(Bloomberg) — Chancellor Olaf Scholz is struggling to pull off his plan to harness the transition to green energy and unleash a decade of economic dynamism in Germany.
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As his government approaches the half-way mark in its four-year term, the vision of a radical push to eliminate carbon emissions — that would turbo-charging growth too — looks to be slipping out of reach.
Germany’s economic malaise amplified by weak global demand and an energy crisis has made life more difficult for Scholz’s coalition. But the chancellor is also adding to the problem, sending conflicting signals to the investors who are crucial to the strategy.
After the first sign of pushback from voters sparked infighting between unruly political partners, Scholz failed to impose a clear line and instead oversaw months of public fighting over key parts of his plan.
“This permanent back and forth, is the problem,” said Jasmin Groeschl, a senior economist at Allianz SE Group. “The coalition has argued a lot in recent months with a lot of different contradictory opinions that create uncertainty for people and also for companies, leading to less investment.”
Scholz blames red tape for thwarting his ambitions, highlighting the loss of momentum to a program deemed essential for Europe’s bid to lead the fight against accelerating climate change.
With the world order in flux and war raging in Ukraine, the sense of drift under the chancellor’s watch is leaving room for the far-right Alternative for Germany to gain support.
The gloom around Scholz’s stewardship of the region’s biggest economy is a far cry from the bold optimism first projected by the Social Democrat chancellor when his three-way coalition with the Greens and Free Democrats took office at the end of 2021.
The alliance committed itself then to the goal of reaching climate neutrality by 2045, accompanied with the promise of a new “Wirtschaftswunder” — an economic miracle — similar to the one West Germany experienced after World War II.
“Because of big investments in climate protection, Germany will achieve growth rates for some time which we last saw in the 1950s and 1960s,” Scholz said in an interview in March with the Neue Berliner Redaktionsgesellschaft, a conglomerate of local papers.
Six months after that prediction, Germany is stuck in a rut. On Monday, the European Commission’s outlook showed the region’s biggest economy suffering a contraction of 0.4% in 2023 — by far the worst performance foreseen for any of its peers. German officials now privately anticipate a similar outcome.
In an illustration of the challenge, Germany’s chemical industry lobby this week said that it saw all indicators — ranging from production to prices and turnover — weaken in the second quarter, and it anticipates more deterioration.
China-led global weakness is part of the problem, hitting the German export-led manufacturing base. That has focused voters’ attention on the economy and raised questions about the domestic boom that Scholz had promised the green transition would deliver.
While it’s too early to expect any fruits of that long-term policy to be delivering already, voters can see that the first phase has been messy. A recent poll by public broadcaster ARD showed only 19% are content with his government, against 79% dissatisfied.
People have even become allergic to the term “energy transition” and the chancellor would really help things if he avoided using that term anymore, a high-ranking Social Democrat said under the condition of anonymity.
The government’s dysfunction isn’t helping. When the Greens’ economy minister, Robert Habeck, presented a proposal in April that would have banned new gas and oil boilers, a storm ensued as the business-friendly Free Democrats furiously opposed the plan.
In the end, Habeck was forced to dilute the heating law by giving homeowners more time to renew their systems, in a measure now expected to eradicate only three quarters of the emissions initially intended.
“Companies would be willing to invest more in the green transformation if they knew what the future holds — what they can rely on,” said Groeschl at Allianz. “But they don’t have that.”
Scholz himself complains about bureaucracy slowing things down, and this month called for action to cut back regulations at the federal, state and municipal level. He even appealed to opposition lawmakers for help — a move seen by some commentators as a sign of despair.
Opposition leader Friedrich Merz from the Christian-Democrat-led conservative bloc countered that “the majority no longer supports your climate policy.”
Another big brake on growth and investment is energy costs. Although lower than last year’s records, gas and power prices are still between two to three times the level compared with before the war in Ukraine.
While the energy transition might one day shield Germany from geopolitical shocks to fossil fuel supplies and political pressure from countries such as Russia, for now it’s just a major headache that’s threatening to drive business abroad.
Habeck has sought to aid energy-intensive companies with subsidies to smooth their transition into carbon-free production, but both Scholz and Finance Minister Christian Lindner of the Free Democrats have blocked his plan on the grounds, arguing that it makes no economic sense.
It would also add to a mounting bill, given that Scholz’s cabinet approved a €212 billion ($231 billion) climate and transformation fund in July.
More worrying, say some economists, is the lack of a fully thought-through plan.
“The government is on the wrong track here,” said Veronika Grimm, a member of Germany’s Council of Economic Experts, who reckons the country needs more radical action such as opening up markets. “They’re trying to maintain the status quo with high subsidies, but that won’t work.”
Measures she would support instead include more imports to ease pressure on the domestic market, a greater focus on emissions trading, investment in infrastructure and ramping up hydrogen generation, while ratifying trade agreements to secure more supply sources.
A special two-day cabinet retreat at the castle of Meseburg north of Berlin this month was supposed to find answers to Germany’s economic woes, but ended without a new masterplan.
Martin Moryson, chief economist for Europe at DWS, still took heart from that meeting, and insists that Germany’s “incredible resilience” in the face of recent crises shows it’s too soon to write off Germany’s prospects as a motor of European growth.
“The government clearly recognized in the Meseberg Program that the challenge lies in dismantling state bureaucracy,” he said. “I believe that something will improve here in the foreseeable future.”
For now, as Germany’s economy lurches in and out of contractions, Scholz is trying get voters on side by insisting that both he and they share frustrations with the way the country functions.
“Germans are tired of the standstill,” he told lawmakers. “And so am I.”
–With assistance from Petra Sorge.
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