Forget Barack Obama. Forget the Hu Jintao/Wen Jiaboa duo, or David Cameron or Vladimir Putin. Germany’s Chancellor Angela Merkel is the world’s most important leader. The latest report showing Germany’s economy growing at a blistering annual rate of nearly 9%, well into recovery from a US-made economic collapse, is just further evidence of the obvious. Despite her carping critics who have bizarrely accused her of dithering, economic malpractice and über-nationalism, Frau Merkel right now is standing head and shoulders above the pack. If we selected a planetary MVL – Most Valuable Leader – she would be it.
The world is facing two immense challenges that too often get lost amidst all the daily headlines. First, how do we identify the institutions and practices capable of enacting a decent quality of life for a burgeoning global population of 6.5 billion people, allowing China, India, Brazil and other countries a place at the table? And second, how do we do all that in a way that does not burn up the planet in a Venus atmosphere of excessive carbon emissions?
In responding to those challenges, Germany is leading the world, led by its female chieftain, the first ever woman chancellor in its history. The shrewd Frau Merkel, with her personable, down to earth demeanour, has displayed steady, effective leadership in five critical areas: the economic crisis, social policy, global warming, foreign policy and, perhaps most importantly, in refashioning capitalism in the face of its near collapse.
Following the economic crisis, Chancellor Merkel and French president Nicolas Sarkozy proposed sweeping regulatory changes, including a redesign of the international architecture of financial institutions. Using the subtle, coded language of diplomacy, they warned the new Obama administration not to block their attempts to crack down on hedge funds and derivatives, as well as on the corrupt rating agencies, outrageous bank bonuses and more. Is there any doubt that the foot-dragging US Treasury Secretary Timothy Geithner would have dithered even more had he not been pushed – shoved, more like it – by the Europeans, led by Merkel?
Keeping in mind that Merkel is the leader of the conservatives in Germany, her defence of ‘social Germany’ has been no less eloquent and thoughtful than that of her Social Democrat predecessor, Gerhard Schröder. During this economic crisis and even before, she reasserted Germany’s desire to ‘retain essential elements of . . . social protection’ and ‘secure the future of the social market economy.’ She has continued to support works councils and worker-elected boards of directors of Germany’s major corporations, and maintained the ‘culture of consultation’ that has become a hallmark of Germany’s social capitalism. You would never catch any Democrat, even President Obama, making such bold declarations or proposals in support of the social dimensions of the US economy. At times, Merkel sounds like the FDR that many wanted Obama to be.
It hasn’t been mere Merkel rhetoric to win votes, either. Rather than twiddling her thumbs while the private sector laid off millions of workers, like the Obama administration has done, Merkel’s government expanded Kurzarbeit, or ‘short-time work’, in which, instead of laying off millions, Germany spread the pain around by having employees work shorter weeks. Most of the workers’ lost wages have been made up from a special fund squirreled away during more prosperous times. In other words, instead of the government paying people not to work, as in US-style layoffs, it paid people to keep working, but at reduced hours.
The impact has been darn near miraculous. According to OECD figures, while the unemployment rate in the US has more than doubled to almost 10%, and the unemployment rate for all OECD countries has increased by 3 percentage points, the unemployment rate in Germany has declined by 0.9 percentage points to 7.0% in May 2010. More Germans have money in their pockets, maintaining levels of consumer spending that drive the economy, and communities and households haven’t been decimated by layoffs like they have been in the United States. Businesses’ workforce has been kept intact, ready to strive for increased production now that the economic recovery has begun. Yet when Larry Summers, one of Barack Obama’s closest economic advisers, was asked why the president didn’t pursue short-time work to stem the economic bleeding, he dismissed the idea, saying the White House wanted to create new jobs, not preserve old ones – as if there is a conflict between those two aims.
Leading European conservatives like Merkel and French president Sarkozy support the notion that corporations have social obligations. For all intents and purposes, the conservatives of Europe are now social democrats, even if not Social Democrats. The European political parties of the centre-right, and in many ways even the far-right, are to the left of the Democratic Party in the United States. Germany is not the land of Citizens United, that horrible recent US Supreme Court decision that expanded the jurisprudence that says corporations have individual rights like people do, further undermining the social dimension of America’s political economy. Indeed, when Volkswagen, which is the largest carmaker in Europe and is 20 percent owned by the German state government of Lower Saxony (where Volkswagen is based), wanted to abolish Lower Saxony’s blocking minority rights, Merkel sided with the state government, a position that would be anathema to an American conservative, or even most Democrats.
Merkel’s economic stewardship has steered Germany further away from the American path of Wall Street’s casino capitalism. In particular, the Germans believe that a manufacturing economy with strong stakeholder rights is the best hope for getting away from a type of capitalism that is over reliant on financial speculation and has led to such catastrophic bubbles. Merkel was once asked by then British Prime Minister Tony Blair what the secret was of her country’s economic success, which includes being the world’s largest exporter and running substantial trade surpluses in recent years. She famously replied, ‘Mr Blair, we still make things’. In Germany, manufacturing still dominates finance because Deutschland capitalism didn’t succumb to the financialisation of the economy that swept the United States and Britain in the 1980s under Reagan and Thatcher. In the US, this led to a tripling in the size of the financial sector as a percentage of both the overall economy and of corporate profits, as well as a loss of millions of manufacturing jobs. Werner Abelshauser, an economic historian at the University of Bielefeld in Germany, says the European way of running the economy ‘is fundamentally about a banking system based on patient capital and firms that emphasise high-quality products and long-term relationships between suppliers and customers’.
At this point, the results speak for themselves. The smart policies of the shrewd Frau Merkel’s government have contributed to Germany’s recent economic success, while the timid policies of the Obama administration so far have led to a lacklustre economic recovery.
Leading the way on climate change
In the midst of an economic crisis, it’s easy for the world’s leaders to take their eyes off the looming challenge of global climate change. But led by Merkel, Germany and Europe have quietly stepped into the role of global trailblazer. More of a pragmatist than an ideologue, Merkel has maintained, and even expanded, many of the best policies of the previous Social Democratic government, ensuring that Germany continues to have the largest solar and wind power industries in the world, with Spain, Portugal and Sweden also making gains. When European unity was in doubt on this issue, Chancellor Merkel used her considerable powers of persuasion and coercion to corral an agreement from the heads of all 27 European Union nations to cut carbon emissions by 20 percent and to make renewable energy sources 20 percent of the European Union’s energy mix by 2020 (up from a 6.5 percent share, which was already twice that of the United States).
Europe already is halfway towards achieving the goals of its 20-20-20 Plan, even as the ‘filibuster gone wild’ US Senate continues to drag its feet. Displaying an important principle that will be crucial to any global climate agreement, the richest European nations – led by Germany – agreed to contribute a greater share toward combating greenhouse gases and climate change. Meanwhile the US, which is by far the world’s largest per capita polluter of greenhouse gases, has refused to move forward until China does, even though China has a GDP per capita one-twelfth of America’s ($3700 versus $46,000). Considering that the European Union has the largest economy in the world, this climate protection agreement is nothing less than epochal in its impact. With half million ‘green jobs’ having already been generated, and with its continent-wide carbon emissions, electricity use and ecological footprint half that of the United States for the same standard of living, European governments and companies are demonstrating that action on global climate change can bring tremendous economic as well as environmental benefits.
In foreign policy, Merkel has correctly steered Germany away from any further entanglement in America’s follies in the Middle East, while maintaining a rhetorically supportive posture toward Europe’s transatlantic ally, including in negotiations with Iran over its nuclear plans. Merkel’s Germany has mostly been a voice of calm and reason, preserving the attitude of a good multilateral team player in the transatlantic alliance, while not allowing the White House – whether controlled by Democrats or Republicans – to bully it into pouring more fuel on the flames of the Middle East. Along with Sarkozy, Merkel has deployed a good cop–bad cop routine toward China, such as when Merkel pulled out of attending the opening ceremonies of the Beijing Olympics to show displeasure with China’s heavy-handed crackdown in Tibet, but Sarkozy and British Prime Minister Gordon Brown chose to attend.
Being a fluent speaker of the Russian language, and as someone who grew up in eastern Germany under communism’s shadow, she has continued her SPD predecessor’s policy of engagement with Russia. While the Bush administration’s bombast made a mess over Georgia, Merkel recognised the obvious – that Georgia and Ukraine are stuck in Russia’s Caucasus neighbourhood. Germany understands that neither Europe nor the US is dominant enough to dictate to Russia, but that doesn’t mean that Europe is impotent. Germany and Europe are by far Russia’s largest trading partners, the EU having accounted for just over half of Russia’s foreign trade in 2007 and 80 percent of foreign investment. Russia’s entire economy is only the size of France’s, and Russia cannot develop its economy without massive European investment. As political analyst Parag Khanna points out, in the long term Europe is staging a buyout of Russia, not the other way around. Meanwhile, under Merkel’s leadership, the EU extended its reach further east with the launch in May 2009 of its Eastern Partnership plan with the six former Soviet states of Ukraine, Georgia, Moldova, Armenia, Belarus and Azerbaijan. Merkel has encouraged the former Soviet states to bury their differences and cooperate in order to enjoy the benefits of the EU’s partnership initiative, aimed at better integrating the regional economies, stabilising the region and adopting democratic and free market reforms.
One crucial foreign policy issue where Merkel so far has been too tone deaf is that of Turkey. Merkel’s caution is defensible though: if admitted into the European Union, Turkey would be its second most populous nation, with significant demographic, religious and economic differences to bridge. Turkey is quite a large bite to swallow, analogous to the US allowing Mexico to have statehood into the United States. But the EU accession process takes years and there is still time to get this one right. The benefits of having Turkey inside the EU as a bridge to moderate Islam are too great to pass up.
Merkel’s critics and their discontents
Despite her many accomplishments and global stature, harsh criticisms of Merkel have come from two directions in recent months. First, during the Greek debt crisis, she was accused of being too slow to recognise the danger to the Eurozone and responding in a timely manner. She also was accused of looking out too much for Germany’s narrow national self-interest and not enough for Europe’s. Financial Times columnist Wolfgang Münchau unflatteringly called her a weak leader, a scheming politician, lacking a convincing strategy and finally pronounced her unfit for the office, writing ‘this crisis is global and requires leaders with a global and European mindset to solve them. In other words, it requires politicians other than Ms. Merkel’. Another pundit commented to me that Frau Merkel, as an East German, lacks the necessary European outlook and solidarity that emanated out of West Germany under her conservative party’s previous chancellor, Helmut Kohl.
Yet considering Merkel’s catalytic role at the European and global levels in financial re-regulation, climate change and resisting further escalation in the Middle East, these criticisms seem exceedingly overblown. Münchau and the chattering class have the luxury of taking pot shots from the sidelines, while a chancellor has to govern. Given European history and cultural differences, it was never realistic to expect that a chancellor of Germany was going to agree to an immediate bailout of Greece or any other Eurozone member. Europe had created a monetary union, not a fiscal union, and not that long ago either – a remarkable though unfinished achievement. The same forces, divisions and reluctance that initially prevented the formation of a fiscal union are still palpable across the continent. Considering the centuries of warfare that have wracked Europe right up through the 1990s and the latest Balkan conflict, five months to put together the pieces of a trillion dollar bailout effort seems like lightning speed.
As a point of comparison, the United States already has a fiscal as well as monetary union, and the federal government has the ability to play financial backstop for any states that get in financial trouble. But when California was going through its own Greek debt crisis in the summer of 2009 and asked the Obama administration for a bailout, the White House said ‘Nein’. That led to California issuing IOUs to prevent bankruptcy and becoming a national laughingstock. Yet in the Eurozone, where there has been no history of member-states acting as a financial backstop for each other, they have banded together to take steps allowing a bailout of financially troubled members if necessary. It’s unprecedented, an historic achievement – yet the mini-me talking heads are dismayed that it took five months to reverse centuries of history. The magnitude of their impatience is outweighed only by the shortness of their vision.
A second line of criticism against Merkel has come from economists like Nobel Prize winner Paul Krugman (and Münchau once again), who are stimulus hawks that have been squawking over Merkel’s calls for Europe to get its economic house in order by reducing its deficits. Krugman has written that the Germans ‘seem to be getting their talking points from the collected speeches of Herbert Hoover’ because in his view the Germans are not spending or consuming enough to stimulate the European and global economies. The Germans have responded that their short work, workfare supports and other built in safety nets, previously derided by free market ideologues as crippling impediments to growth, have acted as ‘automatic stabilisers’ i.e. ongoing fiscal stimulus, providing much of the spending boost that the US Congress had to legislate. And the results speak volumes, as Germany’s unemployment has declined, its growth, exports and trade surplus have leaped forward, even while American unemployment has more than doubled and the US economy has sputtered.
Given Germany’s relatively good economic fortunes, says the Krugman brigade, it must now do more to stimulate domestic demand and consumption, importing from trade deficit nations like the US and other European nations and so help stimulate the global economy. But Krugman no doubt has visited Germany and seen that the German people are not lacking in any material goods to speak of. So what exactly are the German consumers supposed to buy more of? Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household. This kind of logic makes sense to economic professors and their theories, but unfortunately reality outstrips theory on a regular basis. Just because the US can’t play the role of consumer of last resort anymore doesn’t mean Germany should step into that role. Maybe the problem is with the script.
Capitalism 4.0 – Redesigning casino capitalism
The ‘deficit reduction versus fiscal stimulus’ debate is at the heart of an important discussion that has only just begun, and one to which Merkel, along with Sarkozy and European Commission president Jose Manuel Barroso, are making perhaps their greatest contribution. What alternative exists to the perverse consequences of consumer-driven, bubble-stoked economic growth? Many stimulus hawks like Krugman and Münchau have yet to figure out that it is this consumer-driven economic model that has crashed and burned. Merkel and other European leaders are saying that they have seen quite enough of Wall Street capitalism’s deregulated, bubbly, credit binge economy, which spread across the Atlantic like a plague leaving tragedy in its wake. They think casino capitalism is a dead end, and they don’t want to do anything to encourage an economic recovery founded on those same dead-end principles and policies, including launching huge levels of overleveraged fiscal stimulus.
Europe is looking to push reset and start again by getting the balance sheets closer to zero. Beyond economic revival, what Merkel, Sarkozy and Barroso see at stake in the recovery from the crisis is the overall vision for how a national economy is supposed to work, and the future of the global economy. The era of US-style trickle down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable in this era of global warming. And no matter how trickle-down you make your economy, you will never match China or India in that regard. The developed world must find a different way.
So Merkel’s biggest contribution may be the redesigning of capitalism itself, still inching toward a ‘new normal’ in the wake of the recent meltdown. Despite reports of tensions between the three, Barroso and Sarkozy have been worthy partners to Merkel in this endeavour: if there is tension, it appears to be, at least in part, a creative one. Sarkozy has been working with Nobel Prize economists Joseph Stiglitz and Amartya Sen to propose alternative measurements for assessing the health of an economy beyond GDP, average income and other over-used, easily manipulated measuring sticks. And Barroso has acted as Europe’s prime minister, not only corralling the cats but also using his bully pulpit to, among other things, push the Obama administration to join Europe in these endeavours.
If consumer-driven growth was the order of the day in the post-World War II era, now it needs to evolve toward steady-state economic growth, and the developed world must learn to do more with less. The world needs to figure out how an economy can provide for its people without having roaring growth rates like China. It’s not strictly about economic growth anymore, it’s about ecological sustainability and steady-state growth – growing not too fast, but not too slowly, and learning how to share better the amount of wealth produced by each nation. This is the path that Germany, France, Japan and others are choosing.
Germany has been a leader with its social capitalist economy at the heart of this European Union experiment that has grown to become the largest economy in the world, with more Fortune 500 companies than the US and China combined, as well as more small businesses than in the US. Certainly Merkel’s support in the domestic polls have dropped, due to the unpopular bailout of Greece but also because of some cutbacks in Germany due to the economic crisis. Nevertheless, compared to the United States and China, Germany and Europe continue to provide a generous workfare support system to families and workers, at the same time that its businesses remain competitive and it has impressively reduced its carbon emissions and environmental impact. Led by Germany and its indomitable Angela Magnus, Europe shows unequivocally that these goals are not incompatible; in fact they can complement each other quite well. It’s a matter of having the correct vision, the right institutions, and able leadership that will spend money on the right priorities.
If one could trade politicians like baseball or football stars, I would trade away Barack Obama and Joe Biden for Angela Merkel in a New York minute. It’s a make-or-break century, with the fate of the inhabitable planet hanging in the balance, and Angela Magnus is the one for the job. She’s my MVL for 2010.
Steven Hill is author of ‘Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age’.