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December 17, 2019

The marginal impact of the Greens

We got a glimpse yesterday of the kind of impact the Greens will have on German politics. After the grand coalition agreed its climate deal in September the matter had to go to the Bundesrat, the upper house. There it was duly rejected because the grand coalition parties do not have a majority. In cases such as these, the issue goes into a reconciliation committee between the two chambers, which yesterday worked out a compromise. In political terms, this was about getting the Greens on board.

The only tangible result is an increase in the initial CO2 price in 2021 from a previously-envisaged €10 to €25. What is not changing is the single most toxic part of the agreement. This is capping the price from 2025 onwards at €55, which is already lower than the carbon prices in some markets. The Greens called the comprise a step in the right direction - a phrase we have come to equate with kicking the can down the road. The extra receipts will be used to increase the compensation for commuters, which is one priority for the SPD. As we noted before, the compensation is tied to the distance and the tax bracket. Since there is a correlation between earnings and car size, this will effectively constitute a subsidy for large cars. This year Germany saw a record number of SUV registrations, and the SUV remains the biggest growth segment in the car market.

The compromise will do nothing to help Germany meet its agreed 2030 climate goals, and to force industry to make the necessary investments. But Germany’s carbon dependence is so large that even this modest CO2 pricing structure will impact the competitiveness of some marginal producers. Small and medium-sized companies have cited Germany’s high electricity costs as one of their biggest negatives, and that problem will increase with the carbon tax. There were howls of protest from the industry yesterday. We also expect the FDP to do quite well, as it is the only party apart from the AfD that rejects any notion of carbon pricing. 

In political terms, this was a compromise between the CDU and the Greens, a foretaste of what is to come. The compromise tells us not to expect any policy radicalism, on climate as on fiscal policy. The Greens have fewer voters that need to be compensated, but we don’t see the CDU compromising much on the fiscal side. We expect the self-imposed black zero nonsense to go, as a result of which the binding limit will revert to the constitutionally-mandated maximum deficit of 0.35%. This is not an average number, and can be breached in severe recessions. But the rule is largely consistent with a deficit of near zero in the average of the economic cycle. The best we can hope for is the inclusion of a sustainable investment rule, which would temper some of the more extreme surpluses. Our expectation is that a CDU/CSU/Green government will bring gradual but small shifts.

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