News & Insights

What the German elections mean for EU policies and business

Following Sunday’s election, the post-Merkel Germany landscape is still quite foggy.  But the political shifts in Berlin over the past several days are slowly revealing a  new political landscape. Here is what we expect:

A weaker EPP – in Germany and across Europe 

The EPP, the largest political family in Europe, is facing a perfect storm: Angela Merkel – the EPP’s most powerful leader – is leaving after 16 years which leads to a massive void in leadership. She was the go-to politician among European and global leaders whenever an EU position had to be formed on truly relevant subjects, ranging from common debts and immigration to climate change and foreign policy.

Besides, the EPP has not only suffered a weakening blow in the largest EU member state. The most likely coalition to be formed, as CSU leader Markus Söder put it, is “the one that has a public mandate to govern”, which will be led by an SPD Chancellor, Olaf Scholz. This means that the EPP now finds itself in the historically rare position that it neither leads the German, nor the French or Italian government. The traditional EPP summits used to be the central decision making power on European policy, often pre-empting major decisions to be adopted in the Council. Consider that gone for the time being.

The SPD victory is neither a sign of its strength nor means an upwards trend for the S&D

If you take a deep dive into voter movements and motivations, you quickly find that the major reason for the surprising rebound of the SPD in Germany was the weakness of the CDU, not the strength of the SPD. Given this reality, political analysts and outside observers should not  jump to the conclusion that the SPD is thriving. 

Scholz is still being haunted by a financial scandal in which he is being accused to have intervened twice, as Head of the Hamburg State and later as federal Minister of Finance, to save MM Warburg Bank (Hamburg) from having to pay back two illegal tax refunds worth 40 and 47 million Euros. And two days after the federal elections, the state prosecution ordered raids in the premises of a close friend of Scholz. If these produce new evidence, Scholz himself could be either weakened or even toppled.

The Greens and FDP are no longer foes

While policy disagreements still exist between the liberal-conservative FDP and the leftwing Greens, these are no longer an obstacle to working together in a coalition government.  These two parties have transformed themselves in recent years as they realised they were effectively  fighting for the same electorate and with that becoming actually more similar than you would expect. FDP Chief Lindner, who is said to become the next Minister of Finance and possibly also the Economy, described the two parties as the key progressive forces in German politics – the ones that stand for change. This is what they have in common. 

While the FDP sees its role as the guardian of reasonable economic policies and austerity, both parties have similar views on internal affairs and a range of topics,including immigration, foreign policy and the legalisation of cannabis. Even around the major election topic of climate change, the two are aiming for the same goal, albeit coming from different angles. While the Green party seeks subsidies and stronger regulation to push Germany’s CO2 ambitions, for example by prohibiting combustion engines by 2030, the FDP prefers programmes that promote green technologies and industries, in particular in the wind, solar, hydrogen and e-mobility sectors. None of this sounds like compromising will be too tough. Important for businesses: The two parties’ cooperation promises more progress than threats – unless your business is CO2 heavy.

It is noteworthy that the FDP was often criticised for their surprise exit from the 2017 coalition negotiations that could have already placed them in government with the Greens back then. There is pressure on the FDP not to repeat that. Besides, communication channels have intensified in recent years, including a regular discussion forum of MPs dubbed “Pasta-Connection”.

 

Foreign policy will become Greener

Whether the next Chancellor will be Scholz or Laschet, the Greens are almost certain to retain the right to the foreign ministry, as the second largest coalition partner traditionally receives that post. Green party co-leader Robert Harbeck has already prepared the ground for that in public communication and is the most likely candidate for that post. While Harbeck is familiar with realpolitik, this means that human rights will play a stronger role in relations with China, Russia, Belarus and a long list of other autocratic countries. You should also expect more initiatives from him on EU policy, especially related to the European Green Deal.

The European Green Deal

No matter how and when the negotiations will be concluded, European Commission President Ursula Von der Leyen can be sure of one thing: her “man on the moon” project will gain even more momentum given that SPD, FDP and the Greens believe in the importance of climate protection. Even Scholz, who has been clinging to the coal phase-out in 2038, is still likely to support the EU’s climate agenda more than his CDU competitor. Should Scholz become chancellor, he will team up with Europe’s climate chief Frans Timmermans, one of the first to congratulate him after the elections.

Nord Stream 2 will remain a bone of contention rather than a finally closed chapter

The most likely coalition partners, SPD, Greens and FDP, cover the entire range of positions on Nord Stream 2. Olaf Scholz was one of the key promoters of the pipeline, even offering a billion Euros worth investment in German harbours to prepare them for US liquid gas imports in return for Washington dropping its resistance to the project. The Green party was fiercely opposed to the pipeline, mainly pointing to the aggressive EU policy displayed by Russia in Ukraine and vis-à-vis the EU. And the FDP positioned itself somewhat between those two, demanding a moratorium to rethink the pipeline, after thousands of pro-Nawalny protesters were arrested in Russia. While today the pipeline is a fait-accompli, the way it will be filled is likely to become a major bone of contention in Europe heading for this winter. The International Energy Agency (IEA) recently issued a warning that Europe is heading for a stress test, as high worldwide demand led to historically low September levels in European gas storages. Someone will have to fill those tanks, and Russia will be just too tempted to use this as a proof point that Nord Stream 2 is needed.

German automotive to go greener

The past government was arguably a great protector of German automotive interests, both on EU and domestic level. However, that protectionism somewhat resembles exactly the policy strategy that Germany used to accuse France and Italy of in the 90s. And it has not made the German automotive industry the forerunners in e-mobility nor in connectivity or the integration of next generation automotive UX/UI. Besides, while US consumers received sizable compensations during the Dieselgate affair, even the recently revised German laws left most consumers empty handed. It is for no other reason than trying to retain its world market share that Volkswagen is today the spearhead of an industry driven e-mobility wave, outpacing German and EU policy goals for electrification.

The next government will take a slightly different approach, especially if the CDU goes into opposition. Volkswagen is strongly connected to German politics and its e-focussed strategy matches the narrative of the new political forces. BOLDT expects a more ambitious push for more e-mobility, both domestically and on EU level. BMW, Daimler and the entire supply chain from Continental to ZF are on a similar track. The FDP participation should ensure that new laws remain open to whatever technical solution. The European Commission and Parliament will appreciate the support from Berlin, as it makes achieving the Fit For 55 goals more likely.

Expect a liberalisation of Cannabis in Germany, and likely spillover effects in other EU countries

Over the past few years, all political fractions in the Bundestag, except Merkel’s CDU/CSU and the far right AfD, developed pro liberalisation policies for recreational cannabis. Besides, they strongly criticised the over-regulated, costly and bureaucratic current regime for medical cannabis. It was only due to coalition discipline that the strong majority in parliament never voted for a liberalisation law. Now, even if the CDU/CSU will be a partner in a coalition with the Green party and FDP, they will no longer be strong enough to hold up what most politicians and academics consider an overdue change. If the most likely red, green and yellow coalition sees the light of day, pharma businesses and international cannabis businesses should get ready for a U-turn on cannabis in Germany. The FDP wants to boost growers inside the country and turn Germany into an exporter. Olaf Scholz, still acting finance minister, knows that his SPD made costly promises that need to be financed and will surely agree to implement his party’s liberalisation plans in a way that generates tax revenue. The Green party can rightfully claim to have been the first political party to demand cannabis liberalisation decades ago. Finding a coalition compromise on this topic between these three seems a no-brainer. AND: once Germany changes its policy, existing initiatives in Italy, France and other EU countries will feel a huge boost to their cause. 

Interested in learning more? Please reach out to Michael Kambeck.

More News