In june a newly surfaced segment of a German talk show from 1997 set the internet alight. The clip shows Angela Merkel, a fresh-faced environment minister in Helmut Kohl’s government, explaining the urgency of action on climate change. Her fellow panellists listening closely, Germany’s future chancellor says delay will only incur higher costs. The dangers of failure, she warns, include hunger, drought and the mass movement of refugees.
The clip highlights a contradiction familiar to observers of Mrs Merkel’s 16-year reign, which will end once a new coalition is formed after the election on September 26th. On one hand is the diligent scientist-stateswoman, blessed with the ability to understand complex issues and explain their consequences. On the other is the hesitant politician who struggles to convert analysis into action. A quarter of a century on, Germany emits more carbon dioxide per head than most other eu countries, and relies on fossil fuels for 44% of its electricity. After the clip emerged Mrs Merkel, at her final annual press conference as chancellor, conceded that she had failed to act decisively on climate change.
The pattern keeps recurring. Campaigning for the chancellery in 2005 Mrs Merkel promised to slash bureaucracy and promote innovation, pledges that still appear in the manifesto of her Christian Democratic Union (cdu). Her biennial speeches at the Munich Security Conference were compelling tours d’horizon of the global security landscape but rarely heralded meaningful changes in German foreign policy. During the covid-19 pandemic the chancellor was a solid, reassuring presence, but she struggled to impose her will on the restive premiers of Germany’s states.
Mrs Merkel has at times seemed more monarch than chancellor. She will leave office with sky-high approval ratings. Three of the four coalitions she led were “grand” ones with the Social Democratic Party (spd), which suited her centrism but tranquilised politics. She has so dominated the centre that outright criticism of her has come to seem almost lèse-majesté. That has inspired a wave of free-speech martyrs on the conservative fringes, the closest Germany gets to a culture war. In Europe Mrs Merkel has been the indispensable leader. Beyond it, her stout defence of liberal values and her modest demeanour have been reassuring in an age of noisy populism and nationalist showmen.
As Mrs Merkel prepares to leave office some have wondered if a Wechselstimmung (mood for change) is taking hold in her country. The ascent since the 2017 election of the Green Party, which wants to upend strict public-debt rules and rethink foreign policy, seems to offer evidence for this. In May the Bertelsmann Foundation found that a record two-thirds of voters wanted significant political change, and almost as many wanted a new government.
Some recent events have shaken the faith of voters in their state and its institutions. One was the chaotic management of the second wave of covid-19, which undercut a narrative of success during the first in 2020. Then came catastrophic floods in parts of western Germany in July, where the apparent negligence of a few local politicians may have contributed to a death toll of almost 200. The debacle in Afghanistan, where 150,000 Bundeswehr troops had served since 2002, was also hard to swallow.
Yet for all this, a Wechselstimmung is not evident. Germany has weathered the pandemic better than most. The death rate was low and the government’s fiscal response, including policies like the much-imitated Kurzarbeitergeld furlough scheme, cushioned the economic impact. The economy is set for one of Europe’s more robust recoveries. More than two-thirds of Germans say their economic situation is good. Nor did the floods mark an inflection point. Rather, a lacklustre campaign punctuated by trivial rows suggests that none of the parties, including the increasingly cautious Greens, sees much mileage in promising rupture.
Just as German companies excel at incremental innovation but struggle with the disruptive sort, change in public opinion is slow and hard to detect. Spotting this is one of Mrs Merkel’s strengths, aided by her office’s relentless polling and focus-grouping. Her policy shifts, when they came, were usually subtle but on occasion decisive: nuclear power, gay marriage and, most recently, common European Union debt.
Her riskiest step was her decision not to close German borders to over 1m asylum-seekers and other migrants in 2015-16. Even this was an improvised response to an unexpected crisis. Tellingly, this short-term fix entrenched long-term difficulties: it opened the door to the far-right Alternative for Germany (afd) and, by toxifying the migration debate, made it harder to liberalise skilled-labour laws. Five years on, a bitterly divided eu is still unable to reform its asylum rules, leaving it exposed to another crisis.
Fear of the unknown
There is a palpable nervousness about Mrs Merkel’s imminent departure. This is the country’s first post-war poll in which the sitting chancellor is not seeking re-election. The campaign has been volatile, with the lead bouncing between the Greens, the cdu and its Christian Social Union (csu) Bavarian ally, and the spd. A fragmented vote looks likely to make a two-party coalition impossible for the first time since the founding of the republic. Rarely has the identity of the next chancellor and the make-up of any coalition been so uncertain. That may mean long post-election negotiations and an ideologically incoherent government that finds it hard to get anything done.
The rest of the eu is even more apprehensive. Mrs Merkel has shaped its response to crises, from euro-zone bail-outs through Russia’s invasion of Ukraine to Brexit. Germany sits at the continent’s heart, and one of the chancellor’s priorities has been to resist forces driving its governments apart. She has forged useful relationships with figures as disparate as Alexis Tsipras, the far-left prime minister who nearly took Greece out of the euro, and Viktor Orban, the autocratic leader of Hungary (who will take over Mrs Merkel’s mantle as longest-serving eu leader).
Politically, Germany seems an island of stability in a jumpy world. Although this election may be the most open for a generation, none of the parties likely to enter government disagrees over such fundamentals as the social-market economy or the commitment to the eu. Contrast this with France, which may again flirt with Marine Le Pen in next year’s presidential election; perennially unstable Italy, where populist parties command near-majority support; or Poland, a deeply polarised country led by a government undermining the rule of law.
Few of Europe’s crises have upset Germans’ security or given them reason to push for change. Political chaos, overspending or trade deficits are others’ problems. Growth in the Merkel era was solid, if rarely spectacular, and when challenged German institutions have been robust. Five years on, there are even grounds for optimism over the integration of migrants from 2015-16. And it is not modern Germany’s habit to engage in military adventurism abroad.
Critics are wary of handing too much credit to Mrs Merkel. “Germany’s economic success was more luck than policy,” says Marcel Fratzscher, who leads the German Institute for Economic Research (diw) in Berlin. Conditions were propitious. China’s accession to the World Trade Organisation in 2001 opened a vast market for mighty German exporters. The eu’s eastward expansion a few years later created a pool of cheap labour and extended supply chains, and a source of skilled, working-age immigrants. Controversial labour-market reforms pushed by Gerhard Schröder, Mrs Merkel’s predecessor, kept unemployment down. American power has held the peace that was a condition for German trading success. Transatlantic spats over nugatory German defence spending have had few serious consequences.
Yet a strong economy and Germany’s heft in Europe have concealed a darker side at home: a swelling low-wage sector, growing income inequality, ragged housing markets and persistent child poverty. A misjudged energy policy has given Germans the highest electricity bills in the eu. A strict approach to the public finances, expressed since 2009 by a deficit-limiting debt brake in the constitution, has created vast fiscal surpluses even as public infrastructure decays. Covid-19 has revealed other weaknesses in the public sector, especially its slow digitalisation. There are reasons to fear that the next decade could expose deeper failings.
For if Mrs Merkel was a steady hand during crises, she has been less successful in setting a longer-term course. Astonishingly, it is hard to find a single far-reaching reform passed by any of the four governments that she has led. This brings to mind a second German term that ought to preoccupy the next government: Zukunftsfähigkeit, or the ability to face the future. For many, it is something they sorely miss in the country that Mrs Merkel will bequeath.
Weaknesses in the German model are starting to show. Dependence on trade means vulnerabilities to deglobalisation. Growing tensions between America and China leave Mrs Merkel’s engagement-first policy increasingly threadbare. The mighty car industry is highly exposed to technological disruption. Germany’s skills shortage will worsen as a demographic crunch looms in the mid-2020s. New climate targets will require deep-rooted changes to industry, buildings and the power industry. Perhaps most worrying, the political class seems to have learned from Mrs Merkel that it is better not to scare voters with too much talk of transformation, leaving only a limited mandate for change.
Germany is a strong, rich, democratic country that should have a bright future. This special report will act as a stress-test, prodding its industrial, bureaucratic, demographic and security policies at their most vulnerable points to assess where change is most urgently needed. It begins with a look at the country’s perennially low public investment.■
Full contents of this special report
Germany: After Merkel*
The public sector: The urgent need for greater public investment
The car industry: A troubled road lies ahead
The demographic challenge: Parts of the country are desperate for more people
The European dilemma: The European Union will badly miss Angela Merkel
Merkelkinder: The young’s attitudes
Foreign and security policy: The world needs a more active Germany
The future: Germany needs a reforming government
Germany’s urgent need for greater public investment
d engineering are especially affected, and local governments struggle to compete with private firms. Two-thirds of municipalities expect it to get even harder to find town planners. Surveys find construction companies working at capacity. With such supply constraints, spending more without proper planning merely risks stoking inflation.
Bureaucracy and nimbyism play a role. Companies struggle with a patchwork of planning and building rules. Opponents delay public-infrastructure projects with endless litigation. The number of projects blocked by citizens’ initiatives has doubled since 2000. This is problematic for roads, railways and bridges. But it is a “real hurdle” to climate transformation, says Mr Scheller. The recently revised climate law mandates a reduction in carbon emissions of 65% from 1990 levels by 2030, and their net elimination 15 years later. The share of renewables in electricity production must also reach 65%. And overall demand for electricity for batteries to power electric cars, for heat pumps in buildings, and for “green” hydrogen to help decarbonise industry may rise by a quarter.
Agora Energiewende, a think-tank, estimates that Germany will have to install an extra 5gw of onshore wind power every year until 2030, and 7gw a year after that. In 2020 it managed just 1.4gw. A visit to Schleswig-Holstein shows how hard it will be. As far back as the early 1990s, wind power in this northern state began to revitalise what had been some of the poorest communities in western Germany. Today turbines dot the landscape. Schleswig-Holstein has 8.5gw of installed wind-power capacity, and produces 160% of the electricity it consumes from renewables. It can export the excess via new power lines, including to Scandinavia.
In December the state government published new rules for wind-farm construction, after a five-year moratorium imposed amid growing local tensions. The new rules set aside 2% of land for wind energy, but this may not be enough to meet wind-power targets. Add long waiting times for permits and other restrictions and these targets seem unattainable, says Marcus Hrach of the Kiel branch of Germany’s Wind Energy Association. Industry insiders despair at all the hoops they must jump through. “Few people here oppose wind power, but those who do have loud voices,” says Anton Rahlf, a frustrated wind-farm owner on Fehmarn, an island in Schleswig-Holstein.
Other states are even more restrictive. Rules to protect endangered species vary from state to state. A few years ago litigation, regulation and complex tendering slowed the construction of wind farms to a crawl, although 2021 has offered flickering hints at a revival. The mismatch between the federal government’s ambitions and the reality of local regulation, says Mr Hrach, will make it impossible for Germany to reach its commitments under the Paris climate agreement.
Another difficulty, says Alexander Reitzenstein from Das Progressive Zentrum think-tank, is constructing the power lines needed to transport electricity from the windy north to southern industrial states like Baden-Württemberg and Bavaria. Local communities can be given a financial stake in wind farms, but that is harder to do for power lines simply transporting electricity. And under Germany’s federal system, states cannot be bossed around by the government in Berlin. “Lots of politicians who agree on climate in Berlin act differently when a line comes to their local community,” says Tim Meyerjürgens, chief operating officer of TenneT, an electricity-transmission operator, adding that the “salami-tactics” of regular legislative changes harm trust.
There is a near-consensus that the next government must do more to satisfy vast public-investment needs. The debate is over how. For some, tackling the country’s austerity bias is a priority. The debt brake now in the constitution limits opportunities for deficit spending. Critics of German tightfistedness are legion. The European Central Bank has long urged countries with “fiscal space” to exploit it. But all such suggestions have tended to run into an austere wall of fiscal orthodoxy.
Since 2013 the annual public-investment budget has risen from around €93bn to €137bn. This, argues Jens Weidmann, head of the Bundesbank, suggests the debt brake is “a bit of a straw man”. Better to tackle bureaucracy, capacity constraints and municipalities’ volatile revenues by changing the federal structure. But Sebastian Dullien at the imk, a union-linked research group in Düsseldorf, counters that a guaranteed, long-term income stream of just the sort the debt brake inhibits might give municipal authorities, construction firms and engineers the planning certainty they need to reduce bottlenecks and increase staff.
Last year the government invoked an escape clause in the debt brake to finance corporate-support, furlough and other schemes during the pandemic, running up a deficit worth 4.2% of gdp. It will be bigger this year. The cdu/csu wants to reimpose the debt brake once circumstances allow, probably in 2023. So does Mr Scholz, who presents himself as a safe pair of hands (plenty in his spd would like a more expansive approach). The most interesting proposals come from the Greens, who want to add a “golden rule” allowing a debt-funded ten-year €500bn investment programme, focused on climate and digital infrastructure.
Yet the two-thirds parliamentary majority needed to change the constitution is a formidable hurdle. A more likely prospect is the establishment of public-investment companies, essentially off-budget special-purpose vehicles (spvs), devoted to capital spending on, say, broadband provision in schools or upgrading railways. spvs are legally complicated and democratically iffy, frets Mr Südekum. They would incur borrowing costs at a time when investors actually pay to lend to the federal government. But by not adding to the public-debt stock they offer a way of getting round the debt brake. The cdu/csu chancellor-candidate, Armin Laschet, has flirted with what he calls Deutschlandfonds.
More radical ideas are afoot, notably a proposal by Dezernat Zukunft, a think-tank led by Philippa Sigl-Glöckner, a former finance-ministry official who calls spvs “a declaration of defeat to silly fiscal rules”. Dezernat Zukunft wants to shift the fiscal debate away from arbitrary debt limits towards the goal of full employment. Low headline unemployment, the group notes, masks low labour-force participation rates among women and part-time workers seeking more hours.
Although the debt brake limits deficits to 0.35% of gdp, the calculations rely on a complex estimate of “potential” output. In the short run, Dezernat Zukunft reckons tweaks that require legal but not constitutional tampering could allow more deficit spending worth €50bn-60bn a year. In the long run Ms Sigl-Glöckner hopes to see off the debt brake for good. That such ideas now get a serious hearing suggests the fiscal debate has at last begun to shift.
A troubled road lies ahead for German carmakers
Saarland is no stranger to transition, jokes Thorben Albrecht, policy director for the ig Metall trade union. The second-smallest of the 16 states, for a century Saarland bounced back and forth between Germany and France, establishing itself inside the federal republic only in 1957. Coal deposits and steel made it rich, but also left it exposed to job losses when globalisation came knocking in the 1970s. A booming car-parts industry provided a cushion, but Saarland now faces a third shift, as industrial transformation and climate policy come after its two big sources of jobs: cars and what remains of steel.
The government wants 14m electric vehicles (evs) on German roads by 2030, up from 1m today. But the slow death of the internal combustion engine undercuts the business model of gearbox, cooling-system or fuel-injection pump makers—suppliers that dot Saarland and other states. Almost 20,000 people work in Saarland’s car industry, mostly in small and medium-sized firms. The state has neither a large company headquarters nor a big city with a thriving service sector. “A huge reduction in car-sector jobs will mean social problems of a very large order,” says Hans-Christian Herrmann, who charted previous waves of deindustrialisation as the chief archivist in Saarbrücken, the state capital. An ig Metall survey found that 42% of German car workers fear for their future.
Workers at steel plants, which account for around 6% of German carbon emissions, are as worried. “You can see my grey hairs”, chuckles Stephan Ahr, who chairs the works council at Saarstahl, a steelmaker in Völklingen. The plant has already lost tens of thousands of jobs. The main decarbonisation plan, in which polluting coke is ditched in favour of hydrogen obtained from renewables, will require far fewer workers. Other developments, including uncertainty over the carbon price and eu policy on steel imports, add to Mr Ahr’s worries. “Everything affects us without us having any influence,” he says. “It’s take it or die.”
Germany’s industrial model rests on the full employment that buys consensus between firms, workers and government. Labour relations are harmonious. But the impulses to create what unions call a “just” transition can lead to ruinously expensive deals like the “coal exit” agreed in 2019: a €40bn programme to manage the slow elimination by 2038 of the final coal mines, which employ 20,000 people, slightly fewer than the country’s yoga teachers.
The transition is also a challenge to big companies. If carmakers were late to the electric game, Volkswagen, which has almost 300,000 employees in Germany, is scrambling to make up for lost time (and perhaps to repair the damage to its reputation from the diesel-emissions scandal in 2015). Under its charismatic boss, Herbert Diess, and with an eye on Tesla, soon to open a battery gigafactory outside Berlin, vw has gone all-in on electric. It says evs will account for half its vehicle sales by 2030. By 2035 vw, which reckons to account for 2% of global carbon emissions, will cease selling petrol-powered cars in Europe.
eu rules and climate targets are forcing tough decisions. But talk to vw insiders and you see how deep the shift has gone. To power the next generation of cars, vw plans by 2030 to build six lithium-ion battery plants in Europe. Entire plants are given over to ev production. The “meb” chassis (or platform) will be spread across models, ensuring cars are built around batteries rather than vice versa, and may be licensed to other manufacturers. “Think of this as a system, with suppliers, batteries, services and infrastructure,” says Andreas Walingen, vw’s chief strategy officer. “Only then will customers go electric”. Mr Diess has also linked executives’ bonus payments to vw’s share price, a decision one employee says “changed the dna of the governance.” vw’s profits surged in the first quarter of 2021, and investors seem satisfied.
The car industry faces the biggest disruption in its history, says Ferdinand Dudenhöffer, head of the Centre Automotive Research in Duisburg. Electrification is just a start. Audi, a vw brand, is trying a car-subscription model aimed at younger drivers, a growing market that could upend revenue models. Software systems require digital skills and fresh ways of working. “We are strong on the hardware side of cars, not so good on data and ai,” says Danyal Bayaz, the Green finance minister of Baden-Württemberg, another big car state. Some fear vw will never catch up with Tesla—or the Chinese firms muscling in. Fully autonomous vehicles, should they arrive, may bring the biggest change yet.
As for the jobs, the scares are overblown, insists Mr Diess (who faces powerful unions and workers’ councils). “Seats remain seats, steel remains steel, wheels remain wheels, brakes remain brakes,” he recently told the German Press Agency. A study by the Boston Consulting Group and the German think-tank Agora Verkehrswende projects no net loss of jobs by 2030, although other surveys are less sanguine. But the headline figure conceals massive churn, as component making gives way to battery production and coding. Almost half the country’s 1.7m car workers will need reskilling, especially the sme suppliers. This, warns the study, will mean “considerable expense” for firms and workers.
And for the state, too. Carmakers rely on the government to set carbon targets, roll out ev charging infrastructure and tweak regulations to make it easier to harmonise refuelling payment systems across the country. Until 2025 the federal government will subsidise ev buyers to the tune of €6,000 per car. The incentives have lifted the share of evs and hybrids to over a fifth of all new sales, but they are regressive and expensive. Deutsche Bank calculates that each ev could over its lifespan cost the state €20,000 in subsidies and taxes forgone.
Beyond the jobs churn, Saarland looks hopefully to new industries spawned by industrial transformation, rather as cars provided a safety net during the previous wave of deindustrialisation. svolt, a Chinese battery maker, plans two plants in the state which it says could create 2,000 jobs, although locals are sceptical. Hydrogen, an untested fuel central to the government’s climate plans, is another hope. One thing everyone agrees on is that the transition needs to be oiled with public money. The industry reckons some €30bn will be required to make the full transition to decarbonisation. Some politicians pledge that climate protection will be the next engine of prosperity. At least in Saarland, many are unconvinced. “We have just eight years to change a region,” says Ralf Reinsteadtler at ig Metall. “That’s tomorrow.”
Parts of Germany are desperate for more people
On the face of it there is little to separate the two towns. Cloppenburg, near the Dutch border, and Hoyerswerda, 40km from Poland, each has a population of 30,000-40,000. Both, say local officials, offer respite from the strains of urban life: cheap housing and plenty of kindergarten places, the shortage of which is a huge source of stress for metropolitan parents. Neither is near a big city; both offer visitors a friendly, somewhat sedate, face.
But the similarities end there. With one of Germany’s highest birth rates, Cloppenburg is growing at a steady clip, whereas Hoyerswerda has moved in the opposite direction. “This is a family-friendly region,” beams Johann Wimberg, Cloppenburg’s district administrator. “You can build a home here.” Hoyerswerda, a former coal-mining hub, lost half its population after reunification in 1990, largely to westward emigration. The district of Cloppenburg has grown by nearly 50%. Hoyerswerda’s “new” town (built during the communist era) is pockmarked by vacant plots on which gdr housing blocks once stood. Industrial parks on the outskirts of the town are half-empty.
Until a small, covid-induced decline last year, the German population rose steadily over the 2010s, reaching a record 83.2m in 2019. This was the result of high net immigration, running at an annual average of 400,000, mainly from southern and eastern Europe. Even the birth rate, long one of the lowest in the world, ticked up. But now a crunch looms. The birth rate peaked in 1964, and the baby-boomers are preparing to retire. In 2000 there were 26.5 over-60s for every 100 aged between 20 and 65. By 2025 this ratio will have shot up to 41.4. Immigration and labour-force participation rates aside, the working-age population will shrink by over 4m in the coming decade. Within the oecd club of mostly rich countries, only Italy and Japan have older populations.
Some parts of the country will do worse than others. Germany is no stranger to the town-and-country divide, but in some regions its economic structure mitigates against rural decline. Cloppenburg, like many small places, benefits from the success of “hidden champions”: the profusion of smes, often based in the middle of nowhere, that keep well-educated locals close to home. These Mittelstand firms, which often operate in specific niches, are a peculiar feature of the industrial landscape. The area round Cloppenburg also offers less salubrious work in the form of meat-processing plants, which attract transient eastern European workers.
Hoyerswerda has no such luck. This correspondent’s visit coincided with one from the Dresden branch of the Helmholtz Centre, which was considering where in the Lausitz region to locate a new research centre. Torsten Ruban-Zeh, the mayor and irrepressible cheerleader for his city, presented his vision of a vibrant, future-minded place ripe with opportunities for medical research and tourism. He noted that Hoyerswerda could not hope to hold on to the 200 or so students who leave its high-end Gymnasium for university each year, but needed prospects for the next tier of school-leavers, largely in technical work. The experts were not convinced; Hoyerswerda dropped out of the reckoning.
Parts of formerly communist East Germany face almost insurmountable demographic hurdles. Although people are no longer leaving for the west, so many of them did so after reunification (a net 1.74m by 2006), especially the educated young, that the demographic damage is now baked in. All five eastern states are older than all 11 western ones. If some “lighthouse” cities like Leipzig or Jena, on which state governments have showered attention, are muddling through, or better, it is a bleaker picture for smaller towns and the countryside.
Yet few regions are immune. By 2035 only 31 of Germany’s 401 Kreise (districts) will have a working-age population comparable to today’s, according to projections from the Berlin Institute for Population and Development. (The east will suffer disproportionately: 23 of its regions will lose one-fifth of their people.) The public sector is highly vulnerable: almost a third of government employees are due to retire in the next decade, according to Gerhard Hammerschmid at the Hertie School in Berlin.
Help from abroad
Immigration can help only so much. It has already slowed inside the eu, as eastern countries have their own demographic woes. In 2020 Germany modestly relaxed entry requirements for skilled workers from outside the eu. But as Johannes Vogel, a Free Democratic Party (fdp) mp, notes: “Every expert knows it won’t be enough.” The Federal Employment Agency reckons the country needs 400,000 immigrants a year to plug its skilled-labour gap.
The public-pension scheme is also threatened. Since 2007 the number of recipients has risen by more than 1m to above 21m, over a quarter of the population. The system sucks around €100bn a year from the federal budget, over 30% of total spending. A strong labour market and earlier incremental reforms, including a slow rise in the retirement age to 67 by 2031, have somewhat eased the situation. Uncertainty over growth and immigration make long-term predictions hazy. But the coming crunch is as clear as day.
What to do? The imf calls for indexing the retirement age to life expectancy, as Denmark does. More likely are smaller tweaks, including increases in the contribution rate from today’s 18.6% of gross wages. Payments may have to fall, too: last year a pension committee suggested the ratio of average pensions to income would probably have to drop from 48% to 44% after 2025. Jens Weidmann, head of the Bundesbank, adds: “It doesn’t seem very convincing to rule out changes to the retirement age while life expectancy continues to increase.” Failure to reform will only increase the burden on the federal budget, exposing the system to recessionary risks, notes Christian Dudel at the Max Planck Institute for Demographic Research in Rostock.
Yet change will not be simple. Pension reforms do not, as a rule, inspire France-style mass protests. But an ageing electorate will not roll over easily, and in consensus-oriented Germany the government will need to prepare the ground carefully. In June politicians howled when advisers to the economy ministry warned that the state pension system could face serious financing problems as early as 2025. “My hope is that we start reform before it becomes a political battle in which many participants will be wounded,” says Steffen Kampeter, general manager of the bda employers’ association. Four in five Germans think their state pensions will not be enough to live on in old age. It will fall to the next government to ease their fears.
The European Union will badly miss Angela Merkel
Angela merkel’s first eu summit, in December 2005, was a sign of things to come. Tony Blair and Jacques Chirac were locked in combat over the seven-year budget. The chancellor, in office for three weeks, took stock of others’ red lines, schooled Mr Blair and Mr Chirac in the finer details and, after negotiating for hours (and oiling the wheels with German money), brokered a compromise. If the rest of Europe is nervous over Mrs Merkel’s departure, it is because she has made herself the indispensable European: brilliantly briefed, invested in personal relationships, and possessing almost superhuman negotiating stamina.
Mrs Merkel has held Europe together when it counts: leading the charge against Russia after its attack on Ukraine, holding the line on Brexit and now assenting to joint eu borrowing for its post-pandemic recovery fund. But a fair accounting would also find much to criticise. In the euro-zone crisis she forced countries like Greece into punishing austerity and entrenched a narrative of fiscal indiscipline that deepened and lengthened Europe’s recession. In 2015-16 her unilateralism on border policy and negotiations with Turkey infuriated her partners, deepening an east-west split. Many also believe she could have done more to resist the authoritarian drift in Poland and Hungary.
Mrs Merkel is no starry-eyed European. Campaigning in 2005, she said the eu ought to think about returning some powers to governments. Five years later, in a speech to the College of Europe in Bruges, the chancellor expressed scepticism about the “community method”, in which eu institutions like the European Commission and European Parliament (which she is said to dislike) drove integration. As the eu bounced from crisis to crisis, she backed the alternative “union method”, with power shifting back to national governments—none more important than her own.
The European Council, where leaders thrash out deals often shaped by domestic political currents, has become the eu’s central decision-making institution. Presidents of the commission, like José Manuel Barroso and Jean-Claude Juncker, have often had to take a back seat (although the current one, Ursula von der Leyen, a former German defence minister, has quietly strengthened her institution). Mrs Merkel’s approach has not been to everyone’s taste. “She hasn’t been a neutral crisis manager; she’s actively worked against Europe,” complains Alexander Graf Lambsdorff, an fdp mp and former mep.
Yet the eu and the euro have worked for Germany—so well that it is not obvious why any chancellor should push for radical change. If joining the European project was the condition for readmission to the club of civilised nations after the war, more recently it has been the engine for German prosperity. The trading freedoms of the single market; skilled migrants from, and low-wage labour in, central Europe; and the cheap euro have all been a boon. eu countries account for over half of German exports, even after Brexit. And its economic strength has made the country the most important partner for almost all other eu members.
The next chancellor will face a big test when the commission reviews the eu’s Stability and Growth Pact, which limits fiscal deficits and public-debt stocks. Demand for change will meet fierce resistance from German conservatives. (The subject is sufficiently touchy that officials in Brussels are under instruction to keep their thoughts to themselves until after the German election.) But many governments, including France’s, believe the old rules are ill-suited to an era of low long-term interest rates and pressing investment demands. Some foresee a grand bargain, in which Germany accepts longer-term joint borrowing for the eu in exchange for a return to something closer to the pact’s existing rules.
A bigger question is whether the next government will sign up to ideas associated with Emmanuel Macron’s “strategic autonomy” agenda. In a recent paper Jana Puglierin and Mark Leonard of the European Council on Foreign Relations draw on opinion polling to conclude that Germany “may be on the cusp of a nationalist turn”. The remedy, they argue, is for the next government to make a patriotic case for investment in European sovereignty on matters like screening foreign investments, the international role of the euro and competition policy. Boosting European resilience as a hedge against American unpredictability and Chinese aggression, they argue, may become a condition for ensuring voters’ continuing support for the eu.
Many will take some persuading. And yet as it becomes clearer that the global circumstances that allowed Germany to thrive are disappearing, parts of the establishment are embracing European ideas that would not previously have earned a hearing. Take industrial policy. In 2019 Germany joined France in seeking unsuccessfully to persuade Margrethe Vestager, the eu’s competition supremo, to allow a merger of Alstom and Siemens, two industrial giants, so that it could compete against the Chinese.
Germany has also backed the eu’s “important projects of common European interest”, subsidies for “strategic” investments in hydrogen projects, battery production and the like. It is inching slowly towards translating abstract support for common European defence into reality via joint weapons projects. These developments and others hint at a dawning awareness that economic policy has a geopolitical dimension. And that may suggest the country’s foreign and security policy needs a complete reboot.
The attitudes of Germany’s young
The litany of foreign leaders Angela Merkel has outlasted is impressive. Since she took office in 2005, America and France have been through four presidents each, Britain has seen five prime ministers and Italy no fewer than eight. But at home an entire generation has grown up with no memory of another leader. In September 2.8m of these Merkelkinder, making up nearly 5% of the electorate, will be eligible to vote for the first time in a federal election. The Economist met a few at the Sophienschule, a Gymnasium (grammar school) in Hanover. All are near or have just finished their final year of schooling.
For some, the experience of covid-19 was a harsh reminder of political reality in a country where the over-60s make up well over a third of eligible voters. “The pandemic showed how unimportant younger voters really are,” says Marie Sophie Scholz. “Apart from our teachers, no one cared.” All the students have harrowing accounts of failed technology, disrupted home lives, lost motivation and loneliness. Some say their pandemic experiences will influence their vote.
Climate concern looms large. Many students have participated in Fridays for Future climate marches. “The average voter is in their 50s, so for us it’s not enough to vote,” says Julian Köppen. “But we can demonstrate.” Marie is infuriated by condescending politicians who dismiss such actions as excuses for truancy: “If they don’t act now, politics will become a very dark place.” Hannah Sprengel grumbles: “They see what we do, but don’t act.”
Julian is excited by a court ruling that partly struck down the climate law for not taking sufficiently into account the rights of future generations. This approach to sustainability, he reckons, must extend beyond climate to areas like the digitalisation of schools. Max Brinkmann wants more focus on inequality and pensions—and thinks change comes from collective movements (he has joined the spd). For Julian, a big issue is “security”, by which he means “avoiding international conflicts and not provoking other leaders.”
Mrs Merkel was good at that, he reckons. All students appreciate the chancellor’s calm, rational approach to politics, in contrast to what Max fears has become an “emotional and populist” campaign. “We will miss her,” he says, while conceding that the chancellor “pushed away problems” that seemed too hard to solve. There is some scepticism about assuming Mrs Merkel’s departure will mean rupture. “We don’t have to be nervous,” says Hannah. “No one person will make or break a system.” Still, adds Marie, life after Merkel is “looking into the unknown”.
The world needs a more active Germany
On august 2nd the Bayern, a Brandenburg-class frigate, set sail from the North Sea coast with over 200 troops aboard and a novel mission. Over seven months the warship would traverse the Suez canal and Red Sea, dropping anchor in places like Mumbai before reaching the South China Sea, where an assertive China is intimidating neighbours with unfounded territorial claims.
“Germany has a strong interest in stability, security, and rules-based politics in the region,” says Annegret Kramp-Karrenbauer, the defence minister. “We are not a regional power, but we support our partners.” This is unusual talk from a German politician. The frigate’s dispatch was a signal of intent to China and reassurance to allies. It also tells a story of a political class struggling to make sense of Germany’s role in a changing world.
Ms Kramp-Karrenbauer, once considered a successor to Mrs Merkel, suggested sending a frigate in 2019. But peacenik spd mps objected. Wary of upsetting her grand coalition’s balance and ill-disposed to provocations, Mrs Merkel leaned on her former protégée to compromise. True to form, the internal problem was externalised: the Bayern would steer clear of disputed territories in the South China Sea and seek permission to dock in Shanghai. The decision confused Germany’s allies, including America. What exactly was Germany trying to achieve?
The next government will face serious foreign-policy challenges. Some are familiar: a Russian menace, an underfunded Bundeswehr, cyber threats, the risk of a fresh migrant crisis, perhaps from Afghan refugees. The first test for the next chancellor, speculates one official, may come from a French request to shore up Germany’s presence in Mali, already its largest overseas military deployment.
The biggest strategic issue will be the recalibration of relations with China. Over the years Mrs Merkel fostered an agreeable coupling between the growing Chinese market and German exporters. China has been the country’s biggest trading partner since 2016. But this was not glorified mercantilism. Spotting China’s potential earlier than most, and fearing European decline, Mrs Merkel has sought to manage China’s rise, not contain it.
But the relationship has started to sour. The trophy of Mrs Merkel’s engagement, an eu-China investment treaty she pushed last year, is in the deep freeze because the European Parliament will not ratify it. The Greens, likely to join the next government, are human-rights hawks on China. Even the cdu manifesto is tougher than previous iterations. There is a sense that, as Mikko Huotari, head of the merics think-tank, puts it, “Germany’s China policy will have to be recalibrated on most fronts.”
Big industries like cars and chemicals have not withdrawn their long-term bets on Chinese growth. But other sectors have grown tired of the costs of doing business with China. In 2019 the Federation of German Industries (bdi) issued a paper calling China a “systemic competitor” and urging policy changes. Such developments have inspired German support for a bolder eu industrial policy. “We see China as a partner, a rival and a competitor,” says Jens Spahn, the cdu health minister, describing the eu’s taxonomy of relations. “None of this includes dependence—and this worries me.”
Mrs Merkel’s attempts to bring China into the multilateral fold were grounded in a conviction that globalisation could work only if the biggest economies signed up to its rules. But the emerging competition between America and China, which extends far beyond the military sphere, makes this harder. Some firms have started to hedge. Carmakers are ramping up battery production in Europe. Companies will have to think how to navigate patchwork rules, where to locate r&d centres and how much distance to keep between head office and Chinese subsidiaries. Even the semiconductor shortage—a product not of trade wars but of supply-chain hiccups—is a reminder of latent vulnerabilities. All this, says Mr Huotari, shows that “China is no longer an all-in bet”. And some officials fret about Chinese economic and diplomatic pressure.
Belts and roads
Take Duisburg, a debt-ridden former industrial hub fallen on hard times. Home to Europe’s largest inland port and part of one of its most densely populated states, Duisburg is seeking redemption through China’s Belt and Road Initiative, an infrastructure-and-influence programme for which it is the European terminus. Some 70 trains make the 17- to 22-day journey between China and Duisburg every week, bearing electronics, vehicles and other goods for European consumers (and returning with machine tools, car parts and food). “Duisburg has become very famous in China,” says Jinheng Feng, who gave up an academic job in 2017 to set up a consultancy for Chinese firms interested in doing business in the city.
“The New Silk Road is a big chance for Duisburg to build a new economy,” says Rasmus Beck of the city’s economic-development agency. If the results beyond container trade have been limited, officials speak brightly of building “bridges of knowledge”, with China offering tech expertise while learning from Duisburg’s experience of post-industrial transformation. Having found a model that holds promise for Duisburg’s reinvention, few are interested in having it tested by shifts in geopolitics. They point out that, unlike Greece and Italy, Duisburg has been careful to avoid selling big stakes in infrastructure to Chinese investors.
A forthcoming paper by Roderick Kefferpütz, also at merics, says China has become adept at leaning on officials in decentralised Germany. In North Rhine-Westphalia, home to Duisburg, America and Britain have given quiet warnings of Chinese economic influence. In 2018 critics howled when the city signed a deal with Huawei—a now-ailing Chinese tech giant with its European headquarters in nearby Düsseldorf. Elsewhere, cities that fly Tibetan flags or allow Falun Gong protests have been criticised by the Chinese embassy. Andree Haack, head of Duisburg’s economic department, sums up China’s insertion into multiple dimensions of governance. “You can see big politics is coming to the local level. But we have been given no European answer to the digital transformation.”
Germany has grown rich on the back of a benign global order it did little to support. If challenged, it could sprinkle on its trade policy a dash of Wandel durch Handel (“change through trade”, the notion that growth will liberalise autocratic states), a hypocritical idea it suited everyone to pretend to believe. Leaders agonised endlessly over foreign deployments or giving the Bundeswehr armed drones. An idealistic worldview “prevented them from acknowledging that some powerful players do act in amoral, cynical and militaristic ways,” argues Maximilian Terhalle at King’s College London.
Under pressure from allies, this picture has slowly changed. The defence budget, though short of the nato target of 2% of gdp, has risen since 2015. Germany spearheaded the eu’s diplomatic response to Russia’s attack on Ukraine, and its troops head a nato “tripwire” force in Lithuania. Some 2,500 soldiers contribute to 11 multilateral missions abroad, and Germany is a partner in joint European defence ventures like the Future Combat Air System.
Yet this hardly adds up to a strategic outlook grounded in a sense of the national interest. It is not hard to conjure scenarios that would send officials into a tailspin, says Claudia Major, who works at the German Institute for International and Security Affairs. What if America withdraws its nuclear weapons? What if dithering over arms-export rules or new technologies hinders the development of European defence schemes? What if tensions over Taiwan threaten global free trade? The recent Afghanistan debacle, fears Ms Major, may make the country even more inward-looking by strengthening those who argue that interventions never work.
After the Bayern’s departure, the Chinese government issued a hostile statement asking Germany to clarify its intentions before it extended an invitation to Shanghai. Officials in Berlin who had struggled to resolve the ambiguity of the mission were relieved: Beijing had, in a sense, done the job for them. But the country cannot rely on others to fix its problems for ever. “More and more Germans realise that their prosperity, freedom and security require more strategic thinking and acting,” says Ms Kramp-Karrenbauer. “Most important, they realise that doing nothing and being the good guy are not always the same thing.
Germany needs a reforming government
Angela merkel has steered Germany and Europe through difficult years. Although it may come as news to some, she will leave a country more at ease with itself than at any time since the republic was set up in 1949. Germany rests on solid foundations, from its universities and basic research, to its world-beating Mittelstand and undisputed engineering prowess. Its researchers invented the first diagnostic test for covid-19 and the first vaccine to use the messenger-rna technology. Its democracy is robust, it sits at the hub of a strong network of alliances, and its European and global brands are stronger than ever. Few of the deficiencies this special report has sought to highlight seem irremediable.
For all that, suggests Thorsten Benner of Berlin’s Global Public Policy Institute, “We may see the Merkel years as the last hurrah of the German model.” If its foundations are strong, parts of the interior have started to show their age. For many voters, the old verities on debt, industry and Germany’s place in the world retain a vintage charm. But they are increasingly out of step with a decidedly contemporary set of challenges.
Take covid-19. Although Germany suffered a lower death rate and a gentler economic blow from the pandemic than many other countries, the experience also exposed Germans to failings in the operation of their state. Many were shocked to see how schools failed to get to grips with online learning, or the endless bickering between federal and state politicians. The fax machines used by health offices to communicate test results became emblematic of a primitive public sector. Aggregating timely, consistent data proved elusive. Without the ability to impose common it standards, the federal government was left to watch what Mr Spahn calls “400 digital islands” manage fragmented and incompatible systems.
The weaknesses of a tripartite governing system—federal, state and municipal—partly explain such woes. A €3bn fund approved by the federal government to help states observe an online-access law in 2020 took over a year to divide up. By the end of last year less than €500m of the government’s €6.5bn “digital pact for schools” fund, approved in 2019, had been disbursed. Even less had been spent, as understaffed local governments struggled to understand the rules. One difficulty is a constitutional bar on the federal government directly funding municipalities in most circumstances. Workarounds muddy lines of responsibility and accountability. “Everyone knows that we need a federalism reform, and everyone knows that we won’t get one,” says Steffen Kampeter of the bda.
Another problem is the quality of administration. If all bureaucracies battle with complacency and dead wood, Germany’s is worse than most. “All that German officials want to do is develop tactics of risk avoidance,” says one consultant, a claim borne out in international comparisons. Recruitment practices are stodgy, strict silos mean functions are duplicated, and lawyers dominate everything. Bureaucratic jobs have mushroomed; the price of unhappy grand coalitions where places must be found for everyone. One mid-level official says he marvels at the ability of his colleagues to bounce the simplest external request around for days.
The aspirants to replace Mrs Merkel all pledge to make the country more zukunftsfähig, as is customary before all elections. The climate imperative in particular will force them to think more seriously about such arcane matters as planning procedures and municipal staffing. But René Geissler, professor of public administration at the Technical University of Applied Sciences in Wildau, is sceptical. “We’ve been having the same debates for years,” he says. “I really don’t see change coming.” Once governments are in place, serious reform of the public administration often falls prey to more pressing matters.
Germany’s increasingly fragmented politics will not help. The next government could see growing tensions between the usual emphasis on consensus and the pressing need for action. In theory, once it is in place—which may not be until early 2022—a three-party coalition, an unfamiliar experience at federal level but the likeliest election outcome, could unite the best aspects of each party’s programme: Green zeal on climate and investment; a liberal focus on digitalisation, innovation and bureaucracy; and so forth. But at least as likely is internecine bickering and political gridlock, especially in the absence of a chancellor with Mrs Merkel’s clout.
Should it turn out that way, Germany will not be the only casualty. Emmanuel Macron, if he survives his own re-election bid next spring, will at least for a time emerge as the eu’s central figure. But as the French president has always recognised, his country is too weak, and in some quarters too mistrusted, to lead Europe alone; it needs a strong German partner committed to domestic reform and a more assertive posture abroad. And as American attention continues its long shift to China and the Pacific, the pressure on Germany to play a more active role in the eu’s troubled neighbourhood, beyond its (relative) comfort zone of providing deterrence inside Europe, can only increase.
What are the prospects for success? To judge by the election campaign, which has been dominated by trivial scraps, personal peccadillos and arcane discussions about coalition configurations, they look slim. Debate on foreign policy has been especially thin; Europe has been almost entirely absent. Renewal in Germany rarely follows arrow-like from a new government; and even less so from the promises politicians make to an electorate that is hardly enthused by the prospect of disruptive change.
The optimist might claim that the challenges for Germany have become impossible to ignore. Those voices advocating reform, from a more realistic fiscal approach to a grown-up security policy, have started to earn a hearing inside government; some of them may even join the next one. Yet as Germans prepare for a new chancellor for the first time in 16 years, the danger of the complacency for which Mrs Merkel will surely be remembered has become starkly clear. Overcoming it will be the biggest task for whoever takes her place.