14 October 2021

Olaf Scholz’s Quiet Revolution in German Economics

Caroline de Gruyter

At the meeting of finance ministers of the eurozone—the countries using the euro as their currency—in Luxembourg on Oct. 4, one prominent regular attendee was missing. Olaf Scholz, Germany’s finance minister and vice chancellor since 2018, was otherwise occupied in Berlin. Eight days earlier, his Social Democratic Party (SPD) had won national elections under his leadership, making him the most likely person to succeed Angela Merkel as chancellor, pending coalition negotiations.

One might think that other eurozone countries would be filled with anxiety as they tracked Germany’s election and its aftermath, given its outsized weight in determining the EU’s common economic and financial policies. But the reality is that Europe is hardly worried at all. That’s because, although the government’s makeup remains to be determined—it’s still too early to say for certain whether Scholz will end up leading Germany, much less who will succeed him as finance minister—the culture of German economics has already changed significantly in recent years. And that’s not least because of Scholz’s own influence.

A new generation of economists has recently emerged in influential jobs across Germany. This group now regularly shapes political decisions and public opinion, shifting the debate, among experts and citizens, on key European topics such as public debt, the European banking union, and the international role of the euro. Contrary to the previous generation of German economists, many of the new cohort studied and worked abroad. They are at ease with European colleagues and less obsessed with inflation or fiscal discipline than their predecessors were. Whoever succeeds Scholz as finance minister—many think it may be Christian Lindner, the liberal Free Democratic Party leader who, economically, is more orthodox than Scholz—he or she will operate in this new, more relaxed intellectual context.

This new generation’s influence has been especially visible in Scholz’s finance ministry since 2018. Under his predecessor, Wolfgang Schäuble, a prominent member of the Christian Democratic Union (CDU), Germany had been ultra-cautious on economic policy in Europe. In the past, Schäuble had almost revolutionary ideas about what European integration should involve. With fellow Christian Democrat Karl Lamers, he developed a plan for a multispeed Europe, whose small eurozone nucleus—with Germany at the heart—would integrate faster and more deeply. But when France rejected the plan, Schäuble became an exceedingly cautious policymaker. Under his leadership, a eurozone budget, Eurobonds, and other creative solutions for the eurozone’s woes were taboo. He firmly supported the idea of adding a debt ceiling into the German constitution in 2009 and was the main architect of the schwarze Null (“black zero”), the policy of keeping perfectly balanced government budgets. Schäuble incessantly warned against moral hazard, arguing that so-called “program countries” like Greece and Portugal had to suffer austerity just as eastern Germany and the Baltic countries had after the fall of the Berlin Wall in 1989. During crisis meetings in Brussels, insiders say, Schäuble sometimes yelled at colleagues from southern eurozone countries. He was said to have been in favor of Greece leaving the eurozone in 2015.

When Scholz, a lawyer by training, succeeded him in 2018, he quickly replaced key officials in the ministry. Among his new recruits were fellow SPD member Wolfgang Schmidt, who became his state secretary; former banker Jörg Kukies, another state secretary; Philippa Sigl-Glöckner, whose Dezernat Zukunft think tank seeks to reimagine budgetary policies through macrofinance; and Jakob von Weizsäcker, the ministry’s chief economist, who spent years in Brussels as a think tanker and a member of the European Parliament, producing proposals for Eurobonds at a time when this idea was still taboo in German economic circles.

Sigl-Glöckner recently told Le Monde that while working as an advisor to Liberia’s finance minister, she learned how catastrophic austerity politics can be. “At the same time, I saw how these same policies were implemented in Greece during the euro crisis.” When she moved to Berlin after the Greek crisis, she said, “I had the impression that they were doing the opposite of what I had learned from modern macroeconomics.”

While Scholz and Schmidt recruited people like Sigl-Glöckner, the old economic guard in Germany retired from think tanks and professorships. They were replaced by younger colleagues—most born between 1970 and 1990. Among them were Henrik Enderlein (president of the Hertie School in Berlin, who died of cancer in May), Marcel Fratzscher (professor of macroeconomics at the Humboldt University of Berlin), Clemens Fuest (president of the Ifo Institute in Munich), and Guntram Wolff (director of the economic think tank Bruegel in Brussels). Several of them trained in American-styled Ph.D. programs, with Anglo-Saxon textbooks, at the University of Bonn. These people thought differently from their predecessors.

Compared with the previous ordoliberal generation, trained in the German conservative tradition (shaped by the hyperinflation that helped bring the Nazis to power in the 1930s), the newcomers brought about an intellectual shift. Few illustrate this better than monetary dove Isabel Schnabel (born in 1971), who studied in Mannheim, Paris, and Berkeley and is now an executive board member of the European Central Bank (ECB) in Frankfurt. Scholz nominated Schnabel for the job in 2019. She oversees the ECB’s market operations, including the bank’s 2.6 trillion euro ($3.1 trillion) quantitative easing programs. Her predecessor, Sabine Lautenschläger, resigned before the end of her term because she disagreed with these programs.

Schnabel, by contrast, has always supported them and has called it “dangerous” that “German politicians, media, and bankers reinforce the narrative that the ECB is stealing German savings.” Nor is she too worried about rising inflation, as her German predecessors were.

With economists like Schnabel taking center stage, German public discourse has shifted. For the first time, citizens are hearing experts argue on television that public investments are not necessarily bad, even if the public debt increases. For the first time, they are hearing that climate change, an aging society, and decades of public underinvestment in education, public transport, and digital infrastructure actually require more investments now, or younger generations will pay a heavy price. They are also hearing that this should not only apply to Germany but to the rest of Europe as well. When a German economist says what is good for Greece is good for Germany, and vice versa, one can confidently conclude that a revolution has taken place.

Germany’s discourse in Brussels has changed, too. Scholz, who is said to be an avid reader of the Italian Marxist Antonio Gramsci, supported a eurozone budget that his predecessors had opposed. He also promised support for the European banking union, which, set up in 2012, remained half-finished largely due to German hesitations. French Finance Minister Bruno Le Maire has said he was happy for Scholz to break taboos because “we need you!” And, remarkably, Scholz sometimes interrupts his hard-line Dutch colleague, Wopke Hoekstra, who is worried that Germany will concede too much to France. One evening, when Hoekstra made the same point several times, Scholz thanked him and gently said: “I think most of us have gotten your message now.”

During his first two years in office, however, Scholz promised more in Brussels than he delivered. The eurozone budget is a tiny, symbolic affair. The banking union remains incomplete. When reminded of this, Scholz’s standard answer is: “A German finance minister remains a German finance minister.” Until now, his SPD was a junior partner in a government with Merkel’s CDU. The CDU anxiously monitored the far-right Alternative for Germany (AfD) party at its right flank, whose ascent started during the euro crisis with some conservative professors attacking the ECB’s bond-buying program and loans to Greece and other indebted eurozone countries. After the refugee crisis in 2015, the AfD opened a second front against the CDU on migration. This was one of the reasons Merkel was reluctant to give Scholz too free a hand in Brussels.

This changed in March 2020, when the coronavirus pandemic struck. Merkel immediately understood that the eurozone and the European Union were in danger. One of the richest areas in Europe, Italy’s industrialized north, was hit severely. Economic life came to a halt. Italy did not have the money to keep businesses and citizens afloat, as prosperous Germany did. As a result, German companies on generous state support (the debt brake was shelved) would have a competitive advantage in the European single market over Italian companies, which mostly had to fend for themselves. This put the internal market—the cornerstone of the EU, based on fair competition and nondiscrimination—in acute danger. This is why Merkel allowed Scholz in April 2020 to help design a generous European recovery package to supply grants and cheap loans to Italy and other coronavirus-stricken countries.

That’s when Europe realized that an economic change was taking place in Germany. At the chancellor’s request, Scholz put his new people to work. They knew their French counterparts. Some had studied or worked together earlier in their careers. In a few weeks’ time, they set up the EU recovery fund, based on common European debt issuance worth 750 billion euro ($860 billion)—in other words, Eurobonds, which had been taboo in Germany before. In a slightly amended form, the policy was adopted by all 27 member states in the summer of 2020. Tellingly, the German public was supportive of the plan. The German parliament passed it with a large majority—including many conservatives and liberals. The AfD, which had fed on eurozone skepticism for years, did not manage to mobilize crowds.

For those who ask themselves what a new German finance minister will mean for EU and eurozone policy, this larger picture matters a lot. Germany will, because of its mostly Protestant culture, probably always be on the prudent and somewhat frugal side of the European fiscal argument. But the harshness and orthodoxy are slowly melting away, making room for more pragmatism and some flexibility—especially when the EU’s survival is at stake. This is the context the new finance minister will be working in—whoever it is.

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