Scholz faces several hurdles to forge a functioning German government

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(Bloomberg) – Olaf Scholz will step up to succeed Angela Merkel as German Chancellor when his Social Democratic Party begins exploratory coalition talks with the Greens and the pro-business Free Democrats on Thursday.

After winning a narrow electoral victory over Merkel’s conservatives, Scholz needs the other two parties to secure a majority in the German parliament. It would be an unprecedented combination, and the three groups will have to overcome contrasting positions in key areas like climate and finance. The haggling can go on for months.

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Together with the SPD and the natural partners of the Greens, rallying the FDP will be the most difficult task for Scholz. The Liberals have said they will not tolerate a left turn and reaffirmed their opposition to tax hikes and loosening fiscal rules, but appear open to a deal.

“It is time to find the means to make an alliance work and not to draw new red lines,” Volker Wissing, FDP general secretary, told Deutschlandfunk radio on Thursday. “It is a difficult task, but it is not insurmountable.

Read more: Scholz draws closer to German post-Merkel leader as talks begin

Here’s a look at the main issues facing those best positioned to lead Europe’s largest economy:

Taxes

Finding an agreement on how to raise funds to modernize Europe’s largest economy will be difficult. The SPD and Greens want to increase the burden on the rich, while Free Democrats are calling for cuts for businesses and high incomes and have pledged not to raise taxes – a pledge Wissing reiterated on Thursday.

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While it sees no room for maneuver for tax cuts, the SPD is promising relief for low and middle income people. The Greens reject the tax cuts and propose an increase in the maximum personal rate to 48% from 42%, as well as levies on capital gains and wealth – this would hit the FDP constituency hard.

Bottom Line: Rooted positions will need to loosen up so that they are a breakthrough that all parties could live with.

Budget

Control of Germany’s purse strings is essential. FDP chairman Christian Lindner has made it clear that he wants to be the next finance minister, and that’s not his only request.

Read more: German budget hawk sees stars align with finance ministry bid

The Liberals want the government to revert to constitutional borrowing restrictions as soon as possible. Wissing reiterated that the party will oppose Greens’ calls to release the so-called debt brake to allow more investment to help German industry transition to climate-friendly technologies. The SPD is also taking a more flexible approach to spending.

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Although the positions appear diametrically opposed, there could be some common ground. An off-balance sheet instrument such as a government-backed fund could control the official budget, while ensuring more liquidity to tackle climate change.

Conclusion: Fiscal policy is a tricky issue, but there might be room for creative compromise.

Weather

The Greens have become the third force in Germany with the wish to take the fight against climate change seriously. The party is aiming for carbon neutrality within two decades and will not be ready to make many compromises. Their program includes a 10-year investment program of 500 billion euros ($ 580 billion) and strict regulations to force German industry to reduce its emissions.

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The SPD aims for carbon neutrality for electricity production by 2040 before a broader neutrality objective for 2045. The measures in place to reduce the country’s carbon footprint should go hand in hand with job creation and support for communities facing job losses due to the energy shift. .

During the campaign, the FDP attacked the Greens as the “ban party” and opposed their proposal to ban conventional vehicles from 2030. Free Democrats want to encourage innovation and oppose any additional regulatory burdens for German industry.

Bottom Line: The issue is critical for German voters, so there is pressure to make progress. But it will be difficult to align the Greens and the FDP.

Lodging

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Making housing more affordable was one of Scholz’s key commitments, and the Berlin referendum to allow the expropriation of large landlords shows how angry many Germans are at rising rents.

Read more: Berliners are angry with housing. And much of Europe too

The SPD and the Greens aim to accelerate and expand the construction of affordable housing. Both parties support some form of rent control, while the FDP – which helped reverse the Berlin rent freeze – would strongly oppose such regulation. Instead, it would focus on building more to tackle the housing shortage.

Bottom Line: Easing housing squeeze is essential for the SPD, and the FDP will support giving a major boost to housing construction.

Europe

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Rejecting the austerity of the Merkel era, the SPD wants to move forward with a common European investment policy financed from the bloc’s own sources of income. The Greens want the EU bailout fund to become a European Monetary Fund to provide unconditional credit.

Read more: German coalition talks could take months after split vote: Guide

Although the FDP supports the idea of ​​an “EGF”, it takes a more cautious view of the bloc’s finances and wants a full re-application of restrictions on member states’ debt and deficits after the pandemic.

Conclusion: Europe may become a difficult issue, but it is unlikely to derail coalition talks.

Banking

Scholz’s Social Democrats want to reduce risks in Germany’s banking sector, so that taxpayer bailouts are no longer needed in the future. As Minister of Finance, this initiative included promoting the idea of ​​a German banking champion.

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The focus of the Greens would also be on strengthening regulation to prevent fraud and manipulation.

The FDP aims to promote a strong European banking market characterized by competition and a wide variety of business models. This could cause the government to get rid of its stake in Commerzbank AG.

Conclusion: The parties may find a way to continue consolidating the German banking sector.

Minimum wage

The increase in the minimum wage to 12 euros – it is currently 9.60 euros and is expected to rise to 10.45 euros from July 2022 – was one of Scholz’s main campaign arguments. The Greens are also in the game.

The FDP, which represents the interests of companies, is opposed to it and rather wants to make low-wage work more flexible.

Bottom Line: The increase in the minimum wage in Germany is not negotiable for Scholz and it is unlikely that this is the problem that would push the FDP back.

© 2021 Bloomberg LP

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