The New Coalition Agreement

Unlike most of the representatives of the Bundestag (apparently) I have actually read the 191-page Coalition Agreement (pdf file) (okay, I really just skimmed it). It has a folksy title: Gemeinsam für Deutschland – mit Mut und Menschlichkeit (Together for Germany – with Boldness and Humanity). I have to admit that intially I was pretty impressed by all the programs – especially the Euro 25 Billion economic stimulus package – until I stumbled across this sentence on p. 63: "Alle Maßnahmen dieses Koalitionsvertrages stehen unter Finanzierungsvorbehalt.“ (trans. all of the programs outlined in this coalition agreement are subject to the availability of financing.) In other words, these are the programs we would like to implement, but – dear citizens – we are broke! Sorry!.

For those who are too lazy to read the document (or for English readers), Bloomberg has a good summary of the most important points.  I was particularly interested in what message the Black/Red coalition would have about relations with the United States, but there are only the usual platitudes about "strategic partnership for peace", albeit on a basis of an equal partnership.  The initial reaction to the agreement from the German people is "thumbs down" according to Der Spiegel: 

42 Prozent beurteilten den Koalitionsvertrag bei einer Forsa-Umfrage für RTL und "Stern" als "schlecht". Nur gut ein Viertel der Bundesbürger (27 Prozent) gab die Note "gut". Bei 21 Prozent der Deutschen fand der Vertrag teilweise Zustimmung, in anderen Bereichen dagegen Ablehnung. 10 Prozent der Bürger antworteten mit "weiß nicht".

The international press has focused on the plans to increase the VAT to 19% in 2007. The New York Times views this as a betrayal by Angela Merkel of her campaign pledge for reforms:

Mrs. Merkel originally proposed the higher value-added tax as a way to finance a reduction in the payroll tax on employers and workers. That, she said, would make companies more willing to hire, which would, in turn, restore consumer confidence.

But as a price for putting together the coalition, Mrs. Merkel had to agree to use the bulk of the proceeds from the tax increase to cut the deficit. The Social Democrats would not accept radical public spending cuts.

Critics leaped on this as a betrayal of Mrs. Merkel’s campaign pledges. The newspaper Bild doctored a photo of Mrs. Merkel to give her an elongated Pinocchio’s nose, and ran it under the headline "Tax Liar."

And Anatoly Kaletsky in the London Times sees Germany as on the edge of a total economic collapse – like Japan in the 1990s:

This collapse in Japanese consumption from 1997 onwards triggered the Asian financial crisis and the huge economic dislocations that went with it. In other words, the 1997 tax increase was arguably the most disastrous economic measure imposed by any major government since the Smoot-Hawley tariff of 1931.

If Germany follows the Japanese experience — and this seems the most likely outcome — the Merkel tax hike will probably condemn Germany to depression for the rest of this decade and quite likely trigger an Asian-style financial crisis in much of Eastern Europe some time in the next year or two.

Excellent interview with economist Peter Bofinger in Der Spiegel on the eonomic risks of the new tax proposals and the need to stimulate Germany’s domestic consumption.