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Germany retreats from economic liberalism

Germany retreats from economic liberalism

Grand Coalition could buoy EMU in short term

by Denis MacShane in London

Wed 23 Oct 2013

Germany is likely to retreat firmly from liberalism in the Grand Coalition that will probably be formed from laborious government-building talks now under way in Berlin. The result will comfort left-leaning governments in the other two big economies in the euro area, France and Italy, but may discourage foreign investors seeking to build up business in the euro’s heartlands.

Economic liberalism – sometimes, but wrongly, called neo-liberalism as an all-purpose insult – has had a 30-year run since the years of British prime minister Margaret Thatcher and US president Ronald Reagan. But we are now witnessing in Germany the de-liberalisation of European politics. Although one important strand of modern liberalism – the promotion of individual rights – stands upheld, another – the belief that less state, lower taxes and more rights for employers can generate economic growth – is unravelling.

In the short term, the swing to the left in the German parliament (despite a better-than-expected score in the 22 September elections for Christian Democrat (CDU) chancellor Angela Merkel) may improve cohesion in economic and monetary union (EMU).

But, presuming the Christian Democrats team up with the hitherto opposition Social Democratic Party (SPD), it’s still not clear how Berlin will pay for additional demands on public spending without increasing taxes. Whatever happens, the new Berlin government looks likely to maintain a hard line on bail-outs and transfers for struggling debtor states in EMU.

In the SPD’s guidelines for forming a Grand Coalition, the big-ticket demand is for a state-imposed legal minimum wage of €8.50 per hour. Merkel has indicated she is willing to live with this. The CDU’s more right-wing Bavarian partner, the Christian Social Union (CSU), has swung into line, though German employers remain opposed.

The new German government will be based on hard bargaining. Not all in the SPD’s 10-point wish list – ranging from more money for pensioners and healthcare through to higher spending on infrastructure – will be achieved. The SPD will demand a key economic or finance ministry post, with the septuagenarian Wolfgang Schäuble, Berlin’s chief enforcer of austerity on southern Europe, possibly being offered the largely decorative foreign ministry. The SPD has made clear it expects Merkel’s support for Martin Schulz, the left-wing president of the European parliament, to become EU Commission chief next summer.

Merkel’s trump card is that she incorporates many social democratic and Green policies including phasing out nuclear power. She worked reasonably well with the SPD in a previous coalition in 2005 to 2009 and has good personal links with top SPD politicians.

It’s no coincidence that the step back from liberalism is most visible in Germany, where there's a strong egalitarian streak to politics. But in Britain, many see the liberal trend has stultified into excessive pay for the rich, rising inequality, a freeze on social mobility, and too much rentier and too little salaried capitalism. Lord (Maurice) Saatchi, the advertising genius who guided Thatcher to her election victories, has quoted Karl Marx’s critique of deregulated, self-serving capitalism. ‘The end result of competition is the end of competition. After years of internecine warfare amongst capitalists there would be fewer and fewer capitalists controlling vaster and vaster empires.’ Even the former Conservative prime minister, Sir John Major, felt that price gouging by energy companies justified a windfall tax. No-one it seems wants to defend classic economic liberalism.

When a top Tory begins to say Marx had a point, the journey away from liberal economics is clear. British Conservatives and Eurosceptic think-tanks like Open Europe have been proclaiming that Merkel’s re-election could bolster Berlin’s support for UK efforts to repatriate EU powers. These people have been banking on such an outcome to engineer a vote to stay in the EU in the 2017 referendum proposed by UK prime minister, David Cameron. With the new German government’s switch to statism, such hopes look likely to be disappointed.

Denis MacShane, Britain’s former Minister for Europe, is a member of the OMFIF Advisory Board.

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