Germany’s federal government promised a record budget in record time. Instead, it delivered budgetary sleights of hand and an exorbitant scale-up of rearmament. What Chancellor Friedrich Merz is calling the “autumn of reforms” is ultimately a major attack on the welfare state. Understanding the current budget negotiations is key to understanding the ruling class’s new political project in the wake of the traffic-light coalition’s budgetary policy failure.
Ines Schwerdtner is co-chair of Die Linke and a Member of the Bundestag, where she sits on its Budget Committee.
The current government’s overarching goal is unprecedented rearmament, paired with attacks on the welfare state the likes of which Germany has not seen since Agenda2010. While the debt brake was swiftly suspended to allow for military spending, investment in public infrastructure remains highly contentious. This all comes at the expense of the core budget, where “pressure to consolidate” — elite jargon for “budget cuts” — prevails. Today’s political struggle over the welfare state reflects a profound shift in our economic foundations: the German model, based on cheap energy and cheap labour and oriented around exports, has run its course. The political parties are striving to revive this model at the expense of this country’s population and the infrastructure we urgently need.
Restoring the German growth model is a top priority both nationally and at the European level. In other words, everything is to be done to make Germany “competitive” again. At the national level, this dynamic is compounded by intra-European competition over investment locations. The federal government (including all coalition partners, even the Social Democratic Party, or SPD) is structuring its entire policy in line with this goal. In doing so, it stands firmly in the tradition of German ordoliberalism, in which the state acts as the guarantor of a free and market-based economic order. A shift in macroeconomic policy is not up for debate here, and the Social Democrats’ participation in government will not change this fact.
Disagreements within the Coalition
Neither this overarching goal nor the means of achieving it are disputed within the government. In principle, both the worker-friendly Christian Democratic Employees’ Association wing of the Christian Democratic Union (CDU) and the overwhelming majority of the SPD support a programme of austerity. Disagreements concern how far such a programme should go. For the SPD and certain centrist elements within the CDU (who are in turn increasingly marginalized within their own party), the aim is to “downsize” the welfare state to a “healthy level”. They have no intention of abandoning the framework of a socially cushioned market economy, but regard the existing level of benefits as unaffordable and harmful, both to social norms and to participation in the labour market.
These coalition forces long to return to the formula applied by Social Democratic chancellors Helmut Schmidt and, more resolutely, Gerhard Schröder: defending Germany’s export model by weakening domestic demand and pursuing a policy oriented towards European integration and the removal of trade barriers. The resulting high productivity, low unit labour costs, and advantageous terms of trade are then directed, to an extent, into financing the welfare system.
The conservative wing of the CDU/CSU, which increasingly sets the tone for the entire coalition, has a different approach. This wing in particular belongs to that part of the European elite which regards the welfare state as fundamentally detrimental and wants to eliminate it or reduce it to the level of richer emerging economies. This does not necessarily mean that there will be no more government aid or assistance for the needy. What it does amount to is an abandonment both of the fundamental idea that society should protect individuals from risks to their lives and of basic rights to social participation and care regardless of individual circumstances or misfortunes. People are to face the welfare system as petitioners and receive only the bare minimum.
Even more so than in other Western European countries, German elite are unable or unwilling to acknowledge these changing geopolitical realities.
The coalition’s internal disagreements must be viewed against the backdrop of an abandonment of social protections. Even the SPD is, in principle, prepared to make social cuts, insofar as such cuts stabilize the welfare state’s core services. Large segments of the CDU, on the other hand, want to change the system entirely.
This long-term political goal is nothing new for German and European conservatives, who have pursued it since the 1970s. At the beginning of her term in office, one of Angela Merkel’s favourite talking points was that half of all social security payments worldwide were made in Europe. Far from demonstrating the working class’s successful struggles over the distribution of socially generated wealth, in her eyes this phenomenon was a problem in itself as well as evidence of a wider social decline. In Germany, certain factors meant the project of austerity was not rolled out to the extent seen in the UK or the Netherlands. For one, the Kohl and Merkel governments lacked political capital, and the relatively enduring success of the German model meant that deep cuts to the welfare state would have been difficult to justify to the population. Now, faced with the third consecutive year of stagnation and unemployment rates at a ten-year high, we must recognize how the political landscape is shifting.
The Crisis of the German Model
In view of the fiscal challenges facing us — an ageing, increasingly unequal society suffering from decades of insufficient public and private investment — decisive steps are required to make billionaires and top earners contribute their share towards financing these tasks, both through investment and consumption spending. The SPD hints, at least rhetorically, that an increasing government revenue will be unavoidable. But apart from their proposal for a moderate raise in income tax on very high earnings, there seems to be no political will to advocate for something like reinstating the wealth tax.
Both the SPD’s approach and that of the German elite aim to continue and strengthen the German export model. Paradoxically, however, neither is actually capable of doing so. Here, too, a fundamental paradigm shift is required — one that is currently supported only by the democratic socialist Left. Even more so than in other Western European countries, German elite are unable or unwilling to acknowledge these changing geopolitical realities.
When the US government can buy 10 percent of the chip manufacturer Intel without causing much of a stir, we must recognize that the globalization in the 1990s and 2000s, when an advanced economy could distinguish itself through low unit labour costs alone, is over. In China, a completely new form of cooperation is emerging between state industrial policy and the private sector, combining hard market competition with the state’s role as a major investor. The US elite has recognized that it must emulate at least some aspects of this model in order to remain competitive. Party affiliations still determine the area of investment: Joe Biden saw renewable energies as among the key technologies of the twenty-first century, while Republicans under Donald Trump do not. Semiconductor technology and artificial intelligence enjoy bipartisan support, however.
Left Industrial Policy in Europe
To meet these challenges, Europe needs an independent, sovereign industrial policy. This starts with the technologies key to a transition to clean energy, as well as a digital stack fully under EU control. This would require a massive change of economic course, which Europe’s elites are quite simply unwilling to undertake. Doing so would mean abandoning the austerity project they have pursued consistently for more than fifty years — a price they consider to be unacceptable.
Die Linke does support this kind of industrial policy, but not with the aim of rescuing the German and European export model. Quite the contrary; Europe’s future depends on making domestic demand a far more significant pillar of the overall economy. This will be indispensable given the immense demands society will face in the coming years (in the care sector, for instance). This does not mean that Europe should cease to develop and export globally competitive products — just as it will continue to import many goods.
For the ruling class, war and rearmament are not only a crisis but also an opportunity: to bury the welfare state once and for all, and to roll back gains wrested by the working class 70 or even 100 years ago.
On the Left, however, we want trade to take place on a basis that is globally fair and uses ecologically sustainable technology. We also need active industrial policy to ensure that stronger domestic demand does not simply fizzle out. For example, the European car industry gains nothing if intra-European demand for electric cars rises but local industry can no longer compete with imports (or only by erecting trade barriers that are, in the long run, unsustainable). The path back to the globalization of the 2000s is neither viable nor desirable.
Military Keynesianism? Hardly
In this context, it is important to clarify that rising military expenditure in Europe does not signify any break with the EU’s neoliberal orientation. Rearmament is proceeding according to the logic of a state of emergency: fiscal rules are suspended but not fundamentally questioned. All of it serves the status quo. We can already foresee that, despite credit-financed special funds, the policy of rearmament and austerity will place enormous pressure on our social systems and core budget. In the Budget Committee, we see billions being summarily invested in the Bundeswehr, while the topic of social aid becomes the subject of a weeks-long battle in the media, despite accounting for a mere fraction of the overall budget.
For the ruling class, war and rearmament are not only a crisis but also an opportunity: to bury the welfare state once and for all, and to roll back gains wrested by the working class 70 or even 100 years ago. Today’s militarization fits seamlessly into this project, driving it forward rather than obstructing it.
Recent references to “military Keynesianism” are therefore misleading. We are not experiencing anything like the United States of the 1940s, when arms production expanded as part of a politically directed class compromise, with institutional participation by trade unions and the working class. What we are witnessing in Europe is an austerity state that is rearming. European elites are responding to wars and geopolitical conflicts in the same way they respond to every crisis: cut back. The purpose of slashing social spending is not to boost demand but to suppress it. The attacks we are seeing on labour rights and on the poorest segments of society are acts of intimidation, a class offensive from above. Rearmament is meant to lend legitimacy to these assaults — just as, conversely, austerity is itself justified by the claim that “everyone must tighten their belts”. This is the exact opposite of what Keynes would have advocated in an economic crisis.
That is why, for us on the Left, it is crucial to name and link together this unprecedented militarization and attacks on the welfare state. The ruling class is working at breakneck speed on a new economic and political project, all the more dangerous in the context of society’s turn toward fascism and the rise of the Alternative for Germany (AfD). Democratic institutions and assurances are also eroding in the course of this shift. A political Left therefore also needs a robust economic plan to counter this trajectory.
Translated by Hunter Bolin and Anna Dinwoodie for Gegensatz Translation Collective.