Germany’s Model for European Capitalism Is Exhausted

Through Angela Merkel’s reign, neoliberal European integration provided the scaffolding for Germany’s export-led growth. But war on the continent and a series of crises have tested this model’s limits, producing splits within Olaf Scholz’s government.

Germany's chancellor Olaf Scholz talks to the press as he arrives for the first day of a summit at the European Council Building in Brussels on July 17, 2023. (Emmanuel Dunand / AFP via Getty Images)

When liberal big hitters like the Economist, Der Spiegel, Politico, or the Financial Times scramble to bury your political legacy by bewailing your “missed opportunities,” you might be forgiven for taking it a bit personally. That’s especially the case if your name is Angela Merkel and you still cling to that old issue of Time hailing you as “Chancellor of the Free World.”

Merkel’s sixteen-year tenure at the helm of Germany showcased a European brand of impassible neoliberal resilience. Her long reign perfected the art of papering over a seemingly endless doom loop spanning the global financial meltdown, the European debt crisis, Syriza’s referendum, the 2015 refugee crisis, Brexit, Donald Trump, and COVID-19.

As if on cue, political drama erupted as soon as she left the stage in late 2021: Vladimir Putin invaded Ukraine, Germany’s export-led capitalism hit a wall, and its political system now seems ungovernable. More broadly, the European political consensus that once stood behind the continent’s neoliberal integration is today in a shambles.

A year and a half into the post-Merkel era, Germany’s government headed by Olaf Scholz is so deeply divided that ministers contradict each other over practically every major policy initiative. It is called the “traffic light” coalition, in reference to the respective colors of the “red” SPD (Social Democrats), “yellow” hawkish neoliberal FDP (Free Democrats), and the Greens, with each party supporting different strategies to manage Merkel’s legacy. Be it phasing out fossil fuels from combustion engines or from home heating systems, reviving or burying austerity in Europe, or, predictably, how to handle the conflict in Ukraine, the government seems to agree about nothing.

The Free Democrats are at least consistent: their dogged attachment to fiscal austerity and Ordoliberal competition policy makes them a natural enemy of public subsidies used to prop up the German and European decarbonization agendas. Such dogmas are even pushing the free-marketeer party toward a de facto alliance with fossil fuel lobbies and populist revolts against decarbonization.

If the Greens’ compromises with the energy lobby have alienated part of their base, their disregard for the effects of the transition on working-class Germans have also managed to alienate wider layers of the population concerned that they’ll be footing the bill for decarbonization.

As for the Social Democrats, under Scholz’s vacillating leadership the party has remained invested in the status quo inherited from Merkel, schizophrenically oscillating between the need for disruptive green industrial policy to keep German export sectors competitive, and concessions to the orthodoxy of fiscal rigor. Each of these three parties’ support today trails behind the far-right Alternative für Deutschland, which is polling at around 20 percent nationally.

This is neither a simply party-political, nor strictly German affair: lurking beneath the banal spectacle of democratic bickering in Berlin is an interconnected existential crisis for Germany’s export-led capitalism and for the European Union, which has long functioned as a vessel for German macroeconomic preferences.

Just as Germany has traded Merkelian order for Scholzian anarchy, the European Union is also facing the collapse of the ideas and the political coalitions that sustained the neoliberal phase of European integration over the past forty years. The policy dogmas that embodied European neoliberalism — competition policy reduced to “consumer welfare,” fiscal austerity, inflation targeting, deregulation, and, more fundamentally, a religious belief in the efficiency of markets in allocating resources — have all been challenged over the past decade. While ideological frameworks are disintegrating, the political coalition between organized capital, national governments, and EU institutions that long sustained a depoliticized mode of European integration by stealth is also withering away.

The geo-economic ramifications of the Russian invasion of Ukraine, the crisis of Germany’s export-led model of capitalism, and that of EU integration itself jointly form an interconnected European arc for what neocon Robert Kagan and the Bungacast team have called the “End of the End of History”: a spectacular resurgence of (geo)political and ideological conflicts after decades of neoliberal consensus anchored to US hegemony.

Whether these conflicts mark the swan song of neoliberalism or the escalating violence necessary to sustain it is a divisive question: on both sides of the spectrum, the neoliberal-death-versus-continuity debate is reductive when it assumes an internally coherent system, which — unlike Schrödinger’s cat — is either dead or alive. The reality is that under capitalism, neoliberal or otherwise, various subsystems (institutional, political, ideological) can and do follow different trajectories of change, spurring a variety of tensions and contradictions.

French regulation theory (FRT) proposed an entire taxonomy of capitalist crises emerging from the frictions between a given system of capitalist accumulation and the mode of regulation sustaining it. Resisting the urge of adding to the blooming genre of opinion pieces recycling the same, noncommittal Antonio Gramsci quote about the “new world struggling to be born,” a more productive exercise to assess the current state of European neoliberalism is to identify these emerging crises: disentangling change and continuity at the level of concrete institutions, political configurations, and ideologies that long stabilized Germany’s export-led model at the heart of the European Union (EU).

Fragile Model

Germany’s export-led strategy of accumulation has long relied on three core elements: First, a coalition of dominant parties, conservative small and medium enterprises (SMEs), but also large, export-oriented industrial conglomerates, as well as co-opted segments of organized labor in manufacturing sectors. Second, Germany’s domestic institutions regulating money, labor, and firms were uploaded to the EU level — imposing the German model of wage repression and Ordoliberal commitments to fiscal rigor and low inflation to the rest of the EU. Third, regional and global trade systems gave German multinationals access to cheap inputs — Eastern European labor, cheap Russian energy — as well as stable export markets in China and the United States. Today, all these pillars are fractured.

For its internal political stabilization, German capitalism relied on a long-standing ideological and political compromise between an Ordoliberal wing linked to SMEs (the so-called Mittelstand) — and more opportunistic, large exporting industrial conglomerates, which benefited from globalization and the integration of central Europe into the EU.

This compromise has broken down: the Ordoliberal wing remains committed to austerity even though the export-oriented industrial wing is lobbying for lifting fiscal restrictions so that subsidies could help German industry compete with US and Chinese rivals. Over the past four years, the Ministry of Economic Affairs used industrial policy initiatives as tools to recalibrate Germany’s social bloc by strategically marginalizing the Mittelstand.

What might appear as a political conflict between liberal finance minister Christian Lindner (FDP) and his coalition partners is instead a fracture between different factions of German capital linked to different segments of the state and the electorate. Recent studies have shown that Germany’s export successes paradoxically led to a divorce between German financial and industrial capital: whereas German industrial firms used to rely on domestic banks, they now finance themselves on international capital markets, while German banks also prefer to invest abroad.

Second, whereas the EU long provided an external scaffolding to German export-growth prowess, the neoliberal consensus over the form, content, and purpose of European integration is exhausted today. The EU might be a union of twenty-seven different national models of capitalism, yet Germany is not only a first among equals by virtue of its size: it is the capitalist state whose domestic institutions largely shaped the regulatory framework of the entire union.

Between the 1986 Single European Act and the 2007 global financial crisis, a neoliberal consensus prevailed over the form, content, and purpose of EU integration, reconciling the interests of organized capital, core EU member states, and the Commission. In the mid-1980s, this alliance was forged around the shared idea that privatization, deregulation, and transnational mergers were the best hopes for revitalizing tepid growth and competitiveness across Europe.

Besides organized capital, two actors benefited considerably: The first was Germany, whose domestic policy preferences for managing money, wages, and firms were uploaded to the EU level via fiscal austerity, anti-inflationary monetary policy, wage suppression, and Ordoliberal competition policy. This effectively Europeanized Germany’s export-led model of capitalism. The second beneficiary was the Commission: the mandate to drive EU integration by identifying and removing restrictions to competition substantially increased its relative autonomy.

Today by contrast, the consensus over fiscal austerity has been replaced with a battleground between popular revolts against the EU’s austerian brakes on public spending and an orthodoxy striving to reimpose fiscal rigor and close the chapter of “emergency Keynesianism.” EU competition policy, once the beating heart of Europe’s neoliberal consensus, was spectacularly disavowed by the French and German governments that now call it a straitjacket on European competitiveness. More fundamentally, the “stealthy” federalism that expanded the Commission’s powers is now vehemently opposed by core member states: even though Berlin, Paris, and Brussels all talk of European sovereignty and “strategic autonomy,” there is an open tug-of-war to define who is the legitimate sovereign in Europe and whose autonomy should, in fine, be enhanced — that of the Commission, the European Council of heads of state and government, or member states themselves.

A dominant view long assumed that crises would mechanically nudge the EU toward a federalist path by forcing sovereign nation-states to pool competences and resources as they strived to overcome collective action problems. Yet the idea of a European Union “failing forward” toward a federal future has been severely tested by Brexit, COVID-19, and the current war on the continent. If anything, the permanent crisis management of the past fifteen years marginalized the Commission and consolidated the European Council — and thus national leaders — as the effective government of the EU (with Merkel as de facto president). The consensus of the 1980s foresaw European integration via technocratic regulatory convergence entrusted to the Commission is largely spent. Yet today the call to deepen the EU’s competences to manage the current challenges is married to strong opposition in European capitals to handing the Commission extra powers.

Lastly, Germany’s access to cheap inputs and stable export markets is materially constrained. German industrial supply chains are transnational networks, with a notable central European cluster: throughout the 1990s and 2000s, Germany adapted to the competitive pressure of East Asian industry by outsourcing lower value-added production segments to post-socialist central European countries to compress wage and energy costs. For German multinationals, central Europe provided not only cheap labor but also a low-cost energy infrastructure reliant on Russian fossil fuels.

Today, the impacts of the 2022 energy price shock are self-evident: in the wake of Russia’s invasion of Ukraine, energy prices rose dramatically more in Europe than in the United States or China, hitting the price competitiveness of energy-intensive manufacturing export sectors first.

A second issue concerns labor shortages, acute in Germany and in central Europe. According to recent estimates, Germany would need a stable net migration balance of four hundred thousand people per year (i.e., more people arriving than leaving) to stem labor shortages at home. Depopulation, aging demographics, and low pay are today the typical profile of central-eastern European countries, which function as the hinterland of German industry.

Remarkably, a consequence of depopulation in central Europe has been a secular rise in wages, which undermines one key comparative advantage of the region. In theory, this should mean improved leverage for organized labor — in practice however, central Europe has instead become a laboratory for desperate measures to lock German capital in by doubling down on the exploitation of labor and natural resources: radicalized anti-labor legislation, a race to the bottom in corporate tax rates, and the proliferation of bilateral treaties to import docile and underpaid labor from outside the EU.

Changed Course

Rising voices now caution that Germany’s export-led system of accumulation might not be sustainable in its existing form. After all, the institutions, political alliances, ideologies, and infrastructures that have supported both at home and in Europe more broadly are all facing deep crises. There are two main scenarios ahead: either new institutional, political, and ideological configurations at the German and EU level ultimately find a way to keep export-led growth afloat, or this system of accumulation breaks down.

In the first scenario, a neoliberal restoration won’t be enough to surmount the existing challenges: from Budapest to Berlin or Rome, the current normalization of new legal frameworks to import masses of short-term, de-unionized temporary workers from the Global South with low wages, minimal labor rights, and explicit exclusion from citizenship rights is just one example of the dystopian innovations that will be necessary to revitalize the Euro-German export-led model.

The second scenario is that this system of accumulation collapses: access to inputs such as labor, foreign technology, energy, and natural resources might be dramatically constrained for European firms caught in the global US-China rivalry. European access to Chinese and American export markets might also become severely restricted — or, conversely, if these markets are too enticing and there is a trade-off, EU firms might prefer to sacrifice their foothold in Europe. Politically, the Right in Europe is already engaged in creating the conditions for the first scenario: it is up to the Left to fight back and propose an alternative.