Germany is falling out of love with economic orthodoxy

Growing numbers of policymakers and voters back increased investment at home

Simon Tilford

Work on the construction site of the Stuttgart 21 railway project continues at the main station in Stuttgart, southwestern Germany, on August 13, 2019. - The controversial construction project Stuttgart 21 will replace the current terminus station with an underground through station. (Photo by THOMAS KIENZLE / AFP) (Photo credit should read THOMAS KIENZLE/AFP via Getty Images)
Workers build the Stuttgart 21 railway project. Germany’s leading business lobby and trade union federation recently called for a €450bn public investment package © Thomas Kienzle/AFP/Getty

Many instinctively see Germany as a fairer, less market-driven economy than, say, the US or UK.

And they are partly right: the German state redistributes more than the British one, and far more than the US one. But Germany has also been the driving force behind the dominant economic orthodoxy in Europe over the past 20 years: balanced budgets, deep-seated scepticism about the role of the state in the economy and a strong focus on export competitiveness.

Is this now changing? And what could it mean for Germany and Europe as a whole?

Outsiders have long expressed frustration at the apparently strong consensus in Germany over economic policymaking. For the best part of 20 years, there has been little to separate the Christian Democrats and Social Democrats. For successive US governments, Germany has been seen as a significant cause of global imbalances through its unsustainably high export surplus. For many Europeans, Germany’s obsession with fiscal probity and trade competitiveness has hindered attempts to confront the challenges facing the eurozone.

The signs are now multiplying that change could be afoot, not least because the country’s economic prospects have worsened sharply. The global slowdown is hitting demand for German exports, while years of fiscal constraint have lowered economic potential; the country’s infrastructure and skills base urgently need upgrading.

Last week, Germany’s leading business lobby, the BDI, together with the trade union federation, issued a joint call for a €450bn public investment package. The hitherto robust orthodox consensus among the country’s Council of Economic Experts — an academic body that advises German policymakers — is crumbling.

And there is even a new readiness to acknowledge the risks of the country’s export dependence.

But the real reason that change could be in the offing is that Germans themselves appear to have had enough.

A large new poll of Germans’ attitudes to government and the economy commissioned by Forum for a New Economy threw up some striking results, suggesting that a large majority could support a much less “German” economic policy agenda. The survey revealed overwhelming support for more public spending, including a surprising degree of support for this to be financed through debt.

Four-fifths of those surveyed believe that business has too much influence over government policy; a similar proportion think privatisation has gone too far. Little more than a third believe that Germany’s social market economy is producing socially just outcomes, and 80 per cent want the state to provide greater protection to those affected by globalisation or technological change.

What this suggests is that Germany is far from immune to the problems we see in the US and UK, where large numbers of people have lost trust in those countries’ economic systems. In Germany’s case, this has led to a surge of support for the populist rightwing Alternative for Germany in struggling regions, contributing to the worsening crisis of the two main political parties.

At 15 per cent in the polls, the SPD appears to have little to lose, and there does indeed seem to be an increasing willingness within the party to question the orthodox consensus. The CDU has doggedly clung to its mantra of whatever is best for business is best for the economy as a whole, but now even influential figures close to the party are starting to entertain doubts.

But perhaps the determining factor will be what happens to the economy. Germany has formidable strengths but now faces mounting challenges.

The factors that underpinned its heavily export-dependent recovery from the financial crisis — strong growth in China, booming global demand for cars and investment goods German companies specialise in — has gone into reverse, helping to explain why industrial production is down 5 per cent in a year.

Output in the crucial automotive sector declined by 12 per cent in the first half of this year. All this is contributing to a growing sense that the country needs policies focused on boosting domestic consumption and investment.

Could this all be good news for Europe? Weak global trade and persistent trade tensions will emphasise the importance of a healthy European economy to Germany. This could persuade the country to end its opposition to reforms — such as more risk-sharing and a major common budget — needed to improve the eurozone’s economic performance.

Trying to discern a shift away from Germany’s economic orthodoxy can sometimes feel like waiting for Godot. But the country’s economic policy has undergone profound shifts before, such as the embrace almost 40 years ago of market liberalism and small-state ideology.

We could be on the cusp of another paradigm shift.

The writer is the co-founder of Forum for a New Economy. His co-author, Thomas Fricke, is the forum’s director

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