How do you say, “dead woman walking” in German? Today, the answer to that question is “Angela Merkel” after the German leader announced that she would be seeking neither re-election as chancellor in 2021, nor re-election as head of her Christian Democratic Union (CDU) party later this year in December. This after yet another October electoral setback (the second one in less than a month), which has severely diminished the chancellor’s political authority.
Why so much discontent among the German electorate when the economy looks so good on the face of it? Unemployment dropped to 4.9 percent (its lowest October level since German reunification), seasonally adjusted employment reached a record 45 million in September, and the country’s trade performance continues to be among the most dominant in the global economy, as evidenced by the current account surplus, now a shade under 8 percent of GDP. This figure will leave Germany with the world’s largest surplus for the third consecutive year. Angela Merkel herself remains the country’s most respected politician.
But there’s another side to this story. However highly regarded, Chancellor Merkel has repeatedly led governments, coalition or otherwise, which championed the neoliberal dismantling of the country’s “social market economy,” especially in services. Her government also pushed and prodded the rest of the EU in a comparable direction. In Germany specifically, the end result has been the growth of a two-tiered economy, which has heightened economic insecurity, created declining living standards for much of the population, and exacerbated inequality. In other words, too little “social,” too much “market.”
Like the rest of the world when experiencing this kind of policy toxicity, Germany’s voters decided to send a message. Although the chancellor’s party has continued to edge marginally to victory, the two mainstream German political groupings — Merkel’s Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU) on the center-right, and Social Democratic Party (SPD) on the center-left — have both found themselves hemorrhaging political support, on the right to the Alternative for Germany (AfD), and on the left to the Greens. This is a trend that has remained very much in evidence since the 2017 national elections.
There’s an interesting parallel here with the U.S. circa 2016, which also was experiencing a seemingly robust recovery post the 2008 financial crisis. As we now know, however, all was not well underneath the surface. Seething voter discontent gave us Donald Trump. Market-based “reforms” do not always equate to general well-being. Judging from the right-wing populist trends around the world, from Washington to Brasilia, the worry is what follows after Merkel. Is a German Trump (or worse) in the offing?
To be sure, there is an element of “incumbency fatigue” reflected in the recent German state election results. In the state of Hesse, for example, the CDU has run the regional government for 19 years, the last five in coalition with the Greens. It will barely cling onto power after the recent results, which saw CDU’s share of the vote shrink by 11 percentage points, while in Bavaria, the CSU, which has ruled Bavaria for all but three years over the past seven decades, lost its majority earlier this month.
These October elections follow on from last year’s national election, where Merkel’s CDU/CSU coalition held onto power, but also experienced the largest swing against it (-8%). Its former “Grand Coalition” partner, the SPD, finished a distant second, with just over 20 percent of the vote: “a historic low: almost 6% down on the last election.” More recent polls today show the SPD trailing the Greens in national support, and ceding additional votes to the far-left Die Linke.
Clearly, the so-called “Grand Coalition” between Germany’s two largest political groupings (the German political equivalent of a GOP/Democratic Party coalition) did nothing for the political fortunes of either. Both parties have been discredited by the embrace of excessive fiscal policy restriction, and trade mercantilism, which has precluded the German people from enjoying the fruits of their own labor, as it continues to be shipped abroad. As Professor John Weeks notes:
“Germany provides the textbook example of export-led recovery in the era of austerity—stagnant real remuneration for the working class as a whole, a two-tier (‘dual’) labour market that institutionalizes poverty-level wages, and persistently massive trade surpluses. The trade surpluses that seemed a rather curious German obsession in the 1950s and 1960s become in the age of austerity one of the major barriers to global economic prosperity.”
Why? Because Merkel’s ongoing advocacy of “sound government finances” (which effectively has suppressed domestic demand), along with her government’s drive to maintain global export dominance, effectively shut down a similar policy option for Germany’s fellow EU member states.
Here’s the paradox: But for these countries “living beyond their means,” these southern European “profligates” wouldn’t have the capacity to buy German imports, which in turn sustains the latter’s trade surpluses (thereby sustaining the growth that allows Berlin to record balanced budgets). It’s an economic death loop for them.
Getting Angela Merkel to recognize that point has proved well-nigh impossible. When queried about German-mandated austerity for the periphery nations of the EU, she blithely dismissed the concerns, asserting: “Austerity makes it sound evil; I call it balancing the budget.”
But here’s the thing. “Balancing the budget,” or engaging in wage suppression, is not what constituted the core of Germany’s long-term economic success. Historically, Germany’s “Wirtschaftswunder” was sustained as part of a conscious drive to move up the technology curve toward high-end, high-wage jobs, along with the preservation of a domestic manufacturing ecosystem (rather than offshoring it). The undermining of this approach has not only produced less than optimal GDP growth, but also greater inequality.
So why do it? Because it conveniently gives Germany’s bosses a huge lever in its negotiations with the now weakened trade unions: Suppress your wage demands, they can argue, or we relocate to Portugal, Spain or Eastern Europe, where the workers will happily do the jobs at far lower wage rates.
I have previously discussed the backlash that this toxic policy mix has engendered in countries such as Italy. But now it is becoming increasingly evident to Germany’s own voters that the whole strategy is a con, because it largely benefits German industrialists at the expense of the country’s increasingly marginalized workers. As if to pour salt into the wounds, Germany’s historically generous social welfare programs are being cut even as the government has expanded access to the safety net by allowing up to one million Syrian refugees “who had already registered elsewhere in the European Union to enter Germany and register there, temporarily suspending an EU law that requires asylum seekers to be returned to the first country they entered.”
However humane the impulses governing Merkel’s refugee policy were, it was red meat for the German right. Furthermore, the generosity of this humane refugee policy against a backdrop of social welfare cuts also sat uneasily with the German left. After all, it was the SPD-led government of Gerhard Schroeder that introduced the notorious Hartz reforms. These labor market initiatives cut unemployment benefits and the longstanding job protections that used to characterize Germany’s economy, all done with the ostensible goal of making German exports “more competitive.”
The Hartz apologists contend that these reforms permanently reduced German unemployment by almost 3 percent, making them a model worthy of emulation. That’s certainly what Germany has been telling the rest of the European Union.
But that’s only part of the story and masks the real underlying damage created. For one thing, the Dutch economist Servaas Storm haspointed out that the “reforms” conveniently bypassed many of Germany’s key industries, especially in manufacturing:
“German manufacturing strength depends on a regulated, coordinated core in which workers in those industries get high wages, have strong employment protection and good social security... It would have been utterly impossible for German firms and workers to build up such manufacturing strength under the neoliberal policies and rules that Berlin wants to see imposed on Southern Europe. The Hartz reforms bypassed these ‘core industries’ (for good reasons) and effectively created a secondary low-wage, mini-job, flexible labor market in services [emphasis added].”
Storm concludes that “Germany’s manufacturing strength is based on high wages and ‘rigid’ labor relations, not low wages and ‘flexible’ employment conditions!” There is one set of rules for manufacturing, and another for the rest of the economy, which got the Hartz reforms. And yet the Merkel government refused to recognize this fact, and advocates precisely the opposite for everybody else in the EU: namely, the creation of a “secondary low-wage, mini-job, flexible labor market,” the difference being that it wants to impose these conditions across a swath of Southern European industries, not just in services, but in manufacturing as well. Berlin’s “remedy” also conveniently ignored the massive growth of private sector debt leverage in the run-up to 2008 which, as Storm and C.W.M. Naastepad argued, were “aided and abetted by the liberalization of (integrating) European financial markets,” and which Germany’s banks exploited to the fullest degree possible (and were bailed out when it all came unstuck).
What has been the impact of creating this secondary mini-job low-wage service economy? In an interesting parallel of what has been occurring in the American labor market, the Institut Arbeit und Qualifikation (Institute for Work, Skills and Training) reported that the German economy has experienced growing inequality as a result of the big increase in the numbers of low-wage workers as a percentage of Germany’s total workforce (so-called “mini jobs”). Other studies have confirmed this, exacerbated by the virtual neglect of those workers adversely affected by the financial crisis of 2008. Furthermore, Germany’s gender pay gap is also one of the widest in Europe: “Women earn 21.6 percent less than men in Germany—which is a wider margin than the European average of 16.5 percent, according to 2015 government data,” according to the Local Germany, because it is often women who are forced to take on the mini-jobs.
In essence, there has been a massive redistribution of income in favor of capital over labor, exacerbated by rampant gender inequality, all under the guise of “labor market reforms.” The irony, as Servaas Storm concludes, is that it has made Germany’s economic performance worse, not better: “Germany’s economy grew at a rate of 1.2% per year during 1999-2015, and just 0.8% during 2008-2015 — which is hardly a sign of economic health.” Not a surprising development: When you redirect resources away from those who have the highest propensities to consume, it inevitably weakens overall economic performance. Add excessive fiscal restriction, which suppresses domestic demand, and you get a recipe for voter discontent.
Increasingly, Germany’s electorate identifies these policies with the mainstream parties, which helps to explain the rise of the hard-right AfD and the Greens; although in regard to the latter, for all of its environmental bona fides, the Green Party is now firmly centrist in their overall economic orientation (“neolibs on bikes,” according to Jutta Ditfurth, a co-founder of the party). Ominously, that would suggest that Germany’s growing populism will ultimately find its greatest manifestation on the right, if other countries’ experiences are anything to go by. This is especially true in Germany, where Merkel’s liberal immigration policies have engendered more support for the AfD.
Historically, that has not worked out well for Berlin (or the rest of the world). But it’s really not so different from what has emerged here in the U.S., the key difference being that the U.S. political system is a duopoly. That means that these political tensions manifest themselves internally within the two main parties, rather than via the creation of new and more extreme political parties. In other words, you get a Republican Trump, rather than an AfD. But the trends are similar and come in response to comparable political-economic phenomena: the suppression of government policy as an instrument of broader public purpose on the grounds that that market mechanisms are better instruments for achieving the public good. Merkel’s governments have actively perpetuated this ideology. But denuded of a strong government role, the opposite has proven true for Germany and most other Western liberal democracies. We have learned that markets themselves are not neutral, but disproportionately weighted toward the interests of capital against labor. Outside observers, who have decried the rise of extreme nationalism/protectionism, and upheld Angela Merkel as the anti-Trump embodiment of a rules-based multilateral liberal order, might therefore do well to consider the implications of her imminent political demise. Maybe she wasn’t all that she was cracked up to be. We need to do better if we’re to avoid more Trumps.
Marshall Auerback is a market analyst and commentator.