ZEW President Wolfgang Franz on the “Coalition Agreement”

In its most recent annual report, the German Council of Economic Experts has analysed whether the coalition agreement of CDU, CSU and FDP takes into account the diverse economic and political challenges that the German government will have to face in the coming years. After assessing the coalition agreement, the German Council of Economic Experts came to the conclusion although the agreement contains a number of positive aspects, economic policymakers have maybe not yet grasped the scale of these challenges. What are these challenges and why did the Council come to this conclusion?

From the standpoint of economic policy, one of the issues that need to be addressed in the following years is, for one thing, to prepare and implement an “exit strategy” that does not threaten economic stability. This exit strategy must encompass fiscal policy, financial market stability and monetary policy. It should also contain a reduction in the level of newly accrued public debt, the gradual phasing out of support programmes in the real economy and in the financial sector as well as the commitment to move away from central bank policies that promise unlimited liquidity.

Furthermore, this exit strategy has to be combined with investments for the future, which would prevent Germany from becoming stuck in a low growth path. In this context, education and innovation policy promise great potential. With regard to the education sector, it is crucial that policymakers act in line with an important finding in education economics, according to which returns on education investments tend to be higher, if they are made at a very early stage at life.

In addition to the fragile economic upturn, these requirements provide the background against which the coalition agreement should be evaluated. On the basis of these criteria, there are three positive aspects that should be highlighted. Firstly, the coalition agreement rightly emphasises several important regulative measures as part of the reform of the financial market order – although it would have been necessary to place greater weight on necessary transfer of supervisory competences to supranational authorities. What is more, policymakers were right to place a high priority on education and innovation in the coalition agreement. It should however be taken into account that the competences of the federal government are very limited when it comes to education policy. Nevertheless, it would have been desirable for policymakers to concretise a specific education initiative, a need which the German Council of Economic Experts has recognised in its Ten Point Plan. Lastly, the coalition agreement contains several measures that could improve Germany’s attractiveness as a business location, such as corrections in the field of corporate taxation and measures which make it easier for businesses to hire workers on a fixed-term basis. Although policymakers have rejected a statutory minimum wage, they have so far also failed to make a mention of sector-specific minimum wages, which are just as questionable.

The council has also given a damning assessment of the agreement's provisions on the consolidation of public budgets. Instead of developing a consistent consolidation strategy, which would have to be introduced in 2011, policymakers have confined themselves to mere pronouncements; concrete specifications lack completely. What is worse, policymakers have promised tax cuts amounting to a total volume of 24 billion Euros without making a mention of funding arrangements. Instead, the coalition agreement includes mere speculations, suggesting that the need for consolidation of 37 billion Euros could be met through higher economic growth alone by time the debt brake enters into force in 2016. Although greater economic growth facilitates consolidation, it does not solve the problem. Consolidation requires drastic cutbacks. Since all measures announced in the coalition agreement were explicitly subject to provisions relating to financing conditions, all planned tax reductions will have to remain on the wish list for the time being.

In short, it is important that we do not take risks with the German economy’s future.