Explainer

What’s in Germany’s “Traffic Light” Coalition Agreement

I read all 177 pages so you don’t have to.

Olaf Scholz
German finance minister Olaf Scholz attends a debate in parliament in Berlin, July 8, 2018 (Bundestag/Inga Kjer)

Germany’s Social Democrats, Greens and liberal Free Democrats are ready to govern. Two months after federal elections almost to the day, they unveiled a 177-page coalition agreement that lays out their program for the next four years.

Social Democratic Party (SPD) leader Olaf Scholz, who would succeed Angela Merkel as chancellor, hailed the deal as the “biggest industrial modernization of Germany in more than 100 years.” It calls for major investments in decarbonization and digitalization.

Free Democratic Party (FDP) leader Christian Lindner would succeed Scholz at the Finance Ministry, despite his party being the smallest in the “traffic light” coalition (named after the parties’ colors).

The Greens get climate and foreign policy, and the right to nominate the next German EU commissioner. (Unless the conservative Ursula von der Leyen is reelected as commission president.)

Here are the highlights.

Budget and taxes

  • No tax increases.
  • Reapply the constitutional debt brake, which limits structural deficits to .35 percent of economic output, from 2023.

These are victories for the FDP. The debt brake has been suspended during COVID.

  • Use the state-owned development bank KfW to invest in the green economy.

This gets around the debt brake.

  • No pension cuts. No increase in the retirement age.

Important to the SPD.

Climate and energy

  • Reduce greenhouse gas emissions to the level of 1990 by 2050.

The goal of the Paris Climate Agreement.

  • “Ideally” phase out coal by 2030.
  • Become a “leader” in green hydrogen.
  • Renewables to make up 80 percent of electricity generation by 2030.
  • Accelerate planning and approval of new energy projects.
  • Simplify rules to replace aging wind turbines.

This is ambitious. 35 percent of German electricity generation is currently renewable. Coal was due to be phased out in 2038. Without nuclear, which neither the Social Democrats nor Greens support, Germany has had to import more Russian natural gas.

  • Abolish the renewables levy on electricity bills.
  • Require all new buildings to install solar panels on their roofs.

This should help lower electricity costs for consumers.

Defense

  • Deepen defense integration in the EU.
  • Spend 3 percent of GDP on “international action” (defense and foreign aid).
  • Procure a nuclear-capable successor to the Tornado fighter jet.

Germany hasn’t met the NATO spending target of 2 percent since reunification. Its army is barely combat-ready. Fewer than half of the Bundeswehr‘s 244 combat tanks are operational. Not one of Germany’s six submarines is able to leave port. Munitions and spare parts are lacking.

Germany has a nuclear task within NATO. In the event of war, American atomic bombs in the country transfer to German control. The left has wanted to get rid of this for years. Stipulating that the Tornado’s successor must be nuclear-capable makes it less likely that they will get their wish.

Digitalization

  • Connect remote areas to high-speed Internet.
  • Digitize health records (patients can opt out) and prescriptions.
  • Ease approval procedures for (digital) infrastructure.
  • Invest in artificial intelligence, cybersecurity, robotics and quantum computing.
  • Invest in digitalization and IT for schools.
  • Raise research and development spending to 3.5 percent of GDP by 2025.

The pandemic made the need for investments in digital painfully clear. Home-schooling and -working were handicapped by a lack of computers and absence of high-speed Internet. Half of German schools don’t have Wi-Fi. Health authorities still use fax. Germany’s 4G mobile network is one of the worst in Europe.

Economy and business

  • Oblige freelancers to contribute to a pension fund.
  • Raise the minimum wage from €9.60 to €12 per hour.
  • Replace the “Hartz IV” unemployment benefits with a more generous “citizens’ benefit”.

Currently benefits are tied to assets, and they can be cut if the recipient refuses a job offer.

  • Create “one-stop shops” for entrepreneurs, so new companies can be launched within a day.
  • Improve the regulatory frameworks for cooperatives and social enterprises.
  • Mobilize startup financing from institutional investors, including pension funds.
  • Simplify rules for businesses and the self-employed.

Under the last government, Germany fell from third to seventh place in the World Economic Forum’s competitiveness index. Capital and regulatory requirements make it more difficult to start a business in Germany than in neighboring Denmark or the Netherlands. The Greens and liberals are keen to promote startups, especially if they’re working in digital or the green economy.

The challenge is that many business- and job-related regulations are made and managed by state governments, and the “traffic light” coalition does not have a majority in the Federal Council, or Bundesrat.

Europe

  • Complete the European banking union with an EU-wide reinsurance system for national deposits.
  • Open to reform of the Stability and Growth Pact, which limits debts and deficits.
  • No debt-pooling. No eurobonds.
  • Support an EU-wide carbon border adjustment mechanism.

A mixed bag for federalists. It suggests Germany will continue to seek equidistance between the “frugal” north and the integrationist south.

Reform of the Stability and Growth Pact is overdue. Few countries meet the treaty’s deficit and debt limits of 3 and 60 percent of GDP, respectively.

  • Tie the disbursement of COVID-19 recovery funds to respect for the rule of law.

So no reprieve for Hungary and Poland.

  • Transnational lists for elections of the European Parliament.
  • Switch to qualified majority voting in foreign policy.

These match the reform ambitions of French president Emmanuel Macron.

Housing

  • Build 400,000 homes per year, including 100,000 subsidized houses.
  • Cap rent increases at 11 percent, down from 15 percent, over three years in expensive neighborhoods.
  • Ease rules for first-time buyers.

Deutsche Bank reckons the country needs an additional one million homes. Housing prices have doubled in the last decade. Half the population rents, and rents have increased 35 percent. German mortgage requirements are among the strictest in Europe.

Migration

  • Allow dual citizenship.
  • Allow refugees to bring their relatives to Germany.
  • Automatically give citizenship to children born in Germany provided one of their parents is a legal resident.
  • Ease rules for exchange students and high-skilled migrants.
  • Reduce the minimum residency required for naturalization to five years.

The German population is projected to shrink from 83 to 74 million by 2060. There would be eleven million fewer Germans of working age by then, but five million more retirees. A doubling of migration to 311,000 could stabilize the population.

Mobility

  • 15 million electric cars by 2030.
  • Become a European hub for battery production and recycling.
  • Double rail passengers by 2030.
  • Electrify 75 percent of rail by 2030.
  • Raise tax on polluting cars and trucks.
  • Require transport companies to share real-time data.
  • Support research into synthetic fuels.
  • Tighten subsidies for electric and hybrid cars.

The SPD sees great potential for battery production and recycling to replace jobs that will be lost in fossil-fuel industries.

The FDP called out synthetic fuels in their manifesto to replace kerosene and avoid banning domestic flights.

All three parties argued for expanding rail, but a liberal proposal to privatize Deutsche Bahn didn’t make it.

Russia

Germany gets 40 percent of its gas from Russia. The outgoing coalition resisted pressure from in- and outside Germany to pull the plug on Nord Stream 2, an expansion of the Baltic Sea pipeline that allows Russia to circumvent transit nations in Eastern Europe, like Ukraine. The incoming governing parties don’t mention the pipeline in their agreement. They merely state:

We will take into account various threat perceptions and focus on a common and coherent EU policy toward Russia.

The Greens and liberals took a stronger stand in their manifestos. It appears the Russia-friendly Social Democrats got their way.

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