Angela Merkel is Getting it Right

By Steven Hill, International Politik (Germany), October 4, 2010

The Chancellor’s critics are misjudging today’s challenges and the strength of Merkel’s leadership

Forget Barack Obama. Forget the Hu Jintao/Wen Jiaboa duo, David Cameron, or Vladimir Putin. Germany’s Chancellor Angela Merkel is the world’s most important leader. The latest reports suggests that Germany’s economy has been growing at a blistering annual rate of nearly 9%, making a good recovery from the U.S.-led economic collapse. Despite her carping critics who have accused her of dithering, economic malpractice, and über-nationalism, Merkel stands head and shoulders above the pack.

The world is currently facing two immense challenges that often get lost amidst the daily headlines. The first is how to identify the institutions and practices that are capable of creating a decent quality of life for a burgeoning global population of 6.5 billion people. And the second is how to do this in a way that does not burn up the planet through excessive carbon emissions.

Germany, with its first female chancellor, is leading the response to these challenges. Chancellor Merkel, with her down to earth demeanor, has displayed steady and effective leadership in five critical areas: the economic crisis, social policy, global warming, foreign policy, and perhaps most importantly, in refashioning capitalism in the face of its near collapse.

Following the economic crisis, Chancellor Merkel and French president Nicolas Sarkozy proposed sweeping regulatory changes, including a redesign of the international architecture of financial institutions. Using the subtle, coded language of diplomacy, they warned the new Obama administration not to block their attempts to crack down on hedge funds, derivatives, corrupt rating agencies, outrageous bank bonuses and more. Had he not been pushed – or perhaps shoved – by the Europeans, and indeed Merkel, there is little doubt that U.S. Treasury Secretary Timothy Geithner would have dithered further.

Keeping in mind that Merkel is the leader of the conservatives, her defense of “social Germany“ has been no less eloquent and thoughtful than that of her Social Democrat predecessor, Gerhard Schröder. During the economic crisis, and even before, she reasserted Germany’s desire to ‘“retain essential elements of . . . social protection’“ and to „‘secure the future of the social market economy.“  She has continued to support works councils and worker-elected boards of directors of for Germany’s major corporations, and maintained the “culture of consultation“ that has become a hallmark of Germany’s social capitalism. You would never catch any Democrat, President Obama included, making such bold declarations or proposals in support of the social dimensions of the U.S. economy. At times, Merkel sounds like the FDR that many wanted Obama to be.

It has not been mere Merkel rhetoric to win votes, either. Rather than twiddling her thumbs while the private sector laid off millions of workers, like the Obama administration has done, Merkel’s government has expanded Kurzarbeit, or “short work” whereby workers weekly hours are cut rather than being completely laid off. Most of the workers’ lost wages are being paid from a special fund established during more prosperous times.

The impact has been miraculous. According to OECD figures from July 2010,  the unemployment rate in Germany has declined by a full percent to 6.9 percent, while the unemployment rate in the United States has doubled to 9.6 percent.  The unemployment rate for all OECD countries has increased by 3 percent. As more Germans have money in their pockets, levels of consumer spending that drive the economy have been maintained. The workforces of most businesses have been kept intact, ready to work now that the economic recovery has begun. And it has prevented the home foreclosures and utter devastation that occurs to families and communities when the primary breadwinners are laid off, with increases in domestic violence, alcoholism and mental illness resulting from the stress. Yet when Larry Summers, one of Barack Obama’s closest economic advisers, was asked why the president didn’t pursue short-work to stem the economic bleeding, he dismissed the idea, saying the White House wanted to create new jobs, not preserve old ones – as if there is a conflict between the two (Summers recently resigned from the Obama administration, a move greeted with relief by many Obama supporters).

Leading European conservatives such as Merkel and Sarkozy support the notion that corporations have social obligations. For all intents and purposes, the conservatives of Europe are now social democrats. The European political parties of the center-right, and in many ways even the far-right, are to the left of the Democratic Party in the United States. Germany is not the land of Citizens United, a horrible recent U.S. Supreme Court decision that expanded the jurisprudence that says corporations have the same individual rights as people, further undermining the social dimension of America’s political economy. Indeed, when Volkswagen, the largest car producer in Europe, 20 percent of which is owned by the German state government of Lower Saxony, wanted to abolish Lower Saxony’s ownership rights, Merkel sided with the state government — a position that would be anathema to an American conservative, and perhaps most Democrats.

Merkel’s economic stewardship has steered Germany further away from the American path of Wall Street’s casino capitalism. Merkel was once asked by then British Prime Minister Tony Blair what the secret of her country’s economic success was. She famously replied, “Mr Blair, we still make things.“ In Germany, manufacturing still dominates the economy, which did not succumb to the financialization of the economy that swept the United States and Britain in the 1980s under Reagan and Thatcher. In the United States, this led to a tripling in the size of the financial sector, both as a percentage of the overall economy and corporate profits, as well as leading to the loss of millions of manufacturing jobs. Werner Abelshauser, an economic historian at the University of Bielefeld in Germany, says the European way of running the economy “is fundamentally about a banking system based on patient capital and firms that emphasize high-quality products and long-term relationships between suppliers and customers.“

At this point, the results speak for themselves. The smart policies of Merkel’s government have contributed to Germany’s recent economic success, while the timid policies of the Obama administration have so far led to a lackluster economic recovery.

Leading the way on climate change

In the midst of an economic crisis, it is easy for the world’s leaders to take their eyes off the looming challenge of global climate change. Yet Germany and Europe have quietly stepped into the role of global trailblazer. More of a pragmatist than an ideologue Merkel has maintained and expanded many of the policies of the previous Social Democratic government, ensuring that Germany continues to have the largest solar and wind power industry in the world. When European unity was in doubt on this issue, Chancellor Merkel used her powers of persuasion to corral an agreement from the heads of all 27 European Union nations to cut carbon emissions by 20 percent and make renewable energy sources account for 20 percent of the European Union’s energy supply by 2020.  This was an increase from a 6.5 percent share, already twice that of the United States.

Europe already is halfway toward achieving the goals of its 20-20-20 Plan. Displaying an important principle that will be crucial to any global climate agreement, the richest European nations – led by Germany – agreed to contribute a greater share toward combating climate change. Meanwhile the United States, by far the world’s largest per capita polluter of greenhouse gases, has refused to move forward until China does. This is despite the fact that China has a GDP per capita that is one-twelfth of America’s ($3700 versus $46,000). Considering that the European Union has the largest economy in the world, this climate protection agreement is nothing less than epochal in its impact. With half a million “green jobs“ having already been generated, alongside its continent-wide carbon emissions, electricity use, and “ecological footprint” being half that of the United States for the same standard of living, European governments and companies are demonstrating that action on global climate change can bring tremendous economic, as well as environmental benefits.

Cautiously Multilateral

In terms of foreign policy, Merkel’s Germany mostly has been a voice of calm and reason, preserving the attitude of a good multilateral team player in the transatlantic alliance, while not allowing the White House – whether controlled by Democrats or Republicans – to bully it into pouring more fuel on the flames of the Middle East. Merkel has also deployed a good cop–bad cop routine toward China. This included not attending the opening ceremonies of the Beijing Olympics to demonstrate her displeasure with China’s heavy-handed crackdown in Tibet.

Being a fluent speaker of the Russian language, and as someone who grew up in eastern Germany under the shadow of communism, Merkel has continued her SPD predecessor’s policy of engagement with Russia. While the Bush administration made a mess over Georgia, Merkel recognized the obvious – that Georgia and Ukraine are stuck in Russia’s Caucasus neighborhood. Germany understands that neither Europe nor the United States are dominant enough to dictate to Russia, but that does not mean that Europe is impotent. Germany and Europe are by far Russia’s largest trading partners, the European Union having accounted for just over half of Russia’s foreign trade in 2007, and 80% of its foreign investment. Russia’s entire economy is only the size of France’s, and cannot develop without massive European investment. As political analyst Parag Khanna points out, in the long-term Europe is staging a buyout of Russia, not the other way around. Meanwhile, under Merkel’s leadership, the European Union has extended its reach further east with the launch of its Eastern Partnership plan in May 2009 with the six former Soviet states of Ukraine, Georgia, Moldova, Armenia, Belarus, and Azerbaijan. Merkel has encouraged the former Soviet states to bury their differences and increase cooperation in order to enjoy the benefits of the E.U.’s partnership initiative, aiming to better integrate the regional economies, stabilize the region, and adopt democratic and free market reforms. This region requires a difficult balancing act yet Merkel has managed to steer a credible course.

One crucial foreign policy issue where Merkel so far has faltered is that of Turkey. Merkel’s caution is defensible though: if admitted into the European Union, Turkey would be its second most populous nation, with significant demographic, religious, and economic differences to bridge. Turkey is quite a large bite to swallow, analogous to the United States allowing Mexico to have statehood into the United States. But the E.U. accession process takes years and there is still time to get this one right. The benefits of having Turkey inside the European Union as a bridge to moderate Islam are too great to pass up.

Merkel’s Critics and Their Discontents

Despite her many accomplishments and global status, harsh criticisms of Merkel have come from two directions in recent months. During the Greek debt crisis she was accused of being too slow to recognize the danger to the Eurozone, focusing too much on Germany’s narrow national self-interest. Financial Times columnist Wolfgang Münchau, sounding increasingly shrill in his condemnations, called her a weak leader and a scheming politician who lacked a convincing strategy. He went so far as to say that “this crisis is global and requires leaders with a global and European mindset to solve them. In other words, it requires politicians other than Ms. Merkel.“ Another pundit commented to me that as an East German, she lacks the necessary pan-European outlook and solidarity that emanated out of West Germany under her conservative party’s previous chancellor, Helmut Kohl.

Yet considering Merkel’s catalytic role at both European and global levels regarding financial re-regulation, economic recovery, climate change, and the Middle East, these criticisms seem exceedingly overblown. Münchau and the chattering class have the luxury of taking pot shots from the sidelines, while a chancellor has to govern. Given European history and cultural differences, it was never realistic to expect that a chancellor of Germany was going to agree to an immediate bailout of Greece or any other Eurozone member. Europe created a monetary union, not a fiscal union, and it was not that long ago either, with euros circulating in Europe only since 2002. The same forces, divisions, and reluctance that initially prevented the formation of a fiscal union are still palpable across the continent. Considering the centuries of warfare that have wracked Europe right up through the 1990s and the latest Balkan conflict, five months to put together the pieces of a trillion dollar bailout effort seems like lightning speed.

As a point of comparison, the United States already has a fiscal, as well as a monetary union, and the federal government has the ability to play financial backstop for any state that gets in financial trouble. But when California was going through its own Greek debt crisis in the summer of 2009 and asked the Obama administration for a bailout, the White House said ‘Nein.’  This led to California issuing IOUs to prevent bankruptcy and becoming a national laughingstock. Yet in the Eurozone, where there has been no history of member-states acting as a financial backstop for each other, they have banded together to take steps allowing for a bailout of financially troubled members if necessary. It’s unprecedented, an historic achievement, yet the pundits are dismayed that it took five months to reverse centuries of history.

A second line of criticism against Merkel has come from economists like Nobel Prize winner Paul Krugman (and Münchau once again), who are stimulus hawks that have been squawking over Merkel’s calls for Europe to get its economic house in order by reducing its deficits. Krugman has written that the Germans “seem to be getting their talking points from the collected speeches of Herbert Hoover“ because in his view the Germans are not spending or consuming enough to stimulate the European and global economies. The Germans have responded that their short work, supports for families and workers, and other built in safety nets, previously derided by free market ideologues as crippling impediments to growth, have acted as “automatic stabilizers“. That ongoing fiscal stimulus provides much of the spending boost that the US Congress had to legislate. And the results speak volumes , as Germany’s unemployment has declined and its growth, exports and trade surplus have leaped forward.

Given Germany’s relatively good economic fortunes, the Krugman brigade suggests it must now do more to stimulate domestic demand and consumption, importing from trade deficit nations like the United States and other European nations. But Krugman no doubt has visited Germany and seen that the German people are not lacking in any material goods. What exactly are consumers supposed to buy?  Americans are the only ones who seem to think they need three refrigerators, four televisions, and a car for everyone in the household. Besides, Professor Krugman surely has heard of a little thing called “global warming,” which will be exacerbated by the wrong kind of growth. So although this kind of logic makes sense to economic professors, reality unfortunately counters theory on a regular basis.

Capitalism 4.0 – Redesigning Casino Capitalism

The deficit reduction versus fiscal stimulus debate is at the heart of an important discussion that has only just begun, and one to which Merkel, along with Sarkozy and European Commission president Jose Manuel Barroso, are making perhaps their greatest contribution. What alternative exists to the perverse consequences of consumer-driven, bubble-stoked economic growth? Many stimulus hawks like Krugman and Münchau have yet to figure out that it is this consumer-driven economic model that has crashed and burned. Merkel and other European leaders are saying that they have seen quite enough of Wall Street capitalism’s deregulated, bubbly, credit binge economy, which spread across the Atlantic like a plague. They do not want to encourage an economic recovery founded on these same dead-end, casino-capitalist principles and policies, including launching huge levels of overleveraged fiscal stimulus.

Europe is looking to push reset and start again by getting the balance sheets closer to zero. Beyond economic revival, what Merkel, Sarkozy, and Barroso see at stake in the recovery from the crisis is the overall vision for how a national economy is supposed to work, and the future of the global economy. The era of U.S.-style trickle down economics is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable in this era of global warming. And no matter how trickle-down you make your economy, you will never match China or India in that regard. The developed world must find a different way.

So Merkel’s biggest contribution may be the redesigning of capitalism itself, still inching toward a “new normal“ in the wake of the recent meltdown. Despite reports of tensions between the three, Barroso and Sarkozy have been worthy partners to Merkel in this endeavor: if there is tension, it appears to be, at least in part, a creative one. Sarkozy has been working with Nobel Prize economists Joseph Stiglitz and Amartya Sen to propose alternative measurements for assessing the health of an economy beyond GDP, average income, and other over-used, easily manipulated measuring sticks. And Barroso has acted as Europe’s prime minister, not only corralling the cats but also using his bully pulpit to, among other things, push the Obama administration to join Europe in these endeavors.

If consumer-driven growth was the order of the day in the post-World War II era, it now needs to evolve toward steady-state economic growth. The developed world must learn to do more with less. The world needs to figure out how an economy can provide for its people without having roaring growth rates like China. It is not strictly about economic growth anymore, it’s about ecological sustainability and steady-state growth, and learning how to better share the amount of wealth produced by each nation. Germany has been a leader with its social capitalist economy at the heart of this European Union experiment that has grown to be the largest economy in the world, with more Fortune 500 companies than the US and China combined.

Although Merkel’s support in domestic polls has dropped, due to the unpopular bailout of Greece and cutbacks resulting from the economic crisis, compared to the United States and China, Germany and Europe continue to provide a generous support system to families and workers while its businesses remain competitive and its carbon emissions reduced. Led by Germany, Europe shows unequivocally that these goals are not incompatible; in fact they can complement each other quite well. It’s a matter of having the correct vision, the right institutions, and able leadership that will spend money on the right priorities.

Steven Hill (www.Steven-Hill.com) is author of the recently published “Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age (www.EuropesPromise.org).