Click here to read Hans Kundnani’s December 4 update on Germany’s new grand coalition on our blog.
Since the euro crisis began in 2010, Germany has found itself in a position that, like the crisis itself, is unprecedented in the history of the European Union. As the largest creditor in a single-currency area consisting of sovereign states, Germany has had extraordinary power during the crisis—so much so that during the last few years Europeans have been debating whether Germany is now a regional “hegemon” and even whether a “German empire” is emerging. Frustrated with Chancellor Angela Merkel’s slow but unyielding approach to the crisis, Europe has looked to the Social Democrats—Germany’s largest opposition party—for an alternative, in particular the debt mutualization that many economists think is necessary.
When the financial crisis began in 2008, Merkel was leading a grand coalition with the Social Democrats, and it was then–Finance Minister Peer Steinbrück—the Social Democratic candidate in this year’s election—who set the tone for Germany’s initial response. But in the election of 2009, the Social Democrats were eviscerated: they got only 23 percent of the vote—their worst election result since the Second World War. As a result, when the financial crisis turned into the euro crisis after it emerged in 2010 that Greece had hidden the extent of its deficit, the Social Democrats were in opposition. Much to the disappointment of many in Europe, the Social Democrats have since struggled to challenge Merkel’s approach to the crisis.
Merkel has sought to prevent both a break up of the Eurozone and the emergence of a “transfer union”—that is, a European Union in which the “fiscally responsible” endlessly bail out the “fiscally irresponsible”—for which Germans fear they will have to pay. She has imposed tough conditions on debtor countries, which hoped that Germany would stand behind their debt and thereby reduce their interest rates. But although Merkel has become a hated figure in much of Europe, she remains extraordinarily popular in Germany after nearly two full terms in office and seems set to win the election that will take place on September 22 (after this issue has gone to print). In fact, Merkel is so popular that the opposition parties are afraid to challenge her on Europe.
The Social Democrats go into the election essentially torn between Germany and Europe: they want to be “pro-European” but are unable to find a way of doing so that they can sell to German voters. They have been unable to articulate an alternative to the austerity that Merkel has imposed on the rest of Europe. In part, that is because they fear the Christian Democrat line of attack that the Social Democrats want to spend recklessly and let others in Europe get away with murder—and thus create a “transfer union” or “debt union” rather than the “stability union” Merkel promises them. But at a deeper level it is because they share to a large extent Merkel’s basic assumptions about the crisis—in particular, the idea that Germany is a model for others in Europe.
The difficult choice between Germany and Europe runs through the history of the SPD, which celebrated its 150th birthday this year. In its early days, it was an internationalist socialist party whose ideology committed it to both the German worker and the international worker. But this internationalism led to the accusation that the Social Democrats were “vaterlandslose Gesellen “fellows without a fatherland”—in other words, unpatriotic. Bismarck used the accusation to pass the Anti-Socialist Laws that banned the SPD in 1878.
It was in part the SPD’s vulnerability to this accusation of a lack of patriotism that led to the worst moment in the party’s history—and one that still weighs heavily on it—when in the summer of 1914 all but two Social Democratic members of the Reichstag voted in favor of the war credits needed to fight the First World War. Party chairman Hugo Haase declared, “We will not desert our fatherland in its hour of need.” (In fact, many in the party, which by then was dominated by the trade unions, thought the war might bring Germany colonies and export markets from which German workers would benefit.) When the Social Democrat leader Friedrich Ebert became the first president of the Weimar Republic after the war ended, Karl Liebknecht and Rosa Luxemburg, founders of the breakaway Independent Social Democrat Party, accused the SPD of betraying socialism. With the left divided, the Nazis—to whom the SPD lost many of its supporters in the 1920s and ’30s—came to power in 1933. But this time, the Social Democrats chose Europe over Germany. The party still rightly celebrates Otto Wels’s courageous speech against the Enabling Act in the Reichstag in March 1933.
After the Second World War, however, it was the Christian Democrats that became the party of Europe. Chancellor Konrad Adenauer of the CDU sought to integrate the newly created Federal Republic into NATO and the embryonic European Union even though doing so hardened the division of Germany. The SPD’s leader, Kurt Schumacher—who had spent the war in concentration camps including Dachau—was a nationalist who rejected the so-called Westbindung as a betrayal of Germany. But in the 1960s, the SPD moved to the center and reconciled itself to the parameters of Adenauer’s West Germany: the social market economy and the Westbindung. In 1969 Willy Brandt became the Federal Republic’s first Social Democrat chancellor. His Ostpolitik—the Social Democrats’ biggest postwar foreign policy success—aimed to gradually bring about German reunification, but it came to mean a focus on stability rather than transformation. By the 1980s, many Social Democrats thought of themselves as “post-national.” When reunification suddenly became a real possibility in 1989, some, such as the writer Günter Grass, actually opposed it.
The Social Democrats go into the election essentially torn between Germany and Europe: they want to be “pro-European” but are unable to find a way of doing so that they can sell to German voters.
Since reunification, however, the Social Democrats seem to have rediscovered their nationalism, although in a different form. In 1998 they finally came to power again in the first ever “red-green” coalition. Chancellor Gerhard Schröder moved the SPD to the center on economic policy, but in foreign policy he made much of Germany’s regained sovereignty and was much more explicit in articulating and pursuing its national interest than his predecessors. In the 2002 election campaign, Schröder even spoke of a “Deutscher Weg,” or “German way”—a deliberate contrast to the “American way” in both economic and foreign policy.
Like other center-left parties in Europe, the SPD is now struggling to find an alternative to austerity that it can both afford and sell to the public. However, there is another, deeper reason why the Social Democrats are finding it so difficult to challenge Merkel’s approach to the euro crisis: to a large extent, they share her ideas about the causes of and solutions to the crisis. That, in turn, is because economic measures taken by the Schröder government, while helping to create the second “economic miracle” of the last decade, are part of why Merkel has found herself so constrained since the crisis began.
Schröder promised above all to reduce unemployment, which stood at nearly 11 percent when he came to power, rising as globalization put Germany’s previously dominant manufacturers under increasing pressure and competition from emerging economies. In his second term, between 2002 and 2005, he introduced a series of measures that transformed the German economy, such as a package of structural reforms known as Agenda 2010 that included cuts to unemployment and health care benefits and a reduction in state pensions. Moreover, German companies and unions agreed to wage restraint, which reduced unit labor costs relative to other European countries such as France, while the creation of the euro fueled a credit boom in other Eurozone economies from which German exporters benefited massively. (German exporters also benefited from the weakness of the euro relative to the Deutschmark.) German manufacturers managed to maintain their share of the world market in the last decade even as other European countries fell behind. Unemployment began to fall, and Germany went from a trade deficit of 1.7 percent of GDP in 2000 to a surplus of 7.4 percent in 2007.
However, the Schröder reforms also increased the gap between rich and poor and created a new underclass of low-paid and part-time workers. As a result, the German left split again. After quitting as party leader and Schröder’s finance minister after just under five months in the spring of 1999, Oskar Lafontaine formed a new left-wing party, which grew rapidly on the back of its opposition to the reforms. In 2007 it merged with the PDS, the old East German Communist party, to form Die Linke (the Left Party), which won 12 percent of the vote in 2009—much of it from disillusioned SPD voters. Germany now has a five-party system in which it is extremely difficult for the Social Democrats to lead a government.
Although some within the party still want to roll back the Schröder reforms, the SPD claims them as a big success. In fact, the Social Democrats argue Merkel is coasting on the back of the difficult reforms they implemented—she has “added nothing,” Schröder said. But the Schröder reforms also made the German economy more dependent on exports than it already was—in fact, nearly half of Germany’s GDP now comes from exports. Moreover, this was achieved largely through wage restraint rather than productivity growth. Adam Posen, president of the Peterson Institute for International Economics, has recently argued that by restraining wages and failing to invest in education and research and development, Germany is actually moving down the value chain rather than up it.
It was also the Social Democrats who set the tone for Germany’s response to the financial crisis. For Finance Minister Steinbrück, the crisis had discredited “debt-fueled growth.” In December 2008 he attacked the “crass Keynesianism” of the British government under Gordon Brown, who had urged stimulus measures (even though Steinbrück subsequently introduced stimulus measures of his own including a version of the U.S. “cash for clunkers” program and a “short work” scheme that kept German auto workers employed). In 2009 the Social Democrats also supported the introduction of a Schuldenbremse (or debt break), which is now being imposed on the rest of Europe. In short, the Social Democrats are part of what the historian Adam Tooze has called the “anti-debt consensus” in Germany.
This consensus has shaped Germany’s response to the euro crisis. The narrative that emerged immediately after the Greek crisis began in 2010 has stuck: for Germans, the euro crisis is above all a debt crisis caused by fiscal irresponsibility. As it has evolved, they have tended to see other crisis countries such as Ireland and Spain as versions of Greece—what Paul Krugman has called the “Hellenization” of the discourse about the crisis. Above all, there is a feeling in Germany that the crisis was caused by others in Europe. The solution is that they should become more German—emulate the Schröder reforms and reduce debt. Since being in opposition, the Social Democrats have consistently voted with Merkel’s government on bailout measures for crisis countries that have included demands for deep spending cuts.
Although Germany’s economy is doing relatively well compared to others in the Eurozone (unemployment is at its lowest level since reunification), ordinary Germans do not feel they have benefited from the second “economic miracle” and therefore are not only reluctant to bail out other Eurozone countries but also do not spend and thereby keep domestic demand in Germany low. Most economists (outside Germany) believe moderate inflation is needed to solve the crisis, but this would be devastating for German exports and savers. While the German economy needs to become less competitive in relation to the rest of the Eurozone in order to solve the crisis, it must maintain competitiveness in relation to emerging economies in order to continue to export.
If the Christian Democrats seem to be forcing the rest of the Europe to become more German, the Social Democrats seem to want to help them to become more German.
There was an alternative narrative that might have persuaded the German people to support different policies: public acceptance that Germany in general and the Social Democrats in particular were in part to blame for the crisis—not least because under Schröder it was the first Eurozone country to break budget deficit rules. Instead, the Social Democrats have tried to avoid the issue of Europe and campaign on domestic issues such as a national minimum wage.
The Social Democrats have struggled above all with the issue of debt mutualization. In December 2010 Steinbrück and parliamentary leader Frank-Walter Steinmeier (the foreign minister in the grand coalition) wrote an op-ed for the Financial Times in which they called for a bolder approach to the crisis—specifically, for Eurobonds (debt investments backed by the entire Eurozone), albeit only for a limited share of member-state government debt. “We need a signal that Germany wants a more European Germany, rather than a more German Europe,” they wrote. But since then the Social Democrats have backed off the idea. “They know they will definitely lose if they propose further financial commitments by Germany,” said a leading Christian Democrat politician. In their current manifesto, for example, there is only one line about debt mutualization, which suggests the possibility of a “debt redemption fund” rather than Eurobonds. Their current line is that Eurobonds are “an interesting idea for the future” but not an immediate possibility—not dissimilar, in other words, from Merkel’s statement they will not exist in her lifetime. Nevertheless, the Christian Democrats’ election manifesto declares that “‘red-green’ backs debt mutualization and Eurobonds.” Clearly, they see this as a promising line of attack against the Social Democrats.
Steinbrück has occasionally gone on the offensive on Europe. In a speech on foreign policy at the Free University in Berlin in June, he said Merkel’s crisis management was “one-dimensional” because it focused too much on austerity and had raised doubts in Europe about German “solidarity.” Remarkably, he also said that Germany’s huge current-account surplus was a problem and that the country should increase domestic demand as a way to reduce it. He has also suggested that it is “possible” Germany will have to pay more to bail out crisis countries such as Greece. He has urged measures to tackle youth unemployment in the periphery and advocated a “Marshall Plan” to be funded using revenues from a new Europe-wide financial transaction tax.
However, the difference between the Christian Democrats and the Social Democrats on Europe is one of degree rather than kind. The Social Democrats talk of “solidarity” with southern Europe and seek to soften the effect of the austerity imposed by Germany. In that sense, they are more “pro-European” than the Christian Democrats. But their approach is based on the same assumptions—above all, that Germany did its “homework” during the last decade while others were having a party, and that the solution to the crisis is for others in Europe to emulate the measures Germany took under Schröder. If the Christian Democrats seem to be forcing the rest of the Europe to become more German, the Social Democrats seem to want to help them to become more German.
At the time of writing, it seems increasingly difficult to see how the SPD can win the election in September. Polls have consistently projected the SPD to win between 24 and 26 percent of the vote—slightly but not much more than its disastrous 2009 election result. The 13 to 15 percent or so that the Greens are expected to get makes it unlikely there will be enough combined votes to form a “red-green” government. In June, with Steinbrück fighting in public with party leader Sigmar Gabriel, some polls even had the SPD lower than the 23 percent it got in 2009. Some observers speculate that Gabriel has already given up on winning the election and is positioning himself to blame Steinbrück for the inevitable defeat. Nor can the SPD form a coalition with the Left Party, which remains linked to its predecessor, the former East German Communist Party.
It remains possible that Merkel could form another “black-yellow” coalition with the liberal Free Democrats (much depends on whether they win the minimum 5 percent of the vote they need in order to stay in the Bundestag). But the most likely outcome seems to be another grand coalition. In fact, the electoral math may make it the only possible two-party coalition. The SPD are terrified of this possibility, which would put them in the same position that led to their disastrous 2009 election result (in fact, this time they would be an even more junior partner than in 2005, when they won 34 percent of the vote). “Grand coalition” is a “forbidden word” at the campaign headquarters in Berlin, one staffer told me. But much as the Social Democrats fear a grand coalition, there is also a sense that they may have no choice—even if this means choosing Germany over Europe.
Hans Kundnani is the editorial director at the European Council on Foreign Relations. He is the author of Utopia or Auschwitz: Germany’s 1968 Generation and the Holocaust (Hurst/Columbia University Press, 2009).