The End of ‘Rhineland Capitalism’: Germany at the Crossroads

In the decades following the Second World War, Federal Germany established a social-welfare state which brought a measure of social security to the broad mass of the population unprecedented in German history. The German model also ranked highly in international terms.

January 1, 2004
14 min read

Although there is no reason to glorify this epoch as a ‘Golden Age’, ‘Rhineland Capitalism’ did indeed mark a civilising step forward – not only bringing with it a degree of mass affluence, but also political stabilisation within a framework of parliamentary democracy following the horrifying excesses of the Third Reich.

The West German welfare state was not a philanthropic institution; rather it became conceivable only under a set of highly specific historical circumstances.

-# A drastic shift in the balance of social and political forces – national and international – as a consequence of the Second World War which favoured those arguing for social-welfare and democracy.

-# A prolonged phase of economic growth, supported by a Keynesian strategy, which was also pursued by conservative governments.

-# Competition with the German Democratic Republic, which generated an enduring pressure to demonstrate the superiority of the West.

Salami tactics against the welfare state

By the late-1970s, the Keynesian project had already begun to show signs of stress, and a political and socio-economic change became evident – initially tentatively and fairly muted when compared with British Thatcherism. In the late-1980s, the fall of the Berlin Wall and the end of the Cold War revoked the global framework within which German post-war development had taken place. As a consequence, the neo-liberal project in Germany did not begin to become dominant until the mid-1990s.

However, the first cuts in the welfare state had already been made in the 1980s. By resorting to salami tactics, over a decade or so the entitlements of those on unemployment benefit and income support have been steadily trimmed back. At the same time, as a consequence of two decades of rising unemployment, there has been a serious deterioration in the financing of the health, pensions and unemployment benefit systems.

Although the costs of running the welfare system, measured as a proportion of Gross Domestic Product, have only risen marginally over the longer term, unemployment has exposed the Achilles heel of the German system: the financing of the welfare state rests on contributions levied on income from employment, in contrast to systems financed via taxation. And with an average official rate of unemployment of 10% (20% in East Germany), this source of income is at an historic low.

In addition, the social costs of German unification – that is, the integration of 17 million East Germans into the welfare system – was also financed not from taxation but from the funds based on social insurance contributions. Since 1990, around EUR75 billion a year has been transferred annually from West to East.

However, attempts by the Kohl government to make deeper cuts in the welfare state were thwarted by resistance from the – then opposition – Social Democrats and trade unions.

The German version of ‘New Labour’

The change of government in 1998 changed all that. Following an initial period in which a number of measures taken by the Christian Democrat government under Helmut Kohl were reversed – such as limits on sick pay – the resignation of the Social Democrat Finance Minister Oskar Lafontaine in March 1999 paved the way for a swerve to a neo-liberal approach on the part of the Social Democrats.

Under the catchphrase ‘New Centre’, Social Democrat policy began to mutate into a German variant of Blair’s ‘New Labour’, the ideological roots of which were set out in the so-called ‘Blair-Schröder Paper’. Economic, finance, tax, employment and social policy all took on a neo-liberal complexion. The ‘biggest tax reform of all time’, carried out by Schröder in his first period of government, followed the neo-classical dogma that tax cuts for business would create more jobs. Although the reform poured some ¬50 billion into the coffers of businesses and the well-off, it did not create a single job and failed to kick start the economy.

The partial privatisation of pensions has also proved to be a flop. The crash on financial markets has led to insecurity and scepticism about pensions financed by stock market investment.

‘Agenda 2010’ – most serious attack on the welfare state since the war

Germany’s economy has been virtually stagnant for three years – with zero growth expected for 2003, the lowest in the European Union. At the same time, the financial crisis of the welfare state has intensified, compounded by an austere fiscal policy and the pro-cyclical impact of the European Stability and Growth Pact. Germany’s social and material infrastructure has begun to deteriorate. The impact of the decline in public demand, especially on infrastructural spending, under the impact of unemployment, cuts in social provision, and a general sense of crisis, has been intensified by the falling demand on the part of private households. In the absence of a change in direction, recession could lurch into a deflationary crisis.

Against this background, the government has looked for salvation by dramatically stepping up its neo-liberal approach. In March 2003, Chancellor Schröder announced ‘Agenda 2010’ – a social and economic programme representing the most severe attack on the welfare state since the Second World War. It constitutes a fundamental change of course which will ultimately liquidate what has been dubbed as ‘Rhineland Capitalism’. Schröder has already indicated that ‘Agenda 2010’ is just the beginning of a much more far-reaching process.

The ‘reform package’ embraces a range of measures in the field of taxation, the labour market, pensions, and health.

Fighting the unemployed instead of unemployment

The core of the policy on the labour market is the cutting of the period of entitlement to unemployment benefit from 32 months to 18 months for those aged over 55 and to 12 months (previously 24) for those below 55, together with a merging of two other welfare payments – unemployment assistance (paid after unemployment benefit has expired) and income support, both of which are means-tested. In the first period of unemployment, unemployed people receive around 60% of their previous net income in the form of unemployment benefit. Unemployment assistance, the level of which has already been lowered in recent years, which follows on from this will now be cut to the level of income support and merged with it for administrative purposes: income support is the lowest benefit paid out in Germany, and is designed to offer the minimum necessary for existence. At present there about 4 million recipients. In the last 15 years, benefits under the income support system have been steadily lowered and are now below the EU’s definition of subsistence minimum of 50% of average income.

In addition, the requirements on unemployed people to accept a job offer from the state placement system have been tightened, so that almost any work will have to be accepted, regardless of how poor the pay and conditions. The efficiency of the job placement system will also be improved, and measures introduced to promote new small-business start-ups.

The essence of the measures is clear: cost cutting at the expense of the unemployed. Because there are almost ten times more unemployed people than there are vacancies, these measures will do little to cut the high rate of unemployment.

Under another proposal, protection against unfair dismissal will also be reduced, under the slogan of ‘improving labour market flexibility’. Workplaces with fewer than six employees, which are not currently covered by employment protection legislation, will in future be able to hire a number of workers on fixed-term contracts without this bringing them within the scope of the law. The exclusion of employees on social grounds from redundancy programmes will also be allowed only on grounds of age, length of service, and need to support dependants. Industry-level collective agreements will have more scope to respond flexibly to changing economic circumstances

Old age poverty now a certainty

The core of the pension reform consists essentially in raising the retirement age from 62.5 to 65 years and cutting pension benefits. At the same time, time spent not paying contributions – but which have previously been counted as pensionable employment – such as three years for study, will be cut. The measures will lead to an increase in pensioner poverty within a few years, and, as a result of a longer working life, to more unemployment.

Health – because you’re poor, you must die sooner

Sickness benefit, which is paid from the sickness insurance system once an employee’s entitlement to sick pay has expired, will in future be financed solely by employee contributions. Many benefits, such as dentures and glasses, will have to be paid for in full by the patient. Prescription charges will be raised, and patients will have to pay a quarterly fee of EUR10 to have a right to visit their doctor. Maternity benefit will be cut entirely as a benefit financed out of the statutory sickness insurance system. Patient charges for medicines will also be changed, but with some reductions for the long-term sick and participants on structured preventive and treatment programmes.

The life expectancy of lower socio-economic groups is already 10 years below those in better-off groups. The additional financial burdens will mean a return to the grim truth of the nineteenth century: ‘Because you are poor, you must die sooner’.

Tax and local government finances

A further major tax cutting programme is envisaged, intended to cut tax for middle and lower income groups. However, this will be more than offset by new burdens – such as higher health charges. At the same time, there are plans to introduce a tax on earnings from interest. In the wake of the reform of local government finance, the yield from trade tax – which is levied locally – will rise and the number of those liable to tax will be extended. This will not, however, hit those starting new businesses or running small businesses.

A programme of providing cheap loans for local authorities will be provided via the Bank for Reconstruction and additional economic impulse is expected from a programme for building and modernising homes. Regulations governing the operation of traditional trades are to be reformed, and bureaucracy reduced.

Trade unions and the Social Democrats face prospect of divorce

For over a century, the German trade unions have pursued a strategic alliance with the Social Democratic Party (SPD). Eighty per cent of full-time union officials are SPD members, and the general secretary of the construction workers’ union is even a member of the SPD parliamentary group.

After the war, the trade unions pursued a strategy of corporatist inclusion in the welfare state – an approach which served them well for several decades. However, the switch to neo-liberalism triggered a period of crisis, expressed in declining membership and diminished influence on both politicians and the broader public. Alongside their own problems of bureaucratisation, tardy reaction to the structural problems of unemployment and the demands of modernisation, as understood by neo-liberals, German trade unions have also been confronted by an extremely hostile media, which has conjured up an image of fossilised opponents of reform and die-hard dogmatists. Given this, it is hardly surprising that in the summer of 2003, the metalworkers’ union IG Metall – still the largest manufacturing union in the world – suffered its first industrial defeat since the mid-1950s.

In the election campaign of 1998, the trade unions strongly supported the SPD leadership duo Schröder and Lafontaine. Although the relationship deteriorated after the departure of Lafontaine, there was still clear – if muted – support for Schröder in the 2002 election campaign. However, ‘Agenda 2010′ has shaken the relationship so severely that the historic alliance is to all intents and purposes broken.

The largest trade unions – ver.di (for the service and public sectors) and IG Metall – are in open conflict with the government, have engaged with the issues raised by social movements, in particular ATTAC, and increasingly co-operate with them. The same applies for the education and construction unions. At present, those forces which argue for more autonomy and closer co-operation with the social movements have achieved a predominance. In other trade unions, such as the chemical and mining union IG BCE, and within the central union confederation, the DGB, there are still widespread illusions about the unions’ capacity to prevail with the government via dialogue and lobbying. As a consequence, the future strategy remains in contention – and emancipation from the SPD will be a contradictory and protracted process. Should there be a definitive breach – something which is entirely possible – this would be a truly historic development in Germany.

Protest takes shape

The SPD’s swing to neo-liberalism – a step already undertaken by the leadership of the Greens – has meant that parliament in effect is dominated by a neo-liberal all-party coalition. Opponents of this approach lack any parliamentary representation. Those few SPD members who have dared to voice opposition have been brought into line with massive pressure, including threats of resignation on the part of Schröder. There has not been an SPD left capable of independent action for some time.

For the opposition Christian Democrats and Liberals (FDP), the ‘reforms’ do not go far enough. Their calls for more far-reaching measures also have a good chance of being realised as the Conservatives control the Upper House, in which the fifteen constituent states of the Federal Republic are represented and whose consent is required for some types of legislation – including much of ‘Agenda 2010’. As a consequence, in order to get its legislation through, the SPD will need to make concessions.

The post-communist PDS (Party of Democratic Socialism) also lacks any real oppositional power. Although it has now transformed itself into a social democratic party and holds positions which the SPD took up in the 1970s, it failed to clear the 5% hurdle required for full parliamentary representation in proportion to its vote, and has just two members in the Lower House, the Bundestag. Moreover, the PDS is in a coalition with the SPD in two regional governments in East Germany – Berlin and Mecklenburg-West Pomerania – where it has pursued policies along the same lines as ‘Agenda 2010’.

Against this background, and with some delay, a non-parliamentary protest movement has begun to take shape, organised by grass-roots union organisations, anti-globalisation movements, and various left currents. There have been student strikes at several universities against cuts and the introduction of tuition fees, and an increasing number of actions against social welfare cuts.

The biggest success was a demonstration on 1 November in Berlin, which – to the surprise of many – attracted 100,000 participants, despite little advance preparation and a notable lack of support on the part of the trade union leadership. The demonstration was called by ATTAC, local union branches, and left organisations. The success of 1 November shows that there is a broad popular discontent and willingness to protest which has no outlet in the established political system.

This has broken the spell which so far seemed to have blocked any form of mass mobilisation. The Berlin demonstration is a signal for all those who have so far held back. It has already had some impact on the leadership of ver.di, IG Metall and other unions – where the issue is less that of a rejection of trade union mobilisation, but rather fear of more defeats which could put unions even more on the defensive. The experience of 1 November may have begun to change this.

Even the DGB has begun to show that it is prepared to participate in future actions against cuts in the welfare state, not least because it is afraid that it will lose grass-roots support. There is also growing readiness to get involved on the part of other social organisations, individuals within the churches, and the discontented grass-roots of the SPD and Greens. With this degree of impetus, over the next few months a large protest movement could emerge in what is otherwise a conservative country.

In view of the historic turning point at which Germany now finds itself, a decade after the fall of the Berlin Wall, a strong extra-parliamentary movement with a progressive and emancipatory agenda could prove to be a significant factor in the development of this process. And given the significance of Germany for Europe more widely, this would have ramifications beyond Germany’s own borders.Peter Wahl works for the NGO WEED (World Economy, Ecology and Development) and is a member of national co-ordinating committee of ATTAC-Deutschland.


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