Global Economy

Germany's Scholz Takes Power After Merkel's 16-Year Rule


BERLIN—Germany’s parliament elected a new chancellor on Wednesday, ending

Angela Merkel’s

16-year rule. The country’s new center-left leader inherits longstanding challenges from his predecessor and faces a cluster of short-term crises that could complicate his plans to modernize the German state and its economy.

Olaf Scholz,

63, and his Green and free-market coalition partners have agreed on a four-year program to overhaul Germany’s economy, fight climate change, digitize public services and reverse its demographic decline.

For now, however, they will have to manage the country’s worst Covid-19 wave to date, rising inflation, rocketing energy prices, falling consumer confidence, and a manufacturing sector that faces a toxic combination of supply bottlenecks, falling orders and skilled labor shortages.

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On the global stage, Germany faces international criticism of its close energy partnership with Russia—the controversial Nord Stream 2 pipeline is expected to come online this month, just as the U.S. has accused the Kremlin of preparing to invade Ukraine. Mr. Scholz will also have to navigate the mounting hostility between the U.S., Germany’s security guarantor, and China, the country’s key trade partner.

And he will have to do all this while keeping together an unprecedented coalition between his Social Democrats, the environmentalist Greens and the center-right Free Democrats, three parties that often have opposing policies on issues ranging from taxation to immigration.

Analysts said Mr. Scholz will have to avoid the fate of past left-right coalitions, which have often spent more time and political capital trying to keep themselves from falling apart than pursuing their policy agendas.

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Pandemic management will likely consume most of the government’s energy in coming months. To curb rising deaths and hospitalizations, Mr. Scholz supports a general vaccine mandate, a controversial policy that has triggered protests in Germany and will face multiple challenges in the courts when it comes into force, likely early next year.

Already, small but at times violent protests have been burgeoning in the country’s southeast, which has some of the highest incidences of Covid-19 infections.

Inflation, and in particular high energy prices, have weighed on consumer confidence and could haunt Mr. Scholz’s government for months to come.

Outgoing German Chancellor Angela Merkel at the Bundestag on Wednesday.



Photo:

FABRIZIO BENSCH/REUTERS

These are partly a legacy of Ms. Merkel’s 2011 decision to speed up the phasing out of nuclear energy. The final shutdown of all nuclear reactors will take place next year, while coal plants are set to be closed by 2030—leaving Europe’s largest economy reliant primarily on renewables and imported gas from Russia.

“Today, Germany suffers from the highest electricity prices in the West while its CO2 output remains Europe’s highest,” said Josef Joffe, professor of international affairs at Johns Hopkins University in Washington, D.C.

Mr. Scholz’s coalition plans to use gas until it sufficiently develops renewables to power its economy. But there is already a rift in the government over how to deal with Germany’s dependence on Russian supplies: Mr. Scholz’s SPD has traditionally been Russia-friendly while the Greens have pushed to scrap the Nord Stream 2 pipeline in response to the Kremlin’s increasingly antagonistic posture toward the West.

As Russia is massing troops along the Ukrainian border and President

Vladimir Putin

threatens to shut down gas supplies to Europe, Mr. Scholz, a foreign-policy novice, is facing a daunting balancing act, Prof. Joffe said.

Perhaps the biggest foreign-policy test for Mr. Scholz will come if he is forced to take a clearer position in the dispute between Washington and Beijing, something Ms. Merkel managed to avoid.

The growing rivalry between the two superpowers has put Germany and Europe under pressure and even strained global supply chains, said

Clemens Fuest,

head of the Center for Economic Studies, a think tank that advises the government.

The German government could do little to fix supply chains beyond introducing more flexibility for port and customs authorities, but it had to make sure that its trade with China continues to flow, he said.

“Protecting free trade is in Germany’s interest…we are much closer to America in values and democracy, but we can no longer remain fully aligned with them—we must go our own way,” Prof. Fuest said.

Mr. Scholz, historically a proponent of the trans-Atlantic alliance, is expected to adopt his predecessor’s stance toward the U.S., aligning Germany diplomatically with Washington on most big foreign policy issues while maintaining some areas of disagreement dictated by Germany’s trade interests, including the country’s close economic ties to China and, to a lesser extent, Russia.

Mr. Scholz said Tuesday that strengthening ties with the U.S. and within the North Atlantic Treaty Organization would be one of his government’s priorities. He will hold a videoconference with President Biden immediately after his first foreign visit to Paris and Brussels, the seat of the European Union.

“Germany’s foreign policy has continuity,” Mr. Scholz said.

While he said that Germany and the U.S. were bound together by democratic values, he didn’t answer questions about whether he would scrap Nord Stream 2 or join the boycott of the 2022 Beijing Winter Olympics.

While navigating the short-term crises, Mr. Scholz will start implementing his government’s program of structural overhauls, Prof. Fuest said, including upgrading the country’s patchy digital infrastructure and modernizing public administration, cutting CO2 emissions without harming growth or triggering social upheaval, and managing a demographic decline that economists say will trigger an acute labor shortage within two years.

Advisers to Mr. Scholz said he wants to tackle the workforce shortage that is threatening the welfare and pension system by wooing more European migrants and better training foreigners who are already in Germany.

Past governments have failed in similar endeavors, warned Gabor Steingart, a publisher and political analyst, noting that Mr. Scholz’s left-leaning government was unwilling to trim Germany’s generous welfare state to make it more sustainable.

One of the most substantial challenges that Mr. Scholz has taken on is to decarbonize industry and help auto makers shift to electric vehicles.

For that purpose, the government has merged the ministry of economy with a new ministry for climate, to be headed by the Green leader and Vice Chancellor

Robert Habeck.

“The green transformation must be managed in a way that would not damage the German economy,” Mr. Steingart said. “We are the most industrialized country in Europe and we must find the right balance in solving this historic task.”

After 16 years in office, departing Chancellor Angela Merkel received a ceremonial sendoff in Berlin Thursday. A military tattoo played music of her choice, including a rendition of a 1970s East German pop song. Photo: Michael Kappeler/ZUMA Press.

Write to Bojan Pancevski at bojan.pancevski@wsj.com

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