By Marcel Fratzscher
German Chancellor Angela Merkel’s Christian Democratic Union (CDU) may have won a majority in September’s federal election, but that does not mean that the country’s future is clear. What emerges as Merkel seeks to form a new coalition with the Greens and the Free Democrats will not only shape Germany’s economic trajectory over the next four years; it will also determine the fate of the country’s transformation into a truly open society.
In less than a generation, Germany, once the sick man of Europe, has emerged as a global economic powerhouse. But the truth is that Germany’s current economic success is less the result of good policies than of favourable external conditions, especially in Europe, which ensured strong demand for German exports.
To be sure, important domestic economic reforms enabled Germany to take advantage of external demand. But they were undertaken long before Merkel came to power, and few meaningful economic reforms have been implemented during her 12-year tenure. For example, domestic private investment remains weak, partly owing to over regulated services and heavy bureaucratic burdens.
Moreover, as the German government has preached austerity to its neighbours, it has increased social spending on pensions and transfers, all while allowing net public investment to turn negative. The much-needed overhaul of the tax system once hyped by the CDU has failed to materialize. And, though employment has increased during Merkel’s tenure, job creation has not succeeded in reducing the low-income segment of the labor market.
The parties most likely to form the next government – the CDU (and its Bavarian sister party, the Christian Social Union), the Greens, and the Free Democrats – are now fighting over how best to use Germany’s large fiscal surpluses to serve their respective constituents. Whatever decision they make, Germany’s economic performance is likely to remain strong, at least in terms of trade and a balanced budget.
The real test of the so-called Jamaica coalition (named for the parties’ colors) lies elsewhere. What Merkel has lacked in economic-policy achievements, she has made up for in bringing about social change. Under her leadership, Germany has become the open society it is today. But it is also an increasingly divided society.
As it stands, some 20% of Germany’s population of 82 million has a migrant background, and close to five million are Muslim. This multiculturalism is reflected in changing perspectives on the part of all Germans. Four out of five Germans now consider Islam and homosexuality to be part of German society; three out of four say the same about migrants and refugees. And Germany has one of the most pro-European populations on the continent.
The last three governments, all led by Merkel, have contributed mightily to this transformation. Critics call Merkel the first social democratic chancellor from a conservative party, because she has embraced many progressive policies, while preaching stability and traditional values. Arguably her most important decision – which almost cost her the chancellorship, but might ultimately shape her legacy – was her 2015 decision to accept, despite fierce opposition from many in her own party, almost 1.5 million asylum-seekers and push for their integration into German society.
Germany’s Merkel-led governments have also supported early childhood education and children’s rights, while overseeing substantial progress on gender equality. Broader, more flexible access to the labor market, expansion of early childhood facilities, and financial incentives have driven an increase in female labor-force participation to more than 70%, one of the highest in the industrialized world. The current German government also implemented a 30% quota for women on supervisory boards of large companies, as well as a wage transparency law aimed at reducing the country’s gender pay gap, which is still a whopping 21%.
While Merkel did not spearhead these reforms – not least because she had to avoid alienating those in her party who viewed them negatively – she offered tacit support. Similarly, though Merkel herself voted earlier this year against legalising gay marriage, which many in her party do not support, she accepted graciously the Bundestag’s decision, declaring that she hoped the vote would not only promote “respect between different opinions,” but also bring “more social cohesion and peace.”
Ultimately, it is Merkel’s talent at bridging social and political divides that has made Germany’s transformation into an open society possible. And this, not economic policy, might ultimately become the greatest achievement of her chancellorship. In some ways, Germany has already moved beyond the point of no return on its path toward openness, owing to Merkel’s 2015 refugee policy.
Yet there are enormous challenges ahead. Beyond the technical and social challenges associated with the successful integration of refugees, there is a need for greater tolerance toward Islam and diversity more generally on the part of all Germans. Further changes to family and gender policies and an overhaul of the education system will also be needed.
As Germany continues to debate what it means to be German, the outcome of the current coalition negotiations will determine whether Merkel’s next government confronts these challenges effectively. If it does, Merkel will be remembered as the architect of a new German society.
Marcel Fratzscher, a former senior manager at the European Central Bank, is President of the think tank DIW Berlin and Professor of Macroeconomics and Finance at Humboldt University, Berlin.
Copyright: Project Syndicate 2017
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