German coalition deal signals a major shift away from market-driven reform

It took five weeks to negotiate, including a final, 17-hour session that ended on Wednesday morning, and runs to 185 pages but the coalition deal agreed between Germany's Christian Democrats and Social Democrats (SPD) has been greeted throughout Europe with a shrug and in much of the English-speaking media with a sneer.

The deal still has to be approved in a referendum by the SPD's more than 470,000 members over the next two weeks, the outcome of which is uncertain, although opinion polls show a big majority of the party's supporters backing the agreement. And well they might, because the document represents an important policy shift in Germany away from relentless, market-driven reforms and towards a stronger role for the state in determining pay and employment conditions, stimulating economic growth that produces jobs and protecting citizens from the impact of market forces in key areas such as housing.

Although it says little that is new about the European Union, the coalition agreement could have profound implications for Germany's neighbours and partners, including Ireland.

The Social Democrats actually lost seats in September's federal election and won less than 30 per cent of the popular vote, far behind Angela Merkel's alliance of the Christian Democratic Union and its Bavarian sister party, the Christian Social Union, which came close to an overall majority. Most of the concessions in the coalition talks came from the centre-right parties but both of those are set to approve the deal with little controversy and without recourse to a poll of their members. This may reflect the fact that many of the measures that the Christian Democrats initially opposed are overwhelmingly popular with the public.

A poll for the television channel ZDF found this week that more than 80 per cent of Germans support the introduction of a statutory minimum wage of €8.50 an hour and a full 90 per cent favour another key SPD policy that will allow those who have worked for 45 years to retire at 63. Merkel’s last grand coalition with the Social Democrats, which governed from 2005 to 2009, increased the retirement age to 67 and the chancellor had resisted any move to lower it this time. She compromised when the SPD agreed to a CDU proposal to increase the pensions of mothers whose children were born before 1992.

Growing unease
Apart from the minimum wage, the deal would regulate the labour market further by limiting the employment of temporary workers to 18 months and oblige employers to pay temporary workers at the same rate as permanent employees after nine months. This move reflects unease at the expansion of temporary employment in Germany since the labour market reforms introduced by the last Social Democrat chancellor Gerhard Schröder in the early years of the last decade.

Schröder’s reforms, called Agenda 2010, which radically changed the social welfare system and liberalised the labour market, were continued by the grand coalition under Merkel. Despite signs of reform fatigue among the public, Merkel’s most recent coalition partners in the liberal Free Democrats resisted any move to ease up on the liberalisation agenda.

This would be Merkel’s first coalition not to begin under the shadow of an economic crisis – in 2005, Germany’s economic growth was slowing and its budget deficit was above the EU limit of 3 per cent of GDP; and in 2009, the world was still in the grip of the financial crisis of the previous year.

Today, Germans are more confident about their economy but want a fairer distribution of the fruits of success and greater protection of basic living standards. Hence the popularity of the coalition deal’s promise to cap the level of rent increases for private homes and apartments, a move that comes as property prices in Germany’s biggest cities have been soaring.

Shifting profits
The demand for fairness also informs what could be one of the most significant elements of the deal for Irish policymakers, a promise to take action to stop multinational companies from legally avoiding tax by shifting profits across jurisdictions. The document notes that the Organisation for Economic Cooperation and Development (OECD) is expected to complete a plan to deal with "Base Erosion and Profit Shifting" in 2015 but says that Germany will resort to "national measures" if the OECD proposals are not strong enough.

It explicitly mentions transfer pricing and the use of licensing agreements that are favoured by many of the digital giants with European bases in Ireland.

The new coalition would renew the push for a financial transactions tax at EU level, which Ireland opposes, and favours a European banking union but says the EU bailout fund should only help banks as a last resort and rules out the mutualisation of public debt. None the less, a grand coalition in Germany would be more pro-European than its predecessor and more inclined towards solidarity with EU partners.

Most importantly, the pro-growth economic policies of the new coalition would stimulate German domestic demand, reducing the country’s current account surplus and helping exporters from other EU member states.

If the SPD membership rejects the deal – a real possibility – Merkel can seek a coalition with the Greens and if that fails, try to form a minority government. If that fails, there will be fresh elections.

The Christian Democrats and the Greens have just formed a coalition in the federal state of Hessen, where the two parties have for decades enjoyed a relationship of bitter mutual loathing, so a similar arrangement at national level cannot be ruled out. The Greens would demand many of the same concessions as those won by the Social Democrats so Merkel would still be presiding over a shift away from the recent economic policy orthodoxy.

One way or another, after approving a coalition agreement this week that strengthens workers' rights, lowers the retirement age for some and increases pensions for others, introduces a minimum wage and increases regulation in the housing market, the German chancellor may have to choose her words more carefully from now on when she offers advice elsewhere.

Denis Staunton is Deputy Editor