German coalition split: Economic clashes threaten unity

Germany's coalition fractures over economic policies and windfall taxes

Coalitions of the CDU/CSU and SPD are known for their stability and crisis resilience—but the Iran war crisis tells a different story. When gasoline prices skyrocketed, the government ordered fuel stations to raise prices only once a day. It had no positive effect. Now, the "black-red" coalition is cutting the gasoline tax by 17 cents per liter for two months in an attempt to ease public frustration. Oil companies are supposed to pass the full reduction on to drivers—but whether they will remains an open question. Even the head of the antitrust authority doesn't believe the recently reformed competition laws will ensure that happens.

Crises can be an opportunity for governments to demonstrate strength, and they often unite coalitions. Yet for this CDU/CSU-SPD government, the Iran war crisis is acting like an enzyme accelerating its disintegration. CDU Economics Minister Katherina Reiche publicly clashed with SPD Vice Chancellor Lars Klingbeil after he proposed clawing back windfall profits from oil companies.

Chancellor Merz then rebuked Reiche—but the move backfired spectacularly. Instead, she was celebrated as the new Joan of Arc of free-market liberalism by the CDU/CSU parliamentary group, the CDU executive board, and the party's youth wing. The applause for Reiche was also a message from frustrated Merz loyalists to their former idol: the chancellor should stop being so accommodating to the SPD.

"At Best, a Basic Safety Net"

Shortly afterward, Merz launched an attack on the statutory pension system, declaring it would in future serve "at best as a basic safety net." The remark was also meant to placate disillusioned conservatives within his own ranks.

Does this signal a push toward pension privatization? The SPD could do without such neoliberal battle cries from the chancellor like it could do without a migraine. The party must avoid any impression that social welfare reform is merely code for dismantling the welfare state. Whenever Merz deviates from his prepared remarks, alarm bells start ringing in the coalition partner's camp.

Left-wing SPD members believe the CDU/CSU parliamentary group is now three-quarters composed of economic liberals who don't want consensus-based welfare reforms but a neoliberal revolution—with radical austerity and more money for corporations. Yet the SPD has already signed off on a corporate tax cut that will cost the state €23 billion annually. From the perspective of SPD lawmakers, Merz appears to be at the mercy of Reiche's hardline faction. At the last black-red summit at Villa Borsig, the chancellor is said to have shouted down the vice chancellor.

Reform or the Axe?

These tensions run deeper than mere nervous friction. The narratives of the SPD and CDU/CSU on why the welfare state, healthcare system, and pensions need reform barely overlap. The SPD claims it wants to make these systems more efficient and affordable—largely without benefit cuts. The CDU/CSU, however, views the welfare state as unaffordable and, if not wielding a chainsaw, is at least reaching for the axe.

A test of whether the coalition can still find common ground will come with the healthcare reform that CDU Health Minister Nina Warken is presenting to the cabinet on Wednesday—a plan aimed at saving nearly €20 billion annually. Under the proposal, the upper middle class, earning around €70,000 a year, would pay more. But the SPD considers Warken's savings measures targeting pharmaceutical companies—with their hefty profit margins—to be woefully inadequate and rejects the plan to double co-payments for medications, calling it a non-starter.

Reiche vs. Klingbeil, Merz vs. the SPD

Behind the scenes, cooperation between the parliamentary groups often runs smoothly. SPD lawmakers report that if they told their local party branches how harmoniously they work with some Christian Democrats, they'd be met with incredulous stares. The public image of the coalition, however, is one of conflict: Reiche vs. Klingbeil, Merz vs. the SPD.

Is the black-red coalition on the brink of collapse? Even left-wing SPD members point out that the government is tackling major challenges. No administration has ever attempted to reform the welfare state, pensions, and healthcare all at once. Many in the SPD invoke the "responsibility of statecraft"—code for: We're used to suffering. Besides, in times of crisis, there's something worse than a weak, squabbling government: no government at all—and a rising AfD. That alone may be enough to hold this fractious coalition together.