The Weight of Expectations: Perspectives on Germany's Grand Coalition
By Dr. Simon Green

Observing Germany used to be straightforward. Year in, year out, the German economy would live up to its stereotype of being awesomely efficient, providing its citizens with lavish salaries (and that not just twelve, but thirteen times a year!) and enviable social benefits. From the perspective of the UK in the 1980s, where the post-1945 social consensus was being torn up and recast by Margaret Thatcher, many, especially on the center-left, viewed Germany as a real and plausible alternative. But since then a palpable change has taken place. Fifteen years after unification, the self-confidence that had developed during the 1980s has given way to an almost pervasive sense of gloom. Germany seems stuck in a rut, as symbolized by the fact that discussions about a Reformstau have been dragging on for almost eight years now.

While there can be little doubt that many of these concerns are overstated, it is also true that Germany is facing some formidable challenges. Growth has been sluggish and unemployment unacceptably high. In particular, the fiscal position is nothing short of precarious. No less than half the federal budget is spent on debt servicing and propping up the country's ailing pension funds, leaving practically no scope for discretionary expenditure. Despite several attempts at reform in recent years, Germany's expenditure on health remains high in comparison to other countries, and the need to curtail costs remains as pressing as ever. Germany's federal system is hopelessly entangled, both in terms of competencies and finances. In the absence of a consumer spending boom like the kind the United Kingdom has witnessed over recent years, the federal government has only been kept afloat by ever-higher debts, and by repeatedly breaking the EU Stability and Growth Pact's three percent of GDP threshold for budget deficits.

Needless to say, all of this has been well-known for many years. But in the past, whichever Volkspartei was in control of the government could often get away with blaming the other party for its own failure to achieve any significant policy reform in the really difficult areas. Now, however, this is no longer an option. With the indecisive result of the election on September 18, 2005, leaving no political alternative but a grand coalition between the CDU/CSU and SPD, the expectations, both in Germany and internationally, are very high indeed.

The problem is that these very high expectations will only be met if the grand coalition's political leaders rise to the challenge and no longer shy away from genuinely difficult decisions. The need to save € 35 billion annually in 2006 alone just to comply with the Stability Pact again (never mind balancing the budget) constitutes a prima facie example of this. It is almost impossible to see how the savings can be achieved on a sustainable basis without cutting the federal government's staggering € 80 billion subsidy of the pensions system. In turn, this is unlikely to be possible without existing pensioners shouldering at least some of the costs for this. But with pensioners now making up the single largest voter group in Germany, it will take a brave politician indeed to risk alienating this powerful constituency. In many respects, this will be the acid test for the credibility of the grand coalition: how far is it prepared to go in ignoring a powerful (and motivated) group of voters such as pensioners in the interests of regaining control over the country's fiscal problems?

Here a comparison with the British experience is instructive. It has now been almost twenty-five years since a Conservative government began the gradual process of privatizing the provision of pensions and passing the risk for this onto the individual citizen. Certainly, this has not been without costs, which have principally been borne by the comparatively large number of genuinely poor pensioners in Britain. At the same time, very legitimate concerns remain about both the level of pensions private providers will ultimately deliver and the alarming degree to which many individuals are failing to make any provision at all for their retirement. But the prize has been that the British government's finances are now not potentially held hostage by a group it subsidizes.

However, if the current situation demands a solid dose of political courage from Germany's political elite, then the omens so far are not good, despite Chancellor-designate Angela Merkel's brave (and ultimately failed) attempt to sell a tax increase to the electorate in order to finance a reduction of non-wage labor costs. It is difficult to avoid the conclusion that the withdrawal of two key actors in the coalition, Franz Müntefering and Edmund Stoiber, as SPD party leader and Economics minister respectively, was not a case of politicians putting their personal interests over the good of the country. Perhaps a (only slightly) kinder interpretation would be that they were incapable of shouldering the undeniably immense responsibility, not only for their respective parties but also the country's future wellbeing - and these are two agendas which in the world of politics do not always match. But viewed through the lens of British party politics, it is truly astonishing that both politicians are able to fall back on other (well-paid) positions: thus Müntefering will remain in the cabinet (and even Merkel's deputy), while Stoiber will continue as Minister-President of Bavaria and leader of the CSU. Of course, vanity and arrogance have also gotten the better of many British politicians in the past, most recently former Work and Pensions Secretary David Blunkett (twice). The difference is that when politicians stumble over this in Britain, the fall is audible. As things stand, the SPD and CSU are left with a lame duck minister and party leader respectively - and newspapers like Bild understandably shake their heads in disbelief.

Undeniably, the loss of Müntefering and Stoiber as pivotal actors in the coalition is a disappointment; with both politicians gradually coming to the end of their careers, they would have been in an ideal position, had they wanted to, to make the most of an exceptional situation where the long-term interests of the country need to be put above the short-term interests of the party. What is certain is that all of Germany's partners in Europe need a stable, united, and effective German government. Economically, growth in the Eurozone remains too low, unemployment too high, and the Stability Pact is rapidly losing credibility. Inevitably, opponents of British adoption of the Euro seized upon the weakening of the Stability Pact by France and Germany in March 2005 as a justification against the UK's entry.

But politically, too, the EU is facing major challenges: Romania and Bulgaria are due to become members in 2007, and the question of Turkish accession will remain controversial, especially with the CDU/CSU returning to government. Internally, the EU is without a conclusive direction following the failure of the constitution. And most immediately, there is still a new budget to agree upon. Even though Germany, for financial reasons, is unable to play the role in developing European integration that it used to, Germany remains a critical actor in the EU. In that light, the events of recent weeks most likely have not reassured other governments that Angela Merkel has the full backing of her government when she negotiates in the European Council.

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Dr. Simon Green writes from the Institute for German Studies at the University of Birmingham, UK, and is a frequent contributor to AICGS
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This essay appeared in the November 17, 2005 AICGS Advisor.
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Want to know more? Check out these links:

"The Next Foreign Minister," by Peter Siebenmorgen, The Atlantic Times. November 2005.

"Experts Say Merkel Will Bring Change In Style, Not Policy, for U.S." Deutsche Welle Online, November 12, 2005.