcile Green and FDP ambitions.

First up, the Greens will want a clear recognition of their status as the biggest of the other parties and one that was literally challenging for the status of Germany’s biggest party as recently as the spring. This is especially important as it still wasn’t that long ago that they weren’t considered a respectable entity. They will want to control the ministries that touch on their core issues. Control of the big investment programme will be a drop dead veto issue, not least because it looks like most of the discretionary spending available will be in it. It’s quite possible they might want to create a super-ministry for it, maybe linking environment and transport or even economic affairs. Being the second coalition partner usually comes with the title of Vice-Chancellor, not a powerful office in itself but a nice ego trip, although if the superministry was on offer it’s possible the Greens might trade it away.

Secondly, the FDP have been saying for ages they want the Finance Ministry as a drop dead veto issue. The policy consequences might be fixable with enough delicious fudge, but the problem is that giving it up is a big concession from the SPD at a time when they are the party in possession and surely feel they should be getting some reward for winning, and one that implies a similar concession to the Greens, who after all are bigger and more popular than the FDP. Handing over both Finance and the government’s biggest policy priority to coalition partners leaves the SPD element of the government looking a bit thin, reduced to its Mastermind specialist subject in social policy, the Foreign Ministry, and, oddly, the security portfolios like Interior, Justice, and Defence. The latter, notoriously, is a ministry nobody in German politics actually wants and Interior, like interior ministries everywhere, is one where it’s difficult to do anything popular and easy to be destroyed by events.

The real complexity here, though, comes from the Greens’ dual leadership structure and the slowly increasing animosity between Annalena Baerbock and Robert Habeck. Usually, a coalition partner’s leader gets whatever top job is going, but if it’s the Greens there are two of them to look after. If Habeck got Environment++, Baerbock would have to get something similarly grand, implying that the SPD has to give up Foreign Affairs.

A twist on this is that since the election, Habeck has lost absolutely no time in asserting that it’s a co-leadership, dammit, and that the special role of candidate doesn’t have any further relevance now the elections are over and the Greens certainly aren’t going to get the Chancellor’s job. Seeing as he voluntarily gave up the candidacy when the party was doing better in the polls than the SPD did on election day, and Baerbock’s campaign turned into something of a Bärendienst*, you can see why. You can also see why that wouldn’t go down so well in roughly half the Green party. Very quickly after the election, Habeck got it leaked that he would get the Vice-Chancellor’s hat, before rowing back a bit, but it surely hasn’t helped that Baerbock lost the head-to-head in her direct constituency too. The quotes are vicious and the photo even more so.

A further twist is that, of course, the guy in this poster, even though it’s a spoof, doesn’t look like he’s immune to the glamour of international diplomacy and access to a squadron of VIP jets:

It’s also true that the FDP has something of a history of distinguished foreign ministers – Walter Scheel during the Willy Brandt years, even if Egon Bahr did most of the work, and the great Hans-Dietrich Genscher at the end of the Cold War – and it would probably help with a whole lot of coalition-making problems, at least from an SPD point of view. On the other hand it’s been a while since a German foreign minister has managed to “Profil machen” (name the incumbent – quick!) and the FDP’s clientele, although it does care about the EU and NATO, really loves tax allowances so Lindner would be well advised to cling to the Finance Ministry. Which, of course, implies digging into the bag for some more of that fudge.

An important detail here, of course, is that the Greens and the FDP were the first into the so-called soundings, the informal phase of talks. Seeing as both parties have a veto on either the traffic-light or Jamaican options, it was logical that they should come to an agreement between themselves before going any further. If you were looking for either the fudge, or the deal on personal politics, that would be where to look, and unlike the twelve-point plan, that was very much not leaked.

*I did not know this common phrase for screwing something up out of an excess of zeal is a reference to the fables of La Fontaine

When The Red Light Turns Green

The so-called soundings between the SPD, Greens, and FDP have been a success and the three parties are ready to start formal coalition talks, subject to a Green elected officials’ conference today and an FDP executive committee meeting tomorrow. They will kick off from a heads-of-agreement paper that Der Tagesspiegel published here.

The content of this twelve-point plan is not particularly surprising especially in the light of this Handelsblatt op-ed, published the day after the election, by economist Jens Sudekum. Sudekum argued first of all that a traffic light coalition was unavoidable because neither the Greens or the SPD nor really anyone else would agree to a government led by Armin Laschet or Friedrich Merz, and given that, the only remaining option with a majority was the traffic light.

The major barrier to it, something everyone has been talking about for months, is the FDP’s insistence on keeping the kinda-sorta balanced budget amendment and no new taxes, and having the finance ministry to make sure they get it. This is both difficult for the SPD’s social policy goals, and maybe even more difficult for the Greens, whose very purpose requires far-reaching changes that must be expressed in terms of infrastructure. The wider, global shift of emphasis in climate policy from cap-and-trade or tax-and-rebate options to infrastructure-based change makes this conflict even more jarring. Further, sheer personal power is at stake – implementing the Greens’ vision would require a powerful ministry with a large discretionary budget to push the projects through, and giving that to the Greens implies that the FDP must get something comparable.

Sudekum pointed out that there was a potential fix. The FDP likes the idea of the pension system investing in assets, like a sovereign wealth fund. This implies capitalizing the fund up-front, and hence the government borrowing money. The party squares the circle by excluding this from the deficit target on the grounds that the state is acquiring an equivalent amount of assets, ones that could be expected to grow, and therefore its net indebtedness hasn’t increased. As sauce for the goose could be sauce for the gander, perhaps the capital programme could be treated the same way? Further, although the FDP had been promising tax cuts all round for businesses, they had also shown willingness to accept more generous capital allowances instead of basic rate cuts.

Yesterday’s document looks a lot like the fix is in. The fund is in there, as are the capital allowances. So is the return to budget balance, although pushed off another year into the future under the emergency pandemic exemption. The Green, or green, investment programme is there, as is a big slug of public housing investment, the €12/hour minimum wage, and sweeping changes to the welfare state. As everyone has already noticed, this pretty much requires a lot of fudge in the financing, with things like new income under the global minimum tax regime, unspecified involvement of private investors, cuts to subsidies, and a crackdown on fraud and error (now there’s an old classic), as well as the expected post-pandemic revival of growth all chipping in.

This piece points out that the document promises to guarantee the necessary investments in climate policy, digital, education, research, and infrastructure, within the framework of the balanced budget amendment, and that this would cover anything from an investment carve-out, providing the lawyers could come up with a form of words to deal with the predictable appeal to Karlsruhe, or just using the whole of the emergency authorisation for 2022-2023 to pre-fund the programme, something which in itself could go as high as €100bn.

Robert Habeck, interestingly, gave an interview in which he said that the talks were more advanced on the financing issue in private than the heads-of-agreement reflected, perhaps a signal that he has a surprise up his sleeve. Perhaps the proposed sovereign wealth fund could even invest in the projects itself?

Germany: The Results in Data

So the results are in. The Base didn’t get 30 per cent and the Independent Voters didn’t get 20 per cent, and the Economist‘s prediction that the CDU would win because it always wins didn’t work out so well either. The SPD’s lead over the CDU did tighten a couple of points over the margin of error in the final week of the campaign, but not enough to flip the result or to keep the CDU/CSU from getting the worst beating in its history. Here’s a map of the winners on the party-list, proportional section of the vote, from Der Tagesspiegel‘s interactive.

The salient point here is that the usual split along the former intra-German border is nowhere to be seen. Instead, the much older north-south divide has reasserted itself, with an SPD hegemony across what used to be Prussia, a contested zone in the Rheinland (a territory that joined Prussia very late and remained in a special status), a Christian Democratic power base in Baden-Württemberg and a Christian-Social one in Bavaria, while the far-right has become a Saxon regional party, although unlike the CSU, one that hasn’t been able to win the regional elections that would actually give it power.

Although the map breaks along lines with a lot of historical depth, going back as far as the Thirty Years’ War, it’s important to remember that it also strongly resembles the electoral maps of 1998 or 2002, when the SPD broke through in the former DDR and were therefore able to form a government. The CDU seemed hegemonic in the east in the 90s and again in the Merkel years, but there was nothing god-given about this – it might be more accurate to say that the former DDR has been the swing voting bloc in Germany since reunification. This excellent piece points out that 76 per cent of the SPD’s lead in the national popular vote is accounted for by winning big in the East. It was, after all, a Superwahltag because there were regionals in Berlin and Mecklenburg-Vorpommern on the same day, and the SPD did reasonably well in the first and absolutely triumphed with nearly 40 per cent in the second.

The obvious point here is that the CDU’s results in the east were boosted by Angela Merkel’s personal popularity and status as the first easterner in politics even more than anywhere else, and with that gone, all the cards were up in the air. The SPD’s focus on bread-and-butter social policy was a good call – the minimum wage hike, for example, would personally benefit 40 per cent of workers in the former DDR. The CDU doesn’t seem to have noticed any threat at all.

In a great twitter thread here, Dominik Haitz breaks down the correlates of the vote. Not remotely surprisingly, the rich voted for the FDP, the poor for the SPD, the young for the Greens, and the suburbs for the CDU. The extreme right’s popularity was strongly predicted by age, although interestingly, there’s a very different relationship between the percentage of old people and the AfD vote – strong, and linear – than between the percentage of young people and the AfD vote, which splits into two clusters. Ageing and emigration seem to have very different effects.

The Left party, meanwhile, does well either in post-industrial constituencies with high unemployment or else in Berlin kieze where everyone has a cargo bike but there are enough retired apparatchiks to keep the Greens from winning.

Age was an interesting split. There wasn’t a “boomers vs millennials” clean break, instead, different age groups agreed the CDU/CSU should go but chose different opposition options, with the Greens and the FDP both doing much better with the young and the SPD better with the old:

My bet is that the 18-34 market isn’t very interested in the politics of care – their parents are still working, they’re young, they don’t have kids yet – and that’s the SPD’s Mastermind specialist subject. Looking at the data with more granularity, though, it turns out to be more accurate to say that the SPD did well with the old and acceptably with the young, while the Greens and the FDP did sensationally with the young and poorly with the old.

As well as the young, the Greens won the cities, nicely shown by this Tagesspiegel graphic from the Berlin city elections:

Rather than an East-West divide, Berlin now has a divide running around the S-Bahn ring route with the SPD and CDU competing outside it and the Greens dominating within. (The referendum on whether or not to nationalise Deutsche Wohnen AG followed a similar pattern, with a two-thirds majority inside the ring and a narrow majority outside it.)

In terms of social class, it’s probably most telling that the SPD was No.1 among industrial workers (“Arbeiter”) and also among private-sector, white collar employees (“Angestellte”), and maybe also interesting that the Greens did best among civil servants (“Beamte”):

(From here)

Sans Merkel, the CDU/CSU lead among women evaporated.

Wählerwanderung data from the exit poll shows the magnitude of the CDU/CSU catastrophe very clearly. They lost voters, in size, in almost every direction except for a few, baffling, pickups from the extremes:

Also, a million of their voters from last time have simply died without being replaced.

The SPD gained from everyone, including 1.3m over the middle from the CDU, 590k from the Left, and 320k from increased turnout, but lost 320k back to the Greens.

The Greens net-gained from everyone:

The other winner of the day, the FDP, picked up votes from the right and lost them to the left:

This one is probably significant as the FDP now has to make a deal with the Greens before it can talk to anyone else, and you know, it picked up 400k votes from the Right and another 100k from the Left party. Hipsters who landed in a higher tax bracket or taxphobic old Prussians from the east? Meanwhile, the Left party got absolutely spanked in every direction and the far right lost to everyone but did pick up 110k round the horseshoe from the Left, something its left-twitter fanbase outside Germany should probably have a think about.

Finally, 55 per cent of Germans wanted the SPD to lead the coalition, compared to 36 per cent for the CDU.

There’s been a lot of comment about Germans wanting change but not voting for it, but the simplest explanation might be that their definition of change included changing which party would lead the government.