Industry Subsidies

Banking on a Reelection Landslide

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  • Why it matters

    Why it matters

    In the wake of election setbacks in three German states earlier this year, the right-left coalition government in Berlin is shifting its federal election campaign into gear. It’s calling upon a substantial war chest: record tax revenues to be lavished on key constituents.

  • Facts

    Facts

    • German federal parliamentary elections will take place in late summer or fall of 2017.
    • Support for Ms. Merkel’s conservative bloc is approaching 30 percent, according to Forsa polling, while support for the Social Democrats has plunged under 20 percent for the first time in nearly a quarter century.
    • The German government this week approved incentives for buyers of electric vehicles as part of a new €1 billion ($1.1 billion) program. New subsidies also are being offered or considered for farmers, retirees and the military.
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    Audio

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It was the end of February, with elections fast approaching in three German states: Baden-Württemberg, Rhineland Palatinate and Saxony-Anhalt. Polls indicated ominous outcomes for the center-left Social Democratic Party, the junior coalition partner of Chancellor Angela Merkel’s Christian Democratic Union.

The Social Democrat leader, Sigmar Gabriel, who is the country’s economics minister and vice chancellor, attempted to breathe life into the party’s listless election campaign with what he called a “new solidarity project for our own people.” Refugees, after all, should not be the only ones to receive billions of euros in assistance, cautioned the SPD party boss, who pointed to Germany’s critical need for additional affordable housing, day care centers and services for its aging population.

It was wrong to keep the country’s budget surpluses “sacrosanct” and off limits for such needs, Mr. Gabriel declared.

Such transparent posturing ahead of the state elections unleashed criticism not only from the political opposition, but from Ms. Merkel’s CDU and its Bavarian sister party, the Christian Social Union.

Finance Minister Wolfgang Schäuble – the CDU’s second in command after Ms. Merkel – was at a G-20 summit in Shanghai when he read Mr. Gabriel’s remarks. The finance minister, whose raison d’être is a balanced budget, became so unraveled that he broke Germany’s unwritten political rule of not openly addressing domestic policy issues when traveling abroad.

The vice chancellor could not have uttered such “pitiful ramblings,” Mr. Schäuble blasted, indicating it could only have come from some random SPD underling.

“It is common for politicians to show their generosity ahead of important elections and to shower their people with gifts.”

Manfred Güllner, Head of Forsa polling group

In opposing the overreach by Mr. Gabriel, the German finance minister counted on a powerful backer in his corner: Chancellor Merkel, who had strongly urged her coalition partners to “protect the balanced budget.”

Nearly three months and three painful election setbacks later, the situation has shifted dramatically.

While Ms. Merkel would never speak in such social-democratic terms, for fear of frightening her conservative CDU voters, the German chancellor and her vice chancellor share a common creativity when it comes to generously sharing the wealth. But there is one big difference: Mr. Gabriel talks the talk; Ms. Merkel walks the walk.

Even as German auto bosses at BMW, Daimler and Volkswagen were still celebrating the federal government’s recently approved incentives for buyers of electric vehicles, the chancellor was readying her next rounds of targeted subsidies: first for farmers, then for the military.

Next up: increased payments for the retired, which CDU policy experts currently are debating.

Farmers, soldiers, retirees and carmakers — this list of beneficiaries clearly shows that Ms. Merkel and her party have entered early campaign mode ahead of next year’s federal elections.

The vote-buying tactic has not gone unnoticed.

The head of the German economic research institute Ifo, Clemens Fuest, in an interview with Handelsblatt, accused the chancellor of seeking to maximize votes at the expense of sustainable economic growth.

Manfred Güllner, who heads research group Forsa, says such behavior is anything but new. “It is common for politicians to show their generosity ahead of important elections and to shower their people with gifts,” Mr. Güllner said.

Support for Ms. Merkel’s conservative bloc is approaching 30 percent, according to Forsa polling, while support for the Social Democrats has plunged to less than 20 percent for the first time in nearly a quarter century.

In the face of rising support for the far-right Alternative for Germany party – which gained seats in all three state elections earlier this year at the expense of the two governing parties – Social Democrats and conservatives are turning to their respective voter bases and special interest groups for support.

And they are more than willing to pay for it, with taxpayer funds, of course.

Ostensibly in an effort to support “innovation,” the German government has launched a new €1 billion ($1.1 billion) program to incentivize the purchases of electric cars with €4,000 upfront payments for buyers of all-electric vehicles, and €3,000 rebates for buyers of plug-in hybrids.

At first, Finance Minister Schäuble was opposed to the subsidies. “I don’t think much of the buyer’s premium, and I advised the chancellor against it,” he told Handelsblatt in a recent interview. “But all my colleagues in the cabinet were for it, so I have to accept that.”

The German finance minister may even be transitioning from acceptance to advocacy: “Many countries have buyer’s premiums, like the United States, Norway and Great Britain, for example. And now I’m slowly beginning to defend the buyer’s premium for electric cars.”

It speaks volumes about what’s at state politically for the balanced-budget-obsessed Mr. Schäuble to say as much.

In addition to rebates, the German government on Wednesday approved a 10-year tax break for buyers of electric vehicles. Retroactive to the beginning of this year, electric-car buyers will not have to pay Germany’s vehicle tax.

City dwellers are likely to be the main beneficiaries. But Chancellor Merkel also has gifts for those in the countryside – and the parliamentarians in her own party who represent them. The details of new government subsidies for dairies are to be announced at an upcoming “milk summit” that Ms. Merkel will attend.

According to sources, support in the double-digit millions of euros is under discussion.

From the chancellor’s point of view, such taxpayer-funded subsidies are money well spent – especially with elections this fall in the northeastern agricultural state of Mecklenburg-Vorpommern.

This is the state where Angela Merkel first won her seat in Germany’s lower house of parliament, the Bundestag, in 1990 – a seat she has held ever since.

If the new dairy subsidies can buy Ms. Merkel and the CDU additional support, it will be money well spent. Polls put the CDU-coalition at a meager 24 percent in the state, with Alternative for Germany gaining ground.

While Ms. Merkel’s offers to key constituencies seem to be growing in tandem with the popularity of her new far-right political rival, she is well versed in the approach.

In the summer of 2013, just before the last federal elections, the chancellor dangled €28.5 billion in election promises to a gaggle of German voters, according to Handelsblatt’s calculation. The shrewd campaigner latched on to issues traditionally reserved for Social Democrats, such as rent control.

So successful was the tactic that conservatives nearly won an absolute majority in the election. It’s no wonder they are rolling out the same strategy to replicate that success in 2017.

But much has changed in the interim.

No conservative campaign strategist any longer fantasizes about winning an absolute majority.

Given the weakened positions of the two established parties, conservatives can only hope for another coalition with Social Democrats – even though Ms. Merkel and Mr. Gabriel both view the relationship as one of convenience rather than desire.

But such pragmatic politics has its perils – especially for Mr. Schäuble’s mission to maintain a balanced budget.

Time and again since they joined forces three years ago, the coalition partners have solved internal disputes the easy way: Everyone gets more money. At the very onset of their partnership, the SPD wanted retirement benefits at 63, while the CDU demanded benefits for women with children. In the end, both were approved.

It’s the same story today. Members of the SPD and the CSU, the CDU’s Bavarian sister party, were big backers of subsidies for electric vehicles. Ms. Merkel’s CDU was skeptical on that front, but passionate about farm subsidies, which did little to inspire Social Democrats. The outcome: Subsidies for all.

This explains why the coalition government’s planned budget for next year, at €325.5 billion, is nearly 10 percent larger than their first budget four years ago. Only €33.7 billion of the budget is for investments.

But the strategy of buying votes with earmarked funds – rather than convincing people based on fundamental political values – is not universally accepted. A recent position paper by the CDU’s economic advisory council, for instance, criticized “mainstream politics that blur the original profiles of social-market economy and liberal-conservative positions beyond recognition.”

The economic advisors were especially concerned with “the increase of social welfare expenditures by around 100 billion euro to 850 billion euro” for the years 2010 to 2014.

“Make money first, then distribute it!” advised Werner Bahlsen, head of the CDC’s economic council. “We cannot inflict additional burdens on younger generations through higher government debt and sending social welfare down the wrong path.”

But such warnings often fall upon deaf ears in Berlin, as the government tosses budgetary caution to the wind.

Given the roughly €50 billion in outlays that Mr. Schäuble estimates will be needed through 2020 for the refugees who have flooded into Germany, one would think other areas of the government would be focused on belt-tightening.

But the opposite is happening, as if Mr. Gabriel’s generous “solidarity project” were already the law of the land.

Environment Minister Barbara Hendricks, a Social Democrat whose responsibility includes new building projects, will receive a 25-percent budget to her boost next year. Most of the additional money will be used to build new residential construction projects, with tax subsidies planned for the building owners.

That’s good news not only for the construction industry, but also for renters, who’ve seen housing costs soar.

Conservative Transport Minister Alexander Dobrindt also has a couple billion more euros to work with for new roads, while Interior Minister Thomas de Maizière, a Christian Democrat, has an additional half a billion euros to hire more police. That should help win points among conservative voters concerned with security.

Mr. Schäuble has opposed such budget increases.

But he too is a campaigner – in addition to being a victim of his own success. Over the past three years, Germany has added no new debt and still has money to spread around thanks to record tax revenues. Some of that clearly is doubling as the coalition government’s war chest for reelection.

For instance, Defense Minister Ursula von der Leyen is to receive an additional €1.3 billion for the next year. She may need even more for her plan to add to add 14,300 soldiers and 4,400 civilians to the German army, the Bundeswehr, by 2023, while ordering new tanks and helicopters.

But, of course, investing in Germany’s military also aids the industries and regions dependent upon it – and generally pleases the voters within. Yet distributing taxpayer revenues as a campaign election strategy, even at today’s record levels, is a little like letting the genie out of the bottle.

More than a year before federal parliamentary elections, the mood in Berlin is one of intoxicated, excessive generosity. The recent spending habits of the coalition government have drifted far from the modesty that has allowed Mr. Schäuble to consistently balance the budget.

But Ms. Merkel knows voters won’t hold this against her – especially when she spreads her largess far and wide.

Jan Hildebrand writes about financial policy and is Handelsblatt’s deputy bureau chief in Berlin. Thomas Sigmund is Handelsblatt’s Berlin bureau chief. To contact the authors: hildebrand@handelsblatt.comsigmund@handelsblatt.com.

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