The op-ed was first published on FT.com on February 28, 2017.
The emergence of Martin Schulz as the centre-left Social Democrats’ (SPD) candidate for chancellor has fundamentally altered the dynamics of German politics. It is also changing the debate in Germany on inequality and the future of Europe in ways that will have a significant impact across the continent.
Germany is regarded as an economic success story. Unemployment is at its lowest level since reunification, while the trade surplus has reached a record high. And the government has just registered a fiscal surplus of €24bn, or 0.8 per cent of gross domestic product.
Yet, for all the good economic news, polls show that 70 per cent of Germans believe that inequality is excessive. Data show that Germany is a highly polarised society, with the bottom 40 per cent of households today having the same or a lower real income as 25 years ago. Although full-time, permanent employment has increased, so has the number of precarious, part-time jobs. The number of working poor — those in work but earning less than 60 per cent of themedian income — has doubled from 4.8 per cent in 2005 to 9.6 per cent today.
In short, Germany has a two-speed economy with a widening gap between successful export and tradeable sectors, on the one hand, and services and nontradeable sectors, on the other. Levels of social mobility and equality of opportunity are also poor.
It not surprising, therefore, that a lively debate has begun on the effects of the “Agenda 2010” reforms deregulating the labour market and reforming the social security, which were introduced in 2003 by the SPD government of Gerhard Schröder. Ironically, chancellor Angela Merkel’s CDU praises Agenda 2010 as a success, while elements in the SPD criticise it. Last week, Mr Schulz promised to lengthen the duration of unemployment benefits and to reduce the number of precarious job arrangements if he is elected.
However, this debate on the merits of Agenda 2010 ignores the distinctive challenges that German faces today. The country needs significant investment in a more inclusive education system and a revamp of family-friendly policies designed to create opportunities for women and other groups. It also needs to deregulate the services sectors to foster investment, productivity and incomes, as well as strengthening collective bargaining agreements.
Meanwhile, the CDU has begun to attack Mr Schulz for his positions on the EU and the eurozone, particularly his advocacy of “eurobonds” as a way of relieving the debt crisis in the single currency area.
A debate in Germany on the future of Europe and the country’s role in it is certainly overdue. Europe was a non-issue in the 2013 federal elections as the mainstream parties, largely because the CDU and SPD feared that discussing it would play into the hands of the rightwing, Eurosceptic Alternative for Germany party .
But there are risks for the rest of Europe, too. While Germany has traditionally been strongly pro-European, in recent years many in the governing parties have criticised the policies pursued by other EU member states and the European institutions, including the European Central Bank’s monetary policy.
The return of Mr Schulz to domestic German politics has certainly shaken things up. The central question now is whether pro-European voices in both major parties will prevail in the debate he has opened up. The answer hinges on severak factors, including the outcome of the French elections, the Brexit negotiations and whether the threats made by US president Donald Trump will push Germany to align more closely with its European neighbours.