Germany on the Firing Line: Questionable economic judgment amidst a leadership crisis.

• Author: Engelen, Klaus C.

Ever since U.S. President Donald Trump started a global trade war, attacking high German current account surpluses and threatening penalty tariffs on German cars, Germany's economic model as the basis for the extraordinarily strong position of German quality brands on world markets moves further into the firing line.

Faced with the threat of a 35 percent tariff on imported cars in the United States, Sigmar Gabriel, then Germany's economic minister, hit back, saying, "The American car industry is getting worse, weaker and more expensive." If U.S. buyers are choosing German models, as Trump suggests, then "that's why the U.S. needs to build better cars," rather than penalizing competition.

The term "German model" is used to refer to the post-World War II system of organizing business and industry as a "social market economy" (soziale Marktwirtschaft) with close cooperation between company managers and unions.

The term was first coined in 1946 by Alfred Muller-Armack, economic advisor to Ludwig Erhard, the first economic minister of the young German Federal Republic, who is considered the father of Germany's post-war "economic miracle." Erhard's call for "prosperity for all" became the political underpinning for the long dominance of his party, the conservative Christian Democratic Union.

"The outstanding economic development of Germany after the Second World War has been significantly influenced by the social market economy," argues Jorg Rocholl, president of the European School of Management and Technology in Berlin. "Its biggest merit is to balance work and capital in enabling competition."

Erhard advocated for a minimally regulated market economy free from government micromanagement, with prices, wages, and nature of goods determined by supply and demand. Private property rights and stringent antitrust laws were part of his agenda, along with codetermination--putting worker representatives on company boards in the hope of reaching consensus on wages, benefits, and working conditions.

British economist Wendy Carlin points out that the model of social market economy was the launching pad for Germany's unknown "hidden champions," supplying Europe and world market with high-quality mass products.

SOCIAL DEMOCRATS CHANGED THE MODEL

In 1998, after the sixteen-year reign of Helmut Kohl and his Christian Democratic Union governing in a coalition with the Free Democratic Party, Kohl lost the federal elections to Gerhard Schroder, leader of the Social Democratic Party. The German economic model was drastically changed, entering a long-term wage depression in order to create more manufacturing jobs and lower the high unemployment rate (12.6 percent of the working-age population people in early 2005), increasing the competitiveness of German manufacturing firms on European and international markets.

Schroder's government, in a coalition with the Green Party, instituted a series of drastic reforms of the German welfare system and labor relations under the heading Agenda 2010. The unprecedented reform program was adopted in reference to the EU's Lisbon Strategy of market liberalization.

On March 14, 2003, Chancellor Schroder gave a speech in the German Bundestag presenting the planned reforms in three main areas: the economy, pensions and unemployment benefits, and the position in European and world markets. The core welfare reform called Hartz IV came into effect January 1, 2005.

Under Schroder's reform agenda, reported Deutsche Welle at the time, Germany saw "drastic cuts to welfare budgets, tax breaks to workers and corporations, weakening the then-stricter labor laws to allow easier hiring and firing of employees, changing the rules to allow for more part-time and temporary work, creating the social benefit program called 'Hartz IV that merged unemployment and welfare benefits, and reducing the amount of time a person could receive unemployment benefits."

These measures were intended to jump-start a sluggish economy and bring unemployment down.

While conservatives and business-friendly parts of German society supported Schroder's reform agenda, there was an upheaval among the Social Democrats, and a revolt by German's strong union organizations that had essentially paved the way for Schroder to the chancellorship. Facing wholesale defections of his own party members, Schroder triggered a loss of confidence vote and a new election in 2005, which he lost.

This brought Angela Merkel, then leader of the Christian Democrats, to office as the first female chancellor in German history, in a coalition government with the defeated Social Democrats. In her first speech to the Bundestag as chancellor, Merkel thanked her predecessor "for bravely and resolutely opening a door with Agenda 2010, so that our social systems could be adapted to...