The centre-left Social Democrats (SPD), the ecologist Greens and the liberal Free Democrats (FDP) have entered into a coalition to form a new government in Germany. Social Democrat Olaf Scholz has been sworn in as Germany’s new chancellor, bringing an end to the 16 years of rule by Angela Merkel. The outgoing chancellor has steered this hugely industrialised nation through some of the most turbulent geopolitical and economic crises.
Under her methodical leadership, Germany has become Europe’s predominant power. Despite the pandemic-induced economic crisis, Germany remains one of the most internationally successful economies globally, where exports account for 50% of the annual GDP. It is one of the 3 largest trading countries worldwide.
The 3 parties, known as the “traffic light coalition,” are keen on progress. They want to modernise the economy and switch to renewable energy, making the country rely on 80% renewables by 2030. In the words of Chancellor Scholz, this will be the “biggest industrial modernisation of Germany in more than 100 years.” But there have been concerns about the country’s inability to support these plans. Germany’s debt brake restricts annual borrowing to 0.35% of the nominal GDP, which amounts to approximately €12 billion a year. This brings into question the impact the new government will have on German industry.
Where Does the Coalition Stand on Future Economic Plans?
Analysts agree that former Chancellor Merkel fell short on many accounts, including keeping the nation up to speed with technological advancements. Some areas of vulnerabilities include digital backwardness, a weak education system, and a lack of urgency in decarbonising a nation that is considered Europe’s industrial powerhouse. The new coalition government plans to address these concerns as priorities.
Among the many plans, the parties intend to modernise and digititalise administration, reform the electoral law, streamline immigration and improve LGBTQ+ rights. The Greens campaigned to utilise €50 billion yearly to transition the country towards renewable energy, something that will require it to scrap Germany’s debt brake (Schuldenbremse) law. The Free Democrats agreed to form a coalition only if there is no raising of taxes and the country upholds its balanced budget law. Clearly, there will be a collision of interests here.
A Heavy Focus on Climate Change
In its 177-page governing deal, the new government has mentioned “climate” 198 times in all policy areas, from foreign policy to culture policy. Chancellor Scholz stressed on the development of technologies and know-how that will make the industrial sector green and competitive globally. This strategy has been welcomed by the big companies in the country.
"When I first glanced through the coalition agreement, I liked the sound of three numbers: 15 million electric cars, 1 million charging points, and 80% renewable energy. These are three specific goals for 2030 that will support the transformation of the automotive industry in this decade. And they correspond to our strategy at Mercedes-Benz. This way even more cars can become electric and electric cars really green,” said Ola Kaellenius, CEO of Daimler.
A statement issued by Lufthansa said, “The new German government is focusing on sustainability and climate protection in air transport, but is clearly committed to competition-neutral concepts and is striving for international regulation. That is correct. Because, in the globally active air transport sector, regulations that unilaterally burden domestic companies are of no use to the environment.”
What remains to be seen is how the transition towards green technologies impacts these companies’ dividend-paying capacity. Issues with deliveries of semiconductor chips and supply-chain bottlenecks are some factors already hounding the automobile industry. In 2020, European manufacturers like BMW and Daimler faced criticism for relying on public funds to pay their workers, while planning to hand €7.5 billion to investors as dividends.
Legalising the Recreational Use of Marijuana
Under the new government, Germany aims to become the first European country to legalise the sale of cannabis for recreational purposes. This could increase the country’s tax revenues and cost savings by about €4.7 billion, while generating 27,000 new jobs. Plus, it would lead to cost savings worth €1.3 billion per year for the police and judicial system.
Many companies stand to gain from this policy. For instance, Munich-based cannabis company SynBiotic’s shares rose 33% on the Frankfurt Stock Exchange on November 25, 2021, after a deal was reached between the parties. Not only German companies but shares of Canadian companies like Hexo (6.6%) and Curaleaf Holdings (1.86%) also rose.
On the other hand, investors seemed to have forgotten that Aurora Cannabis and Tilray Inc. are actually market leaders in the German medical cannabis market. Both stocks declined on December 1, and have been going downhill, since the broader market has been more concerned about rising inflation and the newer more infectious Covid-19 variant, Omicron.
Overall, the new government might bring in a sweeping wave of liberalisation, which means cutting the red tape to accelerate structural changes, and reducing the reliance on state aid. It isn’t surprising that big businesses are welcoming this new change.
Dividend Forecasting in a Rapidly Changing Political Environment
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With thanks to Matthew Riding & Josefine Olsen
