Germany Politics


Germany: Grand coalition government formed and Angela Merkel confirmed for third term

December 17, 2013

On 17 December, Angela Merkel was confirmed as Chancellor for a third term. The swearing-in came after the Social Democratic Party (SPD) approved the content of the coalition agreement, in what was an unprecedented referendum vote among its members. The SPD won a modest 25.7% of the vote at the federal elections on 22 September, which was far less than the Christian Democratic Union's (CDU) and the Christian Social Union's (CSU) combined 41.5%. Nevertheless, the referendum vote strengthened bargaining position of the center-left SPD in the negotiations so that it was able to ensure that some of the key campaign promises it had made were included in the coalition agreement.

The 185-page-long coalition treaty document was presented to Parliament by CDU head Angela Merkel, CSU leader, Horst Seehofer, and the SPD chairman, Sigmar Gabriel. A number of deals were reached during negotiations, including: an increase in public spending, particularly spending on pensions, education and infrastructure, which will be executed without raising taxes and debt. A statutory minimum wage will be introduced starting in 2015. The first minimum wage in in Germany's history will have a starting point of EUR 8.50 per hour. A new toll on the motorways applicable to cars that are registered abroad will be introduced. Additionally, the retirement age for those who have been employed long-term (people who have worked for 45 years) will be reduced from 67 to 63 and pensions for mothers with children who were born before 1992 will increase starting in July 2014.

Regarding European policy, the new government will not make any significant changes. The coalition government will, however, push for the creation of a financial transactions tax and will continue to reject both the mutualization of public debt in the Eurozone and a common deposit-insurance mechanism. Moreover, direct recapitalization of banks by the permanent European Stability Mechanism (ESM) is seen only as a last resort if unsustainable debt dynamics should appear.

Most analysts agree that in the short-term, the impact of the new measures on the economy is likely to be modest, given the healthy state of the economy at present. However, over the medium- to long-term, analysts foresee that the measures that the government plans to introduce will reduce flexibility in the labor market, jeopardize Germany's public finances, weaken the country's competitiveness and thus erode the economy's long-term sustainable growth.

Author:, Senior Economist

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