The European Commission has proposed a slight loosening of debt limits — but Germany’s neoliberal finance minister Christian Lindner is blocking the change. His zombie economics will impoverish citizens and hasten the rise of the far right.
German finance minister Christian Lindner speaks with Health Minister Karl Lauterbach (L) prior to the weekly federal government cabinet meeting on June 15, 2022 in Berlin, Germany. (Sean Gallup / Getty Images)
Coming after sixteen years of Christian-Democratic rule, Germany’s fall 2021 general election appeared to mark a turnaround. The Social Democrats (SPD) edged into first place (25.7 percent) and leader Olaf Scholz promised a new government that would act on poverty reduction and decarbonization. He formed a coalition with the left-liberal Greens (14.8 percent) and the neoliberal-hawkish Free Democratic Party (FDP; 10.7 percent) — what the German press refers to as a Traffic Light agreement, in reference to the parties’ green, yellow, and red colors. This was effectively the only way to secure a parliamentary majority without the Christian Democrats. Yet it posed an obvious problem: the FDP is a party of fervent pro-capitalists and market fundamentalists whose whole raison d’être is to champion business interests, lower taxes for the wealthy, and oppose state spending.
If many imagined the government would take up a “progressive” mantle, such hopes were further dampened when Christian Lindner, the leader of the FDP, was named finance minister, giving his party tight control over public spending.
In office, Lindner has surely delivered — for his most dogmatically neoliberal supporters, at least. He recently made headlines by putting forward a budget for 2024 with €20 billion worth of spending cuts, made mainly to various welfare programs. Yet Lindner’s commitment to austerity transcends his own country’s borders, as his opposition to the European Commission’s recent investment-friendly shift on EU fiscal policy illustrates. In Germany and elsewhere in Europe, a rising far right has fed off voters’ anger at declining standards of living. If enacted, Lindner’s vision can only help such forces, while spelling economic doom for many Germans.
After the 2021 election, the SPD and the Greens sold their members and voters on the Traffic Light by branding it a Fortschrittskoalition, or a “progress coalition.” Now, these two parties will have to sideline several of their economic and ecological projects, for the new finance minister has decided to apply the brakes. This is despite the fact that, according to Germany’s central bank, the real interest rate on government bonds is slightly negative, with the expected inflation-reduced yield on five- and ten-year bonds remaining just below zero in spring 2023. In short, interest payments do not preclude higher public spending.
Rather than follow SPD parliamentary whip Rolf Mützenich’s suggestion to shift away from austerity for the duration of the crisis, Lindner is opting to use fiscal policy as a wrecking ball. In doing so, he is endangering the economic well-being not only of people in Germany but throughout Europe. Defense spending, of course, will remain untouched: we are at war, after all.
Neoliberal Mythmaking
Lindner has justified his blockade with neoliberal myths and legends. “The time is coming to an end for our country’s policy of mere wealth redistribution,” he claimed in a resolute rejection of additional government spending. “We now have to invest again, to revamp, and to get structural reforms off the ground, for past prosperity can no longer be the basis of social security today and tomorrow.”
Lindner’s statement was preposterous on a number of levels. First, his claim that the recent period has been a “decade of wealth redistribution” is a myth — unless the claim refers to the channeling of billions of euros to the already wealthy. Even though Germany did move away from hardcore neoliberalism under Angela Merkel, both inequality and the number of people at risk of poverty have risen since 2010.
Income earners in the top decile have grown far wealthier since the turn of the millennium, while the gap between those in the bottom decile and everyone else has continued to widen. All the while, the rich have seen no tax increases. Thanks to Lindner, they are now even profiting from so-called bracket creep abolition, one of the policies contained in Germany’s Inflation Compensation Act of September 2022. This reform reduces tax receipts by €10-12 billion, with the bulk of the benefit going to the wealthiest one-third of the population.
The German finance minister’s claim that the recent period has been a ‘decade of wealth redistribution’ is a myth — unless the claim refers to the channeling of billions of euros to the already wealthy.
Lindner’s claim that the goal of debt reduction necessitates austerity is also a myth. Austerity is not the reason that Germany has been able to maintain its Schuldenbremse, or “debt brake” — a constitutional clause that took effect in 2011 and stipulates that the country’s ratio of debt to GDP must remain under 60 percent. Government spending actually increased from 1991 to 2015, yet it did so more slowly than the average nominal GDP and government revenue. During this period, Germany benefitted from a favorable development of the labor market and substantial interest rate savings (these totaled €368 billion from 2008–19 alone), not to mention from the loose monetary policy of the European Central Bank (prior to the current period of inflation) and the country’s reputation as a “safe harbor” for capital.
Lindner has encountered vocal opposition from Germany’s states. In an April op-ed in the business newspaper Handelsblatt, the sitting finance ministers of Mecklenburg-Vorpommern, Bremen, Lower Saxony, Schleswig-Holstein, and Hamburg — all states where the SPD and the Greens are in power — accused him of treating the “sensitive financial relationships between Germany’s states and its federal government” as a “quarry for fiscal consolidation.” These ministers underscored the importance of sufficient federal funding of states and municipalities to Germany’s climate goals, pointing out that aspects of national climate policy must be implemented on the local and state level. (Here it of course must be noted that a coalition government between the SPD and the Greens pursued tax cuts and fiscal consolidation at the expense of both states and municipalities from 1999 onward.)
These lower tiers of government have limited means for generating their own revenue, and Germany’s states are subjected to a stricter debt brake than its federal government. Moreover, after public sector employees hopefully receive a pay raise following their next collective bargaining agreement, most of the burden of increased personnel costs will fall to states and municipalities. The Traffic Light coalition would not be hanging them out to dry, if it were actually serious about pursuing a socioecological transformation.
In contrast to the German finance minister’s approach, a subtle departure from strict ordoliberal ideologies can currently be observed on the EU level.
The Handelsblatt op-ed also pointed out the duplicity of Lindner and the FDP on climate issues: “If the ‘Traffic Light coalition’ wants to live up to its branding as a ‘progress coalition,’ it will require broad support for an economically and socially sound ecological transformation. This support will only exist when people on the ground have their basic needs met.” Given that the hawkish neoliberals of the FDP aren’t exactly champions of workers and the disadvantaged, they are suspiciously quick to become receptive to the concerns of the “little guy” when these concerns can be played off against ecological transformation. In fact, however, these free-marketeers are blocking everything that could make an ecological transformation economically progressive.
Overdue Reforms
Lindner’s policy spells trouble for both Germany and the entire EU. First, by stifling growth, austerity in Germany stands to curb imports of intermediate and consumer goods. Exports to Germany account for a significant share of value creation and employment in other European countries. If Europe’s largest country and strongest economy “tightens its belt,” its closely connected neighbors will be forced to do so, too.
In contrast to Lindner’s approach, a subtle departure from strict ordoliberal ideologies can currently be observed on the EU level. Following the European debt crisis of 2011, a period of mistrust toward capital markets has dawned. Along these lines, Michael Hüther of the German Economic Institute, one of the leading intellectual representatives of capital, has not only vehemently criticized his country’s constitutionally anchored debt brake but also recently cautioned against an overly restrictive monetary policy. Among significant swathes of the EU’s scholarly and political elite, there has been a quiet shift — one that has occurred with neither a public nor comprehensive rejection of the old neoliberal paradigm — toward a “technocratic Keynesianism.” It is based on the insight that a strict neoliberal course in contemporary capitalism would be self-destructive.
The EU’s economic and fiscal policy framework has not escaped this reassessment. This framework is spelled out in the Treaty on the Functioning of the European Union (TFEU), which stipulates that member states “shall avoid excessive government deficits.” To this end, they are supposed to exercise budgetary discipline with regards to new borrowing and the ratio of national debt to GDP, which the Maastricht Treaty tasks the European Commission with monitoring.
Meanwhile, a separate protocol tied to the treaty restricts national deficits and debt-to-GDP ratios to maximums of 3 percent and 60 percent respectively. With its latest suggestions for changes to these rules, however, the European Commission has yielded significant ground to its many critics. One of their recurring points of criticism has concerned the pro-cyclical nature of the existing rules — the fact that they exacerbate economic swings instead of balancing them out.
Compelled to reduce their debts, EU countries are blocked from borrowing to finance public investment at precisely the moment when it is most needed.
In democratic-capitalist welfare states, a category that includes all member states of both the EU and its affiliated Economic and Monetary Union, budgetary deficits are an inevitable and recurring outcome of economic development. Capitalist market economies do not simply achieve on their own a state of balance in which supply matches demand while all capacities are utilized and all people employed. Rather, these economies can only settle into an “equilibrium at underemployment,” as John Maynard Keynes put it.
When the pessimistic expectations of firms and employees push down investment and consumption, a demand gap emerges in the economy as a whole. This gap in turn drives an increase in firm bankruptcies and unemployment. Government budgets are then burdened with a loss of tax revenue and an increased demand for social services, which in the EU context means that member states are pushed up to or over the deficit and debt limits set by Maastricht. Compelled to reduce their debts, EU countries are blocked from borrowing to finance public investment at precisely the moment when it would be most needed to close the demand gap.
Against this backdrop, we should welcome the European Commission’s announcement from November 9, 2022 that it plans to move away from the strict version of its framework for economic management and toward a more investment-friendly policy. This policy abolishes the existing rule that member states with a debt-to-GDP ratio of more than 60 percent must cut the share of their debt that brings them over this mark by one-twentieth each year. Instead of being forced to completely eliminate “excessive debts” within twenty years, countries will now be able to create four-year debt-reduction plans based on analyses of the sustainability of their debts. Once these plans have been presented, countries can extend the four-year period by an additional three years.
Moreover, a new rule specifies that debt and deficit reduction shall be achieved through national net primary expenditures — excluding and thus safeguarding expenditures on interest payments, unemployment benefits, and additional expenditures covered by revenue from tax increases. As Hans Böckler Foundation, the think tank of the German Trade Union Confederation (DGB), has summarized, “If tax revenues decline for cyclical reasons (recession) or grow excessively (boom), government spending will still increase in line with the rule, producing a stabilizing effect.” The proposed reforms hardly meet all the demands of left-wing economists, such as the demand for greater economic democracy. We should also reject the integration of budgetary surveillance into the so-called European Semester, which has been repeatedly used by the Commission to force member states to reform labor markets by cutting unemployment benefits in exchange for concessions on fiscal policy.
Nevertheless, the Commission’s proposed reforms are a step in the right direction. If Germany, the most powerful country in the EU, took its responsibility toward Europe seriously, it would be at the forefront of these reforms. One might especially expect this from the Traffic Light coalition, if it were not just paying lip service to “progress.”
No Progress With Lindner
The progressive changes to the EU’s economic policy framework appear to have pulled the rug out from under the EU’s ordoliberals and from Lindner in particular. Yet the finance minister and FDP leader has made it clear he will resist these changes until the bitter end.
Earlier this year, his ministry caused a stir by putting out a “non-paper” (that is, a statement not on official letterhead) outlining Germany’s opposition to basing debt reduction on country-specific analyses of debt sustainability — precisely what makes the new policy a shift away from the previous regulatory straitjacket. Lindner then doubled down when the European Commission’s official proposal was published, describing it as “unacceptable.”
In particular, the FDP leader took issue with the proposal’s refusal to define a universal debt reduction percentage, which it justifies with the insight that “fiscal situations, challenges and economic prospects vary greatly across the EU’s 27 Member States.” From the ordoliberal perspective, the same set of rules must apply in equal measure to all member states, regardless of how unequal their respective economies may be. In other words, if all of Europe started “speaking German” in its response to the 2011 European debt crisis — as Christian-Democrat Volker Kauder celebrated at the time, in a historically tone-deaf remark — it must not be allowed to stop.
The threat looms large of a return of the front that formed at the start of the COVID-19 pandemic, when Austria, Denmark, the Netherlands, and Sweden opposed the Recovery Fund that suspended the Maastricht Treaty rules.
Lindner is also opposed to giving member states more leeway in how they reduce their national debts. On the contrary, he believes there should be a minimal annual required reduction of debt-to-GDP ratio of 1 percent for highly indebted states and of .5 percent for other states over the 60 percent mark. With his stubborn commitment to universally applicable rules, Germany’s finance minister wants to impose a system in which fiscal policy is automatically forced to toe the FDP’s line.
His insistence that maintaining the 3 percent deficit limit and the 60 percent debt-to-GDP ratio limit would prevent a politicization of debt reduction is nothing short of laughable, as these rules have zero scholarly basis. In fact, they were invented for political reasons by the French finance ministry during the administration of François Mitterrand. And critics are right to warn that a socioecological transformation of Europe would be incompatible with these limits.
Although the European Commission has rebuffed Lindner’s statements for now, the proposed rule changes may still face an uphill battle. The German finance minister has already appealed for support in fighting them. The threat looms large of a return of the front that formed at the start of the COVID-19 pandemic, when Austria, Denmark, the Netherlands, and Sweden — the so-called Frugal Four — opposed the Recovery Fund that suspended the Maastricht Treaty rules.
And considerably more is at stake in the looming battle than it was back then: what is now at stake is not a fiscal instrument for a specific emergency situation but rather the general fiscal policy framework for all EU member states. Furthermore, in contrast to spring 2020, when then German finance minister Scholz welcomed the Recovery Fund and Merkel surprised many by suspending her strident opposition to all jointly incurred debt, the German finance ministry has now joined the front of the Frugal Four.
Lindner wants to stop the modest fiscal upheaval in Europe. This does not bode well for when the COVID-related suspension of the Maastricht rules expires in 2024. Already before the Traffic Light coalition was formed, the economists Adam Tooze and Joseph Stiglitz issued a warning about Lindner:
The greatest threat to European democracy,” they wrote, “is not Russian influence or any other influence from the outside, it is inappropriate and mis-timed fiscal discipline forced down the throats of a majority of Europe’s voters by a minority coalition of ‘northern’ states. It would be disastrous if Germany were to put itself at the head of that coalition, as the Free Democrats have promised to do.
They also highlighted the connection between right-wing populism and neoliberal austerity: “For the electoral chances of the nationalist populists in Italy, there would be nothing better than the prospect of a confrontation with the German Finance Ministry. That would be disastrous for Italy. It would be bad for Europe. And it would be bad for Germany.”
German ‘centrists’ bear responsibility for the Europe-wide rise of radical right-wing parties and governments.
German “centrists” are ignoring these facts or laughing them off. Yet they bear responsibility for the Europe-wide rise of radical right-wing parties and governments. When the Merkel administration forced crisis-ridden countries to accept austerity, welfare cuts, and a dismantling of workers’ rights as a price to pay for staying in the Eurozone, the broader German mainstream was with her the whole way, wallowing in resentment toward the “lazy Greeks.”
Only once the established and technocratic elites who implemented the diktats of Merkel and the Troika were voted out of office and replaced by ascendant forces of the far right did the centrist German commentators begin to fret over Europe. In a fit of frenzy, they then proclaimed Emmanuel Macron Europe’s savior from the likes of Marine Le Pen — even though the politics of the former leads to those of the latter.
Neoliberal austerity impoverishes people and destroys their prospects, creating fertile ground for parties of the radical right that position themselves as opponents of the status quo. In the worst-case scenario, this propels the rise of right-wing populist parties such as in Poland and Hungary, which combine xenophobia and misogyny with clientelistic economic policies, using measures such as tax cuts, family credits, and direct money transfers to win over sections of the working class and banish the traditional left to irrelevance.
Whoever fails to grasp this connection will remain helpless in the face of broad and successful far-right and fascist mobilizations. To stop the advance of the Right at its roots and win a different Europe, we need to go on the offensive against wrecking ball Christian Lindner and his allies in Germany and elsewhere.