Feb 7, 2018 | 18:47 GMT

4 mins read

Germany: Compromise Wins the Day as Parties Reach a Deal

Forecast Update

In Stratfor's 2018 Annual Forecast, we wrote that German coalition talks would last through the early months of 2018 and that the European Union's reform efforts would be frozen until there was a new government in Berlin. The announcement of a coalition agreement between Germany's main parties put the country closer to having a government, but significant challenges remain.

After weeks of negotiations, Germany's main political parties have finally reached an agreement to govern together. On Feb. 7, the Christian Democratic Union (CDU), the Christian Social Union (CSU) and the Social Democratic Party (SPD) settled on a deal to form a coalition government. The agreement focuses mostly on domestic policies, but it also sends mixed messages about Germany's views of the European Union's future, indicating a number of compromises between the SPD, which supports greater spending and risk sharing in the bloc, and the CDU and CSU, which are skeptical of measures that would have a negative impact on Germany's coffers.

The document expresses Germany's commitment to a strong and united Europe and its willingness to cooperate with France on union reforms, indicating the clear influence of the SPD. It confirms that Germany supports the protection of the EU cohesion policy and that Berlin is willing to increase its contributions to the EU budget after the United Kingdom's Brexit. It also expresses a desire for more investment in Europe to boost economic growth and job creation.

However, the coalition deal also includes concessions to the fiscally conservative CDU and CSU, such as a pledge to defend the EU Stability and Growth Pact, which enforces fiscal responsibility. It states that "risk and responsibility are connected," essentially communicating that the next German government will resist reforms that increase financial risk sharing in the eurozone unless they are also connected with risk reduction measures. These inclusions suggest Berlin could be skeptical of French plans to introduce a common deposit insurance for banks in the eurozone.

Stances within the deal that may spark broader disagreement at the bloc level include Germany's support for "fairer taxation" for internet giants such as Amazon, Apple, Google and Facebook, as well as the government's desire to introduce a single, unionwide set of rules to calculate the taxable profits of companies. While France is on the same page with Germany regarding these ideas, the plans are less popular in EU member states that offer low taxes for multinationals. Ireland and Luxembourg have already expressed their opposition, arguing that the changes would threaten their economic models. The document also addresses Germany's support for the introduction of a financial transaction tax in the union, an idea that member states have contemplated for years but never reached consensus on.

Now that the participating parties have done the heavy lifting of establishing all the details of the deal, the next step is for the SPD to put the agreement to a vote among its roughly 440,000 members, which the party has said it will do within the next three weeks. And though the SPD secured a number of important positions in the next Cabinet during negotiations, such as the finance and foreign affairs ministries, there's no guarantee that it will vote in favor of the agreement. After all, many party members are flat-out opposed to any coalition with the conservatives.

Should SPD members reject the deal, the conservatives may have to choose between forming a minority government without the SPD or holding new general elections. And even if there is enough SPD support to form a coalition government, that doesn't necessarily mean smooth sailing for Berlin in the future. Several members of the CDU and CSU are still unhappy with the coalition agreement, which means that Chancellor Angela Merkel could face resistance in parliament from the members of her own party to enforce the policy promises made today. 

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