A Discernible Style of Power

This is not the usual characterization of the Merkel era, which range from reserved praise to downright hagiography. To the extent that her legacy is acknowledged as a dysfunctional one, it is usually cast in terms of her lacking a consistent ideological vision. Merkel is a “postmodern politician with a premodern, Machiavellian contempt for both causes and people,” as Wolfgang Streeck remarked.

But Merkel’s stance at the G20 summit, which was emblematic of her tenure as a whole, very much implied the opposite. Here was a clearly discernible style of political power attached to a consistent set of economic concerns. These concerns reflected a particular theory of, and therefore response to, the economic crisis. Neither were shared by the representatives of the UK and United States.

In this sense, the summit was reminiscent of another conference held in London back in 1933. In the midst of the Great Depression, the world’s heads of state and central bankers met to discuss ways to stabilize currencies and resolve national debt issues. But the chance to reform global economic governance was foreclosed on by the leaders’ incompatible crisis theories. They lacked, as Barry Eichengreen noted in his account of the interwar gold standard, “a shared diagnosis of the problem” and therefore “could not prescribe a cooperative response.”

In contrast to her counterparts at the G20 summit, Merkel’s framework was discernible by two key features: a preoccupation with reducing public debt and an obsession with economic competitiveness. Both inflected policymaking at every level during the European decade of crisis.

At the helm of Europe’s largest and most solvent economy, Merkel found herself in a position to impose her framework. The standard conception of Europe’s problems as a “sovereign-debt crisis” reflects this position. As does the response: the resistance to debt-financed stimulus when it was most needed; the push for austerity measures when they were most harmful; and the extension of loans under conditions of “structural reforms” that worsened underlying institutional problems.

A crisis theory based on cost-competitiveness leads to policies aimed at wage repression. This involves disempowering unions and dismantling collective bargaining arrangements. Rather than depreciating their currency as they did in the past, countries like debt-laden Italy, the mantra went, should engage in “real depreciation” by adjusting their overly rigid labor markets.

The problem is that “competitiveness” is a nebulous concept. Inasmuch as Italy’s economic fortunes depend on how competitive its tradable sector is, it is not cost-competitiveness but innovation (i.e. non-price competitiveness) that matters. Not only will “internal devaluation” not help here, but there is plenty of evidence to suggest that the reason why firms don’t invest in research and development is at least in part due to a lack of public investment. The inane and self-defeating reform demands made on Italy and other countries in the economic periphery — pejoratively referred to as PIIGS (Portugal, Ireland, Italy, Greece, and Spain) — reflect both legs of Merkel’s economic precepts.

The crisis was, in fact, not a crisis of public debt but largely one of private debt, accumulated primarily in the financial sector, then cast onto the shoulders of the public with the bail out of the banks. The supposedly profligate countries of the economic periphery had not in fact overspent. They suffered either from long-run idiosyncratic institutional issues worsened by the constraints of the euro zone or, as was in the case in Spain, Ireland, and Greece in particular, had experienced large private debt-fueled asset bubbles driven by a glut of idle German money, the inflows of which proved difficult to stem.

When the crisis hit, those flows collapsed and these countries struggled to service their debt, to finance current consumption or to make up for the sudden lack of domestic demand by exporting more. The crisis had its roots not only in the credit crunch, but also in the large trade imbalances that had emerged globally, and that were supercharged in Europe after the adoption of the common currency (undervalued relative to the Deutschmark with the intention of making German goods cheaper abroad) ballooned Germany’s surplus to historically unprecedented levels.

Germany’s trade surplus is often portrayed as Merkel’s main economic achievement. It is sometimes evoked as a matter of national pride: the German term for “current-account surplus” is Leistungsbilanzüberschuss, a compound word that includes the noun Leistung, meaning “performance” or “merit.” Beneath the meritocratic hubris, however, Germany’s obsession with its current account surplus has made the country a more unequal and politically divided place than it has been for many decades. It also concealed a key vulnerability: the most valuable asset in the global economy is net demand, and Germany is highly dependent on those who have it — particularly the United States and China.

Stability for Some

In 2005, before Merkel had taken office, Germany had undergone a series of harsh labor market and welfare reforms aimed at restoring “competitiveness.” The so-called Hartz reforms were aimed at weakening unions and cutting unemployment benefits. While this stabilized the economy in a period of global competitive disinflation, for a majority of Germans it was experienced as what Walter Benjamin referred to in his account of conditions in the Weimar Republic as “stabilized misery.” It was effectively a defenestration of working-class prospects in the name of resuscitating the competitiveness of German export capital.

Moreover, putting a lid on wage growth also greatly increased inequality. The resulting underconsumption by an increasingly deprived German household sector likely exacerbated the size of the trade surplus — meaning capital was flowing into the European periphery, causing problems in Southern Europe in particular. This German brand of “stability” that would become a symbol of the country’s strength under Merkel was simultaneously a major cause of the Euro crisis and the source of Germany’s vulnerability.

A suitable economic framework, that is, one that addressed these imbalances, would include a policy of sustained wage growth and higher public investment domestically, to “absorb” some of these exports. But while there were voices abroad clamoring for these changes, they were never seriously discussed at the appropriate level in Germany. This is partly a reflection of the pronounced intellectual solipsism of German elites, including Merkel’s economic advisors.

The result was that economic governance in Europe shifted in the wrong direction. The restrictive fiscal rules of the European Union were codified into the Stability and Growth Pact, which established formal mechanisms to deal with countries that breached the debt criteria.

Troika Unleashed

The country that ran most afoul of these rules was Greece. Unlike that of Spain, Ireland, or Italy, the Greek crisis was not just a liquidity crisis; the Greek state was truly insolvent and had been concealing the fact for some time. While it is a matter of debate how great a role the fiscal rules and their enforcers played in the pro-cyclical austerity measures implemented throughout Europe between 2010 and 2015 (the fear of a market response is another plausible explanation), there is little doubt that they were harshly imposed on Greece.

The “troika” — composed of the council of eurozone finance ministers (the Eurogroups), the International Monetary Fund (IMF), and the European Central Bank – forced the country into three separate “bailouts.” These were additional loan programs adding to its already unsustainable debt, handed out under conditions of grueling structural reforms and budget cuts. This was policy that guaranteed an increase in the country’s debt burden while undermining its capacity to service it.

Very little of the money leant (only about 5 percent) was actually directed toward stimulating the economy. The rest was repaid to private creditors, German banks prominent among them. Greece was further compelled to privatize many of its remaining state assets. It is worth underscoring that the German airport company Fraport now owns fourteen of the country’s airports.

The human consequences of austerity can only be described as degrading. Unemployment in Greece peaked at just under 30 percent and over a third of the country now lives in poverty. GDP collapsed by 25 percent and is nowhere near returning to its pre-crisis level. As it stands now, Greece is expected to run permanent budget surpluses until 2060.

While Merkel had officially devolved some of her responsibilities to her notoriously hard-line finance minister Wolfgang Schäuble, who led the council of the Eurogroup, her personal involvement with the Syriza government’s subjugation in 2015 was nonetheless intimate. As Yanis Varoufakis relates in his candid memoir of his time as Schäuble’s opposite, Merkel, frustrated by the impasse in the Eurogroup, organized a sit-down with her counterpart, Alexis Tsipras.

In a series of informal meetings, Merkel carefully prised Tsipras away from his initial commitment to refuse another bailout, which would see another set of loans extended to the bankrupt state under conditions that not only immiserated millions of Greeks, but also made those loans even harder to repay. Under pressure from Merkel, however, that is precisely what Tsipras eventually did — even after Greek voters lanced the boil of political frustration and defiantly voted “Oxi” against the new bailout memorandum.

Fateful Neglect

It is perhaps these actions taken during the Greek crisis that constitute the most disreputable chapter of Merkel’s time in office. Just as damaging as her actions, however, was her inaction. The Merkel era was also an era of neglect, with respect to investment most of all. Public net investment — in fixed capital, education, infrastructure, etc. — has stagnated in Germany over the last two decades, more than in any other developed country.

This is despite the fact that, unlike most other countries, Germany experienced very low and even negative borrowing costs throughout the entirety of this period. This was exacerbated by austerity measures, since investment spending is usually that part of public expenditure that is easiest to cut.

By any reasonable measure, the German economy (and the European economy as a whole) was run well below its potential. The main result — entirely avoidable — was that unemployment remained high, particularly in southern Europe and among youths. This in turn helped to usher in the rise of right-wing populists across the continent. This is Merkel’s main political legacy of the last decade, a period in which she presented Germany as moral tutor to the world.

On the face of it, the failure of investment in a time of low growth and economic slack, constituted a staggering waste of material, human, and intellectual resources. But the consequences are potentially more far-reaching. Germany is one of the world’s worst polluters: it did little to rein in the large automobile firms that dominate the manufacturing sector; it “solved” the issue of deadly inner-city pollution by unilaterally raising emission standards; in its commitment to phasing out the country’s nuclear power plants, it increased Germany’s dependency on gas imports; and it failed to clamp down on the extraction of highly pollutive lignite.

But above all, Merkel’s spurious concerns with fiscal sustainability came at the expense of making the necessary investments for decarbonization. Not only is such a program hard to realize within the constraints of the constitutional debt brake put in place in 2009, but Merkel has never articulated an understanding of the scale of investment ambitions. These ambitions are, at least politically, incompatible with her economic-governance framework.

No amount of hagiography can conceal that, by the end of her tenure, Merkel was something of a spent force, the standard bearer of a moribund intellectual consensus. This consensus is slowly exhausting its ability to evade reality: if the global economic response to the COVID-19 crisis showed anything, it was that an aggressive macroeconomic response is required like that enacted in the United States, where the business cycle was effectively eliminated while helping those households most in need.

Whether Germany can change its tack will depend on the new man in the chancellery. Last month, Scholz promised the “biggest industrial modernization of Germany in more than a hundred years.” If he wants to make good on this promise, the first thing he will need to do is embark on a large-scale public investment program. This would mean distancing himself, as much as political constraints permit, from the established coordinates of the Merkel framework. In doing so, he might spark hopes for a meaningful reform of European and global economic governance, giving it a new lease on life.