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Angela Merkel: a thin economic legacy

September 16, 2021

Angela Merkel will soon leave the Chancellery under enthusiastic applause. During her long tenure, she was already applauded for her steady stewardship not only of Germany, but also of Europe. Yet, in her case, at least as far as economic policies are concerned, steadiness has mostly meant lack of action.


I am ill-placed to comment on her achievements in Germany. I mostly remember two spectacular moves. The first one is her decision to close nuclear plants down in the wake of the Fukushima disaster. This is a historical mistake. Nuclear energy is the most efficient way to produce quasi-carbon free electricity on a large scale. Wind turbines and solar panels are nice, but they use up a lot of space, output is variable and they are unlikely to ever satisfy the fast growing needs for electricity. This is why Germany has first revived coal plants, arguably the worst source of carbon emission, and it will rely for decades on gas, another source of carbon, both where it is extracted and where it us consumed. Germany will probably have to remain an importer of electricity for the decades to come, thus shifting carbon pollution to neighboring countries. In addition, the country whose economy remains more industrial than most others, will see its comparative advantage in producing cars and machinery eroded by the need to import significant amounts of energy, steel, cement, and the like at a higher cost than it used to pay for domestic production. To make things worse, taxpayers will be asked to pay for the costs of compensating the nuclear plant owners that have been roundly dispossessed by executive order. The Fukushima disaster was the result of fraught planning, poor oversight, and a spectacular lack of preparation. It would have been much easier and dramatically cheaper to make sure that Germany reviews its own procedures than to close the plants. Economic historians may, one day, link the coming German economic decline to this fateful decision.


Her second move was her decision in 2015 to open borders to immigrants. From a human point of view, she was humbling her bean-counting colleagues. From an economic point of view, in one stroke, she was solving the numerous woes associated with a declining population. I was overwhelmed by her courage and vision. My admiration quickly faded away, though. It turned out to be a gigantic political mistake. Domestically, she provided fuel to the hate-mongers of the far right. At the European level, she opened up a lasting rift with her Eastern neighbors. In the end she had to retreat. Bravery and care for fellow humans don’t pay politically, we already knew that.


Beyond that, her fifteen years in power have seen almost no economic reform, at least no serious reform. The economic success of Germany under her leadership owes much to the brave labor market reforms that cost her predecessor Gerhard Schroeder his job. She allowed penny pinchers in the Finance Ministry to single-mindedly pursue the objective of balanced budgets, at the expense of public investments in infrastructure, leaving her successor with a daunting challenge.


Within Europe, largely for lack of competition, she ran the show. She was firmly at the helm when the global financial crisis erupted in late 2008. For one year, she agreed to let the German budget deficit grow. Then she not only closed it down prematurely but she also pressured the other Euro Area countries to do the same. The budding economic recovery petered. The crisis had finally made it plain that the Euro Area needed to undertake serious reforms.


It had been known for years that a monetary union cannot operate with separate banking rules and national supervisors bent on protecting weak national champions. This led to the creation of the banking union but, to protect its perceived interests, Germany did its best to limit the scope of the banking union, which remains incomplete. Since then, the German giant banks have shriveled, and the networks of mostly inefficient regional saving banks are surviving far from the reach of European supervision.


It had also long been known that the fiscal discipline rule known as the Stability and Growth Pact – a German creation from 1997 – was so poorly designed that it had failed to deliver on its objectives. Merkel’s Germany could not completely block reforms but it saw to it that the reforms would be mostly symbolic, simply adding layers of bureaucratic rules and procedures. Unsurprisingly, the Euro Area soon glided into its own public debt crisis – of the kind that was believed to only happen in developing countries – and into a second recession a couple of years after the previous one.


The collective response to the Euro Area debt crisis has been dismal. Under Merkel’s leadership, Greece was obliged to slash its deficit, which had flourished under the Stability and Growth Pact, just as it was going into a deep recession. The result was a record-deep recession. Her much delayed acquiescence to Sarkozy’s ill-conceived idea of forcing Greece to default on its privately held debt has become a class-room example of the well-established principle that, if needed, a default must be swift and never announced ahead of time. Lack of adequate support for Greece provoked a wave of contagion throughout the Euro Area, with more deficit slashing, more recessions and more misery. The only merit of Angela Merkel was not to oppose the celebrated “whatever it takes” decision of Mario Draghi, then President of the ECB. By effectively guaranteeing national public debts, the ECB brought the crisis to its end. Even so, this decision should have been taken early on so that the crisis would not be allowed to spread. It seems that the delay was largely due to Germany’s quiet but firm opposition. The ever-careful Chancellor only moved when it was already very late.


The two consecutive economic crises and the immigration goof-up have been instrumental in the rise of the anti-Europe sentiment that now affects every country. This wave has fed the British decision to leave the EU. When public opinion polls started to indicate that Brexit was a serious possibility, Prime Minister David Cameron pleaded with his colleagues for some concessions. Couldn’t Britain be given a few exemptions from European rules? It was a debate about rules vs pragmatism. Merkel could have weighed in favor of pragmatism, one of her much celebrated qualities, but she didn’t. The continent had figured out that Britain had much more to lose from Brexit than the rest of the EU, which is true. The bet was that British citizens would understand that and vote against Brexit. They did not. So, we all lose. The damage is wider than the economic consequences. The EU has lost its integrity and its ambition to bring under one roof all of democratic Europe. Britain is different from the continent in many ways; the challenge has always been to accommodate diversity. Under Merkel’s undisputed leadership, Europe has failed. 


True, Germany has weathered the Covid pandemic better than most other countries and Mutti deserves the credit for that. Two years of success do not make up for the previous thirteen years. Let us hope that the next German Chancellor will have more of a vision and more ambition than merely avoiding domestic criticism.

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