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Investment Institute
Viewpoint Chief Economist

Wind of change?

  • 13 September 2021 (5 min read)

Key points

  • As the Merkel era is drawing to a close, we take a look at some key macroeconomic challenges ahead for Germany.
  • While last week’s ECB announcements are no tapering, we detect some growing influence of the hawks.

Maybe paradoxically given the ample policy space Germany would normally enjoy given its sound public finances even after the massive fiscal stimulus implemented to address the pandemic, the country is having to deal very quickly with some of the constraints which the entire European Union will have to navigate in the years ahead. Indeed, as the “Merkel era” is drawing to a close, on the occasion of the future coalition agreement, Berlin before most of its European partners will have to sketch out a comprehensive strategy to deal with the post-pandemic macro damage, decarbonize its economy and respond to the “pendulum shift” in public opinion towards more demand for government protection.

Decarbonization is in our view the key challenge, which transcends the parties – the Supreme Court is taking seriously the 1994 amendment to the Constitution which incorporates environment protection into the guiding principles of government action. Its transitory cost will collide with the other priorities of the parties, reducing inequality on the centre-left and improving competitiveness on the centre-right. This may make it tempting to allow some – moderate – drift from the pre-pandemic trajectory for the public deficit. The combination of European and national fiscal rules is a major hurdle, but we see some potential for a measure of flexibility there. We would expect a prudent inflexion though, not a revolution.

The next German government will also have to navigate treacherous waters when it comes to international trade. Germany has embraced the post-1990 globalization and remains reliant on the possibility to constantly count on new sources of “foreign traction”. Still, the era of “politically blind” trade policies is over, and the changeover in the US administration has not altered this state of affairs. Germany is being asked to “choose sides” in the big US/China rivalry. The “bipolarization” of the world economy between US and Chinese areas of influence is not going to be comfortable for big “third party” players.

A reassuring point is that the current political debate in Germany is not obsessing about the ECB stance. While the ECB’s paring back of PEPP announced last week is no proper “tapering”, we detect a growing influence of the hawks in the details of the ECB’s communication.

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