Following the years of the Second World War, Western Germany or Federal Germany adopted a unique economic model which was defined by Wolfgang Streeck as “neither laissez-faire nor étatiste and it is best described as enabling state” in order to show its differences from socialist command economy model, Swedish social democratic model and Anglo-Saxon liberal capitalism. Germany’s grand success in the post-war period and maybe its crisis starting from the 1980s, lies in the mystery of its unique economic model which I am going to analyze.
After the Second World War, two macro economic and political models emerged. These were capitalist liberal economy which was implemented in the Western world and socialist command economy which were seen in the USSR and in the communist world. Although Western world seemed to embrace capitalist liberal economy in fact their economic model was largely Keynesian and it sought state intervention and initiatives in economics similar to socialist model. However, starting from the 1970s Keynesian model was started to be shaken and a new neo-liberal approach emerged especially in the Anglo-Saxon world. This model could be defined as Anglo-American capitalism which was based on neo-liberalization of the economy. The other model in the Western world which was implemented in Nordic Scandinavian countries was a kind of social market economy or social capitalism which sought corporatism and the protection of social welfare state. Alongside with these two models, Germany created and continued its own unique economy in the middle of Anglo-American liberalism and Scandinavian socialism which could be defined as German enabling state.
German model in fact took its roots from Otto Von Bismarck, the legendary chancellor of Germany and his model of conservative welfare corporatism. This model sought a moderate level of decommodification and state was thought to be replaced by market and civil society. Social rights were related to occupational status and women participation into business life was largely discouraged. This contributed to the high employment rates among men. Moreover, German women assumed important role in this conservative model as the boss of the all household affairs (later Nazis also implemented this model). State was given the right to intervene when it is absolutely needed. The system was highly institutionalized and wages were very high. It was a case of expensive welfare state but it was working almost perfectly. Firms were constructed as social institutions and they were socially regulated. External competitiveness was high among German firms and work discipline was perfect. In German “enabling state” model, it was thought that monopolies would be the outcomes if the market was left on its own devices. Thus, the state was given a critical role to construct the order but not the total control of the markets. Citizens were conceived as entities with certain social responsibilities. The market agents or property owners assumed social responsibilities diminishing the need for the state to intervene to mitigate socially undesirable consequences. The market did not need intervention, in this regard.
In his analysis of post-war West Germany Peter Katzenstein suggests that West Germany gained a lot from not having command of full state capacities. Katzenstein argues that semi-sovereignty of the state prevented Germany to fall into the mistakes of some other European states and Federal Germany created other means of public policy than direct state control which meant much better performance than traditional state intervention to the evolving problems of governance in a changing world. Semi-sovereignty rested on two main pillars. Firstly; a fragmented and decentralized state whose capacities for direct intervention are limited and which must learn to make deals with independent actors in civil society that command their own sort of sovereignty that could not be ignored. A state of this sort must therefore be a “cooperative state”, one that governs more by negotiation and cooptation than by legal command. In this context, a political system that has learned to build a culture and develop techniques of indirect control, independent social organizations and institutions with their guaranteed autonomy and power turn into agents of publicly licensed self-government, under the roof of a negotiated public order of which the state is just one element among others, has developed in the West Germany. Secondly, the social groups that are to become partners in governance of a cooperative state must be organized in a way that makes them suitable for the purpose. Katzenstein thought that the deficiencies of the decentralized semi-sovereign German state were compensated by a society capable of governing itself through centralized intermediary institutions. That is why, in this system civil society must be represented by a small number of organizations that can legitimately and effectively speak for their constituents, together covering the society as a whole and not excluding any significant social category, in other words welfare corporatism.
Semi-sovereignty of the German state was also provided by the nature of industrial relations. Under Tarifautonomie (tariff autonomy) system, the government was prevented from direct intervention in wage setting. The void was filled by encompassing trade unions and employers associations safe in their positions and disciplined precisely by their power, which they were both allowed and obliged to exercise, and which could be exercised best only in cooperation with one another and with the state. The result was a situation of “social peace” unique among large countries at the time, in turn supporting exceptional industrial competitiveness and enviable macro-economic performance. In that sense, West Germany’s semi-sovereign weak state successfully held well-organized interest groups accountable to national economic objectives. That is why, at a time of crisis in the whole world in the mid 1970s Germany economy was at its peak. However, starting from the 1980s German configuration in industrial relations of a weak state and strong organized interests entered into a deep crisis. But how and why?
Peter Katzenstein asserts that two outside effects than terminated the German up was the worker militancy that appeared in the late 1960s and the OPEC oil crisis that took place in 1973 and 1974. In following years, due to worker militancy and rising socialist tendencies, union wage policies became more responsive to the demands of a growing and more interest-conscious membership. In 1974, due to the oil shock, Willie Brandt was forced to resign and mass unemployment began to be a problem for Germany. These two developments (worker militancy and oil crisis) spoiled the full employment situation in Germany and triggered many other problems such as low inflation and high wages. For a while the German political economy managed to respond to its institutionally imposed condition of low inflation and high wages with structural change towards an internationally highly competitive production pattern that was known as “diversified quality production”. However, in the 1980s and 1990s, these social partners learned to use their privileged political status to take advantage of the condition of semi-sovereignty of the state and to use core public institutions for the purpose of subsidizing an increasingly untenable labor market regime. Thus,step by step, the public use of private organized interests turned into a private use of the public interest and social peace between capital and labor withered away. German Social Democratic Party (SPD) had to redefine itself in order to solve the problems but the third way and neo-liberal left policies also turned out to be unsuccessful. During the 1980s, Germany was seen as being in need of the neo-liberal transformation. The Christian Democratic Union (CDU) was supporting the social market economy, which was seen as a model incompatible with globalization and in need of change and Germany as resisting the change. As a result, the relationship between state-capital-labor was having an internal tension. Between the years 1982-1998, CDU (Kohl) was in the office, then in 1998 Social Democrats (Schneider) and Greens were ruling.
By the late 1990s at the latest, the decay of Modell Deutschland (German model) became visible in a lasting political deadlock over labor market reform, as due to the pursuit of special group interests in the public realm at public expense. This caused by the transformation of semi-sovereignty into liability. The system first prevented governments from using monetary policies to shore up the labor market and secondly, it forced governments to leave the regulation of the labor market to unions and employers. Helmut Kohl and conservative governments tried to undercut union strength but never became successful.Unions and employers learned to use the Bismarckian welfare state as a functional equivalent to Keynesianism thus, compensating the adverse employment effects of free collective bargaining, not by increasing aggregate demand, but by retiring excess labor and taking it out of the market. Unification of the West and East (Democratic) Germany also forced German governments to make infrastructural expenditures in order to develop the Eastern part. According to Schultz’s analyses between globalization and unification, we realize that the balance of power shifts in favor of capital, and the welfare state is no longer adequate to reconciliate the struggle between labor and capital, after the unification of Germany.
Another important development in the 1990s was the transformation of European Economic Community (EEC) into European Union (EU). Due to the neo-liberal transformation reflected in the Maastricht Convergence Criteria, German “Social Market Economy” was a castle to be defended. Analyses of varieties of capitalism began to ask whether it is still possible to speak of a German model, seeming as a model in need of transformation. Germany was in fact highly and very negatively affected from unification and the European Monetary Union (EMU). These created a social and economic burden on Germany. It gave rise to high unemployment and the necessity of feeding the East Germany, affecting both the German and the European economies. Besides, unlike Anglo-American model, free market economy was challenged by German public opinion. When we have a look to the historical background of German welfare state, it goes back further than Keynesian model (19th century) and thus changing the social security system was much more difficult in Germany. Due to unification, economy collapsed and specifically unemployment increased dramatically. There was pressure on the guest workers -coming from the East part- which gave rise to racial tensions. Moreover, German people, living in former Warsaw Pact countries were coming back to Germany. This resulted in the electoral support in right wing parties. In economic terms, growing interdependence between economies creating pressures on wages. Here, there can be two arguments that are possible to suggest. One is there is a loss of German competitiveness, high wages causing unemployment and there is a need of flexibility. On the other hand, the other explanation would be Germany remains competitive; the biggest problem is the fluctuations of the Deutsche mark against U.S. dollar.
When it comes to the political wave of the conjuncture, we can observe that Maastricht convergence criteria had an attack on welfare regimes and it basically favors neo-liberalism. In the post-Maastricht convergence criteria, Germany had pushed hard for its establishment under Kohl to force EU countries to “share the burden”. However, Germany found itself in an awkward position under Schröder with its failure to comply with all indicators of the pact. In Britain, power of trade unions was pressured by the so called Iron Lady (Margaret Thatcher), but in Germany there was still a power and resistance to neo-liberal policies. Stakeholder capitalism abandoned when Blair came to power and replaced by the “third way”, which can be regarded as the New Labor version of neo-liberalism. Derived from the dramatic changes in socio-political atmosphere in Germany, there have been significant changes in the German model in the last three decades. Resistance by German trade unions to the Constitutional Treaty and co-determinism were observed. The German model would not be carried into the GDR namely similar institutional reforms which would not be carried out in the former GDR. The unwillingness to invest in the GDR caused a wave of migration from the East to the West. Along with these, there comes a new political system as a new political party enters the scene- the governing GDR communist Party. In 2005 early elections, SDP administration came to an end. CDU-SDP coalition was in the office. A trend is observed in the past decade, showing the decline of trade union power, as it is so in other European countries. Real wages were in decline. Until the present crises, the German economy would be fitting in a better shape but not through a class-compromised way but rather with a new balance between capital and labor. Therefore, it is questionable whether there is still a German model to be “defended”. The introduction of share-holder capitalism, namely introduction of the hedge funds, equity capital and acquisition of German Companies were seen and the “German Castle” was not completely destroyed but there was a considerable loss. In the time, Germany was investing in CEE Countries, in order to gain expert competitiveness at the same time putting pressure on trade unions by showing that the industry had alternatives of trade unions did not comply. The German working class was showing resistance to certain policies and it is still possible to speak of a trade union movement -weaker than before- based on the manufacturing industry rather than services.
Cover photo is taken from The Guardian.
Assist. Prof. Dr. Ozan ÖRMECİ