Challenges for the next German government

Germany will go to the polls September 26, ending Chancellor Merkel’s 16-year te nure of office . It is still early days, but a coalition between the conservative CDU/CSU and the Greens seems the most likely outcome of the September elections. The next German government will face several challenges that need to be addressed. For one, the pandemic exposed significant deficiencies in some areas of public administration . Some “ r e-engineering” in this area should be high on the agenda of the next government. Another challenge on the macro-economic level is the imbalance of the German economy , reflected in a continuing very high current account surplus and the disproportional dependence on external demand. This dependence is particular ly problematic given the risk of some degree of de- globalization in the coming years and a re-assessment of the economic connections with China. The Green transition – achieving climate neutrality during the first half of the 21 st century – will be arguably the biggest challenge for the new government. There are two dimensions to this. One is the technical feasibility of “greening” the existing capital stock and infrastructure , without causing significant economic disruptions. The other is how to fund the needed public investments within the current fiscal framework that is clearly limit ing the fiscal space of the next government . The excess savings of the German economy , as reflected in the huge current account surpluses , show that there is in principle no lack of potential funding sources. But finding the right balance between public and private funding of the green transition will be no easy task.