The Germany elections left the world surprised and startled. The outcome allows for only one interpretation: The path towards courageous economic reforms set by the Schröder administration was essentially reconfirmed.
The vast majority of voters support continuing reforms at a faster rate and with a broader scope. Only one out of the five political parties in parliament refuses to embark on economic reforms. With less than 10 percent of the vote, this Left Party has achieved no more than a succès d’estime.
The ruling coalition of Social Democrats and Greens has fought for continuing the reforms with careful attention to social justice. It has lost to an opposition of conservatives and market fundamentalists who propose even deeper reforms.
Once the smoke from the short but intense campaign is cleared, any viable new coalition will acknowledge the economic realities and continue the reforms with vigor. It certainly helps that neither the campaign platforms nor the leading personnel of the political parties are completely irreconcilable.
These past elections were not a vote for a new economic direction. The campaign manifestos did not radically differ in their solutions to economic challenges or the range of policy options. This is one of the reasons why voters had a hard time making their choice along traditional party lines.
Germany is thus on the right track. The reforms of the Schröder administration have marked a turnaround in German economic and labor policy. Its landmarks were the preventive nature of labor market programs, their continuous scientific evaluation, and the new focus of the Federal Labor Agency on job placement, closer contact with the business community, improved employment incentives, and the discontinuation of ineffective labor market programs.
Another fundamental step was the merging of unemployment benefits and social welfare with a stronger emphasis on requiring people to work. This change was accompanied by substantial tax breaks, the new immigration law, longer shop opening hours, a more liberal Crafts Code, and the upgrading of academic elites.
These developments have triggered an intense debate over redefining our social market economy without abandoning the concept altogether. The stricter distinction between issues of social justice and the efficient use of economic resources makes their particular role and contribution more transparent. The question how to create more added value now receives priority over matters of redistribution.
There is an obvious shift from fairness of distribution to fairness of opportunity. Social solidarity and individual responsibility are balanced in a more appropriate manner. The idea that social solidarity is a matter of give and take is increasingly viewed as a prerequisite to social fairness rather than the end of the welfare state.
Politics is the art of the possible. The election outcome and the public debate in Germany offer a range of opportunities to get the German economy – which is basically in a good state of health – back on a growth track. Among the challenges that need to be met are:
(1) a reform of German federalism, particularly with regard to limiting the room for partisan obstraction on the Bundesrat, the upper chamber representing the 16 federal states,
(2) balancing the public budget by cutting subsidies and reducing the size of civil service personnel,
(3) a simpler tax system and lower corporate taxes,
(4) refinancing the social security systems in order to reduce non-wage labor costs, (5) market deregulation, and
(6) improving policy programs in the areas of education, research, and infrastructure.
The much-maligned Grand Coalition of the conservative Christian Democrats and the left of center Social Democrats would be well suited to master most of these challenges. Holding more than two-thirds of the seats in parliament, these parties could change the constitution and avoid vetoes by the Bundesrat.
Representing a broad majority of voters, they would be able to communicate the reform steps more easily to the public. Owing to the veto rights of the Bundesrat, both parties have effectively co-ruled over the past years. They are well aware of their room to maneuver in finding solutions to political problems. In a coalition, they could draw on this experience and benefit politically from economic success.
A number of political concepts – including reforms of federalism, subsidization and corporate taxation – are ready to be negotiated. There is a broad consensus on the need to balance the budget, to reduce non-wage labor costs, to improve education and research, and to implement labor market reforms in a consistent and effective manner. This alone is reason enough to be optimistic. The two major political parties in Germany must now end their leadership quarrels and accept the voters' will to continue the reform process that has been initiated by the past government.