HOW TO FUTURE-PROOF THE GERMAN WIRTSCHAFTSWUNDER - ALLIANZ RESEARCH 23 September 2021
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Photo by khlongwangchao on Shutterstock ALLIANZ RESEARCH HOW TO FUTURE-PROOF THE GERMAN WIRTSCHAFTSWUNDER 23 September 2021 04 Federal election preview: What Germany will get… 08 …what the German economy needs
Allianz Research
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 re-
EXECUTIVE placed 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
SUMMARY dilution of agendas required for an agreement among potentially uneasy political
partners suggests that German politics will see more policy evolution than revoluti-
on 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 urgent-
ly 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 com-
prehensive and concrete plans, though it is high time to finally tackle the well-
known reform „biggies“. These include future-proofing Germany’s institutional
Michaela Grimm backbone (reform and modernization of its federal structure and public admi-
Senior Economist
michaela.grimm@allianz.com nistration), cutting red tape, providing critical (digital) infrastructure,
reforming its education system and fueling the entrepreneurial spirit. Taken
together, these are the pre-requisites 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 al-
Katharina Utermöhl
Senior Economist for Europe most all of the election manifestos are insufficient to limit global warming to
katharina.utermoehl@allianz.com 1.5°C. Carbon prices need to rise and additional policies are required to estab-
lish 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.
Markus Zimmer
Senior Expert, ESG
Adapting to demographic change. Most parties shy away from pointing out
the need to adapt Germany’s pension system, promising further increases of
markus.zimmer@allianz.com
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 infra-
structure, education and new technologies or undermining Germany’s
competitiveness, not least in the (global) war for talent.
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23 September 2021
Neustart
Making the economy
fit for the 21st century
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Allianz Research
FEDERAL ELECTION PREVIEW:
WHAT GERMANY WILL GET...
Political change is upon Germany, but ve been very volatile, with campaigns table coalition partners, namely the
probably not immediately on 26 Sep- marred by sideshow scandals that have right-wing AfD and the Left Party, which
tember and not as far-reaching as nee- seen more emphasis on personality together command around 17% of all
ded for it to master the transformatio- rather than policy substance. As a re- votes. As a result, for the first time in
nal challenges ahead. The federal elec- sult, even a few days before the elec- German post-war history, a three-way
tion on 26 September is bound to bring tions, the race still remains wide open. party coalition is the most likely election
along significant changes to Germany’s In addition, Germany’s political lands- outcome, with a wide array of feasible
political set-up. For one, the vote will cape is becoming increasingly frag- options on the table (cf. Box, opposite).
mark the end of Angela Merkel’s 16- mented, which is bound to complicate .
year chancellorship. Three candidates coalition-building. After all, six parties
stand ready to fill Merkel’s shoes: Olaf are set to enter the Bundestag, of
Scholz for the SPD, Armin Laschet for which none is likely to receive more
the CDU/CSU and Annalena Baerbock than 25% of votes. Moreover, two of the
for the Green Party. However, polls ha- parties are widely viewed as not accep-
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23 September 2021
Box: Coalition scenarios
In recent weeks, polls have notably shifted to the left. With the SPD now likely to emerge as the strongest party, it may
dominate the next government coalition. However, the party with the most votes does not necessarily get to decide who takes
the top job, or join the government at all, as seen in the 1976 election, when the CDU under Helmut Kohl won 48.6%
of all votes but lost out against a SPD/FDP coalition. After all, both the CDU/CSU as well as the SPD are unlikely to achieve
a parliamentary majority in their favorite coalition constellation – “Black-Yellow” and “Red-Green” respectively Therefore,
with CDU/CSU, SPD and the Green party all polling at around 20-25%, the focus will be on who can assemble a workable
coalition government (see Figure 1).
Both the “Jamaica” (CDU/CSU, Greens & FDP) as well as the “Traffic light” (SPD, Greens & FDP) coalitions – while only second-
best options – are likely to command a majority in parliament. We think the first option is more likely to materialize since the
FDP in its role as the ultimate kingmaker on both wings of the political spectrum could well demand a high price in return,
such as the finance ministry. In our view, it would prove very difficult to square the “fiscal circle” with the call for a swift return to
pre-crisis government debt levels and no tax hikes on the FDP side and higher investment spending, tax hikes for the top
income bracket and the introduction of a wealth tax on the SPD/Green side.
At this point, even more uncomfortable political pairings such as a Left Alliance (despite differing views on fundamental for-
eign policy issues) as well as a “Grand coalition 2.0” (i.e. “Kenya” (SPD, CDU/CSU & Greens) or “Germany” (SPD, CDU/CSU &
FDP)) should not be ruled out. Yet, the SPD and CDU/CSU are likely to try all alternative combinations before forming another
government coalition together. Even the possibility of a center-left (SPD & Greens) or center-right (CDU/CSU & FDP) minority
government cannot be excluded at this point, though Germany’s only experience in that regard has been at the Länder level
and shelf lives have proved very short.
Figure 1: Coalition combinations—projected seat shares based on opinion polls since end-August (%)
Sources: Various election polls since end-August 2021, Euler Hermes, Allianz Research.
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Allianz Research
Figure 2: Coalition games cheat sheet
Source: Euler Hermes, Allianz Research
To put it mildly, coalition-building looks government formation process could coalition agreement to emerge among
set to be complicated. Given the more well take until early 2022 and even uneasy political partners likely means
complex task of striking a compromise smash the current record of 172 days that German politics will see more po-
coalition treaty among three parties, that was set in 2017. licy evolution than revolution over the
and in light of notable ideological diffe- In any case, the significant dilution of next four years.
rences (see Figure 4, opposite), the agendas required for a three-party
Figure 3: Government formation process
Sources: Various election polls since end-August 2021, Euler Hermes, Allianz Research.
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23 September 2021
Figure 4: Overview of key election promises by party
CDU/CSU Green Party SPD FDP Left Party
Taxes Reduce corporate taxes Introduce minimum corporate Tax hikes for top 5% of Reduce corporate taxes to Increase in corporate tax rate
from 30% to 25%, no income tax rate of 25% at EU level, incomes & lower taxes for 25%, no income tax increases, from 15% to 25%, tax hikes
tax increases – tax reduc- tax hikes for top income low and middle incomes, raise top income bracket to for high income households &
tions in line with fiscal earners, introduction of a introduction of a wealth EUR90k. tax cuts for low-income
leeway. wealth tax. tax. earners, one-off wealth levy
(10-20%) introduction of a
wealth tax, boost public
investment.
Public finances Keep debt brake, swift Soften debt brake by exclu- Keep debt brake but take Keep debt brake, limit on Get rid of debt brake.
return to “black” zero and ding investment, EUR50bn of advantage of social expenditures, swift
60% debt ratio public investment per year “constitutional leeway”. return to 60% debt ratio.
over next decade.
Public administration Modernization decade for Anchor digitization in public Organize ambitious politi- Overhaul of the federal struc- Digitize public services,
& federal structure the state: digitizing public administration, boost infra- cal projects in “platforms” ture, modernize and digitize ensure sufficient competent
services, simpler and more structure-planning capacities, that include stakeholders public administration. personnel to maintain/
efficient public administrati- make public administration from across political levels explain digital systems.
on, reform of the federal more innovative, creative and & departments.
structure. inclusive.
Europe No debt union (joint borro- Goal Is a federal European Reform SGP into sustaina- Return to strict SGP rules as Reform SGP, extended EU
wing is a one-off), no wate- republic with a European bility pact, develop EU into soon as possible with reform budget financed by common
ring down of SGP but reform constitution, reform SGP fiscal, social and economic focused on tougher sanctions, debt issuance, ECB to directly
focus on stronger enforce- (more space for investment, union, permanent EU ensure joint borrowing is a one finance public spending,
ment, Banking union (no reduce austerity pressure), recovery fund, European -off, no common deposit financial transaction tax, ESM
common deposit scheme) permanent EU recovery fund, unemployment reinsurance scheme, no common EU taxes. becomes EMF, sovereign debt
and Capital Market Union. common European fiscal scheme, common EU inves- restructuring mechanism.
policy financed by own ting, European banking
resources (digital & carbon union, financial transaction
border tax), ESM becomes tax.
EMF, European banking union
& financial transaction tax.
Labor market Keep HartzIV, no minimum EUR12 minimum wage, EUR12 minimum wage, More flexibility re weekly EUR13 minimum wage, get
basic income, maintain reduction in weekly working abolishing sanctions in working hours. rid of sanctions in unemploy-
social security contributions hours, abolishing sanctions in unemployment benefit ment benefit scheme, boost
at 40%. unemployment benefit scheme. benefits to EUR1200.
scheme.
Climate change 65% reduction in CO2 emissi- 70% reduction in CO2 emissi- Boost investment into Extend emission trading 80% reduction in CO2 emissi-
ons until 2035, climate ons until 2030, national CO2 renewables, mobilize system to all sectors, CO2 ons until 2030, climate neut-
neutrality by 2045, use CO2 price at EUR60 by 2023, CO2 private capital for green revenue rebate for house- rality by 2040, higher contri-
revenues to stabilize electri- revenue rebate for house- projects, shift additional holds, expand emission tra- butions to international
city prices, promote carbon holds, higher contributions to heating costs to landlords, ding and harmonize emission climate finance, free local
capture & storage, CO2 inter-national climate finance, 130km/h on the autobahn, pricing. public transport, nationalize
product labels. shifting additional heating mandatory rooftop solar on railways, coal exit by 2030,
costs from CO2 emissions to public and commercial ban underground carbon
landlords, buildings. capture and storage, shift
2% of land for renewable additional heating costs from
energy, coal exit by 2030, CO2 emissions to landlords,
130km/h on the autobahn, 120km/h on the autobahn,
30km/h in municipalities. 80Km/h outside municipali-
ties, 30km/h in municipalities,
ban short distance flights.
Pension system “Generationenrente” No further increase in retire- No further increase in Flexible retirement age Statutory retirement age of
(publicly financed contributi- ment age beyond 67 years, retirement age beyond 67 (earliest at the age of 60, if 65 years, early retirement at
on to pension fund from stabilization of current pensi- years, guaranteed pension pension entitlements reach at the age of 60 with 40 contri-
birth), state-subsidized on benefit level, publicly benefit level of at least least basic security level), bution years, benefit level of
standard pension product administered pension funds 48%, public pension funds introduction of a capital- 53%, tax-financed minimum
for mandatory private instead of Riester Rente, as vehicle of private pensi- funded pillar into the public pension of EUR1200 per
provision (opt-out), improve- introduction of an employer- on provision (Swedish pension scheme (“Statutory month, higher contribution
ment of cross-border porta- financed minimum contributi- model). Equity Pension”), broader assessment limit and a cap at
bility of occupational pensi- on, guarantee pension of investment opportunities for pension benefits, major share
ons. EUR1000 for people insured pension funds and life insu- of occupational pension
for at least 30 years. rance companies, strengthen- schemes to be solely financed
ing of the demographic factor by employers, abolishment of
in the pension formula, tax deferred compensation.
financing of non-insurance
benefits.
Sources: Various election polls since end-August 2021, Euler Hermes, Allianz Research.
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Allianz Research
…WHAT THE GERMAN ECONOMY
NEEDS
Unfortunately, “business as usual” with the German economy has lost further Despite various attempts to reform the
at best small, piecemeal reform steps ground since 2018 (cf. Fig. 5, opposite). balance of power, to this day a third of
is not going to cut it anymore. Germany all laws still require the approval from
needs a major update – a Neustart – This is a worrying development since the German Länder. However, in areas
to ensure that it can master successfully updating the German Wirtschafts- where developments have nationwide
the digital, green and demographic wunder is all about speeding up relevance, such as education and pub-
transitions and, in turn, safeguard its digitization, which in turn is key to lic administration, not every German
prosperity. mastering the central challenges of our state should continue to cook its own
time. This is just as true for achieving soup.
Digitalizing the German climate targets as it is for effectively
Wirtschaftswunder combating Covid-19. Looking at the Second, it is high time for Germany
It is no secret that the German econo- parties’ election program, however, to modernize its public administration.
my is facing strong structural head- we see none putting forward the need- The overhaul needs to be comprehen-
winds. Already in late 2019 we raised ed comprehensive approach including sive, from simplifying structures and
the question of whether Germany is a all reform elements required for a procedures to assigning clear responsi-
“stranded” economy1, given its struggle Neustart – and this is before election bilities over moving from paper-based
to keep up with the 21st century tech promises are potentially watered down to digital public services. On the latter
revolution. At the time, Europe’s largest to strike a coalition deal. Germany is a laggard among EU
economy no longer appeared in the countries, taking the 21st place in the
top three of the 2019 World Economic Future-proof Germany’s institutional EU Commission’s 2020 Digital Economy
Forum Global Competitiveness ranking, backbone! and Society Index (cf. Fig. 6, opposite).
falling four places from the year before Before we focus on how to upgrade the
to seventh. If anything, the 2018 German economy’s hard- and software So what do Germany’s political parties
industrial recession should have served let’s start with the reform biggies few promise on this front? FDP and CDU
as a major warning, but it triggered no have dared to address. We see two underline the importance of updating
noticeable policy reaction. Now, with major speedbumps that need to be Germany’s institutional backbone, but
policymakers largely stuck in Covid-19 tackled to make Germany’s institutional for the moment their proposals remain
crisis mode over the past 18 months, backbone fit for the 21st century and vague at times. Meanwhile Green Par-
structural topics appear to have com- set the stage for any major transforma- ty, SPD and Left Party largely focus on
pletely fallen off the government tional process. First, Germany will need digitizing public services but pay little
agenda, despite the pandemic high- to review its federal structure and opt or no attention to modernizing the pub-
lighting Germany’s struggle to adapt to for greater centralization in some core lic administration and reforming the
digital solutions as well as weaknesses areas. While the federal set-up has federal structure.
in public administration. The European many positives, it has proven to be a
Center for Digital Competitiveness’ disadvantage in situations that call for
Digital Riser Index now suggests that swift and unified decision-making, as
highlighted during the pandemic.
1 See our report Is Germany a “stranded” economy?
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23 September 2021
Figure 5: Digitization progress between 2018-2020 Figure 6: The Digital Economy and Society Index, 2020 Ranking
Source: European Commission.
Sources: Digital Riser Index, European Center for Digital Competitiveness.
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Allianz Research
Chop down the regulation jungle! the one-in-one-out rule came - if a Governance Report by the Hertie
Taken together, these two reform initia- ministry imposes a new rule on German School of Governance and the OECD2,
tives should already help speed up the businesses, it has to abolish an old one Germany does not do particularly well
German economy’s digitization drive. - with too many exceptions, notably in the planning and implementation of
However, to add further “Wumms” to with EU regulation not covered. A more major infrastructure projects (rank 18
the resulting “simplification shock” calls ambitious approach is needed. One out of 36). Excessive bureaucratic pro-
for a meaningful reduction in the bu- idea could be for each regulation to cedures and demanding legal regulati-
reaucratic, regulatory and legal bur- receive a shelf date, after which it ons are named as the greatest
dens that are usually cited as the big- expires unless the case can be made weaknesses. This does not come as a
gest obstacles to doing business in Ger- for its extension. In terms of priorities, surprise as the number of building re-
many, in particular for Small and Medi- a particular focus should also be put gulations has quadrupled from 5,000 to
um Enterprises (see Figure 7). on the relaxation of reporting require- 20,000 since 1990. Given the urgency to
ments, as well as simplified approval make progress on critical (digital) infra-
Both the CDU and FDP propose some procedures for SMEs – in particular structure projects, such as an upgrade
good ideas to tackle the issue, while in the area of starting a business, of telecommunication infrastructure,
SPD and Greens appear to pay lip ser- where Germany ranks 125th out of special regulatory treatment should be
vice to the cause and the Left Party 190 countries, according to the World given, including fast-track permits.
devotes no airtime at all to the cause in Bank's Ease of Doing Business Survey.
its election program. To put the regula- Moreover, tweaks to Germany’s data Invest in digital hardware…
tion jungle into perspective: In 2015, protection law will be necessary to en- Even on the basic requirements for a
Germany’s Ministry for Economic Affairs sure that it does not stand in the way of successful digital transformation, Ger-
and Energy estimated the annual costs innovation and the adoption of new many is missing the boat. The goal of
to firms from bureaucracy at EUR45 technologies. Furthermore, a notable nationwide coverage with gigabit-
billion – about half the total amount reduction in red tape should also help capable internet connections is still
invested in R&D. Up until now, initiatives tackle Germany’s implementation defi- some way off. Too much copper
to reduce the regulatory burden have cit when it comes to realizing major remains where fiber-optic should be,
proven too timid to leave a notable infrastructure investment projects. particularly in rural areas.
mark. For instance, the introduction of According to the 2016 Infrastructure
Figure 7: Where Germany’s medium-sized firms see risks (share of respondents, in %)
Sources: DZ Bank..
2 Hertie School & OECD, 2016 Governance Report.
1023 September 2021
The results of the World Economic Fo- …and modernize digital software! Furthermore, the proportion of ba-
rum’s Global Competitiveness Ranking The German economy’s digital skill set chelor's degrees in mathematics, sci-
help provide an international context: is in urgent need of an upgrade. ence and engineering is still as high as
With an overall ranking of 72 for fiber- Surveys show that the largest factor it was around 25 years ago, behind that
optic internet connections and 58 for holding back digital competency in of the UK and other countries. A trend
mobile broadband connections when it Germany is a serious lack of adequate towards engineering is not foreseeable.
comes to information technology use, equipment in schools. For instance, Of course, reforming the German edu-
Germany has fallen behind Russia, Chi- according to the IEA's International cation system is a mammoth task and
na, all the Baltic and Nordic countries Computer and Information Literacy solely investing in education will not
and several Gulf countries as well. This Study3 only a quarter of German solve the issue. To make Germany’s
is a problem not simply for households schools has wifi, compared to the inter- education system competitive, a com-
that are unable to stream movies at national average of 64%. In Denmark plete rethink of what is taught and how
home: It also holds back small- and the respective share is 100%. Moreover, it is taught is needed. While the reform
medium-sized businesses in certain in Germany, only 3% of schools equip process needs to take on board local
regions because companies with weak all teachers with their own laptops or and regional best practices,it should be
internet connections work less effec- tablets, compared to 24% for the inter- coordinated at the federal level and
tively. Moreover, fiber is also key for the national average and 91% in Denmark. rolled out nationwide. No political par-
deployment of 5G, which, in turn, is It does not come as a surprise that ty is ambitious enough in its program to
essential for the implementation of German schools struggled to adapt set the stage for a true overhaul of the
major new use cases, such as the Inter- to online teaching during the pandemic education system
net of Things. All parties in favor of when schools were closed. Even more Moreover, to ensure that German firms
more public investment with the Greens worryingly, Germany placed last in the will have adequate access to skilled
even proposing to spend EUR500bn Centre for European Policy Studies’ EU workers, Germany needs to focus much
over the next decade. Yet, without a index of readiness for digital lifelong more on providing incentives for life-
meaningful “simplification shock” that learning.4 The survey concludes that long learning while attracting inter-
aims at speeding up complex planning Germany’s education system is unable national skilled workers at the same
and implementation processes pro- to prepare students with the necessary time.
gress is likely to be limited. digital skills and competencies.
3 IEA ICILS, International Computer and Information Literacy Study (2018).
4 CEPS, Index of Readiness for Digital Lifelong Learning (2019) .
11Allianz Research
Figure 8: Broadband take-up (% households)
Photo by Sigmund on Unsplash
Source: European Commission DESI 2020.
1223 September 2021
Awake the entrepreneurial spirit! were clearly neglected (see Figure 9). programs of CDU and FDP, they don’t
There is arguably a lack of entrepre- Interestingly, while startup activity rose feature in the pamphlets of SPD and
neurial spirit in Germany. In 2018, ac- in the US in 2020, in Germany the num- Left party at all. Meanwhile the Greens
cording to a survey by the German de- ber of startups fell by -12% to 201,000 - mention them once but offer no com-
velopment bank KfW5, only a quarter another record-low. It is high time to go prehensive strategy aimed at grass-
of the German working population on the offensive to awaken the German roots start-ups.
would have liked to be their own boss - entrepreneurial spirit. Again, a compre-
a record low. As recently as 2000, the hensive approach is essential: from
comparable figure was 45%. If any- founder scholarships, government sup-
thing, the Covid-19 economic shock has port for university-affiliated startup fac-
probably further reduced that figure. tories and “innovation clusters” to more
After all, the support measures imple- attractive modalities around employee
mented during the crisis did a good job participation in startups and taxes, as
at getting established companies well bureaucratic relief in the first years
through, but startups - the potential of life. While start-up founders will find
future stars of the German economy - many good reform ideas in the party
Figure 9: Founders’ views on Germany as a start-up location
2018 2019 2020
Free market access 2.4 2.2 2.3
Advisory services* 2.8 2.7 2.6
Business founder image 2.5 2.4 3.1
Protection of IP 2.8 2.7 3.1
Quality of public infrastructure 2.6 2.7 3.2
Financing with promotional loans 3.4 3.1 3.3
Financing with bank loans 3.7 3.7 3.7
Financing with venture capital 3.3 3.1 4.0
Legal regulations* 3.1 3.0 4.3
Tax burden* 3.6 3.5 4.4
Policymakers’ commitment** 3.8 3.4 4.5
Educational system** 3.9 3.9 4.5
Bureaucracy (information & reporting duties) 3.6 3.3 4.6
Source: KfW Entrepreneurship Monitor
Note: * Pertaining to concerns of business founders, self-employed persons and entrepreneurs,
**With respect to the teaching of business knowledge and skills
5 KfW Gründermonitor (2020).
13Allianz Research
Green transition:
Rise to the challenge!
Mastering the green transition is the likely pursue climate targets that are tion until 2030 sounds good but being
make-or-break challenge for the Ger- still not in line with limiting global war- on a 1.5°C path would rather require
man economy. And although there is ming to 1.5°C, the proclaimed aim of reductions of around 65%. The next
broad consensus on the overwhelming the Paris Agreement and the tempera- German government will therefore face
importance of the topic, party pro- ture rise at which the damages from the rare task of being more radical in
grams differ markedly in the ways to climate change are expected to exceed its policymaking than its programming
address it – with only one party fully the economic benefits of fossil fuel usa- and will have to rise to the challenge.
up to the challenge. This is shown in by ge. It is only weak consolation that the But what exactly needs to be done so
Figure 10, which illustrates the range of same must be said for the supposedly that Germany – and the EU – can pivot
ambition using the aspired date of ambitious EU Green Deal measures to the 1.5°C path?
climate neutrality and the coal exit proposed in the “Fit for 55” package,
as well as the 2030 emission target. which would likely result in a long-term
The uncomfortable truth is that the next temperature increase of more than
German government will most 2.0°C. The aspired 55% emission reduc
Figure 10: Climate target comparison
Source: Euler Hermes, Allianz Research and Helmholtz-Klima. Temperature alignment is derived by comparing the targets with complementary analysis and
pathways from Climate Action Tracker, CAN Europe and OXFAM6. * Wants to include CO2-reductions outside of the EU to national reductions. ** Wants to
update targets according to new scientific findings and to refrain from national targets in favor of EU compliance with EU targets. Also wants to include
CO2-reductions outside of the EU to national reductions. *** Wants to abolish neutrality, exit or emission targets. Bars extend further up than shown.
6 https://www.oxfam.org/en/press-releases/fit-55-package-not-fit-tackle-climate-emergency-says-oxfam
https://www.helmholtz-klima.de/aktuelles/klimapolitik-wahlprogramme-bundestagswahl2021
https://climateactiontracker.org/climate-target-update-tracker/eu/
https://caneurope.org/press-release-fit-for-55-climate-energy-eu-commission-package/
https://climateactiontracker.org/publications/germanys-proposed-2030-national-target-not-yet-15c-compatible/
https://climateactiontracker.org/countries/eu/ .
1423 September 2021
Without a carbon price, all is nothing! structure projects require a carbon investment demand for the energy
The policy framework needs to provide price beyond the implemented levels transition at about EUR30bn per year,
financial incentives for a quicker decar- to be competitive versus their fossil which will hardly be met without
bonization while limiting economic fuel-based alternatives, carbon con- private-public partnerships for the
costs for current and future generati- tracts for difference provide an additio- investment needs.
ons. The most effective tool in speeding nal financial benefit that compensates
up the transition is to raise carbon pri- for the difference and makes the Still, the estimated EUR30bn does not
ces and apply them to project attractive for investors. cover another important aspect: As
a broader base of emission sources. climate change is already imminent
Research suggests that to reach clima- Another instrument is a credit-enhance- and damages from floods and droug-
te goals carbon prices in the national ment arrangement between a public hts are accumulating, policymakers will
German emission trading system will player, say, a development bank, and a also have to address adaptation.
need to rise to at least EUR100 in the private investor. The new government Among other measures, this needs to
next five years, thus notably higher must explore and use these public- include a discussion on how to ensure
than the currently aspired EUR55-65 by private partnerships to the greatest the insurability against weather extre-
2026. Although carbon prices are the extent because crowding in private mes. This discussion is not only about
most powerful and effective way to capital is key to the green transition, the introduction of different forms of
advance the green transition there are not least with regard to speed: The mandatory insurances but should also
some cases – for example path depen- secret to opening up markets to new aim at the provision of protection infra-
den-cies resulting from long investment technologies is the quick scaling-up to structure and warning systems.
cycles or the establishment of markets drive costs down. For that, a combinati-
for new technologies – where additio- on of the risk capacity of the public
nal instruments might be required, sector and the knowhow and capital of
namely so-called carbon contracts the private sector is inevitable. AGORA
for differences (CCfD). When infra- Energiewende specifies the additional
7 In principle, carbon prices should reflect the damage caused by greenhouse gas emissions, the so-called social cost of carbon. Scientific estimates of these
damages vary considerable with a median of USD85 (EUR72) in 2020 which is expected to rise to USD145 (EUR123) by 2030 https://www.unepfi.org/
publications/discussion-paper-on-governmental-carbon-pricing/.
8 E.g. https://static.agora-energiewende.de/fileadmin/Projekte/2021/2021_06_DE_100Tage_LP20/A-EW_229_Klimaschutz-Sofortprogramm_WEB.pdf.
15Allianz Research
Save the climate – and the people! The A new harvest – CO2! Agriculture is the emission-intense alternatives. This in-
efficiency of energy use by households often-overlooked piece in the climate cludes the expectations for electricity
has to dramatically increase. policy puzzle, but its role is decisive and price developments. Thus, a credible
But a further tightening of energy manifold: It is supposed to capture regulatory framework is needed that
standards for new buildings can only massive amounts of CO2 and perman- decouples electricity price increases
contribute a little to the climate goals.
ently store it in the ground, to provide from carbon price increases.
What is required is rather a tripling of
large amounts of renewable energy,
the energy renovation of existing The decarbonization of the transport
promote biodiversity and, last but not
buildings. Suggested measures like sector hinges upon the right infrastruc-
mandatory insulation and rooftop least, limit food price increases. This will
ture in place. The new government
photovoltaics installation are cost- require a rethinking of agricultural zon-
should not waste time and should
intensive and will lead to further rent ing with respect to the co-use of land
speed up the roll-out of the necessary
increases. On the other hand, shifting for agriculture, energy production and
infrastructure not only for electric
the costs to landlords reduces the carbon storage. But the essential step
vehicle charging and hydrogen
incentives to invest in the needed addi- would be to create and promote car-
refueling, but also for the complemen-
tional housing space, which will also bon markets that provide sound reve-
tary smart IT solutions, including data
fuel a further rise in rents. Either way, nues to incentivize investments in the
increasing rents are done deal. exchange via 5G networks. As mentio-
co-use activities. Goals for co-use inclu-
Moreover, a reduction in energy ned in the context of the general
de agri-photovoltaics (the combined
consumption needs to be incentivized non-climate-related challenges, the
use of agricultural land for photovoltaic
by raising the price for heating and progress in the energy transition
energy production, e.g. by installing
gasoline. All this can be more than depends on the progress in digitization
challenging for low-income house- solar panels on stilts above meadows)
and the availability of skilled personnel.
holds. Considering the average emissi- as well as agri-forestry (e.g. planting
The roll-out of smart meters and prosu-
ons of a German citizen of around energy wood stripes within fields). In
mer or community electricity models
9 tons of CO2 per year, and a cost pass addition, the agricultural sector is sup-
requires adequate regulatory frame-
-through of EUR50 per ton of CO2, this posed to reduce its emissions from live-
works for data protection, building law
could sum up to EUR1800 per year in a stock and fertilizers, which from a glo-
and zoning regulations; a reduction of
four-person household. It is therefore bal emission perspective will only be-
bureaucracy and the acceleration of
essential to use the revenues from nefit the climate if consumer prefe-
carbon-pricing policies to compensate approval processes.
rences also shift towards eating less
for financial hardships, securing a just meat and more sustainable and pro-
transition. This is the double dividend
bably more expensive food.
of carbon prices, mitigating harmful
greenhouse gas emissions by increa- Spark the electrification! Decarbonizing
sing emission costs and also generating industry means first and fore
revenues that can be used to financially most the electrification of processes,
compensate particularly burdened which has to be leapfrogged. Besides
households. The latter should be the portfolio of support measures,
done in two forms: direct lump-
including subsidies, loans and preferen-
sum transfers like the so-called “Klima-
tial tax write-offs, electricity prices will
prämie” (climate bonus) and a stabi-
play a key role. Investments in electrifi-
lization of electricity prices, which
would also particularly benefit lower cation require electricity prices to
income households. increase much slower than the costs for
1623 September 2021
The emission reduction in hard-to- promotes the integration of electricity structure has to dramatically speed up.
abate sectors such as steel or the che- production and storage capacities This includes tripling the installed pho-
mical industry depends on a sufficient from, say, home storage or electric ve- tovoltaics until 2030 as well as tripling
supply of green hydrogen. This is a hicle batteries and thus technically the tenders for onshore wind develop-
complex task demanding tight coordi- enables the electrification of most of ment. This requires the allocation of
nation between European countries the economy. As already mentioned, to sufficient areas, which will cause land-
and regulations in which carbon keep the necessary investments econo- use conflicts. The potential solutions to
contracts for difference will have a mically sensible, carbon price revenues these conflicts, such as rooftop- photo-
central role. Ramping up the necessary should be used to stabilize electricity voltaics or the above mentioned agri-
infrastructure will also require close prices. To pivot to the 1.5°C path, the photovoltaics, come with additional
cooperation with regions outside of the German coal exit needs to be brought costs. In general, the expansion of rene-
EU as the necessary capacity won’t be forward from 2038 to 2030. As coal wables is exposed to acceptance issu-
available within the EU. This provides profitability and CO2 prices in the EU es, “not in my backyard” mentalities
an opportunity to support economic ETS are directly linked, the best solution and lengthy approval processes. In par-
growth and political stability, for in- would be to reach emission prices in ticular, biodiversity and climate protec-
stance in African countries that have the EU ETS that drive coal power plants tion are often conflicting issues. For a
particularly beneficial conditions for completely out of the EU market and better balance, biodiversity and climate
the expansion of renewable capacities. thus also prevent carbon emission change need to be viewed and asses-
leakage to other EU countries. The se- sed as a joint concept that is not
A happy couple – production and
cond-best option is to strictly coordina- focused on a local assessment but ac-
storage! Electricity is at the core of the
te the coal exit in the EU to prevent counts for the larger national and inter-
energy transition. Electricity production
emission leakage to other, potentially national picture. Decision processes
from renewables is no longer an issue:
more polluting, coal power plants. have to speed up, and the participation
Wind and solar energy are cheaper
of local citizens and communities in the
today than their dirty equivalents from Another challenge is to meet the ex-
financial benefits can increase accep-
coal, gas or oil. Availability and utilizati- pected energy demand: the develop-
tance.
on are the next challenges. The solution ment of photovoltaics and wind as well
is the so-called sector coupling, which as of transmission and storage infra-
17Allianz Research
Demographic transition:
Make aging a boon, not a bane!
An ostrich policy will not prevent demo- in retirement age is set to increase by needed to adapt the pension system
graphic change and its consequences 22%, from 18mn to more than 21mn. but with baby boomers starting to reti-
for the German pension system. With That means that even if 100% of the re, the window of opportunity is getting
respect to pensions, most parties’ elec- population in working age contributes smaller. One possible measure would
tion programs are rather generous, to the pay-as-you-go financed pension be a gradual increase of the retirement
promising that the retirement age will system, there are going to be 46 per- age to 70 years from 2035 onwards. It
not increase above 67 years and the sons in retirement age per 100 persons would not only dampen the increase of
benefit ratio will remain at 48%, obvi- in working age. Today this ratio is at the old-age dependency ratio and sta-
ously ignoring the reality of demogra- 32%. In other words, two people in wor- bilize it in the long run on a level of
phic change. Despite the already ag- king age will be needed to finance the around 37%, but it would also add an
reed upon gradual increase of the pen- pension of one retiree. additional 3mn persons to the labor
sion age to 67 years, Germany’s work- force in 2060 (see Figure 11).
ing age population is expected to Like every pay-as-you-go financed pen-
shrink within the next four decades by sion system, the German one is not im-
15%, from 54mn today to 46mn in mune to the effects of demographic
2060. At the same time, the population change. Further reforms are urgently
Figure 11: Development of working-age population and OADR 2010-2060
Sources: German statistical office, Euler Hermes, Allianz Research.
9 Here from the age of 15 to retirement age.
See Bundesamt für Statistik (2019), 14. Koordinierte Bevölkerungsvorausberechnung, Variante 2.
1823 September 2021
The momentarily favored ostrich policy with measures to enable a higher king and aging while the number of
comes at a price. Keeping the retire- labor market participation of women retirees increases. While in Germany a
ment age and the benefit ratio and older workers and employees: for 10% decrease of the population in
constant would imply in the long example, the provision of nursing care working age is expected, this age
run either a federal subsidy to the facilities for children and elderly family group is set to shrink by 31% in Bulga-
pension system of close to 100% of the members who require care, which ria, 27% in Spain and 25% in Poland
contributions, which amounted to is today in most cases provided by and Romania, for example. Therefore,
EUR247.9bn10 in 2019, or a contribution family members. Furthermore, it needs there will be a competition for high-
rate of around 30% to finance the pen- training offers for a smooth transition qualified specialists in the future and a
sion benefits. Both are inconceivable. into the new work environment that will need for an attractive labor market
Higher subsidies from the general be more and more characterized by environment. Against this background,
budget undermine the state’s capabili- digitization and automation, and espe- to avoid overburdening future genera-
ty to manage the green transition, ad- cially labor market reforms that allow tions, there is an urgent need to be ho-
ding insult to injury to the young gene- people to work longer. Otherwise, any nest about the necessity of further pen-
ration. And higher contributions dent increase of the retirement age would sion reforms. These will imply a combi-
the productivity of German companies be nothing but a hidden cut of the nation of a higher contribution rate, a
– with the same result for the young benefit ratio. further decrease in the benefit ratio
generation. and an adjustment of the retirement
To hope for immigration to be the
age to the development of the further
However, raising the retirement age is remedy for any demographic challen-
life expectancy at retirement age,
not the silver bullet to markedly reduce ge might prove to be in vain. The main
which is expected to increase by more
the financial burden on future generati- sending countries (Romania, Bulgaria
than three years for 65-year-olds until
ons. In our model, the federal subsidy – and Poland), like most other EU count-
2060.
paid out of taxpayers’ money – would ries and many major economies
have to increase above 80% in around around the globe (such as Japan
2040 or the contribution rate would or South Korea) all face the same
reach 26%. It only works in combination challenge: their labor forces are shrin-
10. See Deutsche Rentenversicherung.
11. See UN Population Division, World Population Prospects 2019 Revision.
19Allianz Research
OUR TEAM
2023 September 2021
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Discover all our publications on our websites: Allianz Research and Euler Hermes Economic Research
21Director of Publications: Ludovic Subran, Chief Economist
Allianz and Euler Hermes
Phone +49 89 3800 7859
Allianz Research Euler Hermes Economic Research
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FORWARD-LOOKING STATEMENTS
The statements contained herein may include prospects, statements of future expectations and other forward -looking
statements that are based on management's current views and assumptions and involve known and unknown risks and
uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such forward
-looking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive situ-
ation, particularly in the Allianz Group's core business and core markets, (ii) performance of financial markets
(particularly market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including
from natural catastrophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) per-
sistency levels, (vi) particularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (viii) curren-
cy exchange rates including the EUR/USD exchange rate, (ix) changes in laws and regulations, including tax regulations,
(x) the impact of acquisitions, including related integration issues, and reorganization measures, and (xi) general compet-
itive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to
occur, or more pronounced, as a result of terrorist activities and their consequences.
NO DUTY TO UPDATE
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any information required to be disclosed by law.
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