Institutions resilient during pandemic; new coalition sets ambitious goals
Throughout the reporting period, the challenges associated with the pandemic were the dominating issue. Overall, the country and its institutions have proved considerably resilient in this crisis. The country benefited from its strong institutions, sound public budgets, and a broad consensus among its main parties (with the exception of the right-wing AfD) regarding policies. The results of the federal election in September 2021 marked at the very least a pause in the rise of populism that had been threatening Germany’s system since the migration crisis in 2015. In fact, the parties on both ends of the political spectrum saw a significant decline in their share of votes. The formation of the new “traffic light” coalition of the SPD, the Greens and FDP proved surprisingly smooth and resulted in a coalition agreement that has drawn praise for its ambitious targets regarding climate policy, societal reforms and digital transformation. However, even if the populists’ share of votes have declined, the risks of further radicalization remain, in particular with respect to the growing number of people subscribing to pandemic conspiracies and a growing number of politically motivated crimes from both the right and the left.
Health system functioned well through crisis
Importantly, the health system has been able to cope with the pandemic so that even with very large numbers of COVID-19 patients, the system remained functional and was able to provide up-to-date treatment to anyone in critical condition as a result of the virus. The German bio-pharmaceutical sector has demonstrated its prowess as a global leader with its spectacular successes in developing innovative vaccines for COVID-19. Despite this overall favorable impression, the pandemic has at the same time revealed some serious weaknesses, especially with regard to the country’s lagging digitalization in education and healthcare. At the same time, the pandemic has provided both the private and public sectors a crash-course in digitalization, which has expedited the development of digital infrastructures and skill sets in public administration services and the education system. However, much more needs to be done before the country will compare with the level of digitalization achieved by the OECD’s front-runners.
Fiscal strength aided pandemic response
Germany’s excellent fiscal and labor market situation prior to the pandemic is key to understanding the country’s (to date) successful response to its negative economic and social consequences. When the virus reached Germany in January 2020, the country could look back at a decade of successful budget consolidation. In constant decline since 2010, the debt-to-GDP-ratio had dipped just below 60%, a level far below that of other large industrial countries such as France, Italy or the United States. It could also look back at a decade of stable GDP growth, very strong employment growth, a significant increase of the disposable income both of the active workforce and pensioners, and a buoyant growth of public revenues. This solid situation, combined with a large political consensus, enabled the government to enact a swift and comprehensive package of emergency and stabilization measures that were of historic magnitude.
Under the new government, Germany is now pursuing a very ambitious climate policy that – should it prove successful – will also help to boost its credibility in international climate negotiations. But success is far from certain and faces political resistance to investment projects and higher prices.