Last Sunday the general election threw up some shocking and some surprising results. But why was there an election at all? After all, the so-called traffic light coalition government of the SPD, the FDP and the Greens had only served three years.
Germany has been stuck in economic stagnation for two years. Technically it has suffered a mild recession with the economy contracting 0.3% in 2023 and 0.2% in 2024. With disillusionment growing, SPD Chancellor Olaf Scholz proposed an easing of the so-called debt brake and an injection of 10 billion euros into the economy to try to finance much needed infrastructure spending and to try and stimulate the economy out of recession.
A 10 billion euro injection into the German economy by increasing state spending is a fairly modest stimulus but it follows the ideas of John Maynard Keynes. He argued capitalist economies naturally go into recession but there were not necessarily any automatic adjustment mechanisms, as orthodox neo-classical economists argued. They saw the “free market” bringing about economic recovery. Instead Keynes argued, governments need to finance recovery by increasing its debt, with that debt ultimately repaid from the government revenues generated by the recovering economy.
Although an easing of the debt brake was supported by Bundesbank president Joachim Nagel, Scholz’s Finance Minister, FDP leader Christian Lindner, refused. Lindner wanted to retain the debt brake and stimulat the economy by cutting taxes, to be paid for in turn by cutting spending. So Scholz sacked Lindler and the coalition collapsed.
What is the debt brake? The debt brake or Schuldenbremse is a rule restricting the amount of debt that can be incurred at federal level to just 0.35% of the value of total annual German production. That is the gross domestic product or GDP. It was enacted under Angela Merkel’s government in 2009 intending to restrict the total accumulated national debt to a maximum of 60% of GDP. For the European Union this was originally fixed in the Maastricht Treaty 1992 and then in the Stability and Growth Pact first established in 1997.
The debt brake has been reasonably effective in achieving its primary goal. German national debt currently stands at just under 63% of GDP. This compares with 100% in the UK, 110% in France, 120% in the US and an enormous 263% in Japan.
The larger the national debt, the higher the amount of interest the government must find to pay interest on that debt. If national debt seems to be rising out of control, the financial markets (ie rich companies and individuals who speculate on currency movements) can take fright causing a plunge in the value of the currency. That in turn makes imports more expensive and inject inflation into the economy. In turn that may then be met by higher interest rates and cuts to government spending to curb the debt that the government is incurring and reassure those same financial markets.
If that is the rationale of the debt brake, the downside is that it restricts the government’s scope for keynesian debt-funded spending. As in economic stagnation and recession when the debt limit was reached as it was in Germany. The new government, to be led by CDU leader Friedrich Merz, now has to find a way to bring the economy out of recession. This is going to be crucial to the incoming government. For it is clearly economic stagnation that hugely contributed to discrediting the mainstream parties and fuelled the rise of the AfD.
The economic malaise is a shock for Germany, the powerhouse of the European economies in the post-war period. Between 1950 and 1990 the average growth rate of German GDP was 5%, far higher than the US at 3.3% or the UK at just 2.5%. Average growth was slower since reunification but still relatively strong until recently. As a result of these relatively high levels of growth, Germany today is between the third and sixth largest economy depending on the measures used for comparison.
That phenomenal growth was based on Germany rapidly becoming a major exporter particularly to the rest of Europe and to the United States. That export success was based on three inter-related things.
Firstly, there was a growing world economy into which to export. This was particularly so in the so-called long boom in the 1950s and 1960s before things deteriorated in the 1970s. Secondly, that long boom was sustained by high levels of peacetime arms spending during the Cold War between the West and the Soviet Union. But the arms spending was concentrated in the UK and particularly the US. Germany and Japan were restricted in their arms spending because of their defeat in the Second World War. Thirdly, such restricted arms spending enabled Germany and Japan to concentrate investment into areas of industry with high export potential thus raising their productivity and competitiveness.
However, the success of these two powerhouse economies weakened the UK and particularly the US ability to sustain arms spending. The world economy began to enter much more bumpy terrain in the 1970s and then with the arrival of neoliberalism and, ironically, the collapse of the Soviet Union.
The Japanese economic miracle rapidly became a nightmare when a speculative financial bubble burst at the end of the 1980s. It left Japan in a deflationary trap which it may only now be emerging from. Germany however avoided that speculative financial bubble and continued to grow even with the reunification of two very differently structured economies with the collapse of the Berlin Wall.
Germany was also relatively unscathed by the Great Financial Crisis of 2008 which inflicted severe hardship on other smaller and weaker EU economies such as those of Spain, Portugal and, above all, Greece. It’s only much more recently that stagnation and worse has set in.
What do the professional bourgeois economists say needs to be done now? Not surprisingly, opinions differ greatly and are often contradictory or unrealistic or plain wrong. One argument is that Germany became too dependent on Russian energy supply, the price of which went up with the onset of the Ukraine war and the imposition of sanctions against Russian exports. This caused some inflationary pressures in Germany, which have since eased off with alternative energy sources and the drop in gas prices.
Another argument is that the German economy is too export-orientated. Competition in export markets is now fierce, particularly from the Chinese economy. China has certainly been growing extraordinarily strongly since its admission into the World Trade Organisation in 2001. In an act of hubris the US saw China as a platform for US multinational profits with its cheap and disciplined labour force.
But there are two problems with the claim about excessive export-orientation. The first is that Germany remains very competitive in export markets by standard measures, as IMF analysts have pointed out. But secondly what would reorientating away from exports mean in practice? For the Keynesians it means that German domestic consumption should rise to offset the loss of export markets. But that means rising wages. That is not in the federal government’s direct control and would be fiercely resisted by German bosses. The latter depend on maximising gaps between the value of goods produced and how much they pay workers to produce them – for their profits.
Another argument is that Germany suffers from too much regulation and stifling bureaucracy. The problem with this argument, much beloved by the so-called free market-eers, is that the German economy thrived in the past with rather more bureaucracy than exists today. Moreover, deregulation invariably will mean more environmental degradation and a worsening climate crisis.
The Hartz reforms of some 15 years ago were intended to create more “flexibility” in the labour markets. Today some call for workers to pay for the malaise in the German economy by cutting wages, but this would cut domestic consumption and therefore make the malaise worse.
Others say there urgently needs to be infrastructure spending as Germany’s infrastructure is crumbling and the trains no longer run on time. All of this is true, of course. But firstly, how is the money to be found for this if the debt brake is to be maintained? Unless taxes were increased on rich individuals and corporations – a move the rich do not want. Or, more likely, some swingeing cuts to social spending. But also, desirable though such infrastructure spending is, there is no evidence that declining infrastructure has significantly impacted German international competitiveness.
Another argument is that Germany has an aging population which means that fewer and fewer people of working age and capacity support a larger number of people dependent on that working population. This is true and a major problem in the years ahead. That can only be met by two developments. Either an increased productivity in the production of goods that people need to live a decent life and; on the other hand, immigration. It’s a sick irony of the racism unleashed by the AfD and compounded by the concessions of the mainstream parties. The demands for restrictions on migration into Germany and, even worse, the forced expulsion in what is euphemistically called remigration will be economically disastrous for Germany.
Bourgeois economists and the mainstream parties in Germany have no serious answers to the current German economic malaise and the situation is the brink of getting much worse. Trump bizarrely believes the rest of the world have been ripping the US off and he is now imposing a very broad range of tariffs. The US accounts for about 10% of Germany’s exports by value and they could be hit with a 25% tariff which could cut demand for German exports dramatically.
The world economy and the German economy continues to depend on US economic growth and spending on imports. US economic growth is currently stronger that of the EU and of Germany although not nearly as strong as in the period 1950 to 1990. But there are profound doubts about whether that growth is itself sustainable.
US consumption spending is currently sustained by increases in the spending of the richer sections of the population whose wealth has been buoyed up by a financial bubble. Tariffs will increase the price of imported goods into the US raising inflation and with it the prospect of higher interest rates. The financial bubble looks increasingly unsustainable. If it pops, or at least deflates, the US as a market for exports will decline and there will likely be serious financial consequences across the world’s financial markets.
Add to this the acceptance by the mainstream parties of Trump’s demand for much higher European arms spending. It is very likely this can only be financed by squeezing essential government spending in other areas. The government that emerges out of Sunday’s election therefore seems very likely to be caught between an economic rock and a hard place.
The AfD is going to seek to exploit the incoming government’s failures but it has no economic answers and if its racist migration policies were implemented the economy might well collapse.
The race is on to generate a movement which will not only challenge the AfD but also Merz’s government. That movement has to point the way towards an end to the dire problems posed by a system run for profit.
We urgently need to replace it with a system run by those who actually produce the wealth of society, the working class, so they can plan it to meet the needs of all instead of the profits of the few.
