A new competition has erupted among the leaders of Berlin's grand coalition government of conservative Christian Democrats and center-left Social Democrats. Their objective is to plug three concepts, in the midst of the crisis, as elegantly as possible: hope, security and a positive attitude. Everyone wants to be part of the game, including Chancellor Angela Merkel.
It's a Thursday afternoon in Berlin, and the chancellor is at the Martin Gropius Building to open an exhibition titled "60 Years, 60 Works." Officially, the event marks a celebration of German art, including artists like Gerhard Richter, Sigmar Polke and Jörg Immendorff. But it is clear that Merkel is also intent on painting her own picture, one in which pleasant colors predominate.
Even after the war, when Germany was in ruins, these artists managed to create new works out of a barren wasteland, says Merkel. She points out that the challenges these artists faced are a clear sign that the Germans, once again, will be able to find their way out of the current mess, the economic crisis. She insists that things will improve, that Germans should not give up, and that "art is hope."
Hope, as it happens, is also an art, especially in bleak times. German Finance Minister Peer Steinbrück is sitting in a bare conference room with a handful of journalists, explaining the state of the government's finances. As far as he is concerned, the minister says, one thing is clear: "I can rule out tax increases."
At about the same time, Labor Minister Olaf Scholz is traveling in a minibus from the southwestern city of Mainz to a small town called Waigandshain, where he plans to visit a wind turbine manufacturer. It is early summer, and as the bus passes through the Westerwald region, Scholz is discussing the state of retirement pensions in Germany. "Pensions will not be reduced," he promises, noting that the government's pension coffers are full and old age pensions secure. "I know of no one in the government who disagrees with me on this point," says Scholz.
Welcome to the land of illusions. While the economic crisis eats its way more deeply into the real economy day by day, the government in Berlin has put itself on autopilot. Even as the crisis builds to grave proportions in front of its eyes, the Grand Coalition is behaving as if it could survive the storm without changing course.
While experts are still uncertain how much longer the economic slump will last, they agree that the deepest recession of the postwar period will have dramatic consequences. Unemployment will rise to threatening levels, and government debt will balloon. No matter which coalition of parties comes to power after national elections on Sept. 28, it will face the same choice between two evils: Either taxes and contributions will have to be increased or government expenditures significantly reduced.
Presenting the Bill After the Elections
But this is a truth that the major parties prefer not to acknowledge, especially not during an election campaign. Instead, the two coalition parties are doing their best to ignore reality. The CDU and its Bavarian sister party, the Christian Social Union (CSU), are promising citizens billions in tax cuts. The SPD is promising new social benefits, even though it still has no idea how the government will pay for an inevitable rise in unemployment this year and next.
As is so often the case in the run-up to important elections in Germany, politicians spread good deeds and promises before Election Day, but wait until after the election to present the citizens with the bill.
Nevertheless, it is high time for politicians to be thinking about how to cope with the costs of the economic crisis, which will run into the billions. Who will pay the piper, and how quickly should the state's finances be brought back into line again? Where are cutbacks possible and where are they absolutely necessary? Finally, what can politicians do to guide the economy along a new path to growth in the coming years? In light of the daunting challenges of the future, last week's pronouncements by members of the grand coalition feel like a reckless mixture of horse trading and blindness to reality. They will pose a heavy burden for the next administration, which will not only have to cope with the dramatic state of government finances, but also with the accusation of having lied to citizens once again.
Just how large the gap between campaign promises and reality is will become evident in no more than two weeks, when the government releases its tax revenue estimate. It is already clear that the numbers will be devastating. Experts on the staff of Finance Minister Steinbrück expect that federal, state and local governments will face a shortfall for 2009 of close to €25 billion ($33 billion), compared with the last estimate, with about half of the projected shortfall representing a decline in the federal government's tax revenues. Federal, state and local governments can expect to see their tax revenues decline by more than €300 billion by 2013, with the federal government in Berlin facing, once again, about half of that shortfall. And the crisis is not just putting a dent in tax revenues -- it is also responsible for sharply increasing government expenditures. The costs of social welfare will rise as more people lose their jobs. According to an estimate by the CDU/CSU parliamentary group, the increased costs to Germany's social insurance system will amount to €8 billion ($10.6 billion) this year alone.
For the time being, Steinbrück will be forced to increase government borrowing to offset lost tax revenues and increased expenditure. However, the debt ceiling already approved by the German parliament, the Bundestag, is no longer sufficient. To make up the difference, Steinbrück plans to present parliament with a supplementary budget by the end of May or early June, in which he will seek approval of up to €15 billion ($20 billion) in new borrowing.
Steinbrück plans to incur a total of €50 billion ($66 billion) in new government debt this year, more than under any of his predecessors. This sum does not even include a portion of the government's investment in the economic stimulus package or the costs arising from the bank crisis. Both of these expenditures have been hidden in supplementary budgets. But next year's figures will be even more dramatic. Steinbrück anticipates new government borrowing of up to €80 billion ($106 billion) in 2010, a sum that, once again, does not include supplementary budgets.
Prolonged Period of High Budget Deficits
The government budget is also burdened by €17.5 billion ($23 billion) in loans for the Federal Employment Agency (BA), according to an internal coalition document. This sum, which is derived from estimates prepared by the Nuremberg-based agency, is absent from government debt statistics as it officially constitutes a loan. Steinbrück's commitments to the BA are offset by a claim for repayment of the funds, but no one in Berlin expects that it will ever be repaid. According to the coalition document, "the repayment of a sum of this magnitude within a reasonable period of time appears highly unrealistic."
In the coming years, the German finance minister, whether it be Steinbrück or his potential successor, will face a prolonged period of high budget deficits. By 2013, when the new budget expires, the government's new borrowing will have declined by approximately €10 billion ($13 billion) a year for three years, from a level of €80 billion ($106 billion) in 2010 to €50 billion ($66 billion).
Germany's states face similar budget shortfalls. They too will be forced to finance their budgets in the coming years with unprecedented levels of borrowing. This, in turn, will lead to a rise in the national debt. Steinbrück's experts predict that government debt will reach 80 percent of gross domestic product by 2013, as compared with 66 percent in 2008.
In light of these somber prospects, budget experts within the governing coalition believe it is unrealistic to promise tax cuts. "The state of the government budget is dramatic," says Carsten Schneider, the SPD parliamentary group's chief budget expert. "Therefore, there is no room for tax cuts."
And yet the Social Democrats' campaign platform includes the promise of lower taxes for large segments of the population. The chancellor, for her part, is apparently determined not to be outdone by the SPD. Seemingly oblivious to budget deficits and billions in tax shortfalls, Merkel and CDU General Secretary Ronald Pofalla are hoping to woo voters with empty promises. The CDU leadership remembers all too clearly its announcement of an increase in sales taxes during the 2005 election campaign -- and its disappointing performance in the election.
This time, the strategy is to sweet-talk voters instead of scaring them. The Christian Democrats' tentative plan calls for a significant reduction in income tax for all brackets, but a final decision will not be made until the tax revenue estimate is announced in mid-May. Either way, the party leadership is determined to include at least some form of tax cut in its campaign.
A Government of Wasted Opportunities
The fear of public resentment is not the only motivating factor here. Merkel also senses the pressure coming from her own conservatives, especially CSU leader Horst Seehofer. He is tormented by the fear that his party could fail to reach the 50-percent hurdle in Bavaria in the Bundestag election. He is adamantly opposed to allowing business-friendly, liberal Free Democrat Party (FDP) leader Guido Westerwelle to take ownership of the issue of tax rebates. For months, Westerwelle has been wooing CDU/CSU voters with a basket of financial promises.
But the pressure is not just coming from the economic wing of her party. A few days ago, the CDU/CSU's small and medium-sized business association (MIT) was at the Chancellery to meet with Merkel. The gentlemen were clearly upset. "Can you tell us why a business owner should still be voting for the CDU?," an angry member of the MIT board asked. Merkel mumbled something about reducing bureaucracy, but no one at the table was convinced.
At the end of the hour-and-a-half meeting, MIT Chairman Josef Schlarmann handed the chancellor a seven-page document outlining the organization's demands for the CDU/CSU's campaign platform. "The citizen has a right to a thorough revision of tax rates," the document read.
The only politicians who are currently advising caution are a few conservative state governors. For them, all it takes is a glance at their state budgets to realize how unaffordable tax cuts are. Wolfgang Böhmer, the CDU governor of the eastern state of Saxony-Anhalt, faces a mountain of debt worth €21 billion ($28 billion). "Under no circumstances should we be making promises that we cannot keep," says Böhmer. "Tax cuts are only feasible when we have balanced federal and state budgets once again, which is not foreseeable at the moment."
Although the situation is somewhat more positive for his counterpart in the eastern state of Saxony, Stanislaw Tillich, he too is at a loss as to how to cope with the financial crisis and reduce taxes at the same time. "I cannot understand how we can afford tax cuts, given the billions in economic stimulus programs," says Tillich.
Merkel's task is to pull off the feat of simultaneously advocating and opposing tax cuts in her campaign platform. This is, in fact, impossible, and yet she believes that she has already found the magic formula to make it happen: she intends to promise tax cuts, but only under the condition that the government can afford them -- a compromise with which she hopes to unify the party.
Denying the Need for Sacrifices
During political campaigns, the members of the grand coalition are even more generous with the funds of pension contributors than with tax revenues. Last week, both the CDU/CSU and the SPD sought to curry favor with retirees once again. In truth, Germany's senior citizens should feel relatively satisfied with the current situation. In the midst of the worst economic crisis since World War II, their pensions are set to increase, as of July 1, by 2.41 percent in the states of the former West Germany and 3.38 percent in the former East German states -- the biggest increase in years.
But last Monday Handelsblatt published a calculation showing that the recession will translate into heavy losses for retirees. According to the German business daily's analysis, gross salaries are being reduced as a result of a government program that encourages firms to cut working hours rather than lay off workers. Under the formula used to compute retirement benefits, lower wages will translate into smaller pensions.
The truth is that many older Germans would probably appreciate the need for them to make sacrifices in the face of the crisis. But both the Christian Democrats and Social Democrats prefer not to push the issue. CDU General Secretary Pofalla promptly announced that his party would not reduce pensions next year. Labor Minister Scholz, a member of the SPD, taking his cue from a former labor minister, Norbert Blüm, who famously said: "pensions are secure," took the matter a step further. "Pensions will not be reduced," Scholz told reporters at a last-minute press conference, "not next year, and not in the years after that." He had coordinated his remarks with the chancellor in a telephone conversation before the press conference.
Indeed, Scholz is hell-bent on abrogating a fundamental principle of Germany's social welfare system before the end of the legislative period. Until now, pensions were essentially pegged to wage levels, so that retirees would also benefit in good times. During economic downturns, on the other hand, they are expected to tighten their belts, both for reasons of fairness and because it would otherwise be difficult to keep the system afloat. But now Scholz is drafting a law that would permanently prohibit nominal declines in pensions.
What makes the labor minister's zeal seem all the more bizarre is the fact that bureaucrats in his own ministry now treat the prediction of pension reductions as deliberate misinformation. They have determined that old-age pensions will not in fact decline next year, even under the current system of computation. As one Labor Ministry official says derisively, "a waste basket was on fire, and the minister called in the fire department."
Nevertheless, it is too late to stop the process. Although a few CDU/CSU politicians are still critical of Scholz's proposed pension changes, "this is -- and there is no doubt about it -- a campaign gift," says CDU economics expert Schlarmann. Saxony-Anhalt Governor Böhmer, however, advises caution: "I think it's unnecessary to prohibit pension reductions by law."
A Lack of Resolve
But the objections are too late. Chancellor Merkel, who has already indicated her approval of the plan, asked the labor minister to fine-tune the relevant draft legislation with Steinbrück, Economics Minister Karl-Theodor zu Guttenberg and her chief of staff, Thomas de Maizière. There has been almost no criticism of the plan among CDU and CSU leaders, or within the two parties' parliamentary group. No one is willing to follow the example of Jens Spahn, an up-and-coming CDU politician, who had the temerity to characterize Scholz's plans as "arbitrary." His remark prompted the deputy head of the German senior citizens' union to suggest last week that Spahn be "bluntly rammed into the ground."
The grand coalition is known for its lack of resolve when it comes to addressing problems with Germany's social welfare system. It came into office armed with promises to clean up government finances and place the social benefits system on a permanent solid footing. The times seemed uniquely favorable for such an undertaking. The previous administration's Hartz welfare reforms that scaled back monthly government payments for the long-term jobless were producing the desired impact on employment. The economy was in good shape and exports were booming.
But Merkel's grand coalition allowed the opportunity to go to waste. Instead of disconnecting social welfare costs from wages and salaries, as they had promised, the CDU/CSU and the SPD agreed to increase health insurance premiums instead of reducing them. The retirement age was raised to 67, and then prompty lowered again. The CDU/CSU and the SPD were eager not to make themselves unnecessarily unpopular with Germany's more than 20 million retirees.
Campaigning in the Midst of a Crisis
Instead, the government focused on handing out all manner of benefits. The grand coalition devised the parental-leave allowance, a sort of bonus program for affluent double-income couples, which, thus far, has had no measurable impact on the birth rate. The government forced health insurance agencies to spend millions on the development of a questionable therapy program for single fathers, extended the unemployment compensation period for older workers and increased the Hartz IV welfare payments in eastern Germany. The bill always ended up on Finance Minister Steinbrück's desk. He was a willing victim. Despite his affected behavior, Steinbrück did not prove to be the effective treasurer he likes to portray himself as. Instead, he has routinely caved in to the wishes of his fellow cabinet members.
A person who waffles and vacillates in good times is unlikely to find his way to clarity and truth in an election campaign that takes place in the midst of a crisis. But German citizens are used to hearing their politicians make promises to which they no longer feel committed once in office. The history of postwar Germany is one of campaign lies. As far back as 1957, then-Chancellor Konrad Adenauer, who was running for reelection to a third term, promised annual pension increases, but had already reneged on his promise by the following year.
Other politicians have also turned campaign promises into lies, including Helmut Kohl, who, in 1990, said: "We will not introduce any tax increases in connection with German reunification." A short time later, the so-called "Solidarity Tax" would be introduced, which largely went towards financing the infrastructure of the eastern German states. In the 2002 campaign, Gerhard Schröder said: "Tax increases are economically misguided in the current situation, which is why we are not considering them at this point."
But this time German citizens could prove less susceptible to deception. Merkel already did her part to increase the public's mistrust of its elected officials when, after the 2002 Bundestag election, she summoned members of the SPD and Green Party coalition government before a special committee she had formed to investigate whether SPD/Green candidates lied during the campaign.
As chief investigator Merkel said at the time, the purpose of the committee was to examine the monstrous suspicion that members of the newly elected administration, against their better judgment, had sugarcoated the state of the federal budget during the campaign.
MARKUS DETTMER, ROLAND NELLES, ALEXANDER NEUBACHER, RENÉ PFISTER, CHRISTIAN REIERMANN