The First 100 Days of the Grand Coalition

After 100 days of a new government in office, it is standard practice to look back on what has been achieved so far. How successful has Germany’s Grand Coalition of CDU and SPD been so far in terms of economic and financial policy? The first important decision made by the new government was the combined package of retirement at 63 and the so-called “mothers’ pension” (“Mütterrente”). It is of course admirable to want mothers to be financially better off in their retirement, but this move would have to be subsidised by pension holders without children instead of shifting the burden onto future generations. The idea of retirement at 63 is even worse. Germany needs reforms that ensure that we keep working for longer and that more people get integrated into the labour market. In addition, pensions need to be cut and be supplemented to a greater extent by people’s private savings. Retirement at 63 achieves the opposite of this, raising expenditure on pensions and causing many workers to leave the labour market sooner, which will cause revenue from pension contributions to decrease. This is an act of political foolishness, the negative effects of which will be felt by future contributors and pensioners.

The Grand Coalition’s second big project is the introduction of a universal minimum wage. Introducing this minimum wage is a mistake as it will push people out of the labour market rather than integrating them. The damage can, however, be contained if certain groups currently at a disadvantage on the labour market – including young people, especially those without any form of training, as well as older workers and the long-term unemployed – are made exempt. Furthermore, the minimum wage should be adjusted according to region; a minimum wage of €8.50 is likely to have less damaging effects in an expensive city like Munich than in parts of the former East. Unfortunately, it looks unlikely that any of these exemptions are going to be made.

The Grand Coalition’s third and most important project is the planned execution of the energy transition. Reducing the consumption of fossil fuels, turning away from nuclear energy and replacing these energy sources with renewable energy is no easy feat. Germany is an industrialised nation competing with other countries for investment and jobs. Both companies and private households need access to affordable energy. Energy policy should be focused on mobilising market forces and the innovation potential of private companies towards achieving the goals of the energy transition. Until now, producers of renewable energy have not had to put much thought into whether they are producing electricity in the right place at the right time because the money they make is not dependent on the needs of customers. This has to change. The different forms of renewable energy should also be in competition with one another – if wind energy proves more cost-effective in Germany than solar energy, then this should mean that wind energy prevails. In order for this to happen, the current feed-in tariffs must be replaced by a market premium that funds electricity from all renewable energy sources in a consistent manner. The energy policy plans drawn up by the new government do not provide for any of this. Though the plans include some tentative approaches towards creating more market competition, such as the idea of using direct marketing to encourage energy producers to become more customer-oriented, these instruments are not being introduced decisively enough and the plans focus too heavily on the planned economic expansion of renewable energies.

It seems that the Grand Coalition’s only demonstrable success so far is their announcement that the 2015 will see a fully balanced budget. If this proves to be true, this will be cause to celebrate. However, the financial plans of the incoming government also included starting to pay off debt from 2015 onwards. Now the decision has been made to spend more money. Spending more money when the economy is healthy rather than putting it aside for more difficult times is a common error in fiscal policy that governments can’t seem to stop making.

Overall, the achievements of the Grand Coalition over its first 100 days are modest. While Germany needs to be more competitive and have more fiscal discipline to maintain its position in Europe, the new government is rewarding its voters while leaving necessary reforms on the back burner. That being said, after just 100 days in office it is not too late for the government to wake up and change its course rather than sit around waiting for the next crisis to occur.