Our experts Martin Kothé (Berlin) and Alex Deane (London) share their thoughts and insights on this topic in this podcast following an event in London earlier this week.
“The German economy is in good shape” – the mantra and guiding principle
This quote from the coalition agreement is the blueprint for German politics over the next four years. This also is helpful in understanding the economic agenda of the newly formed coalition which will likely abstain from deeper structural reforms.
Despite the new Wirtschaftswunder, which has seen the country constantly break growth records, German industry remains cautious. The influential Federation of German Industry is ‘not happy’ about the course set by the new government and has thus warned that the political measures agreed do not go far enough to make the economy fit for the future. The financial market has shown an indifference to the breakthrough – the DAX barely moved when the coalition was announced.
In short, business and markets have been underwhelmed but there are practical implications companies need to take note of and there is an opportunity to influence policy.
The socialist agenda, labour challenges and tax headaches
Despite a booming economy and record tax revenues, business associations fear that the agenda’s focus has now shifted to redistribution. By promising money to many, the new government undermines the ability to stay competitive. Needless to say, certain industries such as construction may benefit from a more socialist agenda but wider business will be left in the cold.
Tax relief for industry, which is prevalent in other EU member states, will not be an option under the coalition. On top of this, the coalition make-up means that meaningful and arguably needed structural reforms are now unpalatable. In their place, we can expect to see higher levels of consumer-protectionism and regulation specifically designed to benefit employees rather than employers.
Going into detail, those doing business in Germany need to take note of these specific implications:
Germany’s new Minister of Finance, Olaf Scholz (SPD, former mayor of Hamburg), will be looking at stricter regulation in the capital markets, specifically hedge funds and shadow banks. The treaty states that ‘Institutes with relevance for the system should fall under binding regulation and supervision. Identical businesses must be subjected to identical regulation.’ A glimmer of hope is that a former investment banker was put in charge of the issue as the responsible state secretary, meaning that constructive dialogue could be possible.
Labour policy is one area where business will see significant cost increases and reduced flexibility with the coalition in agreement on:
The ability to employ on rolling short term contracts will likely be limited under the coalition, removing flexibility for business and building on the already tough labour laws within the country.
Employees who have moved from full time to part time employment, which is a common shift in Germany, will have the right to transition back to full time employment, removing businesses’ discretion and control over its workforce.
Raising corporate contributions to health insurances by restoring parity for contributions for statutory health insurance. Contributions will be equally split between employer and employee, raising the costs for businesses.
On the bright side, the new government promises to:
Actively tackle the shortage of skilled labour, which is threatening to limit future growth, with a number of educational measures and by facilitating immigration policies to bring in skilled labour to fill the gap.
Increase R&D investment (partly financed by corporate Germany) to 3.5% of the country’s GDP. Included within this is tax deductibility for SMEs to promote research funding.
Intensify assistance to and promotion of start-ups by fiscal stimuli for venture capital, reducing bureaucracy, and by exempting startups from value added tax in the first two years after formation.
Given that most of what the agreement outlines remains vague, business should be encouraged that there is still lots of room to manoeuvre and to influence interpretation.
International relations and Brexit
While tempers have cooled a little on the domestic front, the coalition partners – making a strong commitment in the agreement in favour of free international trade and against protectionism – see themselves confronted with a looming war on tariffs, which could hit Germany’s export-oriented industries hard. Positively, there appears to be a proactive approach being taken. Peter Altmaier, the CDU’s new Minister
for Economic Affairs, toured the US in his first week of office, trying to conciliate. There are clearly battles ahead, notably on international corporate tax rates and, of course, Brexit; it is clear that Germany will be an active participant and not afraid to fight its corner, for its business.
Looking to Brexit specifically, the partners ‘regret the United Kingdom’s withdrawal from the European Union’, while they are interested in maintaining a ‘trustful cooperation’. Publically Berlin’s intention is for the EU27 to speak with one voice and it will repeat the rhetoric that there is no ‘cherry picking’. However, the government behind closed doors will be pushing for a business friendly Brexit agenda. The UK is too important as a business partner and with a government focused on jobs, a hard Brexit looks more and more challenging given this will
likely undermine the home agenda.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting LLP, its management, its subsidiaries, its affiliates, or its other professionals, members or employees.
With over 25 years’ experience in journalism, political communications, and consulting, Mr. Kothé advises companies seeking relevant impact with politics and politicians. He founded FTI Consulting’s public affairs practice in Berlin in 2010. Previously, he served as spokesperson for German Federal President Horst Köhler. He also headed the communications and media team of the German liberal party, FDP. Starting his career in journalism at the BBC’s World Service in London, Mr. Kothé has also worked as a senior parliamentary correspondent for Germany’s news channel n-tv.
Mr. Lemke has been advising clients in public affairs and political communications for more than ten years. Born in Hong Kong, he grew up in the north of Germany, and spent his student years in Spain and Canada. Back in Germany, he started his career in political campaigning, supporting the government of Germany with its nation branding activities. Since he joined FTI Consulting in 2011, he focusses on political aspects of finance, technology and consumer protection.