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Merkel the Fiscal Bureaucrat by Sven R. Larson

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Merkel the Fiscal Bureaucrat

Angela Merkel had an impressively long tenure as Germany’s chancellor. Her 16 years and ten days in office was only 16 days away from the record held by Helmut Kohl, also from the Christlich Demokratische Union (CDU) party. A politician with such a long time in such an influential office will undoubtedly build a significant legacy.

Some politicians retire with a resume full of visionary and transformative accomplishments. That is not the case with Merkel. More than anything, she was a fiscal administrator, a manager of the status quo

This is in part her own fault, so to speak, but it also has to do with the time at which she assumed the chancellor’s office. In 2005, when she was first elected, Germany had just been through one of its most transformational periods. Helmut Kohl had steered Germany through its reunification and had brought the united country through the transition of the three European Communities into the European Union. 

In 1998, Kohl was succeeded by Gerhard Schröder of the Sozialdemokratische Partei Deutschlands (SPD), whose chancellorship was dominated by the preparation for and implementation of the currency union. Like Kohl, he governed Germany through an era of radical change. The growing EU and the currency union were supposed to fuse the two halves of Europe—the former Soviet Bloc and the West—together into one large, free market. It was Schröder’s job to prepare Germany for this new era.

It is not easy to follow in the footsteps of such accomplishments, as the shadows of Merkel’s two immediate predecessors could have made any successor look like an administrator. At the same time, however, she made policy choices that helped define her as an administrator, not a herald of change like Kohl or Schröder. 

Not everyone agrees with the image of Merkel as something of a political bureaucrat. Clemens Fuest, the president of the Leibnitz Institute for Economic Research at the University of Munich, suggests that as far as the economy is concerned, she made a decisive difference for the better. In 2019, Fuest penned a brief status report of the Merkel economy where he reviewed key macroeconomic data and put Merkel’s time in office in a historical context. He concluded that the German economy was better off thanks to Merkel. He pointed to stronger gross domestic product (GDP) growth during her tenure, but his main argument was that she provided her successor with a plateful of strong German government finances. 

But has a politician really made an economic difference for the better by strengthening government finances? Is this not just a metric of skilled administration of the state’s purse?

Fuest is not the only one who credits Merkel for sound government finances. A more recent review, published by CNBC.com in September this year, makes a similar point. Quoting unnamed analysts from Goldman Sachs, CNBC mentions among Merkel’s accomplishments “sound government finances” and the adoption of a constitutional debt brake.

The debt brake is a noteworthy accomplishment with tangible economic consequences. The theory behind it is to force a reduction in the growth of government spending unless it is accompanied by a proportionate increase in tax revenue. The Swiss debt brake, which went into effect in 2003, has for the most part been successful in limiting government debt. The same appears to be true for Germany: according to Eurostat data on government finances, in the ten years leading up to the 2009 adoption of the debt brake, Germany’s consolidated public sector averaged a deficit of 2.35% of GDP. By contrast, over the first ten years with the debt brake, government finances were in balance.

In other words, Angela Merkel did put in place a mechanism to strengthen German government finances. However, there was a price to be paid for this achievement, namely a slowly but steadily rising burden on German taxpayers. In 2005, when Merkel was first elected, total taxes equaled 43.5% of German annual GDP; in 2019, the year before the COVID-related economic shutdowns, that ratio had climbed to 46.5%.

More than anything, Merkel was a tax moderate, opposing reforms that would either raise or lower the tax burden: she was a skeptic of higher taxes, but not a principled opponent. In 2005, she declared her desire to raise the rate of value added tax (VAT) by two percentage points, as part of a plan to shift the overall tax burden from labor to private consumption. However, she also resisted the temptation to enact tax hikes: in the lead-up to the 2017 election, she promised not to raise taxes, a pledge she repeated in 2020. In a speech presenting the CDU platform for the 2017 election, the conservative chancellor highlighted the difference on tax policy between her Union coalition and the social-democrat SPD. It was, she said, a choice between keeping marginal income taxes unchanged and raising them. 

At the same time, she had no problem resisting calls for tax-reducing reforms, such as to eliminate a phenomenon that Germans refer to as “cold progression.” When workers are given a raise, their income increase eventually pushes them up into a new, higher tax bracket. This forces them to pay higher taxes even though the tax rates have not been increased. 

On the margin, and with a large enough number of tax brackets, this can raise the tax burden more than income goes up. The American economy suffered greatly from this very problem in the late 1970s. It got its first remedy with the two-step Reagan tax reform where the number of tax brackets was cut from 15 to two. The second part of the solution came during the Clinton presidency when income tax rates and brackets became inflation indexed. Since then, five more brackets have been added to the US federal tax code, making it more complicated than its German equivalent. However, having only four tax brackets does not help when inflation imposes cold progression on taxpayers. 

In 2014, a group from the right wing of Merkel’s own party challenged her on this very issue. Leading up to the annual party convention that year, a business-oriented caucus within Merkel’s CDU demanded that the party rid the federal tax code of cold progression. With reference to her coalition with the SPD, Merkel balked at the proposed reform. She persisted even as pressure on her grew from within the CDU.

Her stance in the middle between calls for higher and lower taxes paints Merkel in the colors of a government bureaucrat or administrator. Indeed, eliminating deficits from the consolidated government finances was her greatest economic achievement. 

In terms of economic growth, she brought only marginal improvement. Based again on macroeconomic data stretching back to 1995 from Eurostat—a good source due to its stringent methodology—a comparison between pre-Merkel and Merkel-era Germany comes out as follows:

  • In the ten years before Merkel, the German economy grew at an average of 1.2% per year, in real terms;
  • Under Merkel, up to 2019 (excluding the COVID-anomalous year of 2020) the average growth rate was 1.6%.

This is a slight improvement, making Germany one of only three EU member states to see higher growth in the second period (the other two being Bulgaria and Romania). At the same time, Germany only ranked 15th in GDP growth during the Merkel-era: Ireland led the EU with 4.5% real growth per year; Poland also exceeded 4%; and Lithuania, Romania and Slovakia all exceeded 3%. 

It is not surprising that an economy with a slowly rising tax burden also experiences slow growth. Even though there was a slight improvement under Merkel, her economic-policy priority does not appear to have been strong growth. What little improvement the German economy saw could easily be explained by rising exports, which are largely independent of domestic tax policy.

It is, however, important not to cast Merkel as a deliberate government administrator. Her emphasis on balancing the budget was well in line with a policy practice that emerged in European welfare states over the past three decades. The fiscal practice of budget balancing is enshrined in the very constitution of the EU, where the Stability and Growth Pact specifies how much debt and how large a deficit a government may allow itself.  As was made apparent during the Great Recession a decade ago, the Stability and Growth Pact is not just words on a paper. Together with the European Central Bank and the International Monetary Fund, the EU strong-armed Greece and other heavily indebted countries into implementing harsh austerity packages over an extended period of time.

Angela Merkel was a driving force behind the policies that brought debt-ridden countries closer to compliance with the requirements in the Pact. In a 2015 article for German Politics & Society, political scientists Isabelle Hertner and Alister Miskimmon summarized Merkel’s view of the crisis “as being caused by overwhelming national debt.” They also add an interesting note about Merkel’s motive for placing the origin of the crisis in excessive government debt: it was, they surmise, to dispel the notion that the crisis originated in structural imbalances within the currency union.

A challenge to the currency union would be disruptive in theory. By the time Merkel got into office, the common currency had been a fact for several years, and its existence was beyond question within the political mainstream. Among economists, though, there are proponents of both crisis explanations: the fiscal narrative suggests that a welfare state in crisis causes permanent deficits, while the euro narrative puts the blame on the architects of the currency union. 

These two explanations are not mutually exclusive, as Merkel would like to suggest. On the contrary, when taken together they present a formidable picture of a Europe ailing under the burden of two structurally excessive government products: the welfare state and the currency union. 

Merkel preferred the fiscal explanation, though she stopped short of calling the fiscal crisis “structural.” Instead, as Hertner and Miskimmon point out, her position appears to have been that the debt-ridden governments were simply irresponsible. 

There is no doubt that Merkel chose to be a fiscal administrator during her time in the chancellor’s office. However, it is also important to note that she was handed newly-minted reforms that had radically changed the institutional architecture of the European economy. Those reforms had not yet sunk in, which essentially made it mandatory for her to govern with them and take Germany from the phase where the new EU and the currency union were fledgling to a point where the unified European economy was second nature to both governments and the private sector. 

Another aspect of her administrative appearance is to be found within the German constitution. Compelling research in political science suggests that the German constitution itself favors administration and management as opposed to transformative reforms. In 2003, political scientist Manfred Schmidt published an influential essay called Germany: The Grand Coalition (in Political Institutions in Europe, Routledge 2003). Schmidt suggests that the German federal constitution strongly incentivizes the major political parties to form coalitions. These incentives are found in its abundant emphasis on power sharing, or what Americans refer to as “checks and balances.” 

Wherever politicians of different ideological backgrounds come together, the result is inevitably a compromise. It lies in the very nature of a compromise that it promotes the status quo; meaningful change to the prevailing order would go in a direction preferred by either of the compromising parties. 

In other words, Angela Merkel, one of Germany’s most skilled politicians in modern times, may go down in history as an administrator, not a visionary. However, to a large extent her legacy was not one of choice, but forced upon her by historic circumstance, constitutional incentives, and political practice. 

Sven R. Larson is a political economist and author. He received a Ph.D. in Economics from Roskilde University, Denmark. Originally from Sweden, he lives in America where for the past 16 years he has worked in politics and public policy. He has written several books, including Democracy or Socialism: The Fateful Question for America in 2024.

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