Germany is the largest economy in Europe. What if it moves to the left?

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result Sunday’s election It is difficult to predict that the formation of the government may take weeks or months to complete. However, when the dust settled, opinion polls showed that the new prime minister may be Olaf Scholz of the left-leaning Social Democratic Party, who served as finance minister in the alliance with Merkel and led the German economy through the pandemic. . At the same time, the number of seats of the Green Party in parliament may more than double.
Scholz’s SPD and the Greens It can work with the pro-commercial Liberal Democrats to gain enough power to shift the country’s economic agenda to the left.As political leaders redouble their efforts in digitization and digitization, taxes and expenditures may increase Climate policy, And the vigilance of rising government debt may take a back seat.

Carsten Brzeski, head of global macro research at ING, said: “The Greens and liberals in the coalition will bring us the freshest innovative force we have in the German government for some time.”

Global Bank says The final outcome of the post-election competition between political parties is far from certain, and investors are advised to prepare for two potential outcomes: the alliance of the Social Democratic Party, the Green Party and the Liberal Democratic Party, or the weakness of Merkel’s center-right Christian Democrats. Victory, the union led by Armin Laschet may also need to cooperate with the Green Party and the FDP.

The former option will mark a leftward move, but not as dramatic as the alliance between the Social Democratic Party, the Green Party, and the far-left Die Linke. This result may produce more ambitious wealth redistribution and taxation efforts, but analysts have played down this, and may surprise investors.

Regardless of which combination is responsible, it must manage the continued recovery from the coronavirus pandemic. According to the latest forecast of the Organization for Economic Cooperation and Development, after shrinking by 4.9% in 2020, the German economy is expected to grow by 2.9% this year and 4.6% next year.

However, recent data suggests that momentum may be declining. According to data released on Friday, the Ifo index, which tracks the country’s business environment, fell for the third consecutive month in September. China’s economic slowdown, supply chain chaos and soaring natural gas prices may cause losses.

Such a correction may increase the pressure on the country’s new leaders to abolish Germany’s notoriously strict fiscal regulations so that they can continue to spend on the domestic economy.

The country pursues the so-called “debt brake” In the 2009 constitution, with a few exceptions, public lending was strictly restricted after the financial crisis. Due to the pandemic, debt rules have been suspended until 2023. This has caused Germany’s borrowing to surge, and the country’s debt-to-GDP ratio has risen sharply to 70% in 2020.

Although this ratio pales in comparison to the United States, whose debt is now expected to exceed annual GDP, Germany’s centrist parties have been eager to regain control of the country’s public finances. At the same time, the Green Party hopes to relax debt rules more permanently.

UBS strategists Dean Turner and Maximilian Kunkel believe that the debt brake-which has become a key tenet of German fiscal conservatism-may continue to exist because of the overthrow It requires a two-thirds majority in Parliament.

Nonetheless, they expect that Germany’s new leaders will find other ways to increase spending to deal with the climate crisis, which has become more prominent after the climate crisis. Devastating flood Attacked the country in July.

“A common area where all parties have reached consensus is the need to address climate change,” Turner and Kunkel wrote in a recent research report. They continue to say that no matter what alliances appear, green investment “will rise.”

Responding to the climate crisis

Brzeski predicts that the incoming ruling coalition, regardless of its composition, will create a special investment tool to circumvent the debt brake and allow funds to flow to green initiatives.

However, as the coalition government becomes more free, some timetables may be advanced.

The Forest of Sleeping Beauty is dying.This is not the only climate crisis facing Germany's next chancellor

“[The Greens] It may promote the acceleration of the green transformation of the German economy as a prerequisite for entering the government,” Goldman Sachs said in a recent report to clients.

The Green Party has called for a 70% reduction in greenhouse gas emissions from 1990 levels by 2030, while the current government’s goal is 65%.It also hopes to shut down coal-fired power plants by the end of the year This decade, not 2038, and by then new cars will also achieve zero emissions.

This may conflict with Germany’s most powerful companies. In its latest strategy update, Volkswagen (VLKAF) The company said it hopes that 50% of its sales will come from electric vehicles by 2030, and that it will increase to nearly 100% by 2040.

How much the state should intervene may create friction among coalition members.

“The biggest controversy will be: How do you change people’s behavior?” Brzeski said. “Do you do this through motivation and education, or do you do it through [increasing] Price and cost? “

Germany’s left-leaning government may also lead to tax increases for the wealthiest people in Germany, and the Social Democratic Party has proposed a new wealth tax on the super-rich.

But the bank emphasized that how the election will be conducted is still very unclear-the more conservative CDU may still prevail, allowing Germany to stay more firmly on the current fiscal and economic path.

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