Germany’s Economy under Angela Merkel in hindsight


Merkel became the first female Chancellor of Germany in 2005 and is serving her fourth term. Angela Merkel has served as German chancellor for 14 years. If she stays in office until the end of the current legislative period, she will draw level with Helmut Kohl, who was also chancellor for 16 years. Her leadership is marked by her steely reserve, from standing up to Donald Trump to allowing more than a million Syrian refugees into Germany.

A comparison between Germany’s economic data in 2005, the year Merkel became chancellor, and the latest figures reveals a spectacular improvement. In 2005, Germany was ailing, with chronically weak growth. The economy was stagnant, having posted average growth of just 0.5 percent a year since 2001. The public sector deficit equated 3.3 percent of the country’s economic output. Germany had been flouting the European public debt limits for years. The debt level stood at 67 percent and there was no end in sight to its rise. The unemployment rate had climbed to 11 percent; income inequality was growing. While the economy was booming in countries like Spain and the United Kingdom, Germany appeared to be in a state of paralysis: the sick man of Europe.

Today, some 14 years later, the picture is dramatically different. Despite the slump during the financial crisis, economic growth has averaged 1.6 percent since 2005 – in other words, approximately triple the rate over the previous five years. Over six million new jobs have been created and unemployment has dropped to 3.4 percent. At the very least, the income gap has not widened any further. Government revenues have overtaken spending, while the public debt ratio has fallen below the 60 percent threshold set out in the Maastricht Treaty. This recovery has been achieved with little effort. Although bracket creep has led to a rising tax-to-GDP ratio, there have been no cuts in public spending. Falling interest rates and declining unemployment benefits were sufficient to make the budget deficit disappear.

Merkel has often been accused of merely reaping what the previous red-green coalition government had sowed under Chancellor Gerhard Schröder. Without doubt, the Agenda 2010 reforms paved the way for favourable economic development. The government’s plan to boost the ailing economy focuses on reductions in health care benefits, restructuring labour regulations, tax cuts and an overhaul of the pension system. This bill passed on September 26, seeks to make Germany’s heavily regulated labour market more flexible. It reduces to 12 months the maximum duration a person can receive unemployment benefits after losing a job and also makes it easier for companies to hire and fire employees. Older employees, however, could receive unemployment benefits for up to 18 months.

Second, Merkel’s government set other reforms in motion. In 2007, she lowered unemployment insurance contributions from 6.5 to 4.2 percent. This move was financed by an increase in VAT from 16 to 19 percent. Company taxation was reformed in 2008, dropping the tax rate on retained earnings from 38 to 30 percent. Admittedly, the tax base was broadened to compensate; yet, overall, the tax burden on corporation was reduced. Before these measures were able to take full effect, the global financial crisis shook the foundations of the world economy, heralding a period of crisis management. 

Merkel’s joint press conference with Federal Finance Minister Peer Steinbrück, in which they assured depositors that their savings were safe, is engraved on the public memory. In 2009, the German economy was hard hit by the decline in growth around the world. Economic output shrank by 5 percent. The fact that the export industry, the strongest sector in the German economy, was affected, proved to be a blessing in disguise. Despite the dramatic slump in sales, many companies refused to let their employees go. They were confident that the economy would recover quickly. The German federal government supported this strategy in a number of ways, including by extending the short-time allowance. This strategy paid off. The global economy picked up surprisingly quickly, along with the demand for products made in Germany.

The euro crisis presented Merkel with major challenges. She had to convince the German people and her own party that, in order to mitigate the crisis, Germany had to accept considerable liability risks. In so doing, fundamental rules imposed by the monetary union, particularly the no bailout clause, were thrown overboard. She justified these steps by repeating her mantra: if the euro fails, then Europe fails. At the same time, Merkel insisted that the crisis states initiate reforms to overcome their economic problems and get their budgets in order. Later, in the United States and emerging markets such as China, demand for German exports rose substantially; meanwhile, interest rates continued to fall and the weak euro fuelled the boom in German exports. Angela Merkel’s cautious response to the euro crisis is backed by most Germans and by her party, which has just re-elected her almost unanimously as leader.

 Merkel’s most controversial decision was to open Germany’s borders during the 2015 refugee crisis. Supporters of this decision claimed that the influx of refugees would ultimately benefit Germany’s economy as the country needs more workers. By contrast, critics advised caution in light of the high costs for the welfare state. At no time did Merkel herself promise that Germany would stand to gain from the refugee wave in economic terms, stressing instead the humanitarian aspect, the costs of which Germany was in a position to bear. Today, it would seem that she was right after all. Time magazine has named her, The Person of the Year, citing her resolve in leading Europe through this summer’s Greek debt crisis, and her encouragement of other countries to open their borders to migrants and refugees.

If there is one area in which the politics of the Merkel era have taken a particularly unfortunate turn, then, it is the energy and climate policy. Germany has spent more money than most industrialized countries on promoting renewables, yet has achieved very little. It will fall short of its climate goals for 2020.

However, It is likely that the Merkel era will go down in history as a period characterized by prosperity and stability, despite the occasional crisis, but also as an era that where economic policy ran out of steam at the end. Time will soon tell whether the next government can approach the challenges ahead with renewed vigour and more inspired ideas for ensuring future prosperity.

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