Germany and the US, Springing to Inaction

For better or worse, their problems are the world’s problems.

|January 31, 2018

By Jacob L. Shapiro

Germany – the beating heart of Europe, one of the four largest economies in the world, a country helmed by an entrenched, established and respected politician – can’t seem to muster a government. It’s been 129 days since it had one. Now, to be fair, this isn’t uncommon among Europe’s parliamentary systems. The Netherlands went 225 days without a government last year, and Belgium holds the record at a whopping 589 days from 2010 to 2011. But Germany is not the Netherlands or Belgium. What happens there can shake the world.

The same could be said of the world’s only superpower, the United States, which has political problems of its own. The government in Washington recently reopened after a three-day shutdown, though it is funded only until Feb. 8. Unless Republicans and Democrats can come to some kind of agreement on immigration reform – something that has eluded both parties for decades – the government may well shut down again. Even if it doesn’t, political gridlock will so preoccupy Washington that it will actually impair U.S. foreign policy.

Inequality Is the Real Issue

Domestic problems are affecting German and U.S. behavior in eerily similar ways. In both countries, a widening gap in wealth inequality is creating the conditions for potentially radical political change. Of the 28 countries that report wealth distribution data to the Organization for Economic Co-operation and Development, Germany and the United States stand out. In Germany, the bottom 60 percent of the population possess just 6.5 percent of wealth in the country, the lowest figure in Europe. In the U.S., the bottom 60 percent possess just 2.4 percent – the lowest figure of any reporting country. The top 10 percent of both countries, on the other hand, account for a disproportionate amount of wealth – nearly 60 percent in Germany and nearly 80 percent in the U.S., the two highest figures of reporting OECD countries.

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In the case of Germany, this seems particularly mystifying. The country is, after all, enjoying record-low unemployment rates, and by all accounts, its economic growth has exceeded even the more optimistic projections (full disclosure: ours was not so optimistic). But these figures tell only part of the story. The real issue is inequality, in terms of household wealth and real income. Germany may be a rich country – the average net wealth per household is about 214,000 euros, or $265,000 – but the median net wealth per household in Germany is about 61,000 euros. For reference, that’s about 4,000 euros less than it is in Greece, which Germany almost kicked out of the EU for its profligacy. On a per household basis, the bottom half of households in Germany possess less wealth than the bottom half of households in Greece.

And things are getting worse. Sure, unemployment has steadily decreased since 2009, but jobs are not translating into increased wealth for the lower and middle classes. From 2009 to 2016, unemployment declined in Germany by roughly 2 percent. At the same time, the relative poverty rate – defined by Germany’s Federal Statistical Office as the “percentage living in households with an income below 60 percent of national average” – rose about 2 percent. That is not so much a measure of increased poverty as it is increasing wealth for Germany’s top wage earners, as more and more Germans find that the same salary they made a few years ago now puts them below the poverty level.

Income inequality has been increasing too. Kreditanstalt fur Wiederaufbau, a government-owned development bank, published a report in March 2016 that showed that household income grew by 6 percent and 21 percent for the bottom two quintiles, as opposed to roughly 39 percent for the top quintile. Consumer prices over the same time horizon rose by about 24 percent, which means in real terms, 40 percent of German households have seen their purchasing power decline. In 2000, Germany had one of the lowest rates of income inequality in the EU. Now it is simply average – and trending in the wrong direction.

This trend is creating serious political problems. The most notable is the difficulty with which Chancellor Angela Merkel is cobbling together a coalition after German voters turned outside the mainstream to voice their frustration with the status quo. There are other troubling indicators, though. The Social Democrats, or SPD, fared no better than Merkel’s Christian Democratic Union in elections and may face insurrection from their members even if CDU and SPD negotiators come to an agreement. IG Metall – the largest industrial labor union in Germany and in Europe – walked out of talks with industry representatives on Jan. 27 and is now threatening 24-hour “warning strikes” if its demands on salaries and a 28-hour work week are not met.

Germany’s domestic political issues, punctuated by the absence of a German government, are beginning to reverberate throughout Europe. Political uncertainty in Germany has cast a shadow over EU negotiations with the United Kingdom on the conditions of Brexit, since Brussels cannot move forward with a deal without the German government’s approval. France’s president, Emmanuel Macron, continues to wait for a German government to be installed so Berlin can respond to French proposals for EU reform. Internal debates over the status of refugees cannot be resolved if Germany cannot even decide for itself what its immigration policy should be – one of the major current sticking points in the coalition negotiations. In effect, Europe is in a holding pattern, waiting for a German government that will be in a very weak domestic position even if the CDU and SPD conclude an agreement in the next week.

The Advantage in Washington’s Absence

Germany’s inequality problems began roughly when the country reunified in 1990. West Germany absorbed East Germany more easily than many predicted, and that created some of the socio-economic conditions today. But inequality is a much older issue in the United States. Modern income and wealth inequality in the U.S. has been creeping upward since the 1970s.

Donald Trump’s surprising electoral victory in 2016 was at least partly a political expression of that underlying dynamic. It is no coincidence that in the years before Trump’s election, the share in total income of the top 10 percent of all U.S. earners rose to just under 49 percent – a share surpassing that of any time during the Great Depression. This type of wealth inequality is a refrain in U.S. economic history that produces massive political change, of which Trump is likely just a precursor.

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The 2008 financial crisis aggravated the problem. The median income in the United States is at a record high – but when you look at median wealth figures divided by lower, middle and upper income, you see that only the upper income levels have recouped the wealth lost during the financial crisis. Lower- and middle-income U.S. households are still doing worse today than they were in 2007. Like Germany, the United States is also enjoying low unemployment rates – 4.1 percent in December 2017, according to the U.S. Bureau of Labor Statistics. Again, though, employment doesn’t tell the whole story. The Federal Reserve Bank of St. Louis noted in a report this past month that the net increase in jobs created since 2000 – roughly 17 million jobs – has been among workers 55 and older. Jobs don’t help if they don’t pay enough and don’t create opportunities for young workers.

These problems demand Washington’s full attention, and the government is too preoccupied by its own political affairs to do much abroad. Unlike Europe, where countries are waiting on Germany, the world is not waiting on the U.S. – it’s taking advantage of its absence. It’ll be tough for Trump to sell a major war on the Korean Peninsula to a divided electorate. North Korea and China understand as much and are now attempting to split South Korea off from the U.S.-led alliance structure in the Pacific. Turkey’s foray into Afrin is in part a test to see how much it can shape Syria unilaterally – and the test results show an indifference. Russia, meanwhile, is doing its best to parlay a weak hand in the Middle East and Eastern Europe into Russian influence and concomitant U.S. concessions, whether by masterminding a fanciful diplomatic solution to the Syrian civil war or continuing to seek a settlement with the U.S. over Ukraine. Russia has not found much success so far, but the current U.S. posture does nothing to deter Russia from continuing to try.

Domestic politics are less predictable than international politics. Generally, they are less important too. But when two of the world’s four largest economies and the world’s pre-eminent military power are so hamstrung by problems that their behavior on the world stage is affected, the issues cease to be domestic. The U.S. and Germany have officially crossed that line. Germany has no government, and whatever government it eventually forms will be weak and hypersensitive to domestic concerns about inequality and immigration. The U.S. government is squabbling with itself rather than efficiently solving problems, whether at home or abroad. In that sense, it is working the way the Constitution designed it in 1789: without the rest of the world in mind. In 2018, that has global ramifications.