We use cookies to help improve and maintain our site. More information.

03 September 2021

The two Olafs


here is a sense of excitement in the air about Olaf Scholz, who is now the frontrunner in the German elections. A majority of German voters seem to have made up their mind that they like him better than the alternatives. But don’t kid yourself: elections are zero-sum games. CDU and the Greens committed the cardinal error of choosing candidates predominantly out of internal party considerations, without thought for how this candidate would perform in a national contest. For all its faults, the SPD got one thing right: it nominated a candidate who knows how to play a poor hand well.

But be careful what you wish for - especially if you are a Keynesian on the left who is desperate for Germany to drop its economic dogmatism. Olaf Scholz has been at the centre of all the bad decisions that we associate with German economic policy in the last 20 years.

During the second term of the Schröder government, between 2002 and 2004, Scholz was general secretary of the SPD, responsible for selling the Agenda 2010 of labour market and welfare reforms to the SPD’s reluctant grassroots. The German labour reforms happened without co-ordination with the rest of the euro area. It consisted of cuts in subsistence payments to the long-term unemployed and a series of other reforms that had the combined effect of reducing Germany’s wage costs - relative to the rest of the world but also relative to other euro area countries. This is when Germany became uber-competitive. Germany tried to blame fiscal profligacy for the sovereign debt crisis. That was certainly true in Greece. But the bigger underlying issue for the euro area as a whole were divergent labour markets. One metric of these imbalances were Germany’s large current account surpluses. They persist to this day. Scholz was the co-architect of that policy.

In 2009, during the first grand coalition under Angela Merkel, Scholz was among the SPD MPs who voted in favour of the constitutional debt brake. This balanced budget rule went further than the stability pact. It preceded the era of austerity that almost ripped the euro area apart. It led to chronic under-investment, from which the euro area is still suffering today. Scholz was labour minister at the time, not directly responsible. The actual author of the debt brake was another social democrat, Peer Steinbrück, then finance minister. But Scholz was a strong and vocal supporter of this policy.

Scholz changed his mind on the debt brake. I would never blame politicians for changing their mind after a mistake. That said, Scholz has a history of supporting ordo-liberal, conservative economic policies. As chancellor, he may do the same, just like his mentor, Gerhard Schröder.

So why are Social Democrats fiscally conservative? After the second world war, the SPD was the party of Keynesian economics. The most famous representative of that movement was Karl Schiller, the great SPD economics minister in the late 1960s and early 1970s. His disciple was Helmut Schmidt, who later became chancellor. The era of fiscal conservatism started in the 1980s when the SPD was in opposition. The party convinced itself that it had to become respectable by endorsing economic conservatism. The SPD, like the Democrats in the US, also became fully paid-up subscribers of financial deregulation. There is nothing that scares a social democrat more than being called fiscally irresponsible or financially illiterate. This also explains the proximity of leading Social Democrats to financial power. Rich people give them respectability.

In 2011, Scholz became mayor of Hamburg, his home city. His time in office coincided with a financial tax-scheme that was recently declared criminal by Germany’s federal court of justice. The scam consisted of fake reimbursements of capital gains taxes from share transactions. Scholz' Hamburg government, for reasons not fully known, seemed to have accepted the argument brought by one of the main perpetrators that they were owed a repayment. Later, as German finance minister, Scholz was asleep at the wheel when allegations about the Wirecard scandal surfaced.

Scholz is a likeable guy, more sincere than Armin Laschet and more professional than Annalena Baerbock from the Greens. But looking at his record in economic and financial policy, I see a series of poor judgement calls.

He may have wised up. But based on his record, there is nothing to give me confidence that Germany is about to shift policy.

If you would like us to notify you when a new column appears, please fill out this form.