EXECUTIVE SUMMARY
Political change is upon Germany, but no major policy overhaul is in the cards. After the elections on 26 September 2021, Chancellor Angela Merkel will be replaced after 16 years in power. The transition takes place in a highly fragmented political context, which will likely see the first three-party coalition emerge at the federal level and complicate the government-formation process. The significant dilution of agendas required for an agreement among potentially uneasy political partners suggests that German politics will see more policy evolution than revolution over the next four years.
Yet, Germany needs an economic Neustart. Unfortunately, “business as usual” with at best small, piecemeal reforms are not going to cut it anymore. Germany urgently needs a major update to ensure that it can master successfully the digital, green and demographic transitions and in turn safeguard its prosperity.
- Making the economy fit for the 21st century. Most parties seem to lack comprehensive and concrete plans, though it is high time to finally tackle the well-known reform „biggies“. These include future-proofing Germany’s institutional backbone (reform and modernization of its federal structure and public administration), cutting red tape, providing critical (digital) infrastructure, reforming its education system and fueling the entrepreneurial spirit. Taken together, these are the pre-requisites for a faster pace of digitization, which in turn is crucial not only for an effective fight against Covid-19, but also for achieving climate targets and maintaining an internationally competitive economy.
- Meeting the magic number to limit climate change. The policy targets in almost all of the election manifestos are insufficient to limit global warming to 1.5°C. Carbon prices need to rise and additional policies are required to establish new technologies and new markets, and to adapt to the already material damages resulting from climate change. This will affect heating, transport and food prices and thus particularly burden financially vulnerable households and businesses, which calls for revenues from carbon-pricing policies to be used for providing adequate support in the form of transfers and stable electricity prices.
- Adapting to demographic change. Most parties shy away from pointing out the need to adapt Germany’s pension system, promising further increases of benefit levels and freezing the retirement age at 67 instead. However, these promises will come at the cost of a markedly higher tax-financed state subsidy of the pension system or a contribution rate of 30% in the long run, which would mean either curtailing the financial scope for investments in infra-structure, education and new technologies or undermining Germany’s competitiveness, not least in the (global) war for talent.
