Matthew Lynn Matthew Lynn

Germany’s new coalition is a recipe for stagnation

A new, fresh leader. Bold radical ideas. And a programme for rebooting an economy that, for all its formidable strengths, is, to put it kindly, a little stuck in the 20th century. Later today, Germany is set to anoint its first new Chancellor in 15 years, and, at the very least, you might expect some new ideas. The trouble is, there is little sign of them from Olaf Scholz. Instead, the country is opting for the euro-zone’s slow lane, falling behind a rapidly reforming Italy and France.

After two months of complex negotiations, following an inconclusive election in September, the Social Democrat leader Olaf Scholz will finally present his coalition agreement later today. He has put together an unlikely grouping of the Social Democrats, a lumbering left-of-centre, trade union party with a rising Corbynista wing, the Greens, and the pro-business, pro-market Free Democrats. 

The dynamics of the European bloc are in a rare state of flux

In reality, none of them really agree on anything very much except that they think it is about time they had a go at running a ministry or two. The platform for government is likely to be a bland mix of infrastructure spending, phasing out coal power, and slightly easing the debt brake that limits the ability of any German government to borrow money. Here’s the problem, however: the new government is bad news for Germany. 

The dynamics of the European bloc are in a rare state of flux. Under Mario Draghi, Italy has embarked for the first time in a generation on serious reforms. It has also skilfully negotiated the lion’s share of the European Union’s Coronavirus Rescue Fund, allowing it to turbo-charge its economy with lots of money borrowed from other people. The result? Italy is forecast by the IMF to expand by 5.8

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