How the Merkel Era Entrenched Inequality

As the SPD, FDP and Greens continue coalition talks, Germany and Europe are preparing for life after Merkel – but the consequences of her post-crash austerity agenda will endure for many years to come.

After 16 years in power, German Chancellor Angela Merkel decided not to run in the September 2021 election. Credit: Clemens Bilan - Pool / Getty Images

The German election of September 2021 was a political shock. For the first time since World War II, Germany’s conservative party, the CDU, plummeted far below the threshold of 30 percent of votes.

After 16 years in government, Angela Merkel did not run again for the chancellorship. Instead, her faithful follower Armin Laschet headed up the competition for the CDU, losing with a record low of 24.1 percent. This dramatic erosion of Germany’s most powerful political party marks the end of an era—the era of Angela Merkel.

Critics like the German sociologist Wolfgang Streeck might attribute this political shift to the opportunism of ‘Merkelian’ politics, which have hollowed out the ideology of Germany’s conservative party. Merkelian politics, figures like Streeck say, is less about political convictions and more about maintaining power. Whether over nuclear energy, migration, or same-sex marriage, Merkel’s position moves with the tides; difficult and unpopular tasks, meanwhile, are left to ministers, towards whom blame and shame can also be directed.

As a consequence, the CDU has lost its clear political profile and programme. Its remaining strength and popularity depended on the authority of Chancellor Merkel herself, but that authority cannot be inherited—and so Armin Laschet was left with a losing platform.

I do not disagree entirely with this assessment. However, I do believe it to be superficial in its analysis of Merkel’s political position. In my view, it’s necessary to dig deeper and consider the European dimension of her political actions.

To me, it seems that what appears as Merkel’s opportunism is, in fact, the maintenance and European expansion of the German economic model championed by her predecessor Gerhard Schröder. As described by the German left intellectual Ingar Solty, Merkel represents the ‘status quo inherited by the Schröder government.’

The Schröder government, composed of a coalition between the Social Democratic Party (SPD) and the Greens, was a key turning point in contemporary German history. Under a banner which declared Germany the ‘sick man of Europe’ and pushed the need for ‘competitiveness’, Schröder’s administration orchestrated a grand neoliberal programme which reformed the post-war German welfare state and its class composition in the beginnings of the 2000s.

The Agenda 2010, including the infamous Hartz laws, dismantled the pension and unemployment benefits system. The labour market was deregulated, creating the largest low-pay sector in Europe. The crux of this agenda was the disciplining of labour and the dissolution of its bargaining power, and the consequence was the baking-in of anxiety—specifically, the fear of social decline—at the core of German society.

Alongside the launch of the Euro Area (EA), this programme was a key step in the development of Germany’s economic model of export-dependency. At its heart, the programme remains a simple strategy of capitalist redistribution which promotes wage constraint to bolster profit margins. Thus, while unit labour costs started to fall between 2003 and 2008, many companies did not actually translate lower costs into lower prices for customers, instead cashing in higher profits. In that time, the distributional share received by workers—i.e., the wage share—plunged sharply from 66.8 to 61.2 percent.

Keeping wage growth at bay results in a curtailing of domestic demand, especially if the government’s hands are tied through restrictive rules like the German debt brake. If the economy is not supposed to run on the debts of private households and companies, customers need to be found abroad.

Germany opted for the latter strategy, creating an excessive dependency on its traditionally strong export sector. The economic significance of exports rose from below 30 percent of GDP before 2000 to 43 percent in 2008. Given that domestic demand was lagging behind, Germany started to record and celebrate skyrocketing current account surpluses.

After winning the elections in 2005, Merkel found herself in a peculiar situation, entering power in the new neoliberal reality of Europe’s largest economy—a reality marked by an unhealthy economic interdependency in the new EA. Roughly speaking, Northern countries were promoting excessive current account surpluses based on wage constraint and fiscal austerity; Southern countries, in contrast, were swallowing current account deficits, facilitated by credit flows from the North in the context of European financial integration. This unstable ‘unity in diversity’ imploded in the aftermath of the great financial crisis of 2008.

It was here where Merkel’s political convictions came to the fore. Merkel defended Germany’s economic model, whatever the costs for other EU member states. It was suggested during the crisis that Germany should do its part in the adjustment of EA trade imbalances by increasing wages, creating higher unit labour costs, and strengthening internal demand—but at a conference with German industrialists in 2012, Merkel made very clear that there would be no compromises regarding unit labour costs. ‘We are being advised to increase these costs to accelerate harmonisation. In the short term, that may be an option. In the long term, we must not fall for it.’ Thus, instead of coordinating a common European effort to balance trade across the EU in solidarity, Merkel’s government used its weight to place the burden of adjustment entirely on the countries with current account deficits—or, to be more precise, on their working classes.

With Merkel’s reference to the idealised frugality of the ‘Swabian housewife’, the debtor countries were wrongly blamed as the culprits of the EA crisis. Schröderian remedies were enforced for the newfound ‘sick men of Europe’ to restructure their economies, including the dismantling of welfare states and the erosion of workers’ protections and collective strength. Unit labour costs and real wages plummeted dramatically in the ‘programme countries’ to restore profits.

At home, Merkel’s assertion of Germany’s economic model and the narrative of fiscal irresponsibility resonated strongly with Germany’s economic nationalism. Hence, in 2013, Merkel scored the largest electoral victory in her career, with an overwhelming 41.5 percent of votes.

Merkel’s position had never been so strong in Germany and beyond. But history does not stand still: the limits of Schröderian-Merkelian politics have become more and more visible in recent years.

The Hartz reforms have shaken German society to the core, fuelling a sense of social insecurity. This anxiety has been exacerbated by the digital and (ostensibly) ‘green’ transition, and the rise of China as a high-tech rival to the West. All of this provides a fertile floor for the horrific upsurge of far-right resentment. In the end, this might be the said legacy of the Merkel Era: Merkelian politics was and is grossly inappropriate to deal with the challenges of this new world.

The end of the Merkel Era is therefore marked by signs of change. Besides the rise of the far-right, there is a conflict arising among the established Western elites: on one side, the old hawks of the fiscal frugality and wage-constraint; on the other, a new movement pushing for a more flexible fiscal policy to increase public investment and direct a deliberative industrial strategy in order to gain ground in the race for dominance in the new world market based on digital and ‘green’ technologies. This conflict is visible in the EU’s current answer to the Covid crisis (especially in the recovery fund Next Generation EU) and the grand investment plans of the Biden administration in the US.

The same dispute is also manifest in the coalition talks between the SPD, the Greens, and the Free Democratic Party (FDP) for the new government in Germany, which will most likely be led by the SDP’s Olaf Scholz. We should not expect a real political change from this new government: Scholz served as general secretary of the SPD under Schröder, and as finance minister under Merkel. He is ideologically their direct heir; to paraphrase Margaret Thatcher, the new coalition might become Merkel’s greatest success.

Still, for the Left, the conflict over the future role of state intervention presents an opening through which to push for our policy demands, including our struggle for the progressive redistribution of wealth and the empowerment of the working class. In the coming years, of course, it will also be vital to ensure that the rise of China is not met in the West with military aggression. Ironically, it might be here that will we miss Merkel’s devotion to Germany’s economic model the most: she always maintained a less confrontational stance on China, given that it has long been a loyal buyer of Made in Germany.