How to future-proof the German Wirtschaftswunder; Climate policy: Are we in for a ‘blood, sweat, toil & tears speech’? Plus: LatAm country reports

It’s election time in Germany and elections should remind us not only of the rights but also of the responsibilities of citizenship in a democracy... Let’s hope we’ll be getting leaders that aren’t only good at winning at the ballot, but good at governing, too, as Germany needs a true ‘Neustart’ being faced with a host of critical challenges. Our publication on the German elections analyzes the various coalition scenarios along with an outlook on how the major challenges – the ageing population, the fostering of the digitalization and the climate crisis – are being tackled. Here’s where our second publication comes into play, calling for a ‘Climate Churchill’-type ‘blood, sweat, toil & tears’ speech when it comes to climate policy. And a batch of updated LatAm country risk reports. Historic times, all in all!

How to future-proof the German ‘Wirtschaftswunder’

Political change is upon Germany, but no major policy overhaul is in the cards. After the elections on 26 September 2021, Chancellor Angela Merkel will be replaced after 16 years in power. The transition takes place in a highly fragmented political context, which will likely see the first three-party coalition emerge at the federal level and complicate the government formation process. The significant dilution of agendas required for an agreement among potentially uneasy political partners suggests that German politics will see more policy evolution than revolution over the next four years.

Yet, Germany needs an economic ‘Neustart’. Unfortunately, “business as usual” with at best small, piecemeal reforms are not going to cut it anymore. Germany urgently needs a major update to ensure that it can master successfully the digital, green and demographic transitions and in turn safeguard its prosperity.

• Making the economy fit for the 21st century. Most parties seem to lack comprehensive and concrete plans, though it is high time to finally tackle the well-known reform ?biggies“. These include future-proofing Germany’s institutional backbone (reform and modernization of its federal structure and public administration), cutting red tape, providing critical (digital) infrastructure, reforming its education system and fueling the entrepreneurial spirit. Taken together, these are the prerequisites for a faster pace of digitization, which in turn is crucial not only for an effective fight against Covid-19, but also for achieving climate targets and maintaining an internationally competitive economy.
• Meeting the magic number to limit climate change. The policy targets in almost all of the election manifestos are insufficient to limit global warming to 1.5°C. Carbon prices need to rise and additional policies are required to establish new technologies and new markets, and to adapt to the already material damages resulting from climate change. This will affect heating, transport and food prices and thus particularly burden financially vulnerable households and businesses, which calls for revenues from carbon-pricing policies to be used for providing adequate support in the form of transfers and stable electricity prices.
• Adapting to demographic change. Most parties shy away from pointing out the need to adapt Germany’s pension system, promising further increases of benefit levels and freezing the retirement age at 67 instead. However, these promises will come at the cost of a markedly higher tax-financed state subsidy of the pension system or a contribution rate of 30% in the long run, which would mean either curtailing the financial scope for investments in infrastructure, education and new technologies or undermining Germany’s competitiveness, not least in the (global) war for talent.

Please find our full report here.

Climate policy: Time for a ‘blood, toil, tears and sweat’ speech

Today’s paper is looking into attitudes towards climate policy, based on our latest Allianz Pulse survey. The results are sobering: Although combating climate change requires – besides huge investments – far-reaching individual behavioral changes, just 17% of respondents in Germany, France and Italy are prepared to pay the higher price for sustainably produced goods. The vast majority of respondents (80%) are also opposed to the significant price increases that would come from a strong carbon tax with real steering power to reduce CO2 emissions. In some ways, these findings are not surprising. The immense difficulties in overcoming the climate crisis are still not recognized as politicians continue to say the green transformation is a great opportunity for everyone. It’s time for a?“Climate Churchill” to deliver a "blood, toil, tears and sweat" speech to open citizens' eyes to the real challenges to come. Our assessment can be found here.

Updated country risk reports

Argentinia: Rated D4 (high risk for enterprises): With political uncertainty and weak public finances, Argentina is not out of the woods.

Brazil: Rated B3 (sensitive risk) as the country is walking a fiscal and political tightrope.

Chile: Rated?BB2 (medium risk) with a strong macroeconomic framework supporting the recovery; yet political uncertainty is on the rise…

Ecuador: Rated C4 (high risk): Supposedly out of the slump as the dollarization of the economy limits currency risks and anchors inflation, but…

Peru: Rated BB2 (medium risk) with a new policy direction, a test to macroeconomic stability.