German Economics Minister Sigmar Gabriel was in a good mood Wednesday as he presented the government’s annual assessment of Europe’s largest economy.
“The German economy is in good condition,” said the chairman of the center-Social Democratic Party.
He said the German economy would continue growing in 2015, as would the number of people in work. He credited the foresightful government policies that led to flexible corporate labor and industrial policies, and solid finances.
But alongside the self-congratulation, Mr. Gabriel said: “We should not have any illusions about the major challenges that lie before us.”
These challenges must be mastered in 2015. The political gifts have already been handed out. By 2016, Chancellor Angela Merkel’s unwieldy right-left coalition of conservative Christian Democrats and Social Democrats will be paralyzed by state elections in Baden-Württemberg, Rhineland-Palatinate, Saxony-Anhalt, Berlin and Mecklenburg-Western Pomerania.
And a year later, the coalition partners will be vying in the general election.
“When you explain to people why a reform is necessary, then they accept it.”
“The spirit of this agreement is that we are a grand coalition to deal with the major challenges for Germany,” Ms. Merkel said in 2013.
Made of the main political blocs in parliament, Germany’s grand coalition commands a crushing 80 percent of the seats in the Bundestag.
So far, its power has only flowed into projects such as a road toll on foreigners and handouts to special interests such as pension payments for mothers, lowering the retirement age to 63, and introducing a minimum wage.
“Hardly anyone in the population considers these issues to be the truly most important problems,” said Manfred Güllner, an opinion pollster at Forsa. He said many more feel their concerns haven’t been addressed, and business feels the same way. Small and mid-sized businesses feel “homeless,” he said.
“Now is the time to set the course for growth and investment,” said Matthias Wissmann, the president of the VDA association for the German automobile industry. That includes the proposed free trade agreement with the United States, he said.
“A grand coalition especially represents wide portions of the society, and therefore has special power to broker the necessary partnership with the United States,” he added.
Mr. Gabriel is responsible for this task, as well as for Germany’s transition to renewable energy. This year “clarity and reliability” must be achieved in the energy market, he said on Wednesday.
Other major projects for the coalition members include immigration reforms and new rules for the financial relationships between the states and federal government. “There is the misperception that the people would reject reforms,” said Mr. Güllner. “When you explain to people why a reform is necessary, then they accept it.” What they don’t appreciate, he said, is when reforms are ignored. So they expect the coalition to secure the social welfare system for the future, he said, adding that many young people have concerns about their pensions.
The government’s to-do list is long.
Fix the euro zone
The euro zone nations have a common currency, but no common economic policy. The currency union was born in 1999 with this defect, and 16 years later it remains. The overwhelming majority of euro nations are still not prepared to let others influence their economic and financial policies. This is the greatest challenge to Ms. Merkel. Businesses expect that after the latest euro crisis, this work will continue.
“Europe must consistently continue in 2015 along the path for reform for more stability and competitiveness,” said Ulrich Grillo, president of the Federation of German Industries. He talked about a reform marathon, in which the “growth-oriented agenda” of the European Commission must be “resolutely” implemented.
Commission President Jean-Claude Juncker also wants to deliver a “package for the deepening of the currency union.” But to have a chance, he needs the support of the heads of E.U. governments. That is a task for Ms. Merkel, but so far she has shied from it. She knows about the increasing euro skepticism in France, the Netherlands, and in Germany as well.
Implement the energy transition
There was a lot of movement on energy policy in the first year of the grand coalition, with the reform of the German Renewable Energy Act (EEG). But impatience is now growing in the industry. The operators of coal and gas-fired power plants are especially in a difficult situation. Many are in up to their necks, because their plants are seldom getting used due to rising amounts of wind and solar energy. The power plants are supposed to be shut down one after another. The risks for a secure electricity supply are growing. The parliamentary factions of the CDU and SPD have recognized the need for action, and the issue is at the top of their agendas. But if Mr. Gabriel prevails, the coalition will make do with smaller intrusions in the design of the electricity market.
Mr. Gabriel is against keeping power plant capacities on line in case of emergencies. The industry is watching the development with concern and wants clarity quickly. Otherwise, according to E.ON chief executive Johannes Teyssen: “Power plants will be closed down in the wrong places and at the wrong times.” The consequences could be disastrous.
Clarify laws on non-E.U. immigration
An estimated half a million people emmigrated to Germany in 2014. Only the United States attracts more foreigners. Does Germany even need an immigration law? The answer is yes, and for two reasons. First: More than two-thirds of those who moved here come from E.U. countries, for which freedom of movement applies. As soon as the economic situation gets better in eastern and southern Europe, considerably fewer people from those areas will move to Germany. Experts estimate that about 200,000 immigrants are necessary per year to counteract the effects of the country’s rapidly aging society. Therefore, there is also a need to attract skilled labor from outside the European Union. Secondly: The German government has already done a lot to manage the immigration from these third-country nationals, but there is a need for action. So far, only academics have been allowed to enter to look for jobs. Everyone else had to provide a work contract.
Sort out state-federal finances
The timetable is ambitious: By July 2015 Chancellor Merkel and Germany’s 16 state governors want to agree on dividing government revenues among the country’s richer and poorer states. But no one knows yet how to restart the discussions on this sensitive agreement, which have been stalled since the end of 2014. The conditions for reforms are actually ideal. They would only come into effect in 2020, when the current fiscal adjustment scheme and special funding for the former East come to an end. A grand coalition would have an easier time putting together the two-thirds majority than a government with only a narrow majority in the Bundestag. Its efficiency “even with an unchanged redistribution effect could even be significantly raised,” said Christoph Schmidt, the head of the German Council of Economic Experts.
Tackle unnecessary bureaucracy
Mr. Gabriel has promised businesses that it is important “to target visible and also palpable effects when it comes to cutting back on bureaucracy,” according to a 25-point paper his ministry released last fall. For each new regulation that the government comes up with, an existing one must be eliminated. In short: One in, one out. Businesses probably heard his words, but don’t believe them. Bureaucratic costs total €40 billion annually for German businesses. It is of little comfort that that it has shrunk by €12.5 billion since 2006.
The Association of German Chambers of Commerce and Industry, DIHK, has pointed out that neighboring countries such as the Netherlands are setting concrete and extremely ambitious paperwork reduction goals. Of the more than 60 recommendations for dismantling bureaucracy that DIHK has made since 2010, only a quarter have been implemented. The government needs to pick up the pace here, said Ingo Kramer, the president of the Confederation of German Employers’ Associations. Otherwise, he said, the opportunity for more growth this year will be wasted. So it should be: One in, three out!
Ruth Berschens, Jan Hildebrand, Daniel Delhaes, Till Hoppe, Klaus Stratmann, and Frank Specht are reporters for Handelsblatt. To contact them: email@example.com