Key Challenges

Social cohesion in a context of pandemic-related radicalization:
Increasingly fragmented party system
Although the German party system has become more fragmented and now features a variety of parties allowing for a larger number of potential majority coalitions, so far, this has not undermined the ability to form governments on the federal and state levels. In fact, the smooth process of forming a government following the last federal election suggests that the more diverse party landscape may be conducive to the pursuit of new and potentially forward-looking policy strategies. However, there is the strong risk that a growing number of citizens feel increasingly detached from the country’s basic values. The pandemic has helped facilitate the emergence of various populist groups that no longer feel represented by the mainstream parties. In this sense, radicalization has only just begun in Germany. While these groups are particularly pronounced in Eastern Germany, they are present and well-connected throughout the country. So far, the country has no clear and promising strategy for building new bridges for dialogue and trust between the mainstream and these groups.
Concerns about structural change in industry and services:
Concerns over diminishing competitiveness
Critics point out that even before the pandemic, Germany’s attractiveness as a business location had been eroding as a result of its increasingly less competitive infrastructure, a growing shortage of highly qualified labor, high and intensifying regulatory burdens, and high corporate tax rates. Key German industries such as auto manufacturers face the challenge of digital transformation and making the transition to e-mobility, a sector in which powerful new competitors have emerged within a brief period. Energy-intensive sectors increasingly suffer from high energy prices. The pandemic has also massively accelerated a structural shift in the services sector, which has radically reduced the number of offline retailers and had a lasting negative impact on hotels dependent on business travel, as digital transformation has affected all sectors. Measures like short-time works subsidies (“Kurzarbeit”) can cushion a temporary shock but are not effective as a long-term solution for reallocating workers to newly emerging sectors.
The long path to a CO2-neutral economy:
Voters agree on threat of climate change; impact of higher energy prices unclear
The new government’s focus on climate policy reflects a large consensus among voters that climate change is an existential threat. The new coalition agreement defines ambitious targets and describes a battery of measures to speed up the decarbonization of industry, traffic and housing. But the passage of ambitious climate-protection legislation does not yet guarantee successful implementation. The energy- and climate-policy decisions made in recent years have left many questions unanswered. It is still far from clear whether the shut-down of all nuclear power plants by 2022 and a quick subsequent phase-out of fossil-fuel-based power generation are consistent with the continued ability to guarantee a reliable electricity supply at affordable prices. At the end 2021, a dramatic price hike for electricity and gas in the context of the switching-off of nuclear-power plants has foreshadowed how the energy transition might entail shortage and substantive energy price increases. These price increases could endanger social cohesion and industrial competitiveness. Even if voters are in favor of climate protection in general, they may punish politicians who actually impose a massive cost burden on electricity and heating bills. Careful communication and intelligent policy design will be required in the coming years, and opposition parties will have to act responsibly to avoid discrediting the country’s energy transformation strategy.
Demographic trends undermine welfare state sustainability:
Demographic change a threat to welfare state
The last grand-coalition governments have increased the generosity of pension systems generally, while providing additionally higher pensions for mothers, low-income earners and workers who have been in the labor force for exceptionally long periods. However, no solution has yet to be developed for adapting the system to increases in longevity and the increases in dependency ratios that will pick up speed in the 2020s. Also the new coalition agreement of 2021 is silent on how to reconcile the sustainability of pensions and the health system with the imminent retirement wave of the baby boomer generation. The political process must allow for a much more open debate on potential options that is free of topics often deemed to be politically taboo such as linking retirement age automatically to life expectancies. While the need to adjust the pension system was generally recognized within the political discourse 15 years ago, it now seems that voters and politicians have lost their sense of reality and arithmetic in this respect.
Shifting resources from consumption spending to digitalization and infrastructure:
Lagging digitalization;
consumption spending
a concern
Preparing Germany for the digital age is a comprehensive task that requires adjustment across numerous fields, including secondary and tertiary education, public administration, and innovation and infrastructure policy. The pandemic exposed rather starkly a rather well-known fact: Germany’s state of digitalization is insufficient for an industrial country with this income level. Critics point to the need to overhaul the country’s digital networks and to digitalize rail- and road-transport networks. Government budgets must try to rebalance spending toward these avenues of value creation at the expense of current spending. It is far from clear how the new government will achieve that. On the one hand, there is the binding constraint of the German debt brake that is not officially questioned by the government. On the other hand, the coalition agreement includes massive spending plans but lacks almost any idea of how to cut back consumption spending in public budgets and the welfare state. The problem could be solved if Germany realizes further high economic and employment growth. But it is far from obvious that this can be achieved given that the government’s economic program does not include a convincing strategy for making Germany a more attractive investment location.

Party Polarization

Voters shifting to the
center; coalition
formed smoothly
Over the last decades, the German party system has undergone fundamental changes. What was once a four-party system with two major (CDU/CSU and SPD) and two smaller (FPD, Green Party) parties has been transformed into a six-party system with the AfD on the far right and the Left (die Linke) party on the far left side of the spectrum. However, the outcome of the federal election on 26 September 2021, which involved both the right-wing AfD and the left-wing Linke losing votes, has brought a halt to the process of increasing polarization. Compared to 2017, the AfD’s share of support declined from 12.6% to 10.3%. The losses for the Linke were more dramatic, dropping from 9.2% to 4.9% (the normal 5% threshold does not apply only because the party won the direct vote in three voting districts). Another indication that the losses suffered by the large CDU/CSU and SPD parties has not fundamentally decreased the ability of parties to reach a compromise is the surprisingly smooth coalition agreement that was reached by the new “traffic light” coalition comprised of the SPD, the Greens and the FDP. The three parties proved able to form a government rather quickly through what appears to have been a rather harmonious process – which is all the more remarkable given the deep animosity observed between the Greens and the FDP in the past.
Effective grand
coalition government
The last grand coalition government involving the SPD and CDU/CSU was fraught with various tensions and conflicts which nonetheless did not get in the way of effective policymaking. The grand coalition looks back on a legislative period in which the government was able to realize most of the plans that had agreed upon in the coalition agreement of 2018 (see “Government Effectiveness”).
Stability despite
State-level parliaments feature a variety of different coalitions, all of which form functioning and stable governments. This suggests that the rise of the multiparty system has, so far, not been a detriment to effective policymaking. The only party to wing, anti-immigration AfD party. (Score: 8)
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