TCS Daily

Why Schroeder Lost, and What It Means for America

By Kevin Hassett - June 16, 2004 12:00 AM

German Chancellor Schroeder's party suffered an astonishing defeat in the European parliamentary election, garnering less than 22 percent of the vote. The week before the election, I traveled to Berlin to participate in an economic conference. During my visit I spoke at length with German economists and politicians about the state of affairs in their country. The discussions foreshadowed nicely the election results, and gave me a very surprising perspective on the state of politics and policy in Germany.

Schroeder, recall, was far behind in the polls going up to the last election. Germans were enormously dissatisfied with the moribund state of their economy, and blamed the liberal big-government SPD party for their misery. But at the last minute, Schroeder happened upon a successful political formula. He openly and aggressively opposed the U.S. war in Iraq, and ignited a groundswell of pacifist support.

It is not really surprising that such a strategy could win an election for the SPD. The Germans have a long history (dating back to 1945 or so) of pacifism. Germans are also fond of their close relationship with the U.S., but their pacifism trumped that in this election. These opposing forces created something of a delicate balancing act for Mr. Schroeder, who needed to oppose the U.S., but not write America off. He clearly went too far, and constructed a gulf between our countries that was unthinkable a few years ago.

While this occurred, the German economy continued to fall behind, with annual GDP growth of around 1-1/2 percent and unemployment above 10 percent.

Thus a German can look at his once proud country and see an economy that has become a laughingstock with a political influence amongst successful countries that is at an all time low. One German politician at my conference summed up the nation's mood nicely when he recounted a conversation he had recently had with his child. His son asked him what Germans have to be proud of, and the saddened German parent could think of nothing. "I might have answered luxury cars," he said, "but even those are having quality problems."

The analysts in the conference unanimously pointed to one major factor when explaining the sagging German economy: labor unions and government have regulated and taxed capitalists within an inch of their lives. Mr. Schroeder has publicly advocated reforms, but the actual steps he has taken have been inconsequential. At the same time, he has revealed his emotional attachment to big government by pressuring central European countries that are joining the EU to adopt Germany's high-tax/low-growth policies.

This pressure is a nasty reminder for Germans of a lost opportunity. When the country was reunited, the SPD foisted the German regulatory state on East Germany. The result has been economic catastrophe for that former communist country. The other former communist states that had to come of age without a "big brother" have outperformed East Germany to an astonishing degree. GDP growth in Poland over the last year was almost 7 percent. The unemployment rate in former East Germany is almost 18.4 percent.

The Germans now face what is to them an unthinkable possibility. Their eastern neighbors are dramatically more successful than they are and may soon enough be richer. The costs of their lazy socialism are apparent even to their children, and the country is in a panic. "We all recognize," one participant told me, "that Germany needs its own Reagan."

As that has become obvious even to liberal Germans, it was perhaps bad luck for the SPD that Ronald Reagan died when he did. His death reminded the Germans of all that Schroeder had squandered. Germany was once an economic marvel, closely bound to the most powerful nation on earth. By choosing economic policies that are the opposite of those advocated by Reagan, and a foreign policy that offended the nation that helped unify Germany, Schroeder has taken his country down a path that is perhaps as bad as can be imagined. And the German people know it.

For the United States, the latest election is tremendous news. A chastened Schroeder will have to be a more reasonable political ally. And the pressure for the EU to adopt centralized German socialism rather than free market principles is now significantly lower than it once was. This will be a strong boon for the European economy, and will be an even bigger plus for Germany if the voter revolt begins a dramatic overhaul of its economic policies.


TCS Daily Archives