German Social Democrats abandoning third way rhetoric

There is a shift going on in Germany which has the center-left party moving away from the center after disastrous election results. And I think this is a significant signpost of the center-left’s abandonment of the policies championed by Bill Clinton, Tony Blair and Gerhard Schröder in the 1990s. Some brief comments below.

A stroll through recent Germany economic history

When East and West Germany became one country, the integration was all-consuming. And it fundamentally changed the German economy. I have argued that it led to a soft depression, in no small part due to the botched monetary union. But center-left German Chancellor Gerhard Schröder sought to change that by instituting market reform policies similar to those of Tony Blair in the UK and Bill Clinton in the US. At the same time, German labour unions were convinced to lower their wage demands to maintain greater job security and prevent offshoring. The Hartz concept of labour market reforms was the central feature of Schröder’s plan.

The result was that labour costs grew more slowly in Germany than in southern Europe. And so labour productivity in Germany advanced prodigiously. With Germany ensconced in the euro, a fixed exchange rate regime with its major trading partners in Europe, relative unit labour costs for Germany plummeted, allowing the Germans to export to the rest of the Eurozone, not just based on the quality of their wares but also based on price. As the euro crisis engulfed Europe, German policymakers looked back on their reforms as a success that helped them weather the storm.

But, the downside for ordinary German citizens has been economic stagnation, even as the economy has boomed.

Here’s how I put in 2012:

In contrast to German policymakers, German people don’t view the Hartz reforms as unmitigated successes. The reforms have eroded the German social safety net and increased economic insecurity, even while the unemployment rate has dropped.

If you are an average (West) German worker, you have witnessed the following in quick succession over a twenty-year period:

• A solidarity tax, payoff to Russia, and promise to join single currency as the price for re-unification
• A loss of the Deutsche Mark, the symbol of Germany’s post-war economic discipline and success
• A loss of the German economic miracle of the 1950-1980s and a soft depression due to a confluence of events including reunification, a property bubble, aging society, and poor demographics
• A breach of the Maastricht debt and deficit hurdles due to the soft depression
• A stagnation of wages and a loss of economic security and some of social safety net benefits with Hartz reforms because of soft depression
• A bailout of reckless German lenders pushing government debt to GDP well over 75% and now 81%
• Successive bailouts of other euro area members who have not gone through the same trauma and reform

The average German worker feels like a cash cow being sucked dry by a quick succession of reforms and bailouts that take money out of her pocket. First it was for reunification, then for European integration, then to right the economy, then to bail out German banks, and finally to bail out the European periphery. Fatigue has set in.

The turn to populism has forced the SPD’s hand

This environment has made populist parties in Germany – like the AfD on the right and the Linke on the left – attractive, despite a booming German economy. And we have seen these parties erode both the center-right (CDU/CSU) and center-left parties (SPD) of the reigning grand coalition government.

In election after election, both at the national level and the state level, the SPD has been weak. The Green Party has almost eclipsed the SPD as the standard bearer on the left as a result. And so, the party has decided to do something about it. Here’s my translation of a commentary reported in the Süddeutsche Zeitung yesterday:

Germany is experiencing an economic boom. But it has an ugly blemish. Many ordinary wage earners aren’t participating in the upswing. And those who lose their job, quickly get labelled “Hartzer” [as in someone ‘sponging off’ benefits programs now offered under the Hartz reforms]. Even deep into the middle class, one can feel this fear of being cast aside, in the middle of a rich country. Therefore, it is correct that the SPD wants to modernize the welfare state to eradicate the blemish of this boom.

The reforms the last SPD Chancellor, Gerhard Schröder, used to spark the boom, lacked social support. Because Hartz IV has become a stigma, it requires a reboot under a friendly name, like Bürgergeld [citizens’ money], which the SPD is proposing. This includes mitigating the penalties that are causing fears of becoming homeless today. This includes taking better care of the long-term unemployed, so they can quickly find a job instead of becoming dependent on the state. And this includes giving workers a right to further training so that they do not become unemployed.

My take

I see this as a shift of great significance. In the US and the UK right now, we have seen a massive shift to the left of the two center-left parties, Democrats and Labour. In Germany, this shift is now also underway. And, for me, it marks the end of the third way era. Basically, neo-liberalism is dead on the left. The concept that you can grow the economy best through so-called market reforms is in the process of being rejected in every center-left party in the advanced economies of the West.

It’s not clear to me what replaces the third way ideology. Labour leader Corbyn is talking about re-nationalization. And Democrats in the US are talking about wealth taxes, increased ‘tax progressivity’ and a Green New Deal. The Germans are nowhere near as bold here. They are basically just tweaking the existing programs, which are rooted in pro-market ideology.

What is clear is that the center-left parties realize that their middle class voter base feels abandoned by them. And so, they are taking policy positions designed to win those voters back. The economic upturn in Germany is quickly evaporating though. And so, if the SPD wants to win more voters to the fold in the coming elections, I suspect these cautious moves toward rejiggering their platform will have to become more aggressive still.