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4 October 2023

The return of the two Germanys

The country is in economic and political crisis and parties of the extreme left and right are rising again.

By Wolfgang Münchau

Every 20 years or so since the Second World War, Germany has hit a crisis that often looked insurmountable: in the late 1960s, in the early-to-mid 1980s, in the early 2000s, and right now. These past crises looked bleak at the time but were usually resolved by a change of government or reforms. Today’s crisis is more fundamental. It is about Germany’s role in the world and about its economic growth model. There is no obvious reform agenda that will get Germany through this. Nor is there an alternative government or coalition waiting to try something new. This time really is different.

Russia’s full-scale invasion of Ukraine in February 2022 is not the deep cause of anything, but the trigger of everything. Until a year ago, Germany revelled in its role as a geopolitical fence sitter. It was a country that was simultaneously of the East and of the West: dependent on the US for security, on Russia for gas, and on China for exports.

Russia’s invasion exposed the unsustainability of diplomatic fence-sitting. It also exposed Germany’s over-dependence on old gas-guzzling industries, and its lack of industrial modernisation. The debate in Germany today suggests that the appetite for deep change is not all that strong. We may instead be looking at a scenario similar to what happened to Italy after its introduction to the euro in 1999 – a long period of economic depression, a weakening of the classic political centre and a rise of extreme parties.

This summer, the far right Alternative for Germany (AfD) firmly established itself as Germany’s second largest party nationwide – larger than any of the parties in Olaf Scholz’s three-party coalition, including his own Social Democrats (SPD). We know from Tolstoy that unhappy families are unhappy in their distinct ways. The AfD is east Germany’s unhappy family, and it is like no other. It was founded around a decade ago as a movement of west German economics professors who were opposed to the euro. The party was later infiltrated by nationalists opposed to immigration, EU membership, and anything foreign.

The AfD’s centre of political gravity shifted from the west to the east, and in the process it became progressively more extreme. I would not call the party fascist, but some of its members have been tolerant of neo-Nazis, and participated in neo-Nazi protests. According to the latest polls the AfD enjoys support from around 21 to 22 per cent of the electorate nationwide. In east ­Germany, the AfD polls between 29 and 35 per cent. In four out of five east German states it is the largest single party in the polls.

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The trigger for the most recent upsurge of the AfD is Germany’s support for Ukraine’s war effort after Russia’s invasion. Most east Germans oppose weapons deliveries to Ukraine. East Germany, it often seems, is a country of old men and women, many of whom still have a strong attachment to Russia. They have lived through three distinct periods in their adult lives, all heavily overshadowed by Russia: the Cold War era of the Soviet-aligned German Democratic Republic from 1949 to 1990; the age of Russian-German detente in a unified Germany from 1990 until 2021; and today’s era that defines itself in opposition to Vladimir Putin’s Russia.

[See also: The end of globalisation]

Economically and financially, Germany is deeply integrated with the West despite its multiple dependencies on Russia. Culturally – and politically – Germany remains divided between an east that looks towards the East and a west that looks towards the West.

A German journalist from Berlin told me a few years ago that he felt ­Moscow was politically and culturally closer to Berlin than Paris or London. Germany before the First World War had a similar outlook. The country’s split geopolitical personality also informed attitudes towards Nato until not too long ago. Frank-Walter Steinmeier, Germany’s president, and the foreign minister from 2005-09 and 2013-17, was one of the architects of Germany’s pro-Russia policy. In 2016 he described a Nato exercise in eastern Europe as sabre-rattling. It was an extraordinary comment that did not go unnoticed in eastern Europe, where Steinmeier is viewed with suspicion.

Steinmeier has since shifted position, but many eastern Germans have not. They were the beneficiaries of Germany’s close relationship with Russia. Nord Stream, the Baltic gas pipeline, connected the Baltic coast to eastern Germany. East German social democrats were among the main supporters of this now defunct project. One SPD state premier even helped set up a state-owned foundation, with Gazprom money, to circumvent US sanctions against the Russian-owned pipeline consortium.

The figurehead of the Nord Stream pipeline was Gerhard Schröder, German chancellor between 1998 and 2005. He and several east German politicians formed close-knit networks of German-Russian political, economic and cultural diplomacy. Russian-German civil-society organisations sprung up during that period, but have since been shut down. Russia’s invasion of Ukraine and the Western response ended a 30-year period of deep political and economic cooperation.

So is this all over now? Those who look at Germany from London, Washington or Brussels were initially impressed by Olaf Scholz’s now famous speech in March 2022, in which he announced a Zeitenwende, a change of era that would bring Germany closer into the security architecture of the West. I am much more sceptical. I don’t think Germany will revert to its cosy relationship with Russia. But the promise of a new era in German foreign policy and especially for more investment in defence will remain unfulfilled. Germany will continue to struggle to meet the Nato ­defence spending target of 2 per cent of economic output. Many Germans, especially in the east, are not on board.

Russia’s invasion hardened this new ­division, but tensions have been developing in other areas for some time. East Germans are the least green, the least woke, the least globalist among the Germans. They don’t see themselves as part of a US-led Western world. I vividly remember the disappointment many east Germans felt after reunification when Helmut Kohl agreed to introduce the euro. They had just got the deutschmark as their new currency, and were asked to change again.

Reunification in 1990 was outwardly a success but it created its own divisions, some of which are only now coming out into the open. East Germany did not negotiate a new constitution with the West, but adopted the West German one in full. That was a democratic political choice by east Germans at the time. Buyer’s remorse set in a few years later. Nobody wanted, or was able to, undo ­reunification. But what many people did not realise was how far the two sides had grown apart during the Cold War.

For postwar West Germany the US became the main political and cultural reference point. For East Germany, the main partner was, of course, Russia. I have family members who lived in East Germany before the Berlin Wall was built, and who said that they were forced to learn Russian in school, did so only reluctantly, and later made sure that they would forget all of it. But they were perhaps not typical.

Reunification did not end the division. Economically, it was a takeover, not a merger. The west paid an estimated €1trn-€2trn in transfers, unprecedented in size and deeply unpopular. Soon after reunification, east Germany would have more modern roads and infrastructure, but it felt like a golden cage. East Germany is to west Germany what southern Italy is to northern Italy. No matter how much money you poured into it, you never created economic dynamism.

What reconnected east and west was Russia. When Schröder became German chancellor in 1998, one of his priorities was to foster business ties with Russia. He and Putin, who became Russia’s president in 2000, were close personal friends. Their friendship outlasted Schröder’s resignation from office, Putin’s annexation of Crimea, and later his full-scale invasion of Ukraine. As Russia gradually turned into a strategic partner for unified Germany, eastern Germans suddenly had an important role to play. They knew the Russians better than the west Germans.

That all ended at a stroke on 24 February last year. Together with the political upheavals came an economic shock. The first two decades of this century had been unusually benign for Germany, east and west. Russia played an important role. When Schröder left office in 2005, he immediately joined the Nord Stream 2 pipeline consortium that would build two gas pipelines from Russia.

Germany does not have natural sources of energy other than coal. In the early 2000s, it relied on nuclear energy for its electricity. But the only available political power option for Schröder, and for Scholz today, was a coalition with the Greens. The Greens rose from the anti-nuclear movement in the 1970s and have not changed since.

Today the Greens are part of the government and prevailed with the controversial decommissioning of Germany’s last six nuclear power stations, which had supplied the country with around 14 per cent of total electricity consumption until two years ago. The cost for a nuclear-free Germany has been an increase of coal in the energy mix. Coal now constitutes one third of all electricity – the result of a chaotic energy policy.

[See also: Why is the far-right surging in Germany?]

Schröder and the German business establishment knew that old corporate Germany would need an alternative power source – his friend Putin was the man to deliver this. In 2005 Schröder was replaced by Angela Merkel, the first east German leader of united Germany. She was personally not as close to Putin as Schröder but pursued the same policies. And like many east Germans, and unlike Schröder, she was a fluent Russian speaker. During her 16-year chancellorship, Germany cemented its position as an industrial powerhouse, and increased its reliance on Russian gas and oil further. German industry became one of the main economic beneficiaries of industrial globalisation and integrated global supply chains.

In the years before the pandemic Germany recorded current account surpluses in the order of 8 per cent of its national economic output. This is huge, especially for a relatively large economy that should rely more on domestic demand. Most gushed at what they wrongly perceived as a strong performance. Only a small number of economists and commentators, mostly from abroad and myself included, flagged what they saw as Germany’s unsustainable business model.

The export surpluses were, it turned out, not a sign of success but a sign of a deep savings-investment imbalance. Successive governments had failed to invest in the military, in modern digital infrastructure, and in new energy sources. Most people only became acutely aware of these problems in the past year. The German media has since raised probing questions about the German-Russian alliance, especially the role played by Schröder and Merkel. But they are by and large still fully-paid-up subscribers to the notion of an export-orientated old industry model.

The first strains on that model became visible towards the end of the last decade. The German car industry doubled down on old diesel engines and failed to invest in the infrastructure needed to build electric vehicles. The whole Nord Stream project was an attempt to tweak the playing field in favour of German industrial companies. All this happened while China and the US invested in artificial intelligence, electric cars, and other 21st-century technologies. The German economy was doing well in that period. But many observers did not see that it was still stuck in the analogue age of diesel engines and copper telephone cables.

All this came crashing down with the pandemic and the war in Ukraine. The most visible symbol of this change was the explosion of three of the four Nord Stream pipelines in 2022. We don’t know for sure who did this. There have been reports in the German media that a Ukrainian commando was behind the bombing. Whether true or not, the debris of the detonated pipeline that floated to the surface of the sea marked the end of era. Denial is usually the first stage of mourning. Merkel is still in denial. So is her party and much of western Germany. It was all Putin’s fault. Nothing to do with us. So the story goes.

East Germany, meanwhile, has already progressed to the second stage of mourning – anger. It knows that German-Russian relations will not reset to the status quo ante, even under a new Russian leader. The war created new facts on the ground. Germany imposed economic sanctions on Russia, along with the rest of the Western world.

According to figures from the German Eastern Business Association, trade with Russia has collapsed by 76 per cent since the war began. To replace Russian gas, Germany rushed to build port terminals for liquefied natural gas, which can be transported on large sea vessels and requires a special port infrastructure to unload. Today, Germany buys its gas supplies on world markets. The gas pipelines will never be rebuilt.

My expectation is that Germany will remain anchored in the Western alliance, but German society has no appetite for increasing military spending, or for creating an alternative EU-wide security system. It will remain dependent on the US for security. The US has also become Germany’s largest export market. Unless the US were unilaterally to revoke its commitment to European security, for example if Donald Trump were to become president again, Germany will stay a loyal ally. But there is a cost to be paid. East Germany will not be on board. Old divisions will resurface.

The AfD is the main beneficiary of the geopolitical shifts. But it will probably not be the only one. Preparations are also under way for a new party on the left, to be founded by Sahra Wagenknecht, a former leader of the Left Party and wife of Oskar Lafontaine, a former SPD leader and finance minister. The rationale behind a Wagenknecht party is to create a left-wing alternative that stands against the metropolitan, liberal left. Wagenknecht’s main campaign theme is her opposition to weapons deliveries to Ukraine. Schröder and Lafontaine, who fell out in 2000 over economic policy, have recently patched up their differences. What unites them today is pariah status because of their opposition to Germany’s support for Ukraine.

A new left party would further erode the political centre. The stronger the radicals become, the harder it will be for the centrist parties to form coalitions and introduce the kind of reforms that Germany would normally undertake. The failure to reform will drive more people towards the extremes.

It is possible that Germany finds a way to revive the fortunes of its old industries. There may be another decade of life in them. One can also never rule out that some external global shock shifts the patterns of global demand towards German-made forklift trucks, chainsaws, analogue cameras and even, who knows, for fuel-driven cars if governments keep delaying the changeover to electric vehicles. Germany is suffering from acute skills shortages, but it may find new untapped sources of highly skilled labour. North Sea oil changed the fortunes of the UK economy in the 1980s. Fortuitous accidents are always possible.

But so are accidents of the opposite kind. What I expect to happen is that Germany will try to double down on its old industrial model, because it knows no other. But barring some unforeseen shift, this model is not sustainable. History teaches us that the unsustainable is either rendered sustainable, or it will end. I think it will end.

[See also: The EU’s great power delusions]

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This article appears in the 04 Oct 2023 issue of the New Statesman, Labour in Power