Tiziano Zgaga | 14 January 2022

With the new ‘traffic light’ government in Germany, one could have expected a game changer in Germany’s approach to fiscal integration. Instead, the coalition agreement is a compromise between maintaining the old fiscal regulatory framework and showing some moderate opening towards new European spending powers.

The so-called ‘traffic light’ coalition in Germany is made up by the the Social Democrats (SDP), the Greens and the Free Democrats (FDP) (Photo: Francisco Welter-Schultes, CC0 1.0)

The coalition agreement of the new German government led by Olaf Scholz does not advocate for providing the EU with stronger spending powers after the pandemic – something often discussed and considered necessary for a better functioning of the EU. As a result, the agreement mirrors much more the position of the Liberals (FDP, in favour of the ‘old’ EU fiscal rules) rather than the Social Democrats (SPD) and the Greens (in favour of new spending powers). The approach to EU fiscal integration of the Scholz cabinet will thus probably be marked by much more continuity to the previous Merkel governments than expected.

SDP, Greens and FDP: different preferences on EU fiscal integration

Such continuity is surprising considering the party manifestos of SPD and Greens. SPD and Greens want to permanently provide the EU with a more autonomous spending capacity through new European taxes. Next Generation EU should become a permanent fund for investments, thus opening the doors to a fiscal union. The Stability and Growth Pact should be reformed to make it more flexible. Institutionally, both parties support more powers of the Commission and the European Parliament on EU fiscal policy. On the contrary, the FDP is against more spending powers for the EU. The party aims at strengthening the existing fiscal rules. For FDP, Next Generation EU and its ‘debt-oriented’ approach are to be temporary limited and one-off and should not lead to a debt union (Schuldenunion, a word much used by the Merkel governments).

Hence, whereas SPD and Greens wish to institutionalize a new EU fiscal capacity after the pandemic, the Liberals want as soon as possible to re-institutionalize the fiscal rules of the Stability and Growth Pact (currently suspended due to the pandemic). Against these divergences, what is the fiscal synthesis included in the ‘traffic light’ coalition agreement between the SPD (red), the Greens (green) and the FDP (yellow)?

The coalition agreement and EU fiscal integration: (almost) no big surprise

Given that SPD (25.7 %) and Greens (14.8 %) together obtained 40.5 % of the votes against the Liberal’s 11.5 %, we would have expected a game changer in Germany’s approach to fiscal integration. Instead, the coalition agreement is a light compromise on keeping in place the old fiscal regulatory framework and showing some moderate opening towards new European spending powers. As a matter of fact, the coalition agreement aims to strengthen and deepen Economic and Monetary Union but does not specify how to do so. The three parties want to secure growth, to preserve the sustainability of debt and to provide sustainable and climate-friendly investments. However, they plan to do so without substantially amending the Stability and Growth Pact. Crucially, Next Generation EU is defined as an instrument limited in time and amount whose conditionality must be effectively enforced. SPD, Greens and FDP commit to the agreement on the recovery fund and on the new own resources of the Multiannual Financial Framework, but the coalition agreement adds that ‘related proposals will be examined accordingly’. Germany should remain an anchor of stability (Stabilitätsanker) in Europe. The coalition agreement identifies solidity of public finances as tenet of the budgetary and finance policy of the new coalition – both at national and at European level.

We would have expected a game changer in Germany’s approach to fiscal integration. Instead, the coalition agreement is a light compromise on keeping in place the old fiscal regulatory framework and showing some moderate opening towards new European spending powers.

The future of EU fiscal integration after the COVID-19 pandemic: no paradigm change envisaged

In an article published in 1993, Peter A. Hall distinguished three types of policy change: the goals, the instruments and the settings. If a policy faces a re-definition of its goals and instruments, it will experience a radical, i.e. a paradigmatic change. On the contrary, if change affects the instruments and their settings only, change will be moderate, i.e. incremental: it adds new elements to the existing policy without subverting its core functioning. If we read the three party manifestos through the lenses of paradigmatic policy change, we see that SPD and Greens argue for the need of a paradigmatic change to EU fiscal integration, whereas the FDP would support some form of incremental change – making the pre-pandemic regulatory framework stricter.

Surprisingly enough, the fiscal synthesis of two parties in favour of paradigmatic change and one party supporting an incremental change results in a much less ambitious text than expected. There is no mention of increasing the EU’s spending capacity nor any other concrete measure on how to complete the Economic and Monetary Union. On the contrary, the Stability and Growth Pact should be more effectively enforced. No priority is granted to the introduction of new resources to the EU budget.

By stressing member states’ exclusive responsibility for their fiscal policy as a tenet of fiscal integration, the text closes the door on establishing a fiscal union. The need for increasing investments at EU level and in Germany has been recognized, but the preservative approach in favour of the status quo remains there. As a result, a significant deepening of integration after the pandemic will be difficult without having Germany on board. This seems true considering that the presidency of Emmanuel Macron – who had repeatedly advocated paradigmatic change to EU fiscal integration – is about to finish. Recent polls suggest he is the favourite for re-election but it is too early to predict the outcome of the French election of 10 April 2022. In Italy, the fate of the Draghi government depends on whether Draghi himself remains prime ministers or becomes president of the Republic. The lack of ‘propulsive force’ on the side of the new German government might result in losing the critical juncture of the COVID-19 pandemic to significantly advance on the road towards closer EU fiscal integration.

A traffic light strongly blinking yellow: the finance ministry led by the FDP

Crucially, the FDP seems to have influenced the fiscal policy of the new government more than its proportional weight in the coalition would have suggested – both at European and at national level. The leader of the FDP, Christian Lindner, has become the new German finance minister. This ministry is given a particular importance in Germany. According to §26 of the procedural motion of the German government, if on a matter regarding public finances the government decides without or against the vote of the finance minister, the latter can veto such decision. The veto can only be overcome through unanimity among the ministers, otherwise the decision needs to be stopped. In addition to that, the finance minister clearly plays a key role on EU fiscal policy through his vote in the ECOFIN Council – which impacts both on issues pertaining to the enforcement of EU fiscal rules as part of the Stability and Growth Pact and also on decisions regarding new resources to the EU budget.

The FDP seems to have influenced the fiscal policy of the new government more than its proportional weight in the coalition would have suggested

The new German government will have to be judged based on what it concretely does. So far, we only have political plans on paper. What will then be possible in practice is another issue. However, on EU fiscal integration the new coalition agreement seems to blink more yellow than red or green. A traffic light blinking yellow might on some occasion be the moment immediately before proceeding forward. On some others, it might be the sign for stopping.