America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
Not long after Gerhard Schröder became the Social Democratic candidate for the German chancellorship early this year, Chancellor Helmut Kohl attacked his political judgment in a little-reported speech. Schröder, Kohl said, was above all a man who had made a remarkable career of consistently standing on the wrong side of German history. Schröder's instinct for the quick political hit had brought him far, Kohl charged, but when it came to the big decisions that marked the last 25 years, Kohl's opponent had gotten every one wrong.
Schröder had eagerly opposed deployment of American nuclear missiles in Western Europe to counter the Soviet Union's last great attempt to split the Atlantic alliance. He voted against the treaty enabling German reunification. And he proposed last year to postpone indefinitely European Monetary Union and its common currency, the euro, before they officially came to life in May. Accounts of Kohl's speech did not refer to the Persian Gulf War, but the chancellor could have also mentioned that Schröder, as minister-president of the state of Lower Saxony, had tried to rally support against it.
After that attack, the accusations of Schröder's impoverished historical instinct were subordinated as a Kohl campaign theme. This abandoned attempt to put Schröder's political campaign in a long-term context captures the haplessness of the Christian Democrats as they moved toward national elections on September 27. Kohl's argument stuck roughly to the facts, but not many people in Germany appeared to care. This disinterest mirrored the mood of a country ready to thank Kohl for 16 years of measured and correct decisions on cosmic matters and move on. When a visitor to his Hanover office asked him to respond to Kohl's charge about his inability to get on the right side of history, Schröder seemed irritated, saying that if Kohl wanted to make character a campaign issue, he himself did not. When his guest replied that the question was more a matter of basic political orientation than character, Schröder recalibrated and started over with the shy smile, all self-effacement and complicity, that has made him such an effective television performer. "I think the time is over in Europe when it was mainly a question of occupying the strategic heights . . . The strategic heights are occupied. I'm responsible for the lower levels where the work needs to be done."
INHERIT THE WIND
If Kohl loses in September, he will not only have been defeated by the 10.5 percent unemployment rate he promised to slice in half or his promise to turn eastern Germany into a "blossoming landscape." He will lose because of a sense that he has no coherent plan for dealing with the rush for change that the establishment, right and left, neither foresaw nor can control. Schröder's sharp political sensibility has caught this. He has promised to restore hope in Germany's future with a program that peaks in precision with phrases like "we're building on the doers in our society."
With international issues less a consideration than in any previous postwar German election (joblessness is by far voters' chief concern), Schröder, who 20 years ago said he was a Marxist, talks about being part of the "New Middle," a notional turf best controlled in Europe by Britain's Prime Minister Tony Blair. This New Middle is a place where words like "risk," "entrepreneurial spirit," and "flexible labor markets" coexist with expressions of allegiance to social justice and fair income distribution.
In Britain, Blair came to office by pocketing Margaret Thatcher's vast social revolution. He inherited a largely transformed economy and business mentality. But for all the similarities of vocabulary, Schröder wants to lead a country trying to manage the painful deterioration of its old certainties. The controlled, rule-laden consensus capitalism that Germans call their social market economy is still rich, but it no longer produces the security, jobs, or unchallenged sense of belonging to a fair community that were the heart of postwar German identity. Despite the collapse of the Berlin Wall, Germany has not become Europe's leader.
The society Schröder says must modernize lives with contradictory signals about its strengths and liabilities. Daimler-Benz took over Chrysler in the same month the Bundesbank surrendered its de facto control of European monetary policy to the European Central Bank. Volkswagen may have absorbed Rolls Royce, but Germany is now 24th in the World Economic Forum global competitiveness report, leagues behind such countries as the United States (third) or, closer to home, the Netherlands (seventh). Bertelsmann acquired Random House, yet the reaction in Germany was not triumphant. Instead, the public acknowledged that the deal reflected a domestic investment climate where the average return on equity is 12 percent, compared with 20 percent in the United States. Not only is German corporate investment leaving, but, according to the June report of the American Chamber of Commerce in Germany, so do more foreign firms' headquarters. These American, Japanese, and South Korean firms found too little tax flexibility and too few lifestyle advantages between the Main and the Oder.
Germany recorded strong 3.8 percent growth in the first quarter of 1998, but, as the Allensbach polling institute has reported, Germans did not feel this improvement. The institute compared this to 1992 in the United States, when President Bush told the country the economy had turned around but won back no one's vote. Since 1994, confidence in the market economy has fallen continuously among both eastern and western Germans. Skepticism about the country's being on the right path was deep enough in eastern Germany that half those polled in May were unsure whether socialism or market economics were better for the people. Unemployment in the east ran roughly twice the double-digit figures in the west; Harvard economist Robert Barro said that productivity in the east, hobbled by government wage intervention, would likely reach only 68 to 76 percent of the west's by 2030. The east, he seemed to say, would be a drag on the nation's economy for the next half-century.
Whatever formula Kohl or Schröder finds for increasing job and productivity growth, the Organization of Economic Cooperation and Development (oecd) predicted that German unemployment would improve a bit to 9.7 percent in 2003, still roughly twice the American rate, while growth would fall to levels below those of the current spurt. By 2030, there will be nearly as many people over 64 as between ages 15 and 64, a higher proportion than in any other industrialized country except Japan. Whatever the increase in stock market activity, the expansion of German firms' role as global industrial players, or the impact of the government's 1999 move from Bonn to Berlin, it will be virtually impossible to restore the cocooned well-being that postwar Germans had come to regard as a birthright and as their defining national achievement.
THE WIDENING GAP
What happened was this: once an example of equitable income distribution, Germany moved in the 1990s toward polarization between rich and poor, without the programs, job-market expansion, or declining unemployment that characterized the Reagan and Thatcher legacies. Hence the overburdened state. Over the past decade, while jobs and German competitiveness have slipped away and the country has had to pay the costs of unification, globalization has changed the way individual Germans managed their money, making once conservative individual investors comfortable with new ways of accumulating capital. Previously narrow German notions of personal investment, such as time deposits, changed radically, while the labor market and the tenets of Rhenish capitalism remained rigid.
A have-and-have-not society began to develop. By 1993, the number of poor households in Germany had risen to 13 percent of the population, according to the European Union's statistical agency, compared with 13.7 percent in the United States. In 1994, the income of German industrialists and entrepreneurs was three times that of salaried workers, compared with two times in 1980. Since 1991, while income from capital rose by two-fifths, salaries rose by only a tenth. Mercedes and Jaguar sales doubled as jobs disappeared, and in four years the number of deutsche mark millionaires increased by 24 percent. Taxes paid on non-wage income, essentially from personal investment, actually declined this year, underscoring the truth in the joke that tax accountants had replaced politicians, judges, and unions as holders of power in the country.
Encouraging the restructuring of German business, lowering the country's prohibitive labor costs, loosening its restrictive hiring rules, providing incentives for new capital investment -- things that both Schröder and Kohl say must be done -- mean, in the short term, reinforcing the rich-poor trend that goes against 50 years of consensus. The subtext is that the disparities will increase until the German social model evolves away from its old standards of equitable income distribution and its traditional programs of social protection. How will Germany, which once thought it could buy its way out of every social problem, cope? This question seems to worry Germans far more than the rise of a new extremist right, which this spring won seats in the Saxony-Anhalt state parliament, or the increasing numbers of young people who see no reason to block radical parties from public affairs.
Now 54 and part of the generation troubled by this change, Schr"der has many of the emotional and political credentials to move the country. He grew up poor. His father, whom he never saw, was killed in World War II; his mother cleaned British army barracks in Lower Saxony to support Schröder and his four sisters. His biographers, Bela Anda and Rolf Kleine, tell of Schröder's picking turnips for spare change and talking repossession men out of searching the family house by saying there was nothing in it worth seizing. At 13, he flunked a test to become a railway apprentice and left school a year later to sell dishes from a market stall.
Politics came with night school and a law degree. Schröder always had a nose for opportunity, and his rough background provided instant working-class legitimacy. In the late 1970s, he became leader of the Social Democrats' youth organization, riding the antinuclear, anti-American sentiment in West Germany against the missile deployments. Five years later, he visited Fidel Castro and Erich Honecker during his first failed attempt to win Lower Saxony for the Social Democrats in 1987. After his election as minister-president in 1991, he voted against enabling legislation for German unification, explaining that the costs were too great. His biographers said people in his neighborhood election district soon found him such a changeling, so chummy with big business, so openly opportunist that they refused to put up posters for him when he ran again. Schröder, divorced three times, married once more after leaving his wife of 16 years in 1996. His popularity ratings fell by half but turned around in four weeks. He seemed too charming, too emblematic of his times for Germany to stay angry with him for long.
NO POLICIES? NO PROBLEM
As a Social Democrat, Schröder seldom suggests that the conversion he insists the country requires will cause pain. Voters who grew up in a world where all was entitlement and guarantee get reassuring references to his mother's pension, the "you-know-me" verbal nudges of a Social Democratic candidate sworn to social justice. The closest Schröder has come to pointing to how much Germany must change is saying that in 15 years "only half of those in the German economy will benefit from a secure full-time job." Obviously, the phrase is no campaign slogan. Most of the talk instead is of new technology (Germany ranks fourth among the g-8 countries in research expenditures), less bureaucracy, and a new risk-taking business culture. "The SPD," he says, "has published a report breaking with the very statist social democratic attitude and calling for initiative and autonomy. Public opinion has yet to take on this change that shows how we've understood that the omnipotent and interventionist state doesn't have its place in the current circumstances."
But what policy comes in its stead? The SPD has said it will not lower corporate taxes and that it wants to increase family allowances, reinstate a tax on wealth, reverse reductions in sick pay, and restrict facilities given middle-sized employers to cut staff. As for interventionism, Schröder directed the government of Lower Saxony to buy the Preussag steel concern last year when he said it was going to fall under Austrian control. His state's per capita debt has been the highest in the country since he took office. This is more Clement Attlee than Tony Blair.
KOHL IN WINTER
In public, Schröder treats Kohl with stagy respect, mentioning his international successes as if they occurred a millennium ago while shading them with current unemployment figures and enough irony to remove any discomfort from the idea that the country should send the old retainer into retirement.
In fact, Kohl could not have created better circumstances for an opponent. Beyond his broken promises to bring unemployment down to American levels and to turn eastern Germany into an economic wonderland, the Kohl of the late 1990s seems not quite in touch with Germany's daily problems. The statesman of the summit years seemed to have forgotten how to function on the plains. Last year, the SPD succeeded in blocking the tax reform package that Kohl's Christian Democrats said was key to German revival. Kohl then wrapped himself in the creation of the euro, perhaps the last of his historic achievements, but not one for which the Germans have any special affection. The Christian Democrats squabbled continuously over whether Kohl should be replaced as their candidate by Wolfgang Schäuble, the party's Bundestag chief. The pettiness of the infighting made the last half of the incumbent's 16th year in power seem an inelegant coda on an epochal career.
Kohl says that Schröder has no foreign policy competence, but Schröder replies that of all the changes he would make as chancellor, the least would be in Germany's foreign relations. Yes, he said, he has been wrong before on foreign policy; last year, he savaged Iraq and Saddam Hussein without any particular prompting during the Persian Gulf buildup. The one hint of an innovative international approach came in November, when Schr"der told me a British-German-French "triangle" might better suit Europe's leadership needs than the eternal French-German relationship, which he believed had an obligatory feel to it. By summer, the "triangle" reference had been dropped. It seemed too hard-edged and a trace anti-French. Schröder felt so close to power that he fled even the vaguest policy initiatives like old girlfriends or crazy uncles. Of course, he was worried about right-wing youth extremism, but it was not to be dramatized; indeed, he would give full support to the euro, which he once doubted, but not so that it could become a means for one country's trying to undercut another with tax advantages or lower social costs. The voice could have been Kohl's.
Germany's party and electoral system would require a victorious Schröder to form a coalition government. The main possibilities are cooperation with the Greens, an ecological party of anti-NATO and leftist leanings with which Schröder formed governments for eight years in Lower Saxony, or a grand coalition with the Christian Democrats. Leading Greens and Christian Democrats say Schröder would probably prefer the grand coalition, which would lessen his obligations to Oskar Lafontaine, the old-left chairman of the SPD, and give him conservative cover for taking aim, if he chose, at some of the holy writ of the German model.
MAN FOR THE MOMENT
Germans are no longer interested in the sweeping foreign policy successes that have been a hallmark of Kohl's government. This election, then, marks a watershed in German politics. Gone are the times when every trace of German instability carried the sense of potential cataclysm -- a swerve to the Soviet orbit, a nationalist outburst -- with consequences for the Cold War. Kohl's probable successor would be Germany's first chancellor without direct experience in World War II and the early postwar period. Schr:oder, as he has made clear, feels that the concerns of German voters and Germany itself have left the summits and moved onto the plains.
He may have the best skills for the job. Stowing ideologies and dropping friends, he has spent a political lifetime reinventing himself, shading opinions, courting the media, shaping a persona to fit public moods. The man who once said the Soviet Union of Leonid Brezhnev appeared more intent on peace than the United States also claimed Perry Mason's television character inspired his career choice. To a new generation of Germans that sees the foreign policy problems the country faced under Kohl as largely a thing of the past, this seemed all of a piece. No matter what Schröder stood for, close to half of the 1998 electorate thought the Christian Democrats and the Social Democrats very much alike. There was nothing to indicate that 20 years of contradictions had hurt Schröder's popularity. In fact, their breadth, and his life's startling trajectory, make him seem almost comfortable with the vast task of converting the country's economy and readjusting its social system.
Converting the German model into what? Schröder may be elected without having made this clear. It is Germany's postwar achievement that, so far, this likelihood is no storm warning, just politics.