German grand coalition, macro-economic context and electrification of the car market


 Germany's grand tricolour coalition draws a landscape where the will of the States and of Europe to support both activity and the investment necessary for the transition dominates. In a context durably structured around accommodating monetary policies, calls for a return to more orthodox budgetary policies will probably remain timid and this can only favour an electrification that would otherwise be more complicated.

The grand coalition that has finally been negotiated in Germany is rightly being scrutinised today because everyone feels that a large part of our economic life depends on what it will or will not be possible to get our neighbours to accept. The automobile industry is obviously primarily concerned since, traditionally, on the demand side as well as on the supply side, the performance of each national industry depends largely on its ability to fit into what some have called the 'growth modes' of national economies.
To move quickly, on the demand side, manufacturers' catalogues and pricing must be in line with the prevailing forms of income distribution. On the supply side, industrial organisations, model allocations and flexibility levels must be compatible with income, social protection and tax levels, labour market regulations and exchange rate policies. Thus, at cruising speed, this relationship between growth and its foundations for national economies and the car industry is evident and fairly well identified in the various models that economists construct as well as in those used by the car manufacturers' 'planning' departments. It is known, for example, that because cars are a durable good, it is always possible to defer their purchase and that, as a result, car demand systematically over-reacts to changes in growth and income. 
In the context of 2021, in addition to the 'classic' ingredients of this relationship between the life of the automotive industry and macroeconomic variables, there are those relating to the major transition that is required of the industry in Europe and elsewhere if we are to hope to achieve carbon neutrality by 2050. Essentially, it is a question of electrification and what it implies for the industry directly, but also for the infrastructures and the evolution of the national and European energy mix. From this point of view, apart from the elements mentioned above, it is the capacity to invest and to share investment between industries, between industries and States and - possibly - between present and future generations that will determine the capacity of economies to succeed in general and for the automobile in particular in this transition.
In this perspective, we must first of all be aware of the major difference that everyone will have noticed between the management of the crisis that we underwent between 2007 and 2012 and that which has been organised in the face of the health crisis and its economic consequences for almost two years now. While the emergency measures adopted at the height of the financial crisis to support activity, but above all to save the banks, had generated public spending that had greatly increased deficits and public debts, the obsessive reminder of the requirements associated with budgetary orthodoxy had led to the observation that many public debts were unsustainable. The result was the famous 'sovereign debt crisis', which attempts were made - in vain - to curb through more or less violent austerity policies that converged to drag European growth down. For the car industry, this resulted in registration levels that were not at their lowest in 2008 or 2009 but in 2012 or 2013. 
In fact, after 2010, the combination of low growth rates and interest rates that remained high due to a monetary policy that was not very accommodating because it respected the ECB's statutes to the letter, generated a 'snowball effect' implying that, even with a balanced budget, the servicing of the debt mechanically implied a growth in debt. In the software of the time, without 'structural reforms' to increase revenues and decrease expenditures to generate primary surpluses, one could only present a worse copy to Brussels each year than the previous year.

It is important to take stock of what has happened since then and to note that the famous 'Maastricht criteria' or the SGP (Stability and Growth Pact) now appear to be nothing more than the relics of a bygone era.   

It is because the intellectual and then institutional loosening of orthodoxy and support for accommodative monetary policies became a consensus between 2012 and 2020 that the very expensive management of the health crisis was possible. The key mechanism of this crisis management was partial unemployment, the interest and dangers of which have already been highlighted in the automobile sector. 
Its financing had only been possible in Germany, which had very low debts during the previous crisis. This time, it was possible to apply this saving measure throughout Europe, which avoids both the destruction of jobs and skills and the collapse of demand with the blessing of Angela Merkel. 
Now that there is talk of a "return to normal", no country - and Germany in particular - seems in any hurry to turn off the tap. Everyone, at home or in Brussels, intends to organise the rebound and is not ready to unleash austerity policies, as was the case in 2010, to repay the debt that has swelled so much over the past two years. Each country also intends to make the necessary investments to manage its transition as well as its neighbours, without being prevented by a return to orthodoxy and even with the help of the EU. The very title of the "recovery plans" expresses this dual requirement: they are usually referred to as cyclical policies to support activity, whereas the recovery plans as conceived by Brussels or the governments today contain public investments or aid for long-term private investment associated with the requirement for decarbonisation in particular. 
It is thus clear that the final barrier that orthodoxy wishes to maintain, which would consist of tolerating public expenditure when it is part of investment logic and treating it as having to 'return' to 'normal' - which everyone knows can no longer be defined by the CFSP criteria - when it is part of operating expenditure, will be very difficult to define. Typically, higher education and research fall a priori under the heading of operations and, at the same time, boosting it by focusing on areas where the skills needed for transition are lacking can legitimately be claimed as an investment. Positioning the cursor is likely to become a routine exercise in the future, both in Europe and at national level, in parliaments and at the Commission.
In relation to all these questions, the grand coalition and the balances it has sought in the distribution of portfolios, as well as the choices described in the 177 pages it has delivered, are quite emblematic.
For Robert Habeck, the ecologists obtained a super-minister for Climate and the Economy, responsible for ensuring that all laws are in line with the stated objective of Social Democrat Chancellor Olaf Scholz, which is to make his country the "pioneer in climate policy" (1). However, they had to leave both Transport and, above all, Finance to the FDP Liberals, whose leader, Christian Lindner, is both a supporter of budgetary orthodoxy and opposed to any tax increase.
The compatibility between these two 'attractors' of German policy and the expression it will probably have both in Brussels and in the Franco-German couple is sketched out in the 177 pages: the investment part would be managed by a sort of German-style Caisse des Dépôts so that the investments desired by ecologists and, it must be said, very often by industrialists as well, would not be slowed down; austerity would concern operations and, in a context where taxes would not be increased, should lead to reductions in expenditure, unless one manages to dress up operating expenditure as investment expenditure... 
Without going into details, the form taken by the new coalition and the terms in which it defines its government pact seem to consecrate the 2012 turn in Europe. For the moment, at the ECB, Christine Lagarde continues to consider that growth is a concern that must take precedence over fears of a return of inflation. This makes public debt more sustainable and creates a window of opportunity for public and corporate investment. One might even think that, with a little inflation, this would be even more true.

Macroeconomically, if the two components of demand, public spending and investment, are on the rise, then growth is pulled up. What remains is consumption. From this point of view, Germany, by deciding to increase its minimum wage from 9 to 12 euros, and all the European countries faced with labour shortages seem to be taking a Keynesian direction.

For the automotive industry, the landscape we describe is obviously much more favourable to electrification than one where all the investment, including that concerning infrastructure, would have to be borne by companies alone. Like short-time working for almost two years, purchase aids, public research, terminals and PIIEC are all subsidies which lighten the burden on companies and which will enable them this year - and the following years very probably - to make this very rapid transition compatible with high profits.
(1) V. Delphine Nerbollier, "Le projet musclé de l'Allemagne pour mettre son économie au vert", 26 November 2021, Le Temps Online 

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