Germany’s new “traffic light” coalition government is set to establish a new sovereign wealth fund, utilizing EUR60 billion (US$68 billion) of unused borrowing for green infrastructure and economic transformation.
Finance Minister Christian Lindner of the liberal Free Democrats Party announced the move, which is bound to please his Green coalition partners in the coalition led by the Social Democrats (SPD). The financing comes from the surplus debt borrowed to help tackle the pandemic and will instead be used to invest in green transformation, digitalization, education, and research over the next decade.
In addition to the repurposing of debt, the government plans to use up to EUR18 billion in tax revenue generated by eco taxes and the CO2 emission trading scheme for the Climate and Transformation Fund (KTF) in 2022. The fund will help fund green measures such as charging points for electric vehicles and improving home insulation.
The KTF is set to become a crucial part of the coalition’s plans to derive at least 80% of the country's energy from renewable sources and raising the number of electric vehicles on the road from 500,000 to 15 million by 2030.
The government is also planning to engage in “super write-offs” in the areas of digitalisation and sustainability, restructuring debt on more favourable conditions and reduce tax for private investors.
Global SWF previously suggested Germany could establish a sovereign wealth fund using the forecast current account surplus over 2021-25, which could total US$1.6 trillion. The new fund would be about the same size as Kazakhstan’s Samruk Kazyna.
Germany already possesses a sovereign wealth fund, the Nuclear Waste Management Fund (KENFO) which is a US$22 billion fund created in 2017 to manage the funding of the interim and final storage of radioactive waste. KENFO ranks 43rd in Global SWF’s ranking of sovereign wealth funds.
Europe has 20 SWFs with combined AUM of US$1.7 trillion, of which US$1.3 trillion is held by Norway’s Norges Bank and the rest in far smaller funds. The new German fund would become the biggest SWF in the EU, a title currently held by France’s Bpifrance with AUM of US$51 billion.
Yet, the creation of a new German SWF is not without challenges. The plans are met with scepticism from the opposition Christian Democrat Union (CDU), which is legally challenging the plans in the constitutional court, claiming the policy violates budgetary law. Some legal experts have accused the new government of misappropriating the funds.
With control of the finance ministry, the FDP is also eager to re-establish the EUR100 billion debt ceiling and stop any new tax rises, factors it insisted on when joining the coalition with the SPD and Greens. Yet, this fiscal policy could be challenged by the advent of the Omicron variant of Covid-19, which is fuelling a rapid rise of infections in Germany and the rest of Europe and threatens another economic slowdown. In this scenario, some of the billions destined for the new SWF could be diverted to support fiscal stimulus measures.
