News | Economic / Social Policy - Western Europe - Socio-ecological Transformation - Distribution Crisis Germany’s New Economic Policy and Its Limits

Recent state-led initiatives show the need for an interventionist paradigm shift


Federal Minister for Economic Affairs and Climate Protection Robert Habeck presents the 2023 Annual Economic Report at a press conference, 25 January 2023. Photo: IMAGO / Bernd Elmenthaler

Nationalizing energy companies, capping energy prices, implementing an excess-profits tax — left-wing demands that once seemed impossibly remote now suddenly appear within grasp. Without a doubt, economic policy debates have shifted in the wake of the German government’s financial “double whammy” and a major relief package.

Tilman von Berlepsch is an economic policy advisor for Die Linke in the German parliament.

This article first appeared in LuXemburg. Translated by Joseph Keady and Louise Pain for Gegensatz Translation Collective.

The current energy and inflation crisis might enable a progressive realignment in economic policy regulation. But so far, we have only seen signs that a defensive restructuring policy is taking shape. While this restructuring may soften the blows dealt by the crisis, it is primarily geared toward protecting the national recovery process against intensified international competition.

A Crisis of the “Old” Tools of Economic Policy

Germany’s current economic and energy crisis has become a crisis pertaining to the “old” tools of economic policy. Stagflation — a term used to describe persistently high inflation combined with stagnant economic growth — cannot be countered with austerity measures, attempts to increase labour market flexibility, or by raising the interest rates of the central banks (in other words, the remedies that have become the dogma that has fuelled the prevailing economic theory and policy of recent decades).

At the same time, even the last Nobel Prize in Economics was once again awarded to monetarist economists who champion a reverse-causation perspective on financial crises and who claim that it was the savers among us who were responsible for causing the financial crisis, not the banks. By bestowing the Nobel Prize upon former US Federal Reserve Chairman Ben Bernanke, they even lauded someone who was once a key figure responsible for shifting the costs of the bailout onto the people.

The European Central Bank’s (ECB) current interest rate policy and its incremental prime rate increases also indicate that the crisis will continue to be combatted with austerity measures. However, economists who work in political consulting are catching on to the fact that this strategy is doomed to fail. The social costs appear increasingly untenable and are broadly perceived as posing a threat to the recovery process.

Even the German government’s Council of Economic Experts — the so-called “five sages of the economy”, most of whom adhere to a strictly neoliberal outlook — are now calling for higher taxes on the rich in order to more fairly distribute the costs of the crisis. This marks a real watershed in the guild of economists. Even in 2017, when former council member Peter Bofinger penned a special report that called for stronger state intervention in industrial policy, his colleagues were quick to reproach him for not having enough “love for the market” and indirectly denied his qualifications.

Today, the need for a more hands-on state apparatus has all but reached consensus, even beyond the usual calls for state aid during times of crisis. The notion that the state should play an active role and not be regarded solely as a safeguard against risk has gained widespread acceptance among industrial capitalists.

In an astonishing turn, the free-market liberal Free Democratic Party (FDP) is now sometimes among the loudest voices in the Economic Committee of the Bundestag calling for the nationalization of, for instance, the gas provider Uniper — albeit without raising the issue of socialization in the sense of providing energy for the common good. It has led to the passage of billions of euro in relief, which includes, among other things, capping the price of gas and electricity, which is something Die Linke called for at the very beginning of the crisis.

Even if the way in which they are organized differs in many ways from the model proposed by Die Linke, these tools contain a certain impetus for transformation simply by virtue of their providing savings incentives and translating to conditionality for companies. Nonetheless, their objective is not to effect real change — instead, these measures aim to preserve Germany’s industrial base and its position in the new global order. The aforementioned are not tools for real redistribution and reorganization.

Moreover, the debt limit, which sets strict boundaries on national economic policy, is still being defended. This means that (partial) demands from the Left, such as price controls, are gaining acceptance, but are being watered down or their effects are being dampened when it comes to their implementation.

The Limits of Monetary Policy

While the economic mainstream is sustaining cracks and divisions, the conflicting interests of capital and labour that underlie the different “schools” remain unresolved. This is most visible in the contradiction in the European Central Bank’s interest rate policy, which is currently a hot topic of discussion.

The European Central Bank faces a fundamental dilemma that is proving difficult to resolve: on the one hand, it plans to provide cheap credit to companies in crisis, but on the other hand hopes to fight inflation by raising the prime rate, which would lead to an economic downturn and an increase in unemployment levels. The multi-stage “interest rate reversal” to the current two-percent rate and the announcement of additional increases in the prime rate indicate the direction in which things are heading: inflation is to be countered with a decline in prosperity and increased unemployment, which will dampen growth and demand.

This means that the fiscal hardliners are winning out. Monetary value is to be stabilized and asset and capital values saved from devaluation — at the expense of the majority of the population.[1]

But this strategy is simply ineffective. Today’s inflation is not being caused by too much demand or by a booming economy, but by the very opposite: demand is showing signs of weakness and is expected to continue to decline. According to the German business newspaper Handelsblatt, even online sales on Black Friday this year were down by 12 percent compared to the previous year.

Inflation is instead being driven by a lack of supply — particularly the food and energy bottlenecks engendered by war and other crises. This is, in a sense, imported inflation. For example, the Macroeconomic Policy Institute (IMK) calculated that two thirds of inflation during the month of September can be ascribed to food, fuel, and household energy.

A 54-percent increase in corporate profits accounts for more than half of the rise in prices.

The false analysis of an “overheated” economy is leading to wavering monetary policy, which is an indication of the ECB’s current powerlessness: monetary policy has reached its limit. ECB director Isabel Schnabel conceded as much in an interview, stating that, “much of the inflation is due to factors over which we have no direct influence”. The problem is that raising interest rates will not yield a greater supply of food, natural gas, oil, or solar power plants, and will therefore not cause prices to go down. On the contrary, the interest rate is primarily a significant cost factor for the capital-intensive renewable energy and building renovation fields. Raising interest rates has a harmful impact on these.

Meanwhile, the fiscal hawks, employers’ associations, and proponents of neoliberalism are converging on a strict policy of austerity. This winter has seen an intensification of the distribution battle. Nadhim Zahawi, chairman of the Conservative Party in the UK, recently called for National Health Service workers to call off a strike over low wages in order to “send a very clear message to Mr Putin”. In Germany, employers are demanding that the retirement age be increased by another three years to 70.

The unions will struggle to compensate for the purchasing power they have already lost. With an inflation rate that is currently holding steady at ten percent, the question of whether or not compensatory wage increases can be attained will depend not only on the size of wage agreements, but also on the duration of collective contracts.

All of this indicates that the ECB does not operate in a vacuum, and that the monetarist central bank model that is as independent as it can possibly be is crumbling.

Ending the Crisis through European State Interventionism?

A paradigm shift is currently underway in the world of economic policy. In response to the social dislocations that followed in the wake of the harsh austerity policies implemented throughout the EU during the euro crisis, a mild course correction has taken place in recent years: away from the uncompromising terrain of neoliberalism and toward a more moderate Keynesian interventionism, due also in part to the centrifugal forces responsible for engendering the disintegrative effects that led to Brexit.

This “state-interventionist turn” has grown stronger over the course of the COVID-19 pandemic due to the increased value placed on industrial and infrastructural policy. As a result, enormous sums of money were mobilized at both the European and, in Germany, national level in an attempt to forestall social hardship and the collapse of the healthcare system.

But this renaissance in industrial policy is being driven, above all, by geo-economic and geopolitical calculations. The worsening three-way confrontation between the US, China, and the EU is the central reference point for the strategies that inform industrial policy. Along the way, competitiveness is coming to be understood less in terms of a market-liberal “level playing field” and more as the objective of achieving “technological and economic sovereignty”.

Consequently, European and German economic and energy policy is increasingly based on the premises of geopolitical confrontation and geo-economic conflict, which have culminated in a “clash of capitalisms”. Different forms of market-economy regulation and various recovery models are engaged in fierce competition at the global level. Market leadership in central technologies and high-tech production is one key to this systemic competition.

In the US, the Inflation Reduction Act (IRA), a massive subsidy and climate protection programme, is part of that dynamic. According to the macro-economic think tank Dezernat Zukunft, the package heralds “a new age of aggressive industrial policy with geopolitical ambitions”.

The economic shockwaves triggered by the pandemic, which were further intensified by the outbreak of war in Eastern Europe, have made it clear that global supply and production chains are in dire need of restructuring. And yet these tendencies existed before the shockwaves were generated: production was already increasingly being reshored, the real net output ratio was once again on the rise, and consumption patterns were shifting toward increased levels of regionalization.

Given that trade disputes and geopolitical tensions are intensifying, and transportation costs are increasing, along with the costs and crises of environmental and climate policy, what is currently referred to as reshoring or “friendshoring”[2] — the reversal and reallocation of the ever-increasing trend of outsourcing production — may well become increasingly important in the years to come.

A de-globalization that is not guided by confrontation between imperial blocs, but rather is driven by policy and closely linked to a new form of closed-loop economy, would actually have the potential to achieve ecological and social goals and push back market mechanisms. But what is the window of opportunity that post-pandemic state interventionism is opening for progressive crisis management that could drive such a process? And how could that the Left take advantage of it?

Left-Wing Answers to the Crisis

Effectively combatting inflation does not require the ECB to further raise the prime rate. The anti-inflation impact of doing so is beyond questionable. Apart from substantial wage increases, stopping inflation and bringing people’s cost of living down to a bearable level would require support for economic policies that address the components of inflation that are driven by supply and profit.

British economic historian Adam Tooze offers this kind of supply-side perspective on inflation. He regards inflation as “an issue of industrial policy instead of macroeconomics” and claims that price increases are the result of delivery problems and the insufficient production of specific technologies and production factors, such as solar modules or heat pumps.

In Germany, for instance, 125,000 jobs and most of the production capacity in the solar industry alone have been lost since funding for solar power expired in 2012. As such, price increases would not be a general consequence of excessive growth. From this perspective, the only way to counter price increases in the medium term is by increasing productive capacity.

According to a study by the Economic Policy Institute, a 54-percent increase in corporate profits accounts for more than half of all price increases. Even the ifo Institute, which has close ties to the employers’ associations, recently stated that many “companies in certain economic sectors have used the price increases to expand their profits”. Should this cease to be worthwhile due to a hefty excess-profits tax, the bandwagon effects could also be stopped. And if a tax were to make it impossible to generate excess profits through profit-driven price increases, that could make a real contribution toward stabilizing prices.

The same applies to dividends. Vonovia, Germany’s largest real estate group, declared at its shareholders meeting that it intends to raise rents so that dividend payments rise with core inflation. If a large portion of inflation is driven by profits and dividends, an windfall profits tax and constraints on dividend payments can also slow inflation. The US-based energy group ExxonMobil doubled its profits over the previous year to an estimated 42 billion dollars. German energy group RWE is expected to increase its profits by 5.5 billion euro this year. That alone tells us that there is room for prices to go down.

Industrial policy also means deciding which fields should (not) receive investments and which business sectors should (not) have a future.

Of course, it is also true that left-wing economic policy should not focus solely on or limit itself to using the welfare state to soften the impacts of the crisis. In the midst of an income crisis and growing poverty, there can be no doubt that introducing relief packages for energy, gas, and food, with a particular focus on the poorest members of the population, is the right thing to do. It is not enough, however, to simply tolerate the ravages of economic crises and limit ourselves to offsetting their consequences by way of increased social security benefits.[3]

A transformation- and class-oriented economic policy is what is needed if we are to address the causes, rather than the symptoms of the crisis. Left-wing economic policy should not focus on secondary distribution, or distribution through transfer systems, but rather on primary distribution: the distribution of labour and capital (profit and wage rates) in production.

In this sense, higher wages should come at the expense of company profits — for example, by making it politically impossible for companies to recycle the increased cost of wages entirely through prices. Such an expansive wage policy in tandem with price controls would be a form of class struggle that could become an effective brake on inflation. A transformation- and class-oriented economic policy of that kind would support trade union struggles over wages, while at the same time going beyond them.

In order to achieve as much, left-wing economic policy must explicitly act in the interests of employees and be premised upon the conflicting interests of labour and capital, instead of simply being a policy for “the economy”. Focusing solely on small and mid-sized companies — as distinct from “big corporations” — is insufficient.

It is overly simplistic to draw a simple contrast between a good “real economy” and evil “finance capital” in capitalism: they are two sides of the same coin and are mutually dependent. There are large industrial firms organized within the legal structure of foundations with good wages, company pensions, and co-determination models, and there are also brutally exploitative small and micro-enterprises.[4] A class-oriented economic policy would therefore be oriented toward the conflicting interests of capital and labour, not the differences between big and small companies.

Just as support for smaller craft businesses, small- and mid-sized companies, and the self-employed is crucial during a crisis, subsidies and financial help for auto suppliers and steel companies are also essential for transformation. Calling for state funding for big corporations may at first sound off-putting to those on the Left, but the economic aid demanded by unions and industrial associations can be entirely justified under certain circumstances and should be supported.

Whether or not a state-interventionist economic policy is in the interests of the working class depends on its conditions and the regulatory framework for economic aid and subsidies. A transformation- and class-oriented economic policy must establish a clear and tough regimen for companies — one that has the effect of guiding investment, that targets good, ecologically sustainable work over the long term, supports innovation, and emphasizes cooperation rather than competition.

Preliminary attempts at such a regimen can be found in the proposal put forward by the German parliament’s Gas Price Commission. In exchange for economic assistance, it subjects companies to clear conditions that are applied in the bill in the form of an “obligation to retain jobs” with at least a partial ban on the distribution of profits and dividends.

At the same time, the limits of current economic policy — or rather, its inability to establish these kinds of regulations — are becoming apparent. The widely cited Mercator study highlights the uneven distribution effects of these measures. Prioritizing speed over precision, the German government rejects criticism of the social imbalance inherent in its relief packages. In doing so, it has failed to collect the data necessary for a more equitable transfer benefit and to develop the tools necessary to process direct payments. At the same time, unlimited subsidies for what are in all likelihood going to remain high energy costs over the long term are not something the state can sustain on its own if the causes of the problem remain unaddressed.

Ultimately, all three components are necessary: direct payments to all citizens, a conditional price cap, and powerful price supervision. As an instrument for controlling prices, economic researcher Stefan Schulmeister has proposed the establishment of an “Agency for Market Transparency” (AMT) that could curb homemade profit inflation on an ongoing basis. Digital transmission, collection, and exposition of prices along the supply chain could make transparent monitoring possible, render conspicuous price increases and profits visible, determine upper limits for “fair” prices, and, in case of doubt, initiate antitrust proceedings.

Class-Based Regulation of German Industrial Capitalism

Ensuring the provision of cheap renewable energy will be a key factor in preventing a crisis-ridden de-industrialization and preserving the present standard of living in Germany. The easy and often simplistic demand for the nationalization of energy corporations will no longer help to achieve that by itself. Most of the German energy sector is already publicly owned, anyway.

It is a matter of socialization for the purpose of democratic control and decentralization, not of pure nationalization and thereby shifting the legacy of fossil fuels onto the public. Industrial policy also means deciding which fields should (not) receive investments and which business sectors should (not) have a future. Long-term subsidies for projects with dubious benefits and poor future prospects are absurd.

If unions, climate and social movements, and socio-ecological parties recognize actually existing class antagonism and dare to implement a symbiotic transformation strategy with the courage to fight, then it will also be possible to challenge Germany’s growth model in its entirety.

What is needed instead is a left-wing pragmatism in economic policy that is goal-oriented rather than ideologically fixated. The role of the state here is to organize and moderate the democratic process that shapes these objectives. Both civil society and trade unions must have a seat at the table in this process. The state will then set the general conditions necessary to achieve these goals and serve as a reserve investor in the event that private investments are inadequate or insufficient to achieve these goals.

That is because what the current situation requires above all else is investment. Germany’s Kreditanstalt für Wiederaufbau estimates that the level of public investment required to achieve climate neutrality alone is roughly 20 billion euro annually until 2050 —300 billion just for the energy sector and 138 billion for industry.

Contracts for difference would be a sensible tool for promoting the reorganization of industry, for example. These contracts could ensure state compensation for the differential costs between what would pay off on the market economy and what would be socio-ecologically sensible, which in turn would force or enable companies to make the switch to the best available forms of technology. The “carrot and stick” metaphor is an appropriate one here.

This kind of approach is necessary because the costs of transformation are enormous, if we look, for example, at the shift to “green” steel production by reducing hydrogen. The state can step in and take on the additional costs until the leading market for green steel has been established.

In return, the companies would have to ensure a tariff commitment and expand co-management, guarantee trainee and employment positions, and cede some of their decision-making power with respect to investments, products, and supply chains. State funding should be tied to temporary state acquisition of ownership rights at the national, state, or municipal level[5] in order to influence the transformation, preserve organizational possibilities, and intervene in the  economy. It is a matter of socializing corporate freedom of decision — for the common good.

This means that making economic aid and state involvement conditional, and ensuring the democratic regulation of investments are the two factors at the heart of a class-oriented regulation of German industrial capitalism. The state interventionism tested during the pandemic must be utilized in order to expand control over the conditions of capital accumulation. It must function as a means of subordinating the profit interests of companies to the class interests of their employees.

There are limits to that in our current system, because the state is dependent on the economy’s valorization interests. But at least when companies’ decision-making power with respect to their investments is challenged, and employees and society demand participation in company policy, then class- and transformation-oriented economic policy will point beyond the tight corset of capitalist society.

If unions, climate and social movements, and socio-ecological parties recognize actually existing class antagonism and dare to implement a symbiotic transformation strategy with the courage to fight — if they see the state as a battleground and fight for it — then it will also be possible to challenge Germany’s growth model in its entirety.

[1] Part of this discrepancy lies in the fact that inflation functions in a deeply antisocial way, with low-income earners subjected to rising energy costs and individual inflation that is four times higher than the norm. At the same time, people with large monetary assets lose more in absolute terms in the event of sustained monetary devaluation and therefore have a vested interest in ensuring inflation rates remain low. However, 40 percent of people living in Germany have no savings, and if their flexible income were to be adjusted to allow for inflation, they would feel virtually no negative effects from inflation.

[2] The economic trend toward reshoring production and expanding regional value chains (local for local) is not an outcome of climate protection efforts, but rather a positive ecological collateral benefit of de-globalization. In the course of reorienting the supply chains in accordance with external and security-policy criteria in response to the war in Ukraine, economists are increasingly talking about “friendsourcing” rather than plain “outsourcing”.

[3] It is crucial that the price cap placed on gas and electricity also reduce the primary prices, otherwise it will be ineffective in terms of dampening inflation. The state should not be solely responsible for bailing out rising corporate profits. Public assistance benefits like housing assistance must not be allowed to subsidise higher rents.

[4] The old left-wing theory of state monopoly capitalism, which states that capitalism’s tendency toward concentration leads to ever-increasing monopolies that eventually absorb the state, has not yet proven to be true.

[5] Christian Leye and Ulrike Eifler, for example, propose a publicly owned steel foundation for the German state of North Rhine-Westphalia, which would involve the participation of Thyssen Krupp, the unions, and other stakeholders.