The upcoming German federal election in the wake of the collapse of the government coalition holds more significance than ever in a rapidly fragmenting world. With geopolitical tensions rising from Russia’s invasion of Ukraine, threats of trade wars, and internal political crises in major European allies, Germany’s next government faces a multitude of challenges. These challenges span from demographic shifts to energy insecurity and weakening growth forecasts, emphasizing the crucial role the election outcome will play not only within Germany but also in shaping broader tax and trade policies on a European and transatlantic scale.
Germany’s Electoral Tax Debate Remains Domestic
- Campaign rhetoric in Germany’s election reflects a core focus on immigration policies, with tax policy closely following suit. Parties present various tax reform proposals, aiming to stimulate economic growth and enhance living standards for voters. These proposals range from income redistribution to incentivizing private sector investments and adjusting existing fiscal regulations. Amidst the myriad of domestic tax discussions, parties also touch upon European and international tax policy initiatives in their manifestos, such as extending the EU’s Emissions Trading System and considering a global minimum tax on billionaires.
- Despite these broader ambitions, conversations about the potential impacts of European and international tax policies on German citizens remain sparse. Lack of detailed discussions on handling international disputes related to tax and trade policies within Europe poses a risk of exposing German voters to unintended economic consequences from retaliatory measures.
Fit for Fragmentation?
- At the EU level, policymakers face critical decisions regarding existing tax and trade policies that may disrupt global economic dynamics. The implementation of undertaxed profits rules and carbon border adjustments has raised concerns over inviting retaliatory actions from foreign entities rather than fostering policy convergence. The effectiveness of the ‘Brussels effect’ is now uncertain in light of escalating international trade tensions.
- President Trump’s executive orders targeting international tax practices emphasize the looming threat of a tax and trade conflict with the EU. The EU’s stance on enforcing international tax regulations and potential responses to US retaliation remains ambiguous, signifying the need for calibrated responses to maintain economic stability.
- Given the uncertainty surrounding international tax agreements, the next German government faces a crucial decision on its stance towards Pillar Two, reconciling global tax policies with domestic competitiveness goals. Germany’s leadership in fostering EU cohesion on tax harmonization will play a pivotal role in shaping the region’s economic future.
A Focus on Competitiveness
- The next German government’s position on Pillar Two holds significant implications for the EU’s domestic competitiveness framework. As the EU aims to enhance economic competitiveness vis-à-vis global players, Germany’s stance on tax policies will influence the overall decluttering of redundant tax regulations within the region. Aligning Pillar Two with the EU’s competitiveness agenda can reinforce Germany’s pivotal role in shaping regional tax dynamics.
Germany’s Voice in the EU
- Germany’s influence within EU institutions underscores the importance of its stance on tax and trade policies at the European level. With key contacts in key EU bodies, the next German government can leverage its relationships to steer constructive discussions on crucial tax decisions impacting German citizens and the broader European economy.
In conclusion, the 2024 German federal election will mark a critical juncture in shaping the trajectory of tax and trade policies within Europe and beyond. The next German government must navigate complex geopolitical challenges, foster EU cohesion, and prioritize domestic competitiveness to ensure sustainable economic growth. With crucial decisions on Pillar Two and international trade agreements on the horizon, German leadership will be instrumental in guiding the EU’s tax policy landscape towards a prosperous future.
