What The Hell America!

There is a telling rumor in Berlin political circles. Upon his appointment as leader of Germany’s Christian Democrats (CDU) in 2022, Friedrich Merz was gifted a copy of Il Gattopardo (The Leopard) by his conservative colleague Wolfgang Schäuble, the veteran former finance minister and then president of the German parliament. A dismayed Merz is said to have handed back the book shortly after, exclaiming: “But this is a novel — what am I supposed to do with this?”

The novel in question, authored by the last aristocratic ruler of a remote island principate in Sicily, revolves around the old social order’s attempt to contend with the threat of rapid political change, encapsulated by its most famous phrase: “If we want things to remain as they are, things will have to change.” On the surface, this isn’t too dissimilar from the situation in which Merz finds himself. The new German chancellor, sworn in on Tuesday after a shaky confirmation vote in parliament, was once dubbed “the prince of neoliberalism” and is very much an unreconstructed representative of a system whose time has come.

Merz’s own origin story is also patrician and set in a conservative backwater. He was born into the Sauvigny family, a minor branch of landed nobility in the Sauerland, the picturesque mountainous region in the state of North Rhine-Westphalia. Despite some early indiscretions — at one point he sported shoulder-length hair, rode a motorcycle, and was expelled from his first school — Merz’s early life is a faithful reflection of his class background. Raised staunchly Roman Catholic, he served in the military, joined a student fraternity (which in Germany are known as incubators of reactionary politics), and received a scholarship to study law at Bonn University. Following in his father’s footsteps, he became a judge upon graduation.

His first foray into politics, as a member of European Parliament, was relatively uneventful. After his entry into national politics in 1994, however, he quickly became a leading member of the CDU, with ambitions for higher office. Although he was eventually outmaneuvered by his long-time rival Angela Merkel and her allies. Upon leaving politics in 2009, the well-connected and effortlessly Anglophone Merz became a senior counsel for Chicago-based law firm Mayer Brown and the supervisory council chairman of the world’s largest asset manager BlackRock’s German operations.

Now a multimillionaire member of the country’s business elite and owner of two private jets, Merz still pronounced himself “middle class.” A feeble attempt to seem more relatable, it indicated a renewal of his political ambitions in the wake of Merkel’s decision to relinquish her candidacy for chancellorship for the 2021 federal elections. After the CDU’s eventual defeat, which resulted in the ill-fated “traffic light” coalition led by Olaf Scholz, Merz took over as party leader. Following the collapse of Scholz’s government, the Christian Democrats led by Merz achieved a resounding victory in the snap election in February of this year.

The Merz government is a rerun of the “grand coalition” of the Christian Democrats and the nominally social democratic SPD as a junior partner. It now faces a daunting set of challenges, above all revitalizing Germany’s stagnant economy. Once hailed as Europe’s economic powerhouse, Germany’s much-vaunted manufacturing sector has been declining. After years of a generalized slowdown in industrial production, the heavily export-oriented sector was dealt a severe blow by the dual shock of the pandemic and the Russian war against Ukraine.

The attendant disorder in global supply chains and the energy price shock laid bare the German economy’s dependence on both global demand and cheap Russian hydrocarbon imports (oil and gas). As firms adjust to the new reality and move parts of their operations abroad, industrial employment and growth have begun to shrink. Germany’s employment growth has been lackluster, and it has posted the worst economic record of any large European economy over the last years. The recently announced “reciprocal tariffs” of 20 percent on EU exports to the United States (temporarily reduced to 10 percent), in addition to a 25 percent import tax for the German-dominated automobile sector, are only set to intensify the crisis.

These developments merit a fundamental shift in economic policy. The approach of Merz’s predecessors, across the party-political spectrum, was dominated by an overzealous commitment to budgetary austerity, fueling the chronic shortage of both public and private investment in Germany’s aging infrastructure and capital stock. Despite historically low and even negative interest rates on German borrowing during the period, the commitment to restricting structural budget deficits, constitutionally enshrined as the “debt break” in 2009 and reinforced by the EU fiscal rules, dominated national politics in the 2010s.

Moreover, the dominant view that the country’s economic success depended on net exports and that these in turn required cost competitiveness, has led to two decades of relatively muted real wage growth. In concert with the German state’s role in wage repression (by setting public sector salaries), growth in domestic consumer spending has also remained relatively subdued, cementing the reliance on external demand. Attempts during the Merkel era to modernize this system were half-hearted and based on an outdated framework for industrial policy.

Abandoning the entrenched fiscal orthodoxy, however, won’t suffice. The possibility of a drawn-out trade war implies a fundamental reconfiguration of US-EU relations. This would necessarily include the emergence from under the US security umbrella; this, in turn, requires a comprehensive revamping of German military capabilities and the establishing of an independent European command.

This rupture in trade and security relations, if indeed it is permanent, implies a departure from two mainstays of mainstream German conservatism: a commitment to NATO and the Atlanticist order, and an aversion to issuing public debt at scale.

On the former, Merz seems to already have budged. Prior to Donald Trump’s “Liberation Day” tariffs, the then chancellor-elect had proclaimed that Germany must effectively consign its relationship with the United States to the past and find a replacement to NATO within months. The aim of European leaders should be to “strengthen Europe as quickly as possible, so that we achieve independence from the US.”

And indeed, Merz’s first major achievement as incoming chancellor was the passing of a large €1 trillion defense and infrastructure spending package. This was an ominous tone with which to set his chancellorship. Not because it indicated a militaristic turn in German politics: a revamping of the country’s ramshackle army was long overdue, and the rearmament package, though significant, would bring military spending relative to GDP back to its Cold War levels. Military Keynesianism this is not.

What the move revealed instead was Merz’s ideological priorities. The constitutional amendment of the debt break — to exempt any military spending and create a “special fund” for infrastructure spending — required a parliamentary supermajority. Instead of bargaining with the newly resurgent left party (Die Linke) led by former Jacobin Germany editor Ines Schwerdtner, Merz chose to wrangle the corpse of the outgoing Bundestag, which reflected the election results of 2021, into a dirty compromise with the Green Party. In the chancellor’s view then, democratic backsliding is a worthy price to pay in exchange for disenfranchising the political left.

This raises the question of how he plans to approach the far right. In his public statements so far, he reiterated the line of mainstream political parties in Germany that any and all cooperation with the far-right Alternative for Germany (AfD) is off the table. But this omertá doesn’t seem to apply to other far-right figures in Europe. In a recent interview, Merz spoke approvingly of Italy’s cunning post-fascist leader Giorgia Meloni, who was a reliable partner on account of being pro-European and pro-Ukraine.

That same interview, given in February at the World Economic Forum in Davos, is a good showcase of Merz’s other defining attributes as a political thinker. Put simply, there are few ideas worth noting. The then prospective leader of Europe’s largest economy located Germany’s economic challenges in preserving the “competitiveness” of the manufacturing sector (“the backbone of our economy”) and doubling down on labor-market and welfare reforms, citing the “Bürgergeld” (the minimum unconditional unemployment benefit for job seekers) as “disincentive” to work. He took time to mock social democratic governments of Spain and Portugal and noted that their recent economic fortunes were despite their erroneous ideological commitments.

All of this sounds like old wine in old bottles. Manufacturing, which accounts for about 20 percent of employment, is not the country’s economic backbone. The vast majority of Germans work in the service sector, where much of the precarity and associated political frustration is located. Nor is “competitiveness,” which Merz evidently links to unit labor costs, the main challenge that German industry faces.

Instead, German firms are contending with poor infrastructure conditions, excessive bureaucratic hurdles, a demand-starved domestic market, and, above all, their own failure to innovate in the face of increasingly competitive Chinese producers. One of the few other proposals Merz has made a name with, drastically simplified corporate tax declarations (small enough to fit on a beer coaster), is equally unsuited to contending with this new reality.

It would also be too early to conclude that the recent amendment of the fiscal rules signals a genuine departure from the fiscal restraint that has held back German economic potential for decades. “On the contrary,” Merz reiterated after the large spending package was agreed upon in March, the new spending “does not reduce the need for consolidation of public budgets” but implies further fiscal retrenchment in the future due to the implied higher debt servicing costs.

Merz’s rival and predecessor Merkel was fond of lecturing her political opposition that Europe has “7 percent of the world’s population, 25 percent of its GDP, and 50 percent of its social spending.” This is a profound misdiagnosis of the continent’s problems, mistaking its privileges and wealth for its obstacles. But this notion of the supposed unsustainability of this arrangement has become firmly ingrained in the mainstream of German neoliberalism — a notion from which the new chancellor has so far failed to distinguish himself. A bland creature of the conservative wing of the business community, Merz lacks the intellectual and political resources to steer a large trading economy through a dual-front trade rivalry with the United States and China.

In hindsight, Merz should have heeded Wolfgang Schäuble’s advice. The strategy that has become synonymous with Il Gattopardo — how to ensure that everything remains the same by allowing everything to change — involves making concessions and appeasing the forces of disruptive change. But Germany won’t avoid a “second China shock” by simply appeasing the anti-immigrant sentiments of the German far right. Only a wholesale retreat from an exhausted and intellectually derelict geopolitical and economic policy framework stands a chance of securing a prosperous future for the country. Merz, in many ways the last gasp of German neoliberalism, is woefully unequipped to do so.