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?

2 thoughts on “When The Red Light Turns Green

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