July 3, 2022

Finance & Economy

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Germany must become an ecological social market economy

The writer is spokesperson for the German Greens in the European Parliament and vice-minister in the federal German department of economy and climate protection

In Germany, the Green party has entered into a coalition at the federal level with the Social Democrats and liberals for the first time. Realising the aims of the Paris climate agreement and driving an ecological transformation of the German economy are the new government’s top priorities.

Its plans have the potential to set a global standard in tackling the climate crisis. Germany, the fourth-largest economy in the world, wants 80 per cent of its power supply to be provided by renewables by 2030. That will involve, among other things, building wind farms on 2 per cent of the country’s land and installing photovoltaic systems on the roof of nearly every suitable building.

The timely implementation of energy infrastructure projects on this scale will require cutting unnecessary bureaucracy and speeding up the notoriously cumbersome German planning and authorisation systems. In the medium term, Germany will switch completely to renewable energies, becoming a global climate leader in the process.

The Green party now has responsibility for the “super ministry” for economy and climate, which will oversee the final stage of Germany’s transition to 100 per cent renewables — while other countries are discussing nuclear power, which is neither ecologically competitive nor economically sustainable.

Decarbonisation goes far beyond the energy system, though. Since the second world war, German economic policy has been guided by the principles of the “social market economy”. These include fostering open markets and competition, on the one hand, and controlling their negative consequences, such as environmental damage or inequality, on the other.

This regulatory framework must now be extended from the economic and social realms to the ecological. Climate neutrality and protecting biodiversity should be central goals of economic governance alongside prosperity and social security. In short, Germany needs to become a social-ecological market economy.

A transformed German economy will only be an inspiration at home and abroad if it renews its competitiveness based on ecological and social innovation. And this is exactly the point where the Greens’ economic policies differ from those of most centre-right parties. For them, climate-friendly innovations are best achieved by deregulation and carbon pricing. But in our view, modern economic policy has to be based on an intelligent and pragmatic mix of instruments in order to create a framework for enterprises to change their business models in a way consistent with the limits of planet and people.

This democratically defined framework for a highly competitive market economy does include pricing of carbon emissions, but also technical standards, financial incentives and the empowering of consumers to “green” their demand. It should allow for a plurality of technological solutions in order to reconcile economy and planet.

Key here is the idea of a humble state mindful of its own limitations and inefficiencies. Getting serious with a social and ecological market economy will boost private investment in the economy — not in order to curb headlong growth, but in order to expand sustainable forms of production and consumption and shrink unsustainable ones. This huge programme for investment, jobs and innovation will best be achieved if macroeconomic policies and the regulation of financial markets create a relatively stable investment climate.

However, the role of the state should go beyond the creation of a regulatory framework. The state needs to help private enterprises to innovate by boosting infrastructure and supporting innovation as part of an active industrial policy. However, industrial policy is not to be confused with picking potential global champions, which would threaten the many economic and social advantages that flow from an economy based on a mixture of large corporations, successful SMEs, and social businesses as well as innovative start-ups. Green economic policy takes the ideas of German “ordoliberalism” and develops them by the pragmatic use of heterodox ideas.

Completing this transformation will be a tremendous challenge — not only for lawmakers and industry, but for society as a whole. The process of modernisation always creates winners and losers. Social compensation and the democratic inclusion of citizens in the transformation will be key, in order to avoid stoking protest movements such as the gilets jaunes in France. But if Germany succeeds, it can be an example for Europe and beyond of how to reconcile ecology and economy.

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