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Peter Morici: Germany’s Merkel leaves much unfinished business for Olaf Scholz

German Chancellor Angela Merkel accomplished much but leaves Germany’s toughest challenges for her likely successor, Socialist Democrat Olaf Scholz.

Merkel handled crises well, helping hold Europe together through the Global Financial Crisis, sovereign debt meltdowns in southern Europe and Ireland, the Russian invasion of Ukraine, and the Middle East refugee crisis.

But on big structural issues, she was an incrementalist—shunning big reforms and hewing to fiscal conservatism as much as circumstances permitted. 

Though a champion of the Paris Climate Agreement, she leaves Germany poorly situated to eliminate CO2 emissions. After the 2011 Fukushima nuclear accident, she impulsively decided to phase out nuclear power, but Germany still lacks an adequate grid to transfer enough wind and solar power from the north to the industrial south. It still uses too much coal and natural gas.

German Chancellor Angela Merkel has worked with four U.S. presidents. From George W. Bush giving her shoulder rubs to Donald Trump refusing to shake her hand, key moments show how the trans-Atlantic alliance cooled during Merkel’s 16 years in office. Photo: Mandel Ngan/Saul Loeb/AFP/Getty Images

Dependent upon on Russia

Germany spends well less than 2% of gross domestic product on defense, and its military is in poor readiness to help deter Russian adventurism.

Nord Stream 2 deepens German dependence on Russian fossil fuels and enhances President Vladimir Putin’s resources to create mischief. Germany’s decision to complete the pipeline in despite of U.S. and European opposition leaves a deep scar on the Western alliance and Europe vulnerable to Russian extortion.

Led by Germany, richer European Union states imposed tough austerity on Portugal, Spain, Greece and others during the sovereign debt crises that followed the Great Financial Crisis.

Merkel ignored the fundamental inconsistencies in the euro’s
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currency union and how Germany exploits those. In 2003, Chancellor Gerhard Schroder initiated aggressive labor market and social program reforms. After Merkel took over in 2005, those raised productivity and lowered labor costs and had Germany kept the deutschemark, it would have appreciated.

A stronger German economy left the euro undervalued for its exporters and overvalued for industries in Portugal, Italy, Greece and Spain. Germany’s current account surplus soared.

Left the South struggling

Instead of spending the windfall on public investments that might have spurred modernization, imports from the South and more balanced growth across the continent, Merkel ran up trade and budget surpluses and left the PIGS struggling to finance their public sectors and modernize.

The restructuring Germany imposed on the PIGS when they could no longer borrow didn’t fix these systemic dysfunctions. Now the pandemic has put those countries in terrible debt again and potentially back in the soup once euro area limits on national budget deficits are restored.

The eurozone still lacks unified fiscal and labor-market polices, deposit insurance or bank regulation similar to the United States. That makes the EU a free trade paradise for Germany and a monetary hair shirt for Southern Europe.

Germany has no Tesla
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Its large automotive manufactures—like U.S. legacy competitors—are playing aggressive catch up in electric vehicles and will face challenges from emerging Chinese exporters.

Many of its midsize auto suppliers make pistons, tailpipes and other components for internal combustion engines but lack expertise in batteries, software and microelectronics. Those will shrink and shed hundreds of thousands of jobs.

Germany lags behind in high-speed internet, and both its public sector and businesses lag in digitalizing operations. Many health-care agencies report new COVID infections by fax, and inevitable modernization also will eliminate jobs. 

Germany is more successful than its peers exporting to China. However, as the China’s technological sophistication expands—especially in software, artificial intelligence and chips—it will need European technology less, and this too will pressure high-wage employment.

Still, China’s role in the country’s present prosperity makes Germany and the rest of Europe little inclined to join the United StatesIndia, JapanAustralia and the U.K. in muscling up to address China’s military challenge. Without more European help in the Pacific, America must devote fewer defense resources to Europe.

Social tensions

All these will create an employment crisis and exacerbate tensions with the nearly 2 million refugees and their children. Already, Turks face an aggressive racial backlash reminiscent of black-white classes in America.

Germany and the rest of Europe fail to reckon that while Russia poses a regional challenge, Americans see China as a global threat to democracy. With willing partners, we will redirect our military to the Pacific, and as the submarine deal with Australia demonstrates, economic and technological cooperation will follow—leaving Europe marginalized.

The government formed by Scholz likely will seek a post-pandemic return to less severe but still conservative budget policies, while seeking to modernize the German economy. He will likely prove as disinclined as Merkel to upset relations with China or assist America in Asia on security or economic issues.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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