Guten Morgen! 

You missed us? Because we surely missed you! It’s good to have you back from the sun-kissed Urlaub, out of the sea, and right into the pile of emails.

So let’s dive into the first episode of season 6 of the Krautshell: Not much changed, except new subtitles in the INTEL section, and an additional OUTLOOK section, where you’ll find the most exciting happenings to look for in the upcoming week.

We are thrilled that Dr. Steven E. Sokol, President of the American Council on Germany, will continue contributing to our weekly, kicking this season off with a dive into Germany’s political agenda after the summer break, highlighting sticking points for the governing coalition.

In addition, our main articles look into Germany’s budgetary woes, Fabio Panetta’s headache of a committee hearing on digital currency, and Olaf Scholz’s path to hidden economic treasure (don’t worry, you’ll get it when you read). Also, we summarized some of the best quotes on Elon Musk by European stakeholders over the months.

And finally, a farewell note from our beloved in-house expert Mats as he embarks on a new adventure. We hope you enjoy this weekend’s Krautshell and have a great start to your weekend!

Anna                                                     Szilvia

WHAT TO WATCH THIS WEEK:

Budget Showdown: More Cuts than Fruit Ninja

The Bundestag is back from its summer break, and immediately the politicians are tackling the sexiest of all topics: budget. Imagine this: economic resources are dwindling due to a worsening financial situation, while demands for government assistance are soaring. Simultaneously, there’s a chorus advocating for the reinforcement of the welfare state. The complexity of the situation is amplified by the delicate balance within the coalition of three parties – SPD, Greens, and FDP – each with their distinct fiscal priorities. For instance, the SPD is pushing for an increase in citizen’s income (Bürgergeld), the Greens are championing the introduction of a child basic income (Kindergrundsicherung), and substantial segments of both parties endorse subsidized industrial electricity prices to bolster the economy.

Yet, the FDP and their leadership in the Finance Ministry have entirely different plans. They view themselves as guardians of sound financial management – think Scrooge McDuck but more Bier and Bretzel. Their objective is to consolidate the budget, and this stance is fortified by the debt brake enshrined in the constitution, which imposes strict limits on new borrowing. Consequently, spending is down in every department except defense. Which is also slightly misleading as the defense budget has a 100-billion-euro life jacket (aka the special fund for the Bundeswehr announced in the Zeitenwende speech) keeping it afloat. Hence, budget discussions are likely to be heated. Following the presentation of the budget proposal in the Bundestag this week, it will be subject to parliamentary deliberations. The final version is scheduled for passage at the end of November, bringing the process to an eagerly awaited end.

INSIGHTS FROM PARLIAMENT:

Panetta’s Suffering

It was a warm, if not hot, day. Unusual in Brussels even in summer. On days like this, one would like to go to the seaside or simply enjoy the sun. Fabio Panetta, however, had another job. He is a member of the Executive Board of the European Central Bank and had the dubious pleasure of spending this sunny day in a meeting with the ECON Committee of the European Parliament on the topic of the digital euro.

The digital euro is currently being pushed ahead at full speed by the EU. The Commission passed a draft law on 28.06.23, the aim of which is to create a Europe-wide public currency to complement cash – all while supposedly maintaining “high data protection standards.” Not a bad topic for a banker like Panetta, right? To figure out how to make this happen, the EP’s ECON committee invited Panetta for a talk. Unfortunately, the mood inside was much worse than the weather outside.

The German MEPs in particular (but not only) proved to be very skeptical, questioning whether a digital euro would be cost-efficient, or useful at all for that matter because, you know, we also have cash (queue eye roll). Ah yes, the Germans and their cash, almost as intimate a love affair as the continued use of fax machines in the German bureaucracy.

Panetta managed to keep his composure in the face of all these critical questions, repeatedly pointing out that no one was planning to abolish cash and that the digital euro was merely an addition reflecting the preferences of customers and the digitization of the economy. He was supported by a Greek MEP who implored him to convince the German Christian- and Social Democrats of the necessity of the digital euro. Whether Panetta succeeded in convincing them will only become clear in the next sessions. But seriously, what a mess. 

THE BIG PICTURE: The ‘Deutschland Pakt’:

Hot Air or Saving Grace?

In the recent weeks and months, the world of German politics has been anything but a tranquil walk through the Black Forest. Conflicts within the coalition government, featuring the SPD, the Greens, and the FDP, have been on the rise, while concerns over Germany’s economic trajectory have added to the mounting pressure. All eyes were fixed on the Bundestag general debate, where all parties, but especially the Chancellor, were poised to share their perspectives.

Friedrich Merz, the leader of the opposition from the CDU, kicked off the debate with a predictable volley of criticism directed at the government. He took aim at excessive bureaucracy, the upcoming Building Energy Act, and insufficient defense spending, while also advocating for a more technology-friendly approach to climate policy. It was the kind of political discourse one might expect.

In response to this comprehensive critique, Chancellor Olaf Scholz decided to become a pirate. Like – we’re really not kidding. But more seriously, he also offered a measured proposal: the “Deutschland Pakt” (Germany Pact). The plan is meant to reduce bureaucracy, kick digitization into hyperdrive, ensure a sustainable energy supply, and increase investments in ageing infrastructure. Opposition politicians like CDU/CSU deputy chairman Jens Spahn rapidly took to Twitter to criticize the plans as a bunch of hot air.  Nonetheless Scholz called upon all stakeholders, including states, municipalities, and the parliamentary opposition, notably the CDU, to collaborate on a national endeavor aimed at modernizing the country. And he really does need their help. In Germany’s heavily federalized system, Scholz doesn’t have the authority to go it alone. 

Given the challenges facing Germany’s economic development and social cohesion, such a cooperative approach appears to be not just beneficial but necessary. The true litmus test, however, will be whether these well-intentioned words translate into concrete actions.

Elon Musk has been causing quite a stir over the past few months, and now even European political stakeholders are weighing in with their two cents. Here are our five favorite quotes about the South African Wunderkind as he is seen from the European perspective:

Source: Quote 1, Quote 2, Quote 3, Quote 4, Quote 5

by Dr. Steven E. Sokol, President and CEO of the American Council on Germany

“What’s on Germany’s Political Agenda after the Sommerloch?”

As we emerge from the Sommerloch – and look to the fall and the second half of the Ampelkoalition’s term in office – questions abound about the three-party governing coalition. Based on one recent poll, more than two-thirds of Germans (69 percent) do not consider the current government capable of solving the country’s problems. Another poll indicates that nearly two-thirds of Germans (64 percent) would opt for a change in government if elections were held today. Squabbles between the three coalition partners have become public and are eroding public confidence in the government. 

What are the sticking points for the governing coalition? 

There are several big issues on Germany’s domestic agenda that will dominate the debate in the coming weeks: 

Earlier this year, the new Heizungsgesetz (or heating law) was making headlines. The plan encourages the replacement of fossil fuel heating systems by banning the installation of new gas or oil systems starting in 2024. The bill’s main architect is the Vice Chancellor and Minister of Economic and Climate Affairs Robert Habeck (Greens). Supporters of the bill argue that it will help Germany meet its emissions reduction goal, but the bill is highly contentious. Contributing to the concerns, the implementation of the new law has not been communicated to the public in a clear manner. Some 48 percent of German voters do not feel that they are informed about the bill.

The coalition had hoped to pass the heating bill before the summer break, but Germany’s Constitutional Court ruled that lawmakers must be given more time to review the plans. Look out for jockeying between the Greens and the Free Democrats (who are concerned with how the bill will be financed) – and between the government and the leading opposition party, the Christian Democrats. 

When it comes to child poverty, Germany has a structural problem and the government is making moves to replace the current system of support. Just before the summer recess, a major debate was brewing over Kindersicherungsgeld (Child Benefits), which the government wants to introduce in 2025. It would provide relief for low-income families by bundling child benefits and child allowances. Here too, funding is at the center of the debate. Federal Family Minister Lisa Paus (Greens) proposed a 12-billion-Euro plan. After criticism from the Ministry of Finance, which is led by Free Democrat Christian Lindner, she adjusted the cost of the plan downward. But, in a tit-for-tat move she also vetoed Lindner’s Wachstumschancengesetz (Economic Opportunity Law) 

The coalition came into office with promises of building 400,000 new housing units per year to address Germany’s housing shortage. In 2023, it achieved just over half that number. With sky-rocketing construction cost, many project developers are pausing or cancelling projects. Federal Construction Minister Klara Geywitz (SPD) has increased the housing allowance (state subsidy for cost of rent) – but critics argue it is not enough. The SPD is set to introduce a three-year rent break across the country. The Social Democrats are at odds with the Free Democrats over housing. The FDP argues that the rising rent is due to a lack of housing and want to address the problem by liberalizing the housing markets and not by introducing new legislation. 

As one can see, tensions exist between the coalition partners. But, there are also issues between the governing coalition and the opposition parties which are likely to flair up in political debates this fall.

What else is on the agenda? 

In addition to the domestic concerns outlined above, Germany’s economic well-being is a major issue across the political spectrum. 

Germany is facing a skilled labor shortage. According to some accounts, Germany will lack seven million workers by 2035 if no action is taken. The Association of German Chambers of Commerce and Industry (DIHK) reports that more than half of German companies are having issues filling positions due to the skilled labor shortage. In June, the German parliament passed legislation to open opportunities for job seekers from outside the European Union. This will lower entry hurdles for visa applicants based on their professional qualifications, age, and skills. 

While the Christian Democrats welcomed some elements of the bill, they believe that lowering qualification hurdles for foreign workers will appeal to low-skilled workers and not do enough to close the gap in skilled labor. The new skilled immigration law is part of efforts by the government to liberalize conditions for non-Germans. Be on the lookout for debates over immigration in the fall.  

At the same time, Germany’s economy is sputtering as a result of high energy prices, inflation, and economic stagnation. Although the government has introduced a seven-billion-Euro package of corporate tax relief (which targets the Mittelstand), the Christian Democrats have said this is “too little, too late” and have released proposals for a Sofortprogramm (quick fix plan) – which includes capping the cost of electricity, the reduction of corporate taxes, and measures to reduce bureaucracy. It is not clear that Olaf Scholz’s “Pact for Germany” – which was announced this week – will do much to boost the economy.

There’s no time like the present

The main beneficiary of the squabbling between the coalition partners and between the governing parties and the main opposition party has been the populist Alternative for Germany (AfD). The AfD is polling at above 20 percent in some national polls, putting it above the governing Social Democrats. Socio-economic concerns and the uptick in refugees and asylum seekers have fueled the rise in support. 

As Olaf Scholz and his colleagues begin the second half of this (first) term in office, they would be well-advised to keep the disagreements in the back room – rather than out in public – and to clearly communicate how they plan to address the very real challenges Germany is facing.

• Open the Gates! This week, the European Commission officially designated the six companies considered to be “Gatekeepers” under the Digital Markets Act. They are Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft – across multiple areas like browsers, video sharing, and advertising. They’ll have to be quick to implement the obligations – or risk a massive fine. 
• L’Intelligence Artificielle, Monsieur Scholz: Next month, on October 9^th and 10^th, French President Macron and German Chancellor Scholz are booked to meet in Scholz’s hometown Hamburg. The French seem to be going on a lobbying offensive, as the Elysée has (unofficially) indicated it wants to speak about AI. Specifically, that the current draft version of the AI Act from the European Parliament is too restrictive. Let’s see if he can convince Scholz.
• Family Trip to Brussels: This week, the Minister Presidents of the German states took a group excursion to the European Capital. There, they met with Commission President Ursula von der Leyen to lay out the case for a more favorable industrial electricity price. Although they want to help companies in their regions, interestingly enough not all companies are for this cheaper energy, citing concerns about decreased competitiveness globally. We’ll keep you updated.

Here are three appointments for next week that you should have on your radar:

GOODBYES, INDIANA JONES, AND THE AVENGERS

You’d think that after three years and a 100 odd Krautshell editions, putting words on paper would come easily to me; but I guess it’s never easy to say goodbye. So yes, unfortunately this will be my last Krautshell edition (at least for the foreseeable future) as I’m on to new adventures – but what better way to go out than in a blaze of spicy GIFs?

It won’t come as a surprise to my colleagues that writing Krautshell has been one of, if not THE highlight of my time at Erste Lesung. Week in, week out I felt like Indiana Jones, wading through the wonderfully whacky weeds of the Brussels and Berlin political spheres, searching for entertaining tidbits of information like ancient hidden treasures.

And unfortunately, I must report that like many explorers, I found that not everything that glitters is gold. Take my favorite policy area: digital. Three years later, and we’re still wondering how Germany will finance its 5G networks. Or whether a digital Euro is in fact a good idea. Or whether European entities can store their data on cloud servers owned by American companies. Now, some of my co-authors might call me boring because I love to focus on small details like the 24^th Council Compromise regulating data exchange between businesses and governments. The fine print if you will. They’d rather write about Germany’s grand defense strategy. But that’s truly what made the whole Krautshell-experience so special. We were (and are) a colorful team with a broad range of interests, strengths, and characters – which we express in our writing. Sort of like if the Avengers had a book club. 

And what a formidable team it was. The wonderful Dr. Steven Sokol, who brought (and continues to bring) in the perspective from the Washington-side of the Great Pond. The brilliant Anna, Christian, and Szilvia who cahllenged our ideas and encouraged us to be more concise, all while giving us maximum creative freedom. And finally, the mighty Jonny, the fastest House’s View writer in all the West, armed with more German political history knowledge than a doomsday prepper has Spam. Thank you to everyone who helped me grow as a professional policy wonk, these are the days I won’t forget. You’re now in very capable, albeit slightly less American, hands. And on that note: