Germany has made significant strides to transcend ordoliberal nostra. But huge obstacles still stand in the way of progress.
In less than ten years, Donald Trump, Vladimir Putin and Xi Jinping have destroyed the foundations of the ‘German model’. Germany is probably the country in the world where the neoliberal consensus since the 1980s has been most widely and consistently embraced—albeit in distinctive, ‘ordoliberal’ form—on the right and the left. The invasion of Ukraine, American protectionism and a more assertive China are however forcing Germans to question all their beliefs about its place in the world.
This is by nature a long and complex process of mourning, so deeply rooted were these convictions in German society. It certainly offers opportunities for European integration but it also presents serious risks for Germany—as for its neighbours, if the turn is not made in time.
Ordoliberalism and postwar resconstruction
In the aftermath of Adolf Hitler’s statism, which led Germany to ruin, and Joseph Stalin’s version which impoverished and oppressed eastern Europe but in particular the east of the country, postwar reconstruction was carried out under the auspices of ordoliberalism, advocated prewar by the economist Walter Eucken. For ordoliberals, the role of the state is not to intervene actively in the economy or to correct inequalities but to put in place stable and binding rules to frame the actions of private actors and then to enforce them strictly. One of the main differences between German ordoliberalism and Anglo-Saxon neoliberalism is the latter’s individualism: ordoliberalism tolerates collective bargaining between unions and employers.
The reconstruction of Germany took place under the leadership of the Christian-democratic conservatives, in power continuously between 1949 and 1969. It was the work in particular of Ludwig Erhard, inventor of die Soziale Marktwirtschaft (social-market economy), who was finance minister between 1949 and 1963 before becoming chancellor until 1966. This Germany, in economic matters a non-interventionist federal state, suited the wartime allies, which no longer wanted a powerful and active German state in the heart of Europe. Later, ordoliberalism was to serve as the matrix for the European common market.
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When the rest of the western world was Keynesian, Germany was already economically liberal. It only had a brief social-democratic episode under Willy Brandt as chancellor in the 1970s. When, at the turn of the 80s, neoliberalism took hold throughout the west, the ideas of Margaret Thatcher and Ronald Reagan were logically well received in the Germany of Helmut Kohl, Christian-democrat chancellor from 1982 to 1998.
All the associated ideas resonated deeply with the ordoliberalism which had prevailed in Germany since the war: it is always better to have ‘less state’, the priority of economic policies should be to fight inflation, free trade will guarantee world peace thanks to le doux commerce, international trade (as long as ‘undistorted’ by state intervention) will benefit everyone thanks to comparative advantages and free flow of capital will allow for its optimal allocation on a global scale. When the Anglo-Saxon ‘lefts’—including Bill Clinton and Tony Blair—took up these ideas, the German SPD, the most powerful social-democratic party in western Europe, followed suit.
Germany sharply reduced labour costs and domestic demand under the leadership of the social-democrat chancellor who succeeded Kohl, Gerhard Schröder. Contrary to what many Germans—and others—believe, however, it was not this extensive austerity which enabled German industry to withstand the deindustrialisation that hit the rest of Europe in the 2000s.
That wave was mainly the result of the sharp rise of the euro against the dollar, which massively undermined the cost-competitiveness of European industry. German industry was able to escape this because, with the prospective enlargement of the European Union, it massively redeployed its subcontracting value chains to eastern Europe from the end of the 1990s—a movement Italian, French and Spanish manufacturers were not able to carry out with the same vigour.
Before the fall of the Berlin wall, the low-cost country which supplied German industry was often France—since the 2000s it has been Poland or the Czech Republic. Increased supply from these very low-cost countries helped counter the effect of the rising euro on the competitiveness of German industry. Germany exports much more than does France, for instance, but it also imports much more. Thanks to Mitbestimmung (‘co-determination’), which Schröder did not dare touch, German industry developed these supply chains in central and eastern Europe without calling into question its domestic production base.
Since the turn of the millennium, amid China, India and other emerging economies accelerating their industrialisation, German industry has also benefited from its longstanding specialisation in capital goods. When factories sprouted, German machines were installed, the French capital-goods industry having virtually disappeared (apart from the nuclear-power stations France has so much trouble exporting). Similarly, Germany benefited greatly from its specialisation in luxury cars: the middle class emerging in China in particular much preferred to acquire, or have their company acquire, a BMW, Mercedes or Audi than a Renault or Citroën.
Dragging Europe towards the abyss
In short, if German industry held up well during the 2000s, unlike the rest of European industry, it was more despite rather than thanks to Schröder’s policies, which weakened the country’s social and political cohesion and degraded its public services and infrastructure. Because the vast majority of German leaders however remained convinced that the country’s industrial successes were due to socially regressive austerity, Germany almost dragged the entire EU into the abyss during the eurozone crisis, refusing any form of solidarity with the crisis-stricken southern-European countries and seeking to impose its austerity model everywhere. Fortunately, the German government stopped just a few centimetres short of the precipice and finally accepted the minimal concessions indispensable for the survival of the union and the euro.
German society and its leaders had nevertheless come to the conclusion that there was definitely nothing to be done with those less-serious southern-European countries. Their capacity to absorb German exports was already limited by the prolonged austerity imposed on them by the German government. Germany’s future lay outside Europe—in China, Russia and the United States.
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Beyond the bare minimum to overcome the crisis besetting the euro area, Germany was not interested in deepening its integration. It saw itself as a kind of huge Switzerland at the heart of Europe. Indifferent to the fate of its immediate neighbours, it traded with the rest of the world without seeking to get involved in the quarrels of the great powers.
In those years, German industry benefited greatly from the huge stimulus package China implemented in response to the financial crisis. And despite the invasion of Crimea by Putin’s army in 2014, Germany continued to develop its relations with Russia by launching the Nord Stream 2 gas pipeline.
Illusions about trade shattered
But this project did not last very long. In 2017, Trump came to power in the US and challenged the free-trade policies of his Democrat and Republican predecessors. He was quick to identify the EU, and Germany in particular, as adversaries.
In Trump’s view, the Europeans were pumping massive amounts of American resources into their own security. He began imposing tariffs on several European products, affecting German exports in particular—a protectionist policy his successor, Joe Biden, pursues in practice, notably with the massive subsidies to domestic producers in the Inflation Reduction Act. And the US paralysed the World Trade Organisation by refusing to renew the judges on its arbitration panels.
Xi announced his desire to reduce the country’s dependence on foreign manufactures—American of course but German as well. In electric cars, but also in high-speed trains, wind turbines and many other sectors, Chinese producers have become powerful competitors for German industrial giants. German industry remains heavily dependent on the Chinese market, particularly in the automobile sector which structures its entire economy. It is in serious danger of being crushed in the Sino-American trade war.
For his part, by invading Ukraine in February 2022, Putin shattered German illusions about the potentially pacifying and integrating role of trade with Russia. He also undermined an important part of Germany’s energy-intensive industrial base, its chemical industry, which depended on access to cheap Russian fossil-fuel resources. It is now fashionable to mock these German miscalculations but until very recently such illusions were widely shared among French elites, although France’s dependence on Russia was much less than Germany’s, especially in energy.
In just a few years, the US, China and Russia have thus destroyed the fundamentals guiding all decisions of the German economic and political elites for four decades. On these ruins, Germany has to invent a new vision of its place in the world—with external constraints increasingly pressing.
Profound change towards solidarity
Even if the debate has never been explicit, there has been a profound change in Germany’s attitude towards European solidarity: the arrogance and indifference to the fate of its neighbours shown during the eurozone crisis is recognised as a mistake. This was reflected in the agreement reached very quickly in mid-2020, at the initiative in particular of the chancellor, Angela Merkel, that the EU take on joint debt to help the countries most affected by the pandemic.
The contrast with the Greek crisis of a few years earlier was striking. There was reluctance on the part of the remaining four ‘frugal’ member states but Germany threw its weight behind the initiative. Even if it has significant capacity to react on its own, due to its relatively low public debt and the confidence the debt it issues enjoys, Germany has understood that it can no longer get out of trouble alone if the rest of the EU is entangled in a destabilising crisis.
In the 2010s, Germany had contributed to facilitating China’s penetration of Europe by forcing southern countries in trouble to sell their ‘family jewels’ to limit their debt. This led to Chinese companies being entrusted with the management of the ports of Piraeus and Genoa and the Portuguese electricity utility. In 2016, however, the takeover of the German robotics manufacturer Kuka struck a chord in business circles and public opinion: Germany (finally) realised that such competition from large, state-subsidised companies was not only affecting southern-European countries and ageing industries but threatening the heart of German industrial power, capital goods. Berlin has agreed to tighten the monitoring of foreign investment in Europe and fight more robustly against unfair competition from state aid to foreign firms seeking to sell or invest in Europe.
Ready for industrial policy
Faced with Chinese manufacturers supported at arm’s length by the state and the massive subsidies granted to American manufacturers of electric vehicles and renewables under the Inflation Reduction Act, Germany has taken stock of Europe’s backwardness in digital technology and semiconductors. Even if German industry is in much better shape than French today, it still produces essentially the same types of product as in the 20th century and is as ill-prepared to deal with the current upheavals. While always very opposed to any industrial policy, Germany now seems ready to accept the idea and to agree to a ‘sovereignty fund’ to support innovation in European industry.
Germany rebuilt itself after 1945 on the idea of never again becoming a military power and developing relationships with the rest of the world exclusively through export of industrial products. And in the intervening period it became an Exportweltmeister (world champion in exports). This peaceful stance had many advantages in terms of ‘soft power’: no one was afraid of Germany any more and it made doing business around the world easier, including arms sales. Not having to spend a lot on military equipment also gave Germany a competitive advantage over France, the United Kingdom and the US.
Coming after other shocks—in particular the collapse of Yugoslavia and persistent tensions in the Balkans—the war on Ukraine however finally convinced the German public and its leaders that this posture was no longer tenable. Hence the Zeitenwende (changed times) announced by the chancellor, Olaf Scholz, in reaction to the Russian invasion, accompanied by creation of a €100 billion fund to make up for the German shortfall in military equipment.
On all fronts, Germany has thus begun to confront the collapse of its postwar Weltanschauung. But without creating a major internal crisis, can it give up all its old totems quickly enough to build something radically different in a truly European framework, given the urgency imposed by external forces?
Germany is a slow-moving liner. This does not only have disadvantages: it avoids the adventures and one-offs so common in French public policy. But amid such great upheavals it can become fatal. This was particularly evident in the debates in early 2023 over the delivery of tanks to Ukraine.
The first obstacle is that the ordoliberal logic has been embedded in the Grundgesetz, the 1949 ‘basic law’ which serves as the country’s constitution. In particular the Schuldenbremse (debt brake) was incorporated into the constitution in 2009, at the height of the ordoliberal wave, when Germany wanted to set an example to impose permanent austerity on the whole of Europe. The Schuldenbremse effectively prohibits the federal state, the Länder and municipalities from incurring significant new debt. It was supported at the time by both main parties.
As this is a constitutional rule, change would require a two-thirds majority in the Bundestag, the national assembly, and the Bundesrat, the senate bringing together representatives of the Länder, which is almost impossible in an increasingly fragmented political landscape. Its enforcement is further secured by the powerful and independent Bundesverfassungsgericht (federal constitutional court).
The real-world changes under way in Germany nevertheless oblige considerable public investment, tangible and intangible, including to redress the backlog decades of austerity have bequeathed. Germany is the only member of the Organisation for Economic Co-operation and Development where net public investment (deducting depreciation) has been negative since the beginning of the century. Bridges are often cracked, the rail network is delapidated, high-speed internet and mobile networks are lagging behind and so on.
To get around this obstacle, the coalition led by Scholz has resorted to funds considered extra-budgetary to finance the acceleration of the energy transition and the Zeitenwende on defence policy imposed by the war. But Germany will likely have much trouble implementing the public policies its future—and that of Europe—demands, if it does not explicitly call the Schuldenbremse into question.
Germany, again unlike France, has a long tradition of seeking social and political consensus on public policies. This has deep roots, linked to the absence in Germany of a moment of break with the corporatist tradition as the French revolution effected. It is sustained by the institutional landscape, where the Bundestag is elected with strict proportional representation (and a threshold of 5 per cent for party representation) and the Bundesrat is endowed with much greater power than the French Senate.
A German chancellor cannot be compared to a French president who, although generally enjoying only minority support, has the means to impose his choices in short order. Before taking any significant decision, the chancellor must obtain the agreement of his coalition partners and the assent of the Bundestag, which takes time. Coalition formation is itself becoming more and more complex, as the 2021 parliamentary elections showed.
Strong political support
Ordoliberal ideas are in retreat among German political and economic elites as well as public opinion. The SPD has clearly broken with the economic liberalism which marked the Schröder period and the succeeding coalitions with Merkel. The Greens, which are making progress in public opinion without being on the radical left, have always been very suspicious of the ordoliberal austerity led by Wolfgang Schaüble, Merkel’s indomitable finance minister, because of its negative impact on the ecological transition and its detrimental effects on European construction.
But ordoliberal thinking continues to enjoy strong political support. Since the 1990s, the small Free Democratic Party has abandoned its historical political liberalism and pro-Europeanism to become an American-style, ultra-neoliberal grouping, hostile to any form of European solidarity. Its presence within the current coalition, imposed by the electoral arithmetic, constitutes a powerful brake on all necessary evolution.
Similarly, the victory of Friedrich Merz within the Christian Democratic Party at its last congress in December 2021 marked a halt to the positive trend in relation to ordoliberal dogma during the last years of Merkel’s mandate. Merz has taken extreme positions, very close to the FDP, on economic, social and European issues. And then there is the far-right Alternative für Deutschland, a potential partner in future right-wing coalitions—it is not only firmly opposed to migrants but to any form of European solidarity and is very neoliberal on economic issues.
This strong capacity for ordoliberal resistance is reflected at European level. Beyond the one-off NextGenerationEU plan agreed in 2020, German leaders are hardly mobilising to perpetuate common debt issuance and further resource-pooling. The negotiations to reform the Stability and Growth Pact remain largely dominated by ordoliberal theses—in particular that the EU must, as a priority, continue to put pressure on member states to limit public spending. (French leaders are also largely committed to neoliberal ideas.)
Reservations on military aid
There is too strong resistance within the SPD—and within the trade union movement—to drawing all the consequences of the new geopolitical situation created by the Russian invasion. One might have expected that reluctance to help Ukraine would be marked in a France where openly Putin-compatible candidates won 45 per cent of the vote in the first round of the last presidential election and elites of right and left had bathed for 60 years in a neo-Gaullist discourse hostile to the North Atlantic Treaty Organization. Yet this has not been the case so far—even if the lone approach towards Putin by the president, Emmanuel Macron, on various occasions may have infuriated many of France’s allies.
It is rather in Germany, very pro-American and attached to NATO since the creation of the federal republic, that military aid to Ukraine has raised the most reservations, especially within the SPD. This is the result of a mythical vision of the Ostpolitik led in the 1970s by Brandt—who was nevertheless very lucid about the Soviet threat—as well as a strong reticence on the left towards anything resembling German rearmament and fear that German industry would be weakened and jobs threatened by loss of access to Russian markets and raw materials.
This fear is reinforced by concern for even more important Chinese markets, were Germany to be drawn into a head-on confrontation between the US and western Europe on one hand and Russia and China on the other. It is widely shared in business and trade union circles, very influential in German politics on the right and left.
Moreover, not only does the Schuldenbremse prevent the country going into debt but the political forces opposed to tax increases are still able to block any such move to enhance the budgetary effort on defence. Even were this effectively augmented, the will to give it a truly European—and in particular Franco-German—dimension remains to be demonstrated. Up to now, attempted co-operation among defence industries has most often ended in resounding failure. The European Sky Shield initiative launched last October by Germany with 13 other countries, without consultation with France, does not bode well.
Dealing directly with Beijing
While Germany has understood that European solidarity is essential and it is necessary to protect the domestic market more—supporting European players through an active industrial policy—it has not given up playing its own card on the world stage. The economic relationship between Europe and China can only be rebalanced if the EU speaks with one voice when negotiating with this country of 1.4 billion inhabitants. It has been unable to do so until now due to the desire of each national leader to deal directly with Beijing—the Chinese leaders easily playing Europeans off against one another.
By going alone to meet Xi last November, just after the 20th Congress of the Communist Party had ‘re-elected’ him for a third term as head of the country, Scholz made it clear he was still not ready to play a truly European game in relations with this key country. The same reproach can of course be addressed to Macron who, despite his great pro-European speeches, regularly acts the lone rider on the world stage too.
Germany’s desire to equip Europe with a genuinely common industrial policy, endowed with significant resources, also remains to be confirmed. For the moment, the measures announced at European level remain very limited due to lack of additional resources. Only rendering permanent the relaxation of the rules governing state aids to deal with the pandemic and then the energy crisis is really significant.
Germany has made big use of these possibilities, with €356 billion in aid to companies in 2022—55 per cent of the total granted in the EU. In practice, we are heading more towards a renationalisation of industrial policies than a truly European one. This no doubt suits German political and economic leaders.
Serious risk for Europe
Since the peak of the ordoliberal hysteria represented by the German government’s handling of the eurozone crisis, widely supported by domestic public opinion, things have changed a lot in German society. Germany has realised that the ordoliberal dream of a Europe devoid of solidarity, bureaucratically managed by rules in a world pacified by free trade—a world in which Exportweltmeister Germany would flourish—is now out of reach.
But this calls into question the fundamentals that have structured German society since World War II, while the forces that could hinder the necessary changes remain powerful. So too are those pushing Germany to go it alone in trying to pull the country out of this mess.
There is a serious risk these forces will prevent Europe from responding quickly enough, strongly enough and collectively enough to the colossal challenges it faces.
A French version of this essay was published on Le Grand Continent