Germany after Merkel will face three key challenges, Goldman says

  • Germany has put in place some of the most ambitious climate targets in Europe, seeking to cut its greenhouse gas emissions by 65% from 1990 levels by the end of this decade.
  • The IMF expects German gross domestic product to reach 3.6% this year and 4.2% in 2022.
  • The latest polls project a win for Germany's ruling conservative bloc, the CDU/CSU, with 27% of the vote.

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LONDON — Germany is about to embark upon a new political chapter that will have three main challenges, analysts at Goldman Sachs said on Friday.

German Chancellor Angela Merkel will leave office this Fall following 16 years in power. Though Goldman believes she will leave Europe's largest economy well-placed to recover from the coronavirus pandemic, the U.S. investment bank said climate change, trade frictions and an ageing population will be the biggest obstacles in the coming years.

"We see Germany exposed to a number of medium-term challenges, related to the missed structural opportunities during the Merkel years," analysts at Goldman said, adding that "the next government faces a balancing act between achieving the country's ambitious climate goals and reaping the economic benefits from the green transition."

Germany has put in place some of the most ambitious climate targets in Europe, seeking to cut its greenhouse gas emissions by 65% from 1990 levels by the end of this decade. The 27 EU nations together vowed to reduce emissions by 55% over the same period.

It comes at a time when policymakers are under intensifying pressure to deliver on promises made as part of the Paris Agreement ahead of this year's COP26, due to be held in Glasgow, Scotland in early November. Yet, even as politicians publicly acknowledge the necessity of transitioning to a low-carbon society, hopes of limiting global warming — and meeting a crucial global target — are quickly deteriorating.

Germany's climate plan will demand effective action in helping the most vulnerable sectors and workers to make sure they are not marginalized and that they support the move to a carbon-neutral society. In France, for instance, when the government tried to raise fuel taxes in late 2018, the move trigged a massive backlash that led to the so-called "yellow vest" movement.

Trade

In addition, "Germany's export-oriented economy looks vulnerable to ongoing de-globalisation trends," Goldman said.

Germany has become Europe's economic powerhouse thanks to its exports. In 2019, exports reached an all-time-high of 1.33 trillion euros ($1.57 trillion). This number dropped to 1.21 trillion euros in 2020 amid the Covid-19 pandemic, according to data from its national statistics office.

There are concerns that recent issues over supply-chains, calls for protectionism, the U.K.'s departure from the EU and an overall stagnating level of global trade will all hamper German exports going forward. 

"Ongoing supply shortages of intermediate inputs could last longer than expected, dampening the recovery in exports and investment, particularly for the automobile sector," the International Monetary Fund said in July, specifically referring to Germany's economic recovery.

The Fund expects German gross domestic product to reach 3.6% this year and 4.2% in 2022.

Demographics

"Germany's potential growth rate is in the middle of the G-7 pack but will come under particular pressure through demographic change," Goldman said.

Analysts said the country "will be affected more strongly by population ageing than most advanced economies, with the dependency ratio rising sharply in coming decades."

This will bring fiscal challenges as an older population will likely mean more costs with health and social security services.

The latest polls project a win for Germany's ruling conservative bloc, the CDU/CSU, with 27% of the vote. The Green Party is placing second with 19% of support, followed by the Social Democratic Party with 17%, according to Politico's Poll of Polls.

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