The strange death of liberal Germany

Published in Business Spectator (Melbourne), 11 September 2014

The elections in the state of Saxony a couple of weeks ago mark a historic shift in Germany’s political landscape. The liberal, business-friendly Free Democrat Party got kicked out of parliament, having lost two thirds of their previous voters and being left with only 3.8 percent of the vote. This means that they can no longer be a coalition partner in the next government.

As a result, for the first time in post-war history, the FDP will not have a single minister at state or federal level. And it is likely to get worse. If the next state elections in Thuringia and Brandenburg this Sunday go according to opinion polls, there too the FDP will cease to exist as a parliamentary party. This would leave only 64 liberal state MPs across the whole country, whereas only five years ago the party held 258 MPs at both a federal and state level.

It is an unprecedented decline of a political party that was part of the federal government for longer than any other party. A party that used to hold important offices, including the economics, justice and foreign affairs portfolios, and once even nominated the Federal President as head of state. Now the FDP has become a case for a liquidator rather than a turnaround consultant.

It is sad for the FDP and it is tragic for the country because a liberal voice in German politics is missing more than ever. (This is not to say that the FDP was a very effective voice in recent times.)

Over the past years, the political scene has changed substantially. A quarter century ago, German politics was easy to understand. There was a large centre-left Social Democratic Party, a slightly larger Christian Democrat Union and two smallish parties: the Greens on the left and the FDP on the right.

Coalitions were usually formed by either left or right blocs, with the FDP occasionally also supporting Social Democrat-led governments.

Since those days of political lucidity, parliament has fractured due to the arrival of new parties. The whole political spectrum has shifted leftwards for various reasons. The former East German communists have re-established themselves as ‘the left’ party, challenging the SPD. The eurosceptical ‘Alternative for Germany’ is trying to fill the void left by the FDP but also scores points with conservative populism.

Meanwhile, Chancellor Angela Merkel has turned her Christian Democrats into a pseudo-social democratic party, outbidding the real SPD on any kind of welfare state and feel-good policies they may have on offer. And the only party to challenge this new consensus, the FDP, is out.

Looking around the German political landscape, it is now entirely populated by parties that promote a stronger state to implement their various agendas. There are parties that toy with the idea of a state-guaranteed, work-free minimum income; meanwhile the Grand Coalition government is introducing a minimum wage so high that it would require a miracle for it not to destroy thousands of jobs.

Despite a rapidly ageing population, Merkel’s government has also just decreased the retirement age, which can only be called an act of economic vandalism. The government’s move away from nuclear power and fossil fuels while subsidising renewables is costing households and businesses billions in the form of higher energy bills. And of course there is the euro disaster, which has locked Germany into a de facto liability union with the rest of the continent.

In all of these areas, an economically liberal voice would be desperately needed. However, with the demise of the FDP, there is no party left that could still play this role.

As I have often argued in this column, Germany is not the economic powerhouse that the world believes it is. It may look good compared to, say, Greece or Portugal, but are these really the right benchmarks?

The truth is that Germany faces numerous economic and demographic challenges for which the country is ill-prepared. It is at last waking up to the fact that there is a lot of policy homework to do if the country wants to remain prosperous in the coming decades.

This week, Der Spiegel newsmagazine has a cover story under the telling headline ‘The crumbling republic’. It highlights the parlous state of German investment, both public and private. Maintenance on public buildings, roads and schools is so poor that either some serious upgrades will be undertaken in the future, or it will lose parts of its infrastructure fabric to decay. Germany is eating its seed corn, Der Spiegel writes. At the same time, German companies are relocating their activities abroad where the environment for doing business is better.

The magazine also quotes prominent economist Marcel Fratzscher, head of the German Institute for Economic Research, who nowadays likes to open his public talks with the following riddle: “Which country is this? Since the beginning of the century, it has grown less than the eurozone average. Its productivity has only increased marginally, while two out of three employees have a lower income than in the year 2000.” Of course, the intuitive answers to this riddle are Greece, Italy, Spain, France or Portugal. In fact, it is Germany that Fratzscher is talking about.

The Germans have been lulled into believing that they are the leading economic nation in Europe. This has allowed Merkel to rise to unprecedented popularity by only pursuing policies with popular appeal, even where they are leading the country in the wrong direction. Economic reforms, or indeed anything that looks like a tough nut to crack, are not on her agenda.

In its better days, the FDP was the only party prepared to challenge this cosy consensus of German feel-good politics and talk about those issues that were not universally popular. The voters obviously did not appreciate such tough talk and have delivered the maximum punishment to the party by voting it out of existence. You can do that with a party but the problems will not go away just because the voters do not like to be reminded of them.

There is now something one might call a ‘Germany bubble’, where experts believe it is safe to lend the German government money for longer periods at zero or even negative interest rates. It is a bubble characterised by leaders of other European countries count on borrowing based on Germany’s credit rating. It is a bubble where the Germans themselves feel more afraid of paying for other European nations than of losing their own jobs.

But it is a bubble because it is a perception that is built on shaky foundations. Germany, as Der Spiegel correctly writes, is a crumbling republic in more ways than one. When the effects will be felt, one can only hope there will be a respectable, non-extremist party like the erstwhile FDP to pick up the pieces.

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