Merkel’s failures – an overview

By
Pieter Cleppe
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After almost 16 years as German Chancellor, Angela Merkel is leaving office. During that time, she was Europe’s most powerful politician, at the helm of Europe’s leading economy. Even if the German economy performed relatively well during that period, a closer look at her legacy reveals she has little to be proud of. An overview of the many policy failures she is responsible for.

Eurozone bailouts

When Germany gave up its D-Mark, there was a very clear quid pro quo: whenever governments in the Eurozone would get into trouble, they would not be able to count on being bailed out by taxpayers from other countries.

In practice, that’s of course not how things went. For years already before the Eurozone bailout machinery was created in 2010, the European Central Bank had been fueling easy money to banks in Eurozone member states that would have never been able to enjoy the low interest rates offered by the ECB to obtain euro funding.

Banks in Italy, for example, used that money to buy Italian government bonds, which in turn drove down Italy’s borrowing rates. There was little incentive left for governments in excessively indebted member states like Italy or Belgium to implement the necessary structural reforms to generate tax revenue to finance government spending. Eurozone membership was sufficient to keep those bloated welfare states afloat. Similar dynamics were at play all across the Eurozone, long before Greece, one of the Eurozone governments that were being showered with easy money, was suddenly no longer able to refinance its debt. Others, like Spain and Ireland, witnessed a housing bubble and bust, caused by easy ECB cash that had been pumped by local banks into the real estate market, in turn saddling some of these local banks with excessive debt, with the ensuing financial instability ultimately forcing the Irish and Spanish government to request a Eurozone bailout.

The pressure had been building for a while until finally, in early 2010, the Greek sovereign debt crisis erupted, which was followed by three fiscal bailouts of Greece, as well as bailouts of Ireland, Portugal, Cyprus and Spain. Others, like indeed Italy and Belgium, were being bailed out by the ECB.

The German establishment, with Angela Merkel at the helm, could have blocked bailouts, but opted not to do so, despite some severe misgivings, witnessed by a number of high profile Bundesbank resignations in 2011. Apart from endorsing bailouts, Merkel also provided tacit support to the ECB to do “whatever it takes” to keep the shaky monetary union alive.

It would be wrong to claim that the Eurozone would not have survived without Merkel. Many in the Western policy establishment – in particular in Washington D.C. – were terrified of a Eurozone break-up and the unpredictable contagion it would unleash. Then Merkel is the face of the ultimate decision to use taxpayers cash of Northern Europeans to pay for the mistakes of politicians in the South of Europe over which the former have no control. She is the face of permitting the European Central Bank to erode the purchasing power of the euro in order to allow politicians to be able to avoid necessary policy reforms.

Germany’s energy policies

Often, admirers of Angela Merkel have tended to describe her as a steady leader, above the fray, unwilling to make drastic decisions based on public mood of the day, which would supposedly distinguish her from the “populists”.

A look at the real Merkel, however, reveals a very different kind of politician. A negative description would be that she’s some kind of a nihilistic, opportunistic chameleon, prepared to defend the opposite of her previous stance. Perhaps more positively, one could call it “pragmatism”. In any case, the real Angela Merkel is the politician who back in 2010 stated that attempts to build a multicultural society in Germany had “utterly failed”, in order to then morph into some supposed “protector of refugees”. This is the politician who insisted there was “no possibility” for Greece to be bailed out, before she u-turned on that stance shortly after.

Most notable is Merkel’s big change of heart over energy policy. A trained physicist, she has always been a supporter of nuclear power, until she got her government to decide to phase out nuclear power, right after the public turned against it following the Fukushima nuclear disaster in March of 2011. This despite some more independent thinking greens considering this to be the ultimate stress-test for nuclear.

The result of these policies are that Germany is being plagued by sky-high energy prices for households. Also from the perspective to cut CO2 emissions, Merkel’s approach hasn’t exactly been a great success, given the persistent role of coal in Germany’s energy mix, which is apparently only possible to change by means of importing more Russian gas via the controversial new Nord Stream 2 gas pipe line between Russia and Germany.

Germany’s economic competitiveness

As mentioned, Germany’s economy did fairly well during Merkel’s time in office. However, the reasons for that were unrelated to Merkel. For one, there were the courageous but unpopular “Agenda 2010” labour market reforms implemented by her predecessor, Gerhard Schröder. His policies managed to really restore Unit labour cost competitiveness had really by the end of 2005, when Merkel became Chancellor, and have remained stable since. This was also due to responsible wage restraint that was agreed between employers and employees.

Secondly, as a result of the ECB’s expansionist monetary policies, intended to keep interest rates as well as the euro exchange rate low, the German export sector profited from an exchange rate that was artificially weak. This helped exporters, but did hurt importers and consumers – a cost that may well be three times as big as compared to the benefits for exporters.

Under Merkel, a minimum wage was introduced, increasing the cost for employers to create jobs and reducing the flexibility that was possible under the system of sectoral agreements, while no proper reform of the pension system was undertaken – despite the massive ageing challenges the welfare state faces. Annual top-ups needed for the state pension system may well reach “well above €100bn by 2031”, compared with €67.8bn in 2018.

That was all before the Covid crisis during which Germany abandoned its spending restraint, doling out more corporate welfare than other European economies, of course justifying a lot of the spending by the supposed German need for “more public investment”, given the poor state of some of Germany’s infrastructure, in particular digital infrastructure.

This overlooks that also private investment by German small and medium sized companies has been dropping with 46% since 2006, which is a phenomenon visible in other Western economies and partially connected to outsourcing due to globalization. It is likely also a result of the financial repression by the ECB, which was tolerated by Merkel, and which not only hurt savers badly, but also drove up German real estate prices to painfully high levels.

Obviously, it would be way too simplistic to attribute everything to Merkel, but it is a fact that her fingerprints are all over Germany’s reluctance to engage in meaningful competitiveness reforms and the ECB’s monetary policies, with their consequences for the German capital market.

Undermining EU harmony

Despite being seen as the “leader of the EU”, Merkel hasn’t made a lot of friends in the European Union. Her Eurozone bailout policies contributed to anger in the North over the request to pay for transfer as well as anger in the South over the conditions linked to those transfers. Both dynamics resulted in greater electoral support for anti-establishment parties.

Also her handling of Central and Eastern Europe leaves much to be desired for.  Despite warnings from the French Interior Minister, Merkel’s government opted to push ahead with outvoting Eastern European countries and impose “mandatory refugee quotas” at the EU level in 2015.

For Merkel, it did help to divert attention from her own policy failures, at the expense of the good relationship with Central and Eastern Europe, where some the likes of Hungarian PM Orban thankfully used it as a means to consolidate support by subjecting the EU migrant quotas to a referendum. It caused Germany to lose a lot of political capital which it could have used to criticize a certain kind of cronyism in a more credible way.

Then there’s also Nord Stream 2, where Central and European countries feel abandoned by Merkel, fearing that this makes it easier again for the Kremlin to bully them.

Furthermore there’s of course Brexit. Here, we can be short. Merkel did not go out of her way to help British PM Cameron secure any concessions that may have convinced the UK to stay into the EU. Only Central and Eastern European leaders were courageous enough to make concessions to the UK – over the strings to welfare benefits some of their citizens enjoy in the UK. This followed Merkel going along with the appointment of Jean-Claude Juncker, a classic Brussels-style EU federalist and proponent of things like an EU army, as European Commission President in 2014, two years before the British referendum. Cameron being outvoted together with Orban on this issue didn’t exactly back up his claims that reform of the EU was possible. Merkel was nowhere to be seen.

On that front, things had started pretty badly. When Merkel came to power in 2005, the “European Constitution”, yet another Treaty providing the EU with more powers and bureaucracy, such as the EU’s “Foreign Minister” and Council Presidency, had just been firmly rejected by the French and the Dutch. One would think that such a clear message coming from two founding member states would have been enough to shelve the unnecessary changes, but together with other leaders, Merkel decided to repackage the “constitution” in the form of the Lisbon Treaty.

In fact, she was the leading force behind continuing with the whole thing. It was rejected again in 2008, this time by Irish voters, who were simply asked to vote again one year later, when they fell into line, as the country had been badly hit by a financial crisis that was also partly the result of the cheap money enabled by euro membership.

Migration chaos

Much has been said over Merkel’s handling over the 2015-2016 migration crisis. To be fair, the “gates of Europe” were wide open long before Merkel made the assertion “Wir schaffen das“, meaning “we can manage this”, going against many in her own party.

The episode reveals another spectacular and panicky u-turn by Merkel. In August 2015, her government was using television adverts to warn people in Albania not to come to Germany as their chances of getting asylum were close to zero. And then, that same month, her government decided to suspend the so-called Dublin rules. This meant that it would stop returning Syrian asylum seekers to their first port of entry in the EU. Suddenly, the “hard line” vanished.

Merkel made the assertion “Wir schaffen das“, meaning “we can manage this”, going against many in her own party. Maybe it had something to do with the fact that a few months earlier Merkel had been sharply criticised for her insensitive response to a sobbing Palestinian refugee girl who begged to be allowed to stay in Germany.

Perhaps her approach after that of taking selfies with refugees to humanise them deserved praise, but the overall effect of her policy was not positive.

Again, the suspension of the Dublin rules wasn’t the key factor leading to the great influx, which really began in March 2015. More important was Europe’s failure to close the Balkan route. This only happened in March 2016, which stopped the flow from people from Turkey to Greece and led to a large drop in drownings-at-sea. Many people, both genuine refugees and others, no longer tried to cross from Turkey, which had given shelter to more than 3.5 million refugees.

Still, the suspension of Dublin was the ultimate concession that the German government, along with the other countries along the Balkan route, had lost control over their borders. Following the chaos, a consensus has emerged that whatever the solution to helping refugees is, this chaos isn’t among it.

The large inflow of immigrants led to increased violent crime and allowed terror groups to take advantage of the situation. It was accompanied with high unemployment among newcomers and a low rate of return for those denied asylum.

It all made already complex integration challenges even harder. Merkel has long since u-turned once again and abandoned her open-door approach. But it was too late to avoid a political fall-out.

Of course, migration policy is very complex and Merkel cannot be blamed for the Syrian war and its effects, but her abdication of responsibility in the midst of the crisis made it all worse.

Also her so-called “solution” to spread migrants can only be called a failure. In practice, it also appeared impossible to spread people within a passport-free zone, as a child could have predicted. The few people who were relocated to poorer EU member states, such as Portugal, have mostly already left those countries. Successful approaches like the Australian one or using development aid to pressure countries of origin to welcome back those that were denied asylum in Europe were never seriously considered at the EU level, not least because these are anathema to Merkel.

Abandoning transatlantic foreign policy

Last but not least, Merkel also took steps away from Germany’s transatlantic foreign policy attitudes.

In a profile of Merkel, the Wall Street Journal notes:

“As she is preparing to leave office after her fourth term—having interacted with four U.S. presidents—she has overseen a dramatic increase of her country’s economic dependence on China, pushed through a far-reaching energy deal with Russia, joined France in challenging U.S. political influence in Europe and rejected American demands in areas such as economic policy and Berlin’s openness to Chinese technology(…)

The shift also has roots in the chancellor’s changing views. As a leader, Ms. Merkel gradually became disillusioned with the U.S., a development triggered by the 2008 financial crisis, which she blamed in part on America’s loose financial regulation. Since then, she developed a fascination with China that mixed concern about its totalitarian drift with admiration at its rapid growth and technological progress, according to aides, confidants and her own statements.”

Surely, Merkel is merely following trade flows, which happen to have increased with China, one could object. Then Merkel did actively override concerns of other EU governments on signing an EU investment pact with China at the end of last year, when Germany was chairing the EU Council and in this capacity in the driving seat.

One could also retort that the U.S. are the ones to have distances themselves from Europe and Germany, most certainly under Trump. Then, the WSJ describes how it is “emblematic of the cooling U.S.-German relationship” that “Angela Merkel declined the offer of being Joe Biden’s first call as president. She would be at her cottage, gardening”.

This indicates how it goes deeper than an aversion of Trump.

Again, in Germany, there is a profound reluctance to follow the American confrontational path on a number of issues, and there is certainly a lot of support for good relations with Russia. Then if Angela Merkel ever started her Chancellorship among the ranks of German transatlanticists, she most certainly no longer belongs there. Still one should not expect her to end up as a lobbyist for a Russian state vehicle, like her predecessor Gerhard Schröder. She’s above all, a pragmatic.

That pragmatism apparently even extends to expressing skepticism over the democratic process. Again, here’s an interesting revelation from the WSJ about Merkel:

“Elections in Western democracies tended to produce leaders of ever-decreasing quality, she told confidants recently, including political scientist Herfried Münkler, he said.”

Many would agree with her, and hopefully Merkel won’t conflate appreciating the downsides of democratic elections with admiration for Chinese-style technocratic authoritarianism. In any case, given her many failures, she’s not ideally placed to criticise the quality of Western leadership.

 

This article contains some excerpts from a profile of Angela Merkel written for CapX a few years ago.

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