Democratic values in the EU and the rise of the German right wing

In the United States, the Republican Party is baffled by how their electorate has favoured Donald Trump for nomination for President in 2016. Equally, the Democrats are scurrying to quell the massive inflow of votes to Bernie Sanders, whose message resonates with the disaffected. But this disaffection is not isolated to the US. Everywhere one looks in Europe, new, alternative and fringe candidates are getting record support. I want to talk about this in the German context because a recent broadcast by German public TV made clear to me that the rising tide of discontent is everywhere, even in countries like Germany that are doing relatively well.

Here’s how I am going to frame this discussion; yesterday I wrote that I believed the talk about helicopter money and basic income was a recognition by academics, investors and policy makers that the present economic policy framework is not delivering good enough results for the developed world. The economic growth numbers say we are in a middling recovery. Nevertheless, recent electoral patterns suggest that the situation for many is significantly more precarious than the headline numbers would imply. The rise of eurosceptic and nationalist candidates in Germany, France, Italy, Spain, Greece, Portugal, the Netherlands, Finland, the US, the UK and elsewhere tells us that many voters want a drastic change.

My view here is that the present policy framework worked as interest rates were declining due to increasing private debt. But with rates at zero and private debt already elevated, it has instead led to poor aggregate demand growth, and increased job and financial insecurity. These forces will combine to create a low growth future that inevitably means rising inequality via poor productivity growth, the substitution of capital for labor, and stagnant middle class incomes. The political outcome is one of rising discontent, which is made manifest via increased votes for alternative candidates and parties. And, in the past, right wing, nationalist type alternatives have gained in these economic climates (see here).

So that’s the lead here.

Now the second thing to note is that Germany’s export-led model has benefited German GDP growth in aggregate.

While these numbers are in nominal and not percentage of GDP terms, they show Germany with such a large current account surplus that it allows the government to operate at a surplus without forcing the private domestic sector into deficit net of investment. And that means that Germany can reduce any residual risk associated with its lack of monetary sovereignty. The news in Germany’s public television yesterday highlighted the finance ministry’s declaration that tax receipts were doing even better than expected due to Germany’s economic growth exceeding expectations.

Yet, when I watched Tagesthemen on German public TV it showed a high level of discontent among voters. Regarding the coming lifting of visa requirements for Turkey, the numbers were: “I think the lifting of the visa requirements for Turkish citizenship is” good (33%), not good (62%).

On TTIP, the negatives were even higher. “TTIP brings Germany” advantages (17%, down 14 from June 2014) vs. disadvantages (70%, down 15% compared to June 2014)

And the rationale behind these negatives was as follows on two scores:

• “I am concerned that TTIP will weaken consumer protection”: 79% yes, 16% no
• “I think it is right that the negotiations have so far been kept secret”: 13% yes, 83% no

At the same time, the SPD and CDU/CSU governing coalition parties are seeing steep falloffs in polling support, while the more nationalist AfD party, formed just a couple years ago, is polling at a record 15%, ahead of more established third parties, the FDP, Greens and Linke parties.

Why is this happening?

I would posit that this owes to one problem in Europe and one in Germany. The first problem is European democracy. If you recall, the polling for entering into the euro in Germany was always negative as the euro was being considered. The Germans simply did not want to give up their currency. But because the populace had no say in the matter, Germany entered into the euro without a popular vote. In fact, at the time a popular vote was considered and rejected due to the probability that the vote for the euro would have failed in Germany as it did in Denmark. This was a turning point in Germany regarding the EU. It was clear to Germans that ‘democracy’ was much more representative than direct and that German political representatives were not acceding to the will of the people.

The second problem for many Germans was the Hartz reforms that lowered German labor cost increases, made it easier to fire workers or hire them on flex time, reduced the German social safety net and made German wages more competitive for export. These reforms were controversial because they lowered work and income security for the German middle class. But because the reforms were championed by the SPD, the traditional ‘workers’ party’ in Germany and because Germany was going through upheaval associated with currency and political reunification – a soft depression, as I called it – the reforms were accepted.

If you fast forward to today, in the wake of the mass wave of immigration coming into Germany, the original two democratic problems take on greater significance. In the intervening time, there has been a growth in income and wealth inequality in Germany, a stagnation of middle class wages, increased income insecurity due to part-time work, and an increase in the working poor, also due to part-time labor arrangements. What seems to be happening is that the gains of export-led growth in Germany are going to the middle class only in terms of reduced unemployment, with income gains going to the owners of capital and shares. Meanwhile the ECB, the one institution which most represents the European Union now, is holding base rates at zero and taxing deposits on reserves such that the value of the traditional form of German investment, savings, has been eroded in nominal terms.

Thus, you have a populace with increased income insecurity that feels burdened by a large migration wave, no interest on savings, and a general lack of voice in European-wide institutions. The fact that the migrants for visas deal with Turkey is being implemented hastily at the end of June only serves to add to the angst regarding a loss of democracy.

So the Germans, despite the headline numbers showing growth and low unemployment are turning to the AfD, a party that rejects the euro and that wants to take a more aggressive stance against migrants. And remember, this is happening when German GDP is increasing, unemployment is low, and the German deficit has turned to surplus. To the degree the German economy suffers, support for the AfD will only increase.

My conclusion here is that Europe has a full-blown crisis of democracy on its hands. The European Union is losing democratic legitimacy even in its so-called core, Germany, Austria, Belgium, the Netherlands and France. Moreover, the EU seems to be sleepwalking through this crisis as if the upcoming Brexit vote is the only signpost of public discontent with the EU’s institutional arrangements. I believe this is a serious error. And as time goes along, parties like the AfD will gain in support. And as they do so, the EU will lose so much political legitmacy that a breakup of the EU beyond Brexit will be possible.