The Unbearable Complacency of Angela Merkel

Germany's economy is far more vulnerable than it seems, but its government is completely uninterested in doing anything about it.

German Chancellor Angela Merkel attends a press conference with U.S. President Donald Trump in the Oval Office of the White House on April 27, 2018.  (Chris Kleponis-Pool/Getty Images)
German Chancellor Angela Merkel attends a press conference with U.S. President Donald Trump in the Oval Office of the White House on April 27, 2018. (Chris Kleponis-Pool/Getty Images)

The going seems good in Germany right now. The economy is booming. Unemployment is at record lows. Inflation is negligible. Public finances are in rude health. The crises in the eurozone and over refugees have abated. And veteran Chancellor Angela Merkel, who made a flying visit to Washington on April 27, has finally formed a new coalition government.

So it’s perhaps understandable that Germany has been content to coast along with its existing economic policies in Europe and at home. Why mess with an ostensibly winning formula? Steady-as-she-goes, business-as-usual Merkelism seems successful and safe.

Yet Germany is actually far more vulnerable than it seems. Europe’s export powerhouse has long been a free-rider on both the open markets and the nuclear security guarantee provided by the United States. Both of those are under threat from Merkel’s ungracious host in Washington, U.S. President Donald Trump. The crumbling of that liberal international order seems likely to make Germany even more reliant on the European Union for its future prosperity and security.

Yet Merkel seems unwilling to make the short-term concessions needed to secure the longer-term stability and effectiveness of both the eurozone and the EU. This complacency is dangerously shortsighted — and a potentially historic tragedy for Europe.

Germany’s economic growth model relies heavily on two big things: incremental improvements to the industrial goods, notably cars, in which it has long specialized and the ability to find other countries willing to absorb its trade surpluses by running deficits. Both are now in jeopardy. Digital technologies are disrupting manufacturing; in the case of cars, Germany languishes behind China and the United States in the development of autonomous electric vehicles while sales of the “clean” diesel automobiles that it produces are plummeting now that it turns out they are poisonously dirty.

Meanwhile, the United States is increasingly unwilling to absorb Germany’s export surpluses. Indeed, Trump’s obsession with eliminating America’s bilateral trade deficits threatens a trade war with Germany and the entire EU. Merkel seems likely to fail in her bid to persuade Trump to suspend the imposition of punitive U.S. tariffs on steel and aluminum imports from the EU, which are due to come into force on May 1. That, in turn, could provoke EU retaliation, to which Trump has threatened to respond with tariffs on German cars.

Germany is doing little to respond to these economic challenges. While Merkel enjoys lecturing other European leaders on the need to “do their homework” on economic reform, she hasn’t implemented any growth-enhancing structural reforms in more than a decade. Should it be any wonder that Germany is a digital laggard, given the analog-age dinosaurs dominating its telecoms sector and the red tape making it difficult to start a business?

Nor is Germany investing enough in its future. Bridges are crumbling. Other vital trade arteries such as the Kiel Canal are in disrepair. Universities are underfunded. Broadband internet speeds are shockingly slow. German carmakers’ response to the diesel scandal, in which they were revealed to have systematically deceived consumers and regulators about harmful emissions, was telling: They sought — and obtained — lower fuel emission standards instead of investing much more in electric cars.

Moreover, while countries such as China that previously relied unduly on net exports for their growth have shrunk their current account surplus since the financial crisis, Germany’s current account surplus — the world’s biggest — has swelled to $310 billion in the year to February, a whopping 8 percent of GDP. That leaves it dangerously dependent on foreign demand.

Germany is increasingly vulnerable not just economically but also in security terms. President Vladimir Putin’s revanchist Russia is on Germany’s doorstep; its heavily militarized Kaliningrad region is a mere 373 miles’ tank ride to Berlin. Meanwhile, Trump has cast doubt on the U.S. nuclear security guarantee. Yet Germany’s attitude to its defense borders on carelessness. Decades of underinvestment have left its armed forces in a sorry state, with submarines that don’t sail, tanks that don’t drive, and planes that don’t fly. It spends a mere 1.2 percent of GDP on defense, well below the NATO target of 2 percent that Trump is rightly (albeit obnoxiously) demanding be met. While politicians in Berlin are correct in pointing out that Germany’s generous foreign aid also enhances the security of its neighborhood, soft power is not much of a deterrent to Russian tanks.

Given its World War II history, Germany’s queasiness about all things military is understandable. And to its credit, it is playing a more active role in NATO, not least in leading the tripwire forces in Lithuania that seek to deter Russian aggression. But its penny-pinching on defense is still perilously complacent. It also refuses even to consider the need for a German — or eventually a European — nuclear deterrent. Both of those hobble efforts to strengthen common EU defense as a hedge against U.S. disengagement from NATO. After Brexit, France will be the EU’s only significant military power.

All the more reason, one would think, for Germany to do all it can to strengthen the EU and the euro on which it relies for its prosperity, political identity, and place in the world. While the EU has shrugged off Brexit and the eurozone weathered its existential crisis in 2011-2012, these remain weak and unstable. The victory of populist parties in the recent Italian elections is a reminder that the euro is a flawed and fragile construct that politics or panic could yet tear apart. Putin-friendly parties on both the far-right and far-left are increasingly popular in many European countries — and in government in Hungary, Austria, and Greece. France, Germany’s essential European partner, came perilously close to a presidential runoff between far-right and far-left anti-EU candidates last year.

In the end, fortunately, French voters chose Emmanuel Macron, perhaps the most pro-German and pro-EU president ever, and one who is living up to his promises (and German demands) to reform the French economy, including by liberalizing its labor laws. But having for years lamented the lack of a strong and reliable French partner to drive forward European integration, Merkel is now spurning Macron’s bid to reform the eurozone and strengthen the EU by, for instance, completing the banking union, creating a eurozone budget, and increasing democratic accountability. Whatever the suggestion, her answer is nein.

The point is not that Macron is right about everything, still less that Germany should go along with all France wants. It is that the future of the eurozone and the EU matters immensely to Germany, and so it ought to engage constructively with this exceptional opportunity to put things right while the European economy is faring well and there is some political momentum ahead of next year’s EU elections.

After a decade in the driving seat as the eurozone’s leading creditor, Germany can scarcely imagine being at the sharp end of an economic crisis, let alone empathize with those that have suffered one. But not seizing this opportunity to fix the eurozone is still a huge gamble. Economic fortunes change. And Merkel will rue her foolishness if France’s next president is Marine Le Pen.

It is always hard to change when the sun is shining but much less painful than doing so when storms arrive. Those storms are now visible on the horizon. Germans would do well to wake up from their slumber, while their country is still economically strong, before the lightning strikes.

Philippe Legrain is the founder of OPEN, an international think tank on openness issues, and a senior visiting fellow at the London School of Economics' European Institute. Previously economic advisor to the president of the European Commission from 2011 to 2014, he is the author of five critically acclaimed books, most recently Them and Us: How Immigrants and Locals Can Thrive Together. Twitter: @plegrain

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