The View from Berlin - Germany’s economic climate and the European Green Deal

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Dr. Constanze Adolf

The last five years have been shaped by an exponential advancement in AI, overshadowed by the impacts of COVID-19 and the Ukraine war. However, it’s also been five years of the EU Green Deal. Key results include the Renewable Energy Directive, the EU Gas Package, and the reform of the EU Emissions Trading System. In the upcoming term, the focus will shift towards implementing this legislation to ensure the EU achieves climate neutrality by 2050, underpinned by at least EUR 1 trillion in sustainable investments until 2030.‍

Digitalisation, decarbonisation and a more resilient economy

‍While the results of those five years have yet to be evaluated, it is clear that a single country is hardly able to tackle those challenges on its own. This is particularly true for Germany. Germany’s prosperity as the largest economic power among the EU27 is heavily reliant on trade within the EU single market. During the energy crisis, with electricity and gas prices skyrocketing, Germany uniquely benefited from relaxed state aid rules, cushioning price shocks for businesses with around €73 billion in state aid.

Internally, efforts to drive the green transition amid Germany’s struggling economy appear largely doomed to fail, as each new initiative sparks disputes within the so-called “traffic light coalition” of Social Democrats, Greens, and Liberals, ultimately diluting their impact. Last year’s contentious debate over climate-friendly heating in Germany has highlighted how the transition to a greenhouse gas-neutral EU by 2050 increasingly affects people’s daily lives, emphasising the need for sustainable transformations across the economy and society. Consequently, the challenging domestic political situation of the current federal government has weakened Germany’s position in the Council of Ministers. For instance, it has caused surprise that Germany amended already agreed-upon legislative packages multiple times retrospectively.
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Next steps for Germany after the election

Even in times of inflation and global conflicts, and despite the populist sentiment ahead of the European elections, the EU shows its commitment to moving towards decarbonisation. This signal to Berlin, to the economy, and to the international community is not loud, but it is clear. However, following the election, the EU’s Green Deal policies are under scrutiny. Can conflicting economic and ecological goals be resolved in a socially acceptable way? And what consequences will this transformation have for Germany? Germany will vote in 2025 with a stark rise of populist parties. Furthermore, the Franco-German connection, once called the “motor of the EU” seems to be in hibernation which leads to an significant communication vacuum.

The crisis has become a game-changer, prompting a serious commitment to the Green Deal. The post-election period will call for the democratic parties to join forces to enable long-term transformation processes and investment decisions by the business community. What is also needed is an economic policy model that provides a framework for entrepreneurship in a climate-neutral Germany and in the EU as a whole. One pathway might be the call for a “European Industrial Deal” by President Von der Leyen, Mario Draghi, Enrico Letta and the current Belgian Presidency. A summit on this topic is due to take place in Antwerp today, and we expect a Declaration may be published which seeks to set the agenda for the next five-year EU institutional cycle. One from which Germany will benefit a lot.