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The Balance Sheet of the Grand Coalition (September 17, 2009)

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A Small Economic Miracle

Not only the mood, but also the situation has changed. During the first three years of the Grand Coalition, before the financial crisis, it really seemed as though political leaders could influence the course of the country. The Grand Coalition managed to reverse trends in the areas of public finance, economic growth, and unemployment. The decline in joblessness was nothing short of spectacular. Under Chancellor Gerhard Schröder, there were five million unemployed in February 2005. This figure fell to 4.6 million at the beginning of the Grand Coalition and to less than 3 million in the autumn of 2008. Growth far exceeded the average rates during the past decade, there was leeway for lowering non-wage labor costs, and the Social Democratic finance minister was justified in hoping that he would be able to submit a balanced budget in the not-so-distant future. [ . . . ]

The most frequently heard objection to the coalition’s consolidation strategy was that the 3% increase in the value-added tax would prove poisonous to the economy. As is well known, things turned out differently. The economy grew by 2.5 percent in 2007 – the year of the biggest tax hike in the history of the Federal Republic of Germany. Higher taxes and additional revenue from the booming economy provided a basis for consolidating public finances. In addition, the coalition passed unpopular cuts to a variety of subsidies, including the allowance for first-time homebuyers, the tax exemption for interest income and capital gains, and the commuter allowance. Since the CDU and the SPD had unanimously defended the lowering of the commuter allowance against attacks from parties as diverse as the Left Party and the CSU, it was bitterly disappointing to see this legislation struck down by the Federal Constitutional Court. But it has been even more disappointing to see that the careful course set by the Grand Coalition for a sustainable financial policy has now ended in the record debt levels necessitated by the financial crisis. By instituting a debt ceiling, the two large mainstream parties have at least pursued their intention of enshrining a responsible financial policy in the constitution, but this will not be reflected in the budget figures for the coming years.

An End to Reforms

The SPD and the CDU/CSU brought hardly any projects from their pre-2005 reform phase to the Grand Coalition. The SPD suffered too severely from the consequences of its Agenda 2010 policies; the CDU/CSU from its near defeat in 2005. The only policy that breathed the spirit of radical reform was the raising of the retirement age to sixty-seven. Once again, the SPD acted against its supporters’ direct interests in an effort to make the solidarity system fit for the future. This marked a turning point, since the SPD no longer had the strength to continue down the path of self-destruction for the common good. In addition, Angela Merkel had lost all desire for radical reforms even before she could have begun tackling them in the autumn of 2005. The CDU/CSU preferred to overtake its coalition partner on the left, as in the controversy over the extension of unemployment benefits. [ . . . ]

Afterward, the coalition no longer worked on structural reform. On the contrary, it temporarily disabled the demographic factor in the equation for calculating social security in order to pass an unplanned increase in benefits. The reform of compulsory long-term care insurance was far less comprehensive than had originally been hoped for. But it was the dispute over healthcare that perhaps most spectacularly demonstrated the coalition’s inability to carry out reforms. [ . . . ]

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