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All eyes on Germany

As Germany takes on the rotating presidency of the European Union – for the first time in 13 years – it does so in uncertain times that are overshadowed by the ongoing COVID-19 pandemic, a worsening economic crisis, and deteriorating geopolitical situation.  At home, the country faces the worst economic slump since World War II, and, in the EU, a stress test greater than the global financial crisis a decade ago. Farther afield, the country tries to manage a deteriorating Atlantic alliance, changing relations with China, and a belligerent Russia.

In these uncertain times, not only are expectations high when it comes to the German presidency.  They are high in general, as many looking at the country from abroad marvel at the way the pandemic is handled by its politicians; they admire the public health care system and its crisis preparedness.  They compare Angela Merkel´s matter-of-fact speeches to Trump´s narcissist incoherence, or the success of wide-spread testing to the initial failure of the National Health Service in Britain.

What is more, in early June, the governing coalition approved a 130 billion euro stimulus package:  some 77 billion for immediate relief to smaller and medium scale enterprises, financial support of municipalities, families with children, and temporary reductions in value added tax etc.; and future-looking investments of 50 billion in hydrogen energy, the 5G-net, e-mobility, artificial intelligence, quantum technology and digitalization.  Last but not least, this national package is complemented by the French-German led EU program to aid member states affected by the pandemic and the economic crisis.

At home, Germany seems to have abandoned its long-standing debt avoidance policy, as Finance Minister Olaf Scholz opened the government´s coffers and took on significant debt.  In the EU, German fear of a transfer union seemed less and less a red line, and the possibility of “eurobonds” at least a potentiality. During a nearly decade-long economic expansion, we managed our public finances well and with prudence, Scholz proudly proclaimed, and therefore can now afford to go into deficit-spending.

Seen from outside, Germany appears as a country with a strong and resilient economy, sound governance, and a stable political system. The country seems on the right course and mostly doing the right things.  But is it?  What is the view from inside Germany?  What do some recent books about its economy, society and political system tell?  Are German observers as positive as some outsiders seem to be?  Clearly, they are not, as these four books make clear.  It seems that much is not right, and much is at stake.

“Prosperity for All!” was the winning slogan of Ludwig Erhard in the 1950s, when West Germany experienced what came to be known as the economic miracle.  The policies of a social market economy Erhard propagated laid the foundation for Germany´s quick ascendance to a leading economic power, and the country has been on a course of success ever since – or so the story goes.  In her book “Germany – an economic fairytale,” Ulrike Herrmann, journalist with the left-green leaning Tageszeitung, tries to debunk this founding myth of German economic and social success: rather than Erhard policies, which stressed fiscal and monetary stability, independence of the central bank (Bundesbank) and export-orientation, it was a fortunate combination of strong American support, favorable demand conditions during reconstruction, and corporatism that made the economic success possible.  The “social” in the Germany´s market economy owes nothing to Erhard, who disliked unions and public welfare, but to Chancellor Konrad Adenauer.  His emphasis on social policy, embedded in Catholicism, sought greater social security for the masses, and ultimately, social stability in mind, which was needed to make sure that the country integrated into the Western alliance rather than drift towards Soviet influence.

The tragedy, so Herrmann, is that since the 1950s, the mythology of the economic miracle has trumped reality.  But why is it important to demask Erhard now, who left politics in 1966?  The reason is, she argues, that German economic policy, based on these myths, continues to make the same mistakes over and over again: the responses to the various economic crises of from the 1960s and into the 2000s all had similar reflexes:  a Bundesbank stressing monetary stability to fight inflation; a government stressing fiscal prudence in social programs yet engaged in stimulus spending for the economy; and an economy focused on exports while neglecting domestic demand potentials.

For Hermann, these are ultimately crypto-nationalist policies that neglect a basic truth:  the German economy is successful because it is embedded in the EU and the eurozone and can expand.  With its export fixation it can also export some of its problems to member states and find at least temporary relief to economic and social pressures, as was the case with labor market reforms of 2005, the so-called Hartz-IV measures. European integration made it possible, yet the still dominant myths continue to frustrate greater common progress.  What Germany needs, Hermann concludes, is a demystification of its economic past and presence – a message that would certainly find a welcome reception in most EU member states, particularly Greece and Italy.

Social inequality, Hartz-IV and its implications are a core theme of Christoph Butterwegge´s book “The Torn Republic”.  Professor emeritus at the University of Cologne, he left the Social Democratic Party the year of the Hartz-IV reforms, and was nominated by Die Linke (The Left party) as a candidate for Federal President in 2017, coming in second to former Vice Chancellor Frank-Walter Steinmeier. For Butterwegge, Hartz-IV has changed the country as profoundly as hardly any other domestic decision by parliament and government since the 1950s. While its supporters essentially attribute the subsequent economic upturn and reduced unemployment to Hartz IV, he argues that, as a result, Germany has become less social and more unequal.  In essence, by establishing a vast low-wage sector to reduce labor costs and enhance exports, it led to the Americanization of the German economy and society.

Hartz-IV put enormous pressure not only on the long-term unemployed, but also on wages, resulting in real wage losses, especially among lower-incomes. With stricter regulations and sanctions, Hartz-IV made unemployment less attractive, and in effect stigmatized it, thereby incentivizing job seekers to take lower-paying jobs and accept worse working conditions. For those receiving public benefits, Hartz IV became a disciplining tool. Ultimately, falling wages increased the competitiveness of German industry, especially in export markets, and created a new precariat. As a result, Germany has become increasingly polarized along economic and social lines – not to the extent of the US or Britain – but significantly more so than in the past.

Butterwegge offers a detailed analysis and interpretation of a Germany no longer principally divided by ideology, as it was from 1949 to 1989 with West and East Germany, but torn apart internally by sharper and growing inequality.  His recommendations are hardly surprising but nonetheless ambitious that, in his view, could go some way towards a more equitable and therefore less precarious society: a minimum wage designed as a living wage; a tax-funded universal citizen insurance system covering health, accidents, unemployment, long-term care and old age; and effective income and wealth redistribution through a modernized tax system.

Inequality is also the theme of Daniel Goffart´s book, and as its title “The end of the middle class– Farewell to a German success story” suggests, it is less about the new precariat of low wage earners than the decline and ultimate demise of the middle of society.  Goffart, a journalist with the magazine Focus and previously Handelsblatt, uses the familiar image of an onion to describe the class structure of postwar Germany: small tips representing the upper and the low class on top and bottom, and a thick layer of the middle class in between.  The onion has changed to a pear, with a small top end and broadening lower bulge.  He tells the familiar story of a self-serving elite, and a middle class getting an increasingly worse deal: for example, while senior executives of major corporations earn ten times more than they did thirty years ago, average incomes have moved little; and while it was normal for the average family to life well on one salary in the past, you now need two salaries to afford a two-bedroom apartment in major cities.

Why did this happen?  Two forces chiefly, demography and digitalization, converged and propelled by misguided policies, created today´s challenges:  first, beginning in the 1980s, the baby boomers entered the labor market in massive numbers at a time when deindustrialization gained momentum and many skilled blue-collar jobs were eliminated. The new service jobs came with lower wages and greater insecurity, with the overall result that large numbers of middle-class people were demoted financially and underwent a process of deskilling.  At the same time, tax policies favored the rich and did little to help the middle class:  for example, today, people reach the top tax bracket when they earn 1.3 times the average income, whereas it was 20 times that in the 1950s.  What was once a progressive tax system has effectively become regressive for the middle class.

Since the 1990s, changes in the labor market began to overlap with the second force, digitalization, which becomes the main focus of the book. Goffart quotes at length from a speech Siemens CEO Joe Kaeser gave 2016 at the Digital Life Conference in Munich, where he stated outright that digitalization will destroy the middle class and that societies will be faced with growing polarization, including Germany.  A relatively small group will benefit – software engineers, digital entrepreneurs – but society at large will lose because many skills are no longer needed. Unless we do something about the growing conflict potential, subsequent social and political tensions could tear Germany and certainly also other countries apart.

This is strong tobacco, so to speak, and to his credit, Goffart devotes some 40 pages to what should be done.  It is an ambitious list of “ten commandments” that amount to nothing less than a new social contract. At the center are two measures:  first, better and more comprehensive regulation of global tech giants and multinational corporations generally. For years, they have taken advantage of all possible loopholes and accounting tricks to avoid taxes and their responsibilities to the public.  They have to become part of the solution by paying their fair share to the societies in which they operate.  Second, a search for new public revenue sources is needed to enable governments to become more proactive in responding to changes. At present, governments rely too heavily on indirect taxation and individual income taxes, yet are rather generous when it comes to major corporations and taxing wealth.  Goffart sees these main reforms clearly as a European project, coordinated between Brussels and member states. Germany alone can neither make the difference in reigning in corporate power and freeriding, nor reform its tax system alone.

In contrast to the previous three books, the historian Edgar Wolfram, professor of history at Heidelberg, paints a much more positive portrait of Germany since 1990 in “Der Aufsteiger,” a title difficult to translate as it combines positive connotations of ascendance and ambition.   It follows his previous book “The successful democracy,” and Wolfram stands like no other contemporary historian for the positive narrative of post-war Germany.  In some ways, Der Aufsteiger gleams with optimism, while nonetheless retaining a measured modicum of critical reflection.  Sounding a familiar note, he feels that Germany, while more important internationally since unification, is still too hesitant and uncertain about its role.

Less focused on the economy, he is more concerned about politics, and especially internal cohesion. He arrives at cautiously phrased positive assessment of how East and West Germans relate to each other, and like Herrmann views unification as a success.  Nonetheless, Wolfram is concerned about the rise of rightwing parties like the Alternative for Germany. While the country managed the immediate influx of some 1 million migrants in 2015 rather well, their longer-term prospects are uncertain.

Importantly, he views the red-green coalition under Chancellor Schroeder (which pushed the Hartz-IV reforms, thereby alienated the Social Democratic base, and accelerated the party´s decline, as Butterwegge would testify) as the most proactive and reform-minded of German governments since the Willy Brandt era of the 1970s. And here is also the paradox of the last 15 years of German history that emerges when reading these books:  while the world changed in many ways, and while Europe is different from what it was just a few years ago, Germany seems much the same.  No major reforms have been instituted under Angela Merkel´s long chancellorship unless something seemingly unexpected happened, for example the radical change in energy policy in response to the Fukushima nuclear accident.  As a result, such reforms seem isolated and lack a broader vision. It appears that the country reacts more to problems when they arise – like the current pandemic – than taking proactive measures to forge the future.

So, what does it all mean?  All four books, well written and competently executed, are controversial and found much criticism, which is to be expected.  They fit well into a lively culture of political debate, too self-centered perhaps, but of high quality and without the viciousness that characterizes political discourse in some other liberal democracies.  Will they make a difference?  Perhaps. From Herrmann we learn that Germany has to grow out of its post-war myths and confront reality; from Butterwegge, the main lesson to take the growing inequality more seriously; Goffart makes clear that Germany is fighting a losing battle in maintaining the status quo; and Wolfrum stresses the importance of reform over inaction.

Germany today is more vulnerable than many outside and inside the country assume.  Unless reforms are seriously put on the agenda – which has not happened for years – any dividend the country may have earned will likely evaporate soon.  This is bad news for Germany, Europe and the world.  It would be a great opportunity foregone by inaction and inertia. Put differently, without major domestic reforms Germany may not be able to assume the leadership many wish for, and without a more assertive, proactive and reform-minded role in Europe, its moment may soon pass. The current crisis offers an opportunity for change, and it is therefore positive to note that Merkel and Scholz made things possible that seemed impossible just a few months ago. They did it mostly in the fields of economic and fiscal policy, but why not think bigger and take up the challenges of social cohesion, digitalization or security policy as part of more comprehensive reforms at the European level as well?

An alternate version of this article was initially published by Project Syndicate

Helmut Anheier is the Academic co-Director of the Dahrendorf Forum and Professor of Sociology and Past President at the Hertie School.

The opinions expressed in this blog contribution are entirely those of the author and do not represent the positions of the Dahrendorf Forum or its hosts Hertie School and London School of Economics or its funder Stiftung Mercator.