Germany's New Political Leaders Face Big Problems of Their Own Making
Regulations, taxes, bad energy policy, and a lack of entrepreneurial spirit hold the country back.
Economically troubled Germany just held elections and will soon have a new government. The conservative Christian Democratic Union/Christian Social Union (CDU/CSU) is likely to create a coalition with the Social Democratic Party (SDP), which was the dominant force in the last coalition. A government formed by the country's two traditionally dominant parties is usually termed a "grand coalition," but the arrangement hardly rates that name now that support for the SDP has plummeted behind that for the populist Alternative for Germany (AfD). That leaves the country's future uncertain since Germany's troubles are largely the result of decisions made by the SDP and the CDU/CSU in past governments.
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The Collapse of a Coalition Leaves Limited Options
Germany's outgoing government was a "traffic light coalition" of the SDP (red), the classical liberal Free Democratic Party (FDP, yellow), and the Greens (green). It was an ideologically incoherent arrangement that presided over several years of economic doldrums, dithering over the response to the war in Ukraine, and terrible energy policies. It fell apart when the FDP had enough of fighting with its partners and withdrew from the coalition.
But the FDP—which with its market-oriented views is usually considered a natural partner for the CDU/CSU—was punished by voters. All the coalition participants lost support, but the FDP fell below the 5 percent threshold for participation in the Bundestag, the lower house of parliament. That left the CDU/CSU as the election's winner with 28.6 percent of the vote and a choice of forming a coalition with either the anti-immigration AfD, which too often flirts with the country's Nazi past and drew 20.8 percent, or parties to the left including the Left Party, the descendant of East Germany's totalitarian ruling regime, which pulled almost 9 percent of votes. Having ruled out the AfD—which is considered untouchable in German politics by everybody but, it seems, voters—that leaves the SDP, with 16.4 percent of the vote, as the only viable partner for cleaning up the country's mess.
Unfortunately, that mess was largely the handiwork of the two parties which will make up the new government.
Germany's Self-Inflicted Economic Woes
"A decade ago, Germany was the model nation," Bertrand Benoit wrote February 21 for The Wall Street Journal. "Today, Germany has gone from paragon to pariah. Its economic model is broken, its self-confidence shattered and its political landscape fractured."
Much of this has to do with the country's famous bureaucracy and crippling regulations. Last year, the International Monetary Fund called out the country's red tape as a major reason "Germany is struggling." Even The New York Times, not known for enthusiasm over limiting the reach of government, noted that "companies in Germany complain that the demands of bureaucracy are costing them time and money that would be better spent building their businesses." One executive told the paper that the German government regulates sharing business cards at meetings.
"This is not a country for entrepreneurs, and this has to do with costs, taxes, and bureaucracy," Johns Hopkins University political scientist Yascha Mounck wrote last week of his native Germany.
Germany's various governments have also long committed themselves to a policy of Energiewende, or energy transition, "moving away from nuclear and fossil fuels towards renewables and better energy efficiency," in the words of the country's Federal Ministry for Economic Affairs and Climate Action.
But the government has stubbornly adhered to that policy as conditions changed. It did so even as flows of natural gas from Russia on which the country's energy production heavily relied choked off after that country's 2022 invasion of Ukraine and subsequent tensions with the West. In 2023, Germany closed its last nuclear power plants, committing to a future powered by wind, solar—and a lot of coal when renewable sources turned out to be unreliable. That means much higher energy prices.
The result has been deindustrialization, as many companies leave the country. Two years ago, when the traffic light coalition was in full swing, Politico's Matthew Karnitschnig reported that "confronted by a toxic cocktail of high energy costs, worker shortages and reams of red tape, many of Germany's biggest companies—from giants like Volkswagen and Siemens to a host of lesser-known, smaller ones—are experiencing a rude awakening and scrambling for greener pastures in North America and Asia."
Overseeing all these policy choices have been the CDU/CSU and SDP, which have led every German government since the Second World War—sometimes together in "grand coalition" governments. To set Germany on a better course, leaders of the two parties will have to repudiate what they've done in the decades leading to this moment.
Weighed Down by Culture and Consensus
But it's not just political choices. As Mounck added in his commentary on Germany, "it's also cultural, because it's not that cool in Germany to be an entrepreneur. Society doesn't reward you. It doesn't reward failure. If you're in the EU and you want to set up a company, you go to Luxembourg or Belgium, as they are much more business friendly."
Mounck spoke with Wolfgang Münchau, a political analyst and author of the timely book, Kaput: The End of the German Miracle. Münchau described Germany as a "consensus society" where everything is done by compromise and mutual agreement.
"The trouble with consensus societies like Germany is that when the consensus is wrong, you don't have corrective forces," he told Mounck. He contrasted this with the United States where "correction shifts in politics almost happen unexpectedly" and political and economic entrepreneurs can challenge and potentially displace the status quo.
That's fascinating stuff. But it also poses a much bigger problem for Germany and its new coalition government than the bad policies of recent decades. It's one thing to admit that past governments were mistaken, repeal old laws, and try something different. It's quite another to challenge an entire country's cultural complacency and its discomfort with breaking away from a previous course and group mindset. How can that even be done?
Germany's new political leaders face some serious challenges in reviving what was once a vibrant and prosperous country. Prominent among those challenges is admitting that some of their past policies regarding regulation, taxes, and energy were terrible ideas. But they also must somehow breathe entrepreneurial spirit into a country that has too long been resistant to encouraging people to go their own way and take entrepreneurial risks.
