The Political Economy of Germany under Chancellors Kohl and Schröder

Decline of the German Model?

Jeremy Leaman

• Publisher: Berghahn Books
• Year: 2009
• ISBN:
  9781845459369
• Edition: 1
• Topic: History
• Subtopic: German History
• Index: History

While unification has undoubtedly had major effects on Germany's political economy, the pattern of current policy-making preferences was established at an earlier stage, in particular, at the beginning of the 'Kohl-era' in 1982. This essentially neo-liberal pattern can be seen to have dominated the modalities chosen to guide Germany through the process of unifi cation and was mirrored in developments in other OECD countries and in particular within the EU. This book demonstrates that the three policy imperatives (neo-liberal structural reform, European monetary integration, and unification) produced a policy-mix which, together with other structural economic and demographic factors, has had disappointing results in all three areas and hampered Germany's overall economic development.

Chapter 1

1982: CRISIS AND TRANSITION

The removal of Helmut Schmidt as Federal Chancellor in October 1982 by means of the first successful ‘constructive’ vote of no confidence in the history of the German Bundestag is seen to a greater or lesser degree as a turning point in the development of economic policy in Europe’s strongest national economy. There is, of course, always a danger of overstating the significance of the regime change (Borchardt 1990: 32), the replacement of the ‘social-liberal’ coalition (Social Democratic Party of Germany [SPD] and Free Democratic Party [FDP]) with a centre-right coalition (Christian Democratic Union/Christian Social Union [CDU/ CSU] and FDP) under Helmut Kohl, particularly given the usual political/electoral rhetoric of the Wende (the ‘turn-around’ or ‘great change’) deployed by Kohl’s party machine. One is instinctively reluctant to give credence to the electoral propaganda of Germany’s Conservative Party, better known for its slogan ‘no experiments’ that had been rolled out repeatedly during the Party’s seventeen-year stint under Adenauer and Erhard up to 1966. There are also both marked elements of continuity between the Schmidt and Kohl regimes and of policy change prefigured by legislative measures taken under Schmidt’s chancellorship with the particular encouragement of the FDP. And yes, the epistemology of discontinuity is riddled with syllogisms and overworked notions of ‘eras’ – the Adenauer, Erhard, Brandt, Schmidt, Kohl, and Schröder eras which conceal fundamental, structural constants qua social power hierarchies and corresponding policy imperatives. Nevertheless, this chapter will seek to demonstrate that there was indeed a significant Wende in the political and economic culture of the Federal Republic involving a paradigm shift in policy ambitions.

Paradigm Shift: Indicators 1982–89

As implied above, the neat periodisation of developments in a political economy like that of Germany suits many actors in the process as well as statisticians and historians. It allows the construction of narratives of merit, of blame, of pride in responsibility and relief in the perceived responsibility of others. It allows the truncation of causality and the convenience of selection: the trends of macroeconomic indicators, for example, can be linked or isolated according to the interests or ideological preferences of the narrator. So it is with the dramatic regime change of October 1982 with the added piquancy of the whiff of ‘betrayal’; SPD and trade union banners in late 1982 and early 1983 stressed the FDP’s Verrat and even invoked the memory of Bismarck’s demise with demands that the ‘pilot [Schmidt-Bismarck] should stay on board’, alluding to the famous cartoon of 1890 where Bismarck’s resignation is depicted as the ‘pilot disembarking’ and Schmidt’s nautical background and reputation as fixer are implied.

Periodisation allows the convenient self-demarcation of predecessor/ successor from the errors of the future or the past respectively. However, in the case of the 1982 Wende, the periodisation into Schmidt and Kohl eras belies the significant features of continuity between one regime and the other. It is therefore important to assess the evidence of continuity before identifying the key changes in Germany’s political economy since the early 1980s. It is helpful to separate the features of continuity into two generic categories.

Structural Economic Constants

a) The German macroeconomy was – either side of the watershed of 1982 – distinctively organised, with high levels of capital concentration, particularly in the key sectors of heavy industry, mechanical and electrical engineering, automotive and chemicals.

b) The governance of Germany’s corporate sector was (and remains) highly centralised with a characteristic network of reciprocal holdings, involving both banks and ‘non-banks’ (productive and trading enterprises) where universal banks in both the private and the public sector wield – as long-term stakeholders – significant influence over the strategic decision making (research, development, investment, marketing, employment) of the major corporations; centralisation was/is also evident in the organisational density of the individual branches of the economy, in particular in the centralised system of collective bargaining, where national trade associations negotiate branchwide wage agreements with a corresponding national trade union.

c) The political economy was and remains heavily integrated in, and thus highly dependent on, the global trading economy, with a characteristic pattern of high value-added exports (predominantly capital goods, motor vehicles and consumer durables) and lower value-added imports.

d) Germany’s renowned depth of skills training and high levels of qualified blue- and white-collar workers was -before and beyond 1982 – administered within a tripartite system of employment regulation, where employers, trade unionists and state agencies operated a predominantly cooperative regime of consultation, ‘co-determination’ and co-supervision (e.g., of the statutory social insurance funds), as well as consensual conflict resolution in the network of Labour Courts.

e) Germany’s economic culture, in contrast to Anglo-Saxon systems, has been historically more ‘risk-averse’ in the sense of manifesting a preference for security, reliability and long-termism at both the micro-and the macroeconomic level. This arguably reflects both Germany’s latecomer status as a unified industrialised power, in which state mercantilism and private cartels sought predictability in a hostile commercial environment, and the real experience of social and political turmoil which overwhelmed the country between 1914 and 1949, of two wars, two hyperinflations, slump, death and bereavement on an unimaginable scale, three changes of state form and the overwhelming shame of genocide. The result was a conservative investment culture in which capital was mobilised far less via equity markets – as in the United States and the United Kingdom – and predominantly via the banks and insurance companies as house banks and long-term stakeholders. A consistent 7 per cent of German households own shares, compared to over a quarter in the United Kingdom and (currently) 49 per cent in the United States. Equity returns – qua dividends and asset prices – were in turn traditionally less generous, with a higher propensity to retain profits for reinvestment. Despite a comprehensive system of social insurance, the household savings ratio was and is high and constant (1982:12.7 per cent; 1991: 13.7 per cent; 2004: 10.5 per cent) compared to the United States (1982: 8.9 per cent; 1991: 5.4 per cent; 2004: 1.8 per cent) or Japan (16.7 per cent; 14.1 per cent; 2.4 per cent respectively).

Structural Political Constants

a) The pronounced devolution of powers in Germany’s federal system remained in place after 1982, and with it the inbuilt weakness of central government powers, by which the paradigm shift must be measured. With key competencies in the hands of the eleven (now sixteen) regional governments and their associated district and local councils – notably education, policing, regional transport, tax collection, environment and spatial planning – the scope for ‘shifting’ the axis of the economic paradigm was limited at best. Subsidiarity continued to be reflected firstly in the higher volume of resources deployed at regional and local level; in 1980, the federated states and local councils accounted for 69 per cent of the total expenditure of state territorial authorities. Secondly, they employed many more civil servants than the Federation (Bund); out of a total of 3,041,700 full-time Beamte in 1980 only 553,400 worked for the Bund (18 per cent), 1,567,900 for the Länder (52 per cent) and a further 920,000 for local authorities (30 per cent). These ratios had changed insignificantly by 1990 (Bund: 17.9 per cent; Länder : 49.6 per cent; local authorities: 32.5 per cent) (Figures: Statistisches Jahrbuch der Bundesrepublik). The power of the lower-tier authorities was compounded by statutory entitlements to agreed shares of income taxes and value added tax (VAT) and by revenue from specific regional and local taxes.

b) Within Germany’s extreme federalism, the Upper House (Bundesrat), representing the governments of the regional states, has the statutory power to initiate legislation, but notably to influence or indeed block some 70 per cent of all national legislation. Throughout most of the period of social-liberal rule under Brandt and Schmidt, the Bundesrat was controlled by the opposition parties (CDU/CSU), influencing legislation either directly in debate and revision or indirectly through the anticipation of revision on the part of the federal government. (Bräuninger and König 2000). In particular, the Bundesrat was ‘extraordinarily’ active in the initiation of legislation in the ninth legislative period, i.e.,1980–82 (ibid. 14).

c) The power of the federal government was likewise constrained by the ceding of sovereignty to the European Communities and by the increasing influence of European Commission (EC) directives on domestic (federal and regional) legislation (Bulmer and Radaelli 2004). In this context, Sturm and Pehle raise the question of ‘The Bundestag as a “junior Partner” of European institutions’ (Sturm and Pehle 2001:57), referring in particular to the number of EC /European Union (EU) directives incorporated in Federal Law; in the eighth legislative period (Schmidt’s second cabinet) they amounted to 1,706; in the tenth legislative period (Kohl II) it rose slightly to 1,828.

d) Arguably the most significant structural political constraint on federal executive power and thus on the latter’s ability to define the dominant paradigms of macroeconomic policy was and remained the influence of the autonomous Bundesbank; this influence had grown after the collapse of Bretton Woods, the floating of all convertible currencies and the erosion of exchange controls (Leaman 2001: 155ff; Kennedy 1991). The European Monetary System (EMS), with its core feature of the Exchange Rate Mechanism (ERM), was in part designed to moderate the dominance of ‘the bank that rules Europe’ (Marsh 1993); the design -conceived by Valéry Giscard D’Estaing and Helmut Schmidt – failed; the EMS/ERM were effectively managed by the strongest central bank in the strongest trading economy with the strongest currency in Europe. The EMS period (1979–99) indeed arguably represents the pinnacle of the Bundesbank’s power and influence; more than any elected government in Europe, this unelected, unanswerable institution defined the rules by which the turbulent waters of the post-Bretton Woods era were to be navigated, rules by which all the other (democratically answerable) monetary and fiscal authorities in Europe had to abide. While this volume will argue strongly in support of the notion of a paradigm shift in German economic policy since 1982, there is a persuasive case for the foundations of that shift having been laid early in the 1970s by the Bundesbank’s version of monetarism.

Arguments in Support of the Paradigm Shift Hypothesis

Despite the strong elements of continuity in both structural economic and structural political terms, 1982 can still be seen as a very significant marker in the history of Germany’s political economy, not because of any immediate radicalism as manifested by Kohl’s ostensible policy models, Thatcher and Reagan, but rather because it ushered in a period in which there was a gradual but inexorable shift in the quality of economic policy decisions, the ideological paradigm within which they were consistently framed and the global context within which national, regional and global institutions operated.

The main reasons for highlighting the above features of continuity were to relativise the importance of regime change at the federal level but also to underscore the relative weakness of the SPD-led governments of the 1970s in a global economic and institutional environment which did not favour the coordinated nation-state interventionism normally associated with social democratic preferences. More particularly, the policy mix and reform measures of the social-liberal coalition are seen to prefigure the programme adopted by the Kohl governments of the 1980s by a number of commentators. Butterwegge sees the Law on Improving the Budget Structure of December 1975 as a clear ‘caesura’ (Butterwegge 2005:117), in that with the Bill:

the period of expansion in social policy which had lasted several decades came to an end and a phase of stagnation or regression began. The dismantling of the Social Democratic ‘Model Germany’, successfully invoked in the federal election campaign in 1976 against Helmut Kohl as chancellor candidate, did not just begin with the latter in 1982; rather it was ‘re-adjusted’ already under Federal Chancellor Helmut Schmidt, restructured step-by-step and attuned to the goal of ‘securing the location’ [Standortsicherung] by means of the transformation of the welfare state.

Against the background of the exogenous shock of the oil crises, the furious debate within Germany’s economic, political and academic elites about the supposed causes of ‘the’ crisis (Leaman 1988: 240ff) and the increasing fragility of the SPD-FDP coalition, it is not difficult to interpret the changes to pension and employment law in 1978 and the major expenditure cutbacks in the ‘Operation ‘82’, agreed in October 1981, and in particular in the Second Law on Improving the Budget Structure as confirmation of Schmidt’s preparedness to accept policies ‘which towards the end of his period in office hardly bore any resemblance to social democracy, and in practical terms prepared the ground for the [Christian-Democratic] Union to take over power’ (Butterwegge 2005:118f). It is no coincidence, perhaps, that the intensification of austerity policies at the expense of the subjects of social policy began when Lambsdorff took over as Federal Economics Minister in October 1977 from his party colleague, Hans Friderichs.

‘Preparing the Ground’: The SPD and the Path to Neoliberalism

Apart from the need to consider the views of an increasingly strident coalition partner, the prefiguring of the neoliberal revolution on the part of Helmut Schmidt and the SPD can above all be identified in the seemingly contradictory views within the Party towards the country’s macroeconomic policy architecture. In his 1983 review of ‘social democratic parties in Europe’ Anton Pelinka (1983:3) identifies the extension and strengthening of democratic controls in society as the central and enduring principles of social democracy; this ‘consummation of political democracy’ (ibid.) is furthermore centrally linked to the perception of the flawed nature of markets in advanced capitalism in the eyes of all social democrats – a perception shared with Keynesians, Marxists and ordoliberals – and the corresponding need for the political management of economic activity to avoid cyclical and structural crises and to remedy the distributive ills of capitalist society. There have been significant differences between different social democratic movements at any given point in time, and modifications in the goals, strategies and policies of individual parties over time, but the core belief in the democratically legitimated political management of national economic affairs has remained a constant. Thus, while views concerning the collective ownership of productive assets have altered markedly over time, European social democracy remained consistently associated with Keynesianism in the half century following the 1930s depression, i.e., with the politics of the anti-cyclical management of aggregate demand and the welfarist redistribution of social wealth to provide both public goods (qua physical and social infrastructure) and to prevent the kind of multiple deprivation evident in the history of capitalism hitherto. Scharpf (1987: 23) talks correctly of the ‘intellectual hegemony’ of Keynesianism in the period up to the 1970s. It was this hegemony that persuaded Germany’s political and academic elites in the 1960s to modify the ‘intervention phobia’ of the Adenauer era (Ambrosius 1984: 108), firstly by establishing the Council of Economic Experts (Sachverständigenrat) in 1963, which was designed to monitor macroeconomic policy and provide scientific guidance and in its early years had strong Keynesian leanings; secondly, with the establishment of a grand coalition between Christian Democrats and Social Democrats in 1966, Keynesians within both parties were given key positions under Kiesinger’s chancellorship: Franz-Josef Strauss (CSU) as federal Finance Minister and Karl Schiller (SPD)...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• Dedication
• List of Tables and Figures
• Introduction
• 1. 1982: Crisis and Transition
• 2. The Fall of Helmut Schmidt and the Formation of the Wende Administration
• 3. The Kohl Era: CDU Supply-sidism in Practice
• 4. Liberalisation and Monetary Accumulation
• 5. German Unification and the Unravelling of Neoliberalism
• 6. The Transformation Crisis in the East in an International Context: 1995–2006
• 7. Squaring the Circle: Politico-economic Trends in the Schröder Era 157
• 8. Coping with Stagnation: the Persistent Contradictions of Economic Orthodoxies in Germany and Europe
• Postscript
• Bibliography
• Index