Members of ‘traffic light’ coalition walk together
The ‘traffic light’ coalition led by Olaf Scholz © Reuters

Good morning and welcome to Europe Express.

The wait is over. Germany has a new government, Olaf Scholz is set to become chancellor, Christian Lindner from the pro-business Free Democrats scoops up the finance ministry, Green leader Robert Habeck will be the minister for economy and climate, with co-leader Annalena Baerbock as foreign minister.

I’ll unpack what the coalition agreement has to say on EU topics, including the banking union, rule of law and why the Greens got in a bit of a pickle over the future of European Commission chief Ursula von der Leyen.

We’ll also explore an ill-timed commission snipe at Italy’s draft budget and what it means for sensitive eurozone discussions on fiscal rules reform.

The largest group in the European parliament, the centre-right European People’s party, meanwhile, selected Maltese MEP Roberta Metsola as its candidate for the leadership of the parliament in January.

On the financial regulation front, the EU yesterday agreed to further postpone a set of rules on trades that fail to settle — which were agreed in late 2013 and were due to kick in beginning of February (More here).

In anti-vaxxer news, we’re exploring how the far right in Austria is fully embracing the conspiracy theories that have led to a spike in poisonings in the US from horse de-wormer Ivermectin.

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More evolution than revolution

With its 178 pages, the new German coalition agreement continues the tradition of lengthy pacts (the previous coalition accord was 175 pages long). On the content, the deal is also continuity rather than radical change.

The most significant policy shifts from the previous coalition government led by Angela Merkel’s Christian Democrats seem to be headline-grabbing measures such as the legalisation of cannabis for recreational use and the lowering of the voting age from 18 to 16. But on Europe, you’d be hard-pressed to detect huge differences. Here’s a look at what matters:

  • Coal and cars: Meeting the climate targets in the Paris climate accord is “the highest priority”, reads the coalition agreement. If the outgoing government was lukewarm on phasing out combustion engines, the new government wants 15m electric cars on German roads by 2030. An exit from coal-powered energy plants and the closure of coal mines should also “ideally” happen by 2030.

  • Carbon leakage: Germany will develop an industrial strategy linked up to the European Green Deal and wants to avoid carbon leakage. Even though the new government supports an EU-wide carbon border adjustment mechanism (CBAM), it says the format for making importers pay could follow so-called Carbon Contracts for Difference, which the German government is likely to introduce for the country’s industrial suppliers.

  • Club climate: Germany wants to use the EU and other international forums to create an “international climate club with a common minimum CO2 price and a common CO2 border adjustment”. Berlin will also introduce minimum quotas for climate-friendly products in its public procurements.

  • Banking union: The three parties pledged to complete the EU’s banking union, including a European reinsurance system for national deposit guarantee schemes “where contributions are strictly differentiated based on risk”. But, in keeping with the traditional German position, “a full communitarisation of the deposit guarantee systems in Europe is not the goal”.

  • No perma-fund: Despite the emphasis on investments for the twin green and digital transformation, the new German government takes a leaf from the old in insisting that the bloc’s €800bn post-pandemic borrowing spree is “limited in time and size”. Several countries including France have started toying with the idea of expanding the recovery fund and making it permanent.

  • Rule of law: Poland and Hungary are not off the hook. The new German government will approve the commission’s recommendations on EU recovery plans only for countries where “preconditions such as an independent judiciary are met”.

  • Frenemies with China: The new government continues a multiple-track approach to Beijing: co-operate wherever possible, insist on a level playing field and develop a German strategy for China that is part and parcel of EU’s own policy towards the Asian giant, as well as in co-ordination with the US and other like-minded partners.

  • Russia, it’s complicated: German-Russian relations are “deep and multi-faceted”. Beyond a desire to co-operate with Moscow on climate, health and hydrogen, the new government does acknowledge “the interests of our European neighbours, especially our partners in central and eastern Europe. We will take into account various threat perceptions and focus on a common and coherent EU policy towards Russia.” Critical references to Nord Stream 2 that the Greens had made in their party manifesto have gone.

  • Green commissioner: Before even announcing the new accord, Green politicians took to Twitter to make public one significant win: their party will nominate the next German EU commissioner. This led to a flurry of speculations that the new government will no longer support Ursula von der Leyen for a second term at the helm of the European Commission. In the end, the agreement states that the Greens will nominate a candidate only if the commission president is no longer German. When asked about it in the news conference, Olaf Scholz said the coalition agreement described “future cases”, in “terms as friendly as possible”.

Chart du jour: Search for fusion

Column chart showing the growth in numbers of private fusion companies from 1992 to 2020

Advances in technology and funding have sparked optimism about mankind soon being able to harness the fusion reaction that powers the sun to generate clean, limitless electricity on Earth. This research field was first developed in the Soviet era but that has delivered little in six decades of research. (More here)

Frugal catnip

Age-old divisions over the eurozone’s budgetary rule book are beginning to heat up as finance ministries start dissecting each others’ 2022 spending plans, writes Mehreen Khan in Brussels.

Next month, EU finance ministers will have to sign off on the European Commission’s assessment of countries’ draft budget plans for next year. It’s a debate that will serve as an appetiser for how northern frugals and the high-debt southern countries line up on the tastier debate about what to do with the Stability and Growth Pact (SGP).

The commission seemingly threw a bone to the so-called Hanseatics yesterday, by warning that a number of high-debt countries are in danger of overshooting their fiscal restraints next year.

According to Brussels: “In several member states including some high-debt ones, the projected supportive fiscal stance is set to be driven by higher nationally financed current spending, or by unfunded tax cuts. In some cases, this is expected to have a sizeable impact on the underlying fiscal position.”

The language is unusually pointed for the commission’s annual end-of-year assessment. It’s likely to be leapt upon by frugal countries which are worried that the expanding debt burdens accumulated during the pandemic pose a serious risk to the eurozone’s wider financial stability.

Even more unusually, Italy was singled out as needing to curb its nationally financed spending and pursue a “prudent” fiscal policy. Like other indebted economies, Prime Minister Mario Draghi is being encouraged to use the billions of loans and grants provided by the EU’s recovery fund for investments and reforms instead.

The size of Italy’s debt burden — more than 155 per cent of gross domestic product — has long been a source of neurosis for the eurozone’s thrifty northern states. Previous Italian governments such as the populist-led coalition of Giuseppe Conte sparked tremors in the bond markets in 2018 by vowing to defy Brussels’ debt and deficit rules.

Draghi’s arrival has helped alleviate immediate fears about Italy’s public finances in hawkish finance ministries such as The Hague and Vienna, partly because of his plans to implement root and branch structural reforms in return for EU recovery cash.

But Brussels’ warnings that even Draghi’s government is at risk of spending money it doesn’t have, threaten to poison a looming debate about how best to rewrite the post-pandemic fiscal rule book before it has even begun.

Antivax central

As Austria prepared to go into yet another national lockdown this week, 40,000 Austrians took to the streets in Vienna on Sunday in protest. When the government collapsed amid scandal in 2019, only 6,000 demonstrated in the capital, writes Sam Jones, FT’s Switzerland and Austria correspondent.

The anger of the crowd — directed primarily at the government’s plan for compulsory vaccination from next February onwards — has not been lost on Austria’s long-established rightwing populists.

Austria’s Freedom party (FPÖ) has now gone all out as the party of opposition to lockdowns, vaccine certificates and vaccines.

Leader Herbert Kickl (who, ironically, is housebound with coronavirus) has compared the current government to both east-German communists and fascists, called for “unrestricted resistance”, and recommended horse de-wormer Ivermectin as post-infection treatment (that same false information has led to rising numbers of poisonings in the US).

For most of 2021, the party’s leadership equivocated on politicising the pandemic. A campaign built around opposition to lockdowns in 2020s important to Viennese municipal elections fell flat.

But two big things have recently shifted.

In September, a new party of vaccine sceptics, MFG, swept up 6 per cent of the vote in Upper Austria, taking a large portion of FPÖ supporters and signalling vaccine-scepticism as an increasingly powerful political touchstone.

A month later, with the ousting of conservative People’s party chancellor Sebastian Kurz, the FPÖ gained a political opening: Kurz had long resisted implementing tougher restrictions nationally, but his successor, Alexander Schallenberg, has not held back.

Many moderate conservative voters are deeply opposed to them, and as a result, are now seen by the FPÖ as turnable. The People’s party’s poll collapse means that everything is to play for. Bold bets may pay off.

It is a high-stakes course for the FPÖ to pursue, given lives are genuinely at stake. But with more than one in five Austrians still having refused even a first dose of the vaccine as of this week, the party is perhaps reasonably calculating that on this highly contentious issue, the odds are good that it can boost support from the 16 per cent vote share it recorded in September 2019, its poorest in a decade.

Other European populist movements will be watching closely.

What to watch today

  1. Top EU officials tune into a video summit with Asia-Pacific leaders

  2. EU ministers are due to sign off on their negotiating position on sweeping digital regulation at a competitiveness council in Brussels

Notable, Quotable

  • WTO reform: Trade ministers gather in Geneva next week to iron out differences on the World Trade Organization’s reforms. Ahead of the meeting, the EU’s top trade official is making the case for overhauls in this FT op-ed.

  • Channel tragedy: More than 30 people have drowned during an attempt to cross the English Channel from France — the worst accident in a surge of clandestine small-boat crossings that have frayed relations between French and British authorities.

  • El gran budget: Spain’s chamber of deputies today is expected to approve the biggest budget in the country’s history, including €27bn in EU recovery funds. The budget deal consolidates Prime Minister Pedro Sánchez’s hold on power.

  • PM for a day: In Sweden, Magdalena Andersson’s government collapsed yesterday just seven hours after she became country’s first female prime minister. The Greens quit the coalition in protest at the parliament’s refusal to back the government’s spending plans and instead adopted a budget drafted by the opposition.

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Today’s Europe Express team:,, Follow us on Twitter: @valentinapop, @MehreenKhn, @samgadjones.

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