Summary: Germany under its last emperor Wilhelm II strived to become a world power and ultimately failed. Today’s Germany, while dispensing with the empire’s militarism, is more successful: it is dominating Europe, due to its economic weight. Germany’s dominance is increased through its unnecessarily high external surpluses. These benefit only Germany’s industrial elite, which is propagating an ideology designed to make the average German believe that the surpluses are serving him as well. They do not.
This year marks the centennial of World War I and of the end of the German Empire.
The last three decades of this empire were shaped by what came to be called Wilhelminism, after emperor Wilhelm II, who ascended the throne in 1888. The term Wilhelminism has a negative connotation today, partly because it stands for a militarism which in the final instance led to World War I and partly because of Wilhelm’s eccentric and unstable character. For example, a high-ranking member of the German Foreign Office, Friedrich von Holstein, called Wilhelm’s governing style already in 1894 an “Operetta Regime”.
Germany has changed massively since the empire. Nevertheless it can be shown, that the the current Berlin Republic, i.e. Germany since its unification in 1991, is characterized by a New Wilhelminisms, which is even more successful than the old one.
Germany’s power in Europe is greater than it has ever been in the empire. It exerts economic and political hegemony. Without Germany’s consent, nothing moves in Europe. Using gunboat diplomacy, the empire may have succeeded to exert the one or the other concession from other major powers in colonial matters. But today’s Germany dominates the fortunes of Europe.
Why is today’s Germany so successful? For one, because it has replaced the dysfunctional political system of the empire with a functioning one. This includes renouncing the empire’s endemic militarism, racism and anti-semitism by today’s official Germany.
External surpluses create power
The New Wilhelminism, however, does share with the old one the fact that it is based on Germany economic might. Between 1871 and 1913, i.e. the establishment of the empire and the last year before the outbreak of World War I, Germany’s economy grew by 2.7% annually, driven by the country’s industrialisation. Over the period mentioned, this led to a tripling of the economy.
Without its expanding economy, the empire’s policies of building a navy and of expanding its colonial empire would not have been feasible. It was also important, that, among the other major industrial powers, UK, France and United States, only the latter’s economy expanded more quickly than Germany’s. As a consequence, Germany became, in the years leading to World War I, the world second-biggest industrial power after the US and its second-biggest exporter after Britain.
In comparison, economic growth in the Berlin Republic averaged 1.6% annually during 1991-2016. This is less than during the empire and also less than the average annual growth in the European Union of 1.8%. But this somewhat slower growth does not matter much today, since Germany already is the largest economy in Europe. The economy of Britain, Europe’s next-biggest economy, is 30% smaller than Germany’s.
Globally, a different picture emerges. Here, Germany has the fourth-largest economy, trailing the US, China and Japan and is the third-largest exporter, surpassed by China and the US. So Germany’s economic position in Europe is stronger than during the empire, while its global position has become weaker, due to the emergence of Japan and China as industrial powers.
Crucially for its political influence, today’s Germany is running very high external external surpluses in its trade with Europe and the rest of the world. These surpluses reached 6.8% of GDP during 1991-2016. The surpluses turn Germany into a creditor vis-a-vis most other nations, which further increases its power.
Since Germany’s surpluses dampen growth of its trading partners, the German economy is growing more strongly since the financial crisis of 2008 than the European Union. Thus, average the annual GDP growth in Germany during 2008-16 was 1.1% in Germany but only 0.7% in the European Union.
The external balance of the German empire, on the other hand, was more or less balanced, as persistent deficits in merchandise trade were matched by surpluses in its trade in services and by profit transfers from abroad. Today, the empires chronic deficits in merchandise trade have turned into chronic surpluses – another sign that the New Wilhelminism is more successful than the old one.
Euro strengthens Germany’s dominance
Germany’s current economic might in Europe is made possible by a special irony of history: the introduction of the Euro in 1999. The creation of a common currency in Europe had been advanced by France’s president Francois Mitterrand in order to “tame” the reunified Germany.
The opposite has happened: the Euro is strengthening Germany’s dominance. Firstly, the common currency makes it impossible for the countries which have adopted it to reduce trade imbalances through currency devaluations. For Eurozone countries, the only ways to reduce trade imbalances is to either reduce economic and wage growth – or even reduce wages – which is politically much more painful. As a consequence, annual growth in the eurozone (excluding Germany) during 2008-16 was only 0.1%.
In addition, the countries having adopted the Euro don’t have their own central banks any more. Instead, monetary policy in being conducted by the European Central Bank (ECB), which, while nominally being responsible to all Euro countries, is dominated by Germany. This was demonstrated during the Greek debt crisis, when the ECB stopped providing liquidity to the Greek banks in order to force the Greek government to agree to a unduly harsh and partly counterproductive“ adjustment programme. Thereby the ECB did, upon German pressure, exactly the opposite for what it had been established.
Like the Eurozone, the German Empire was a currency union, having replaced the multitude of currencies which were in circulation in Germany before 1871 by the Mark. And like Europe today, the empire had a dominant member state – Prussia, whose share of two thirds in the population of the empire was much bigger than Germany’s 16% share in the population of the European Union.
But Prussia did not exploit its dominance to force the Reichsbank, the empire’s central bank, established in 1876, to exert pressure on the other member states of the empire. Instead, the Reichsbank sole endeavor was to ensure the stability of the currency. Even though the states of Bavaria, Saxony, Baden and Württemberg retained their own central banks, there are no reports of major conflicts between them and the Reichsbank.
Similarly as in the European Union, the empire’s currency union in the empire was preceded by a customs union. Already in 1834, the so-called German Customs Association was established, which included by 1866 almost all parts of the later empire. The resulting lowering of traffic barriers within Germany led to increased competition and differentiation between Germany’s regions. In the 1850s an industrial heartland was emerging in the Ruhr Valley, marked by iron producing industries using the region’s coal. Starting from the 1870s, other centers were emerging around new electrical and chemical industries. The higher wages in the Ruhr Valley, in Berlin and in other large cities attracted workers from agrarian areas in Germany’s South and especially East. In the years preceding World War I, every second German was living in a place different from his birthplace – so strong was migration within the empire.
In the US as well, migration from economically weak regions to strong regions is one of the main mechanisms to cushion the effects of differences in economic conditions between regions. Other such mechanisms are transfer payments from the federal budget, such as pensions, Medicaid, Medicare and food stamps.
The German empire knew similar payments, due to, among others, the introduction of a obligatory insurance against sickness in 1883 and of a pensions insurance in 1889, one of the first such schemes worldwide. And, as is well-known, these and other social transfer payments were further extended by Germany after World War II.
In the the European Union, on the other hand, there are no central transfer payments. Instead, EU member states have to finance these payments themselves. As economists familiar with conditions in the US, as Joseph Stiglitz, emphasize, this leads during economic crises in individual countries to the curtailment of transfer payments during times when they are most needed. On the other hand, Stiglitz stresses, the migration of workers within the European Union is curtailed by language and other cultural barriers and also not desirable, since it weakens the national identity of the countries the migrants are leaving.
Even so, internal migration is taking place within the European Union, with Germany by far the most favoured destination. In 2015 460,000 EU citizens were moving to Germany but only 84,000 to France and 64,000 to Italy. The center, Germany, is thereby getting ever stronger and the other regions ever weaker.
Manipulation through industrial elites
But Germany’s high external surpluses, which, as mentioned, are a major reason for its dominance in Europe, have a high price for Germany itself as well. For, every external surplus implies renouncing higher domestic consumption and investment. Thus, consumption in Germany during 1991-2016 increased by only 1.5% per year and investments by only 0.3%
So why the high external surpluses?
Because the elite owning and running Germany’s industry has succeeded to convince most people that the surpluses are good for Germany. If Germany’s industry warns that the country’s international competitiveness is in danger, wages and taxes are being reduced, social benefits cut and environmental standards weakened. Exports increase, since its costs are declining. Imports, on the other hand, are growing much more slowly than exports, since domestic demand is being weakened by the slowdown or even cuts in wages, transfer payments, government expenditures and investments. Germany’s industry does not mind – she just wants to bolster her profits, be it from export or domestic sales.
Everybody else has to foot the bill: workers, whose wages are depressed, Germany’s service sector, who is suffering from weak domestic demand, government, future generations, who will feel the consequences of low investments and Germany’s trading partners, whose demand and growth is siphoned of by the deficits to Germany.
How do Germany’s industrial elites succeed to deceive so many people?
Well, they have a lot of experience in these matters. Already during the empire, wages were growing more slowly than the economy because entrepreneurs successfully argued that higher wages would endanger their firms. However, during the empire the state tried to counterbalance low wage growth with the introduction of various social programs, such as the aforementioned sick and pension payments – the old Wilhelminism was, here too, less radical than the present one.
Second, by having established a unified organisation to represent its interests, Bundesverband der Deutschen Industrie (BDI), industrial companies are now speaking with one voice. By contrast, there were two competing industrial associations during the empire, the Centralverband Deutscher Industriellen, which was demanding protective tariffs, and the Bund der Industriellen, which opposed tariffs.
Thirdly, the industrial elite is manipulating Germany’s politicians with a carrot-and-stick tactic. On the one hand, they are threatening that a loss of international competitiveness would lead to a crisis marked by rising unemployment. On the other hand, politicians are well aware that their own power abroad, especially within the European Union, is enhanced by the high external surpluses caused by industry’s export drive. This creates a near-addiction of politicians from Germany’s industry.
A striking example is the chancellorship of Gerhard Schröder (1998-2005) and the cuts in social transfer payments implemented by his government under the innocuous title Agenda 2010. Adding insult to injury, Schröder was a Social Democrat; Agenda 2010 has led to to a decline in voter support for the Germany’s Social Democratic Party (SPD) which subsequently cost Schröder the chancellorship and which persists to the present day. Germany’s industrial elite has thus succeeded to kill two birds with one stone: orchestrating a cut in social transfer payments and weakening the SPD. The empire’s industrial elites could only dream of such achievements.
Fourth, and most importantly, Germany’s industrial elite is propagating an ideology which depicts its egoism as a service to the community and has succeeded to let a majority of the population believe in this ideology.
Also this ideology is not new. For example, at the time of its establishment in 1876, the name of the empire’s above-mentioned industry association Centralverband was Centralverband Deutscher Industrieller zur Beförderung und Wahrung nationaler Arbeit, which translates as Central Association of German Industrialists for the Promotion and Preservation of National Labour, signalling that the Centralverband was serving national interests. However, the name is unlikely to have had a great impact and was indeed later simplified.
In comparison, the weapons used by BDI are more effective. For the BDIs propaganda is arousing Germans’ pride of the export achievements of their Germany’s industry. The popularity of the slogan Exportweltmeister, or world export champion, bears witness to the success of BDI propaganda. The analogy to Fussballweltmeister, or world soccer champion, is no coincidence. Both terms satisfy the national psyche’s craving for international recognition, much like most Germans supported the naval buildup during the empire, which was supposed to assure Germany “a place in the sun”, i.e. a colonial empire, beside the established colonial powers Britain and France. To be sure, the expenses for the navy were wasted, since by the late 19th century, when the buildup started, it was already too late to build a serious colonial empire. And militarily, the German navy always remained inferior to Britain’s. It is similarly wasteful today to constrain domestic demand for the sake of external surpluses and to forgo investments for Germany’s future, from schools to care for the elderly.
Ideology of surplus
BDI and the other associations of capital owners in Germany also exercize a large – and harmful – influence on the reasoning about economic questions, both by the average German and by most politicians. The industrial and other economic elites are thinking about the economy like if it would be a company.
For a company to achieve profits, its revenues have to be higher than its expenses. This truism is turned by the industrial elite into a mantra for economic policy, by opposing any budget deficits, be it in Germany or individual EU member countries, and by advocating surpluses, including trade surpluses. (Interestingly, their criticism of deficits does not extend to the deficits of other countries in their trade with Germany).
As BDI itself surely knows, the analogy between a company’s and a nation’s accounts is wrong. Profits are surpluses only in company accounts. In national accounts, they are a form of income which can finance consumption and investment – in this case by companies and their owners.
But, as Upton Sinclair has told us, it is difficult to get a man to understand something, when his salary depends upon his not understanding it. Germany’s industry is benefitting from the ideology of surplus because the latter facilitates the acceptance of restrictive wage policies, high corporate profits and external surpluses.
There comes a point, however, when the ideology of surplus is also hurting German industry. This is when it is preventing the German and other EU governments to conduct countercyclical fiscal and monetary policies. This was the case during the recession caused by the 2008 financial crisis, which lasted longer in Europe than in the US because EU governments abstained from expansionary fiscal policies. German industry preferred to bite its teeth and endure the slowdown than to admit that the ideology of surplus was wrong. It was helped, however, by the fact that a considerable part of its sales are going to non-European customers.
The European Central Bank, on the other hand, has been running expansionary monetary policies after 2008, against the wishes of Germany. It seems therefore likely that the ECB extremely hard stance vis-a-vis Greece and other countries during the Euro crisis mentioned earlier was motivated by ECB president Draghi trying to mollify Germany for these expansionary policies conducted against its wishes.
The jobs argument
The standard response of the industrial elite to criticism is to claim credit for Germany’s low unemployment rate. The latter indeed amounted to only 3.6% in October 2017.
But, first, Germany’s low unemployment, inasmuch it is caused by its external surplus, is causing higher unemployment at its trading partners. For example, the average unemployment rate in the EU stood at 7.4% in October, and the rate of the Eurozone countries (except Germany) at 11.0%. The high rate in the Eurozone countries is also due to the adjustment programmes Greece, Spain and Cyprus were forced to adopt, with Germany as the driving force.
Second, one precondition for the low German rate is low wage growth, which increase corporate profits and social inequality. Third, Germany’s service sector could employ more people, if wages and domestic demand were higher. And fourth, the present structure of employment embodies a dangerous dependence from the main industrial export sectors. Here, the automobile sector has to be mentioned in the first place.
The latter holds, together with its suppliers, a 7.7% share in German GDP. This is why the government has so far done everything to keep the car industry happy, including delaying the introduction of stricter environmental protection standards by the European Union. As is well-known, this was still not enough for Volkswagen, Germany’s largest car company, so that it cheated in emissions tests for its cars in the US, Germany and other countries.
Furthermore, the car industry is confronted worldwide with extraordinary challenges regarding its future. These reach from the displacement of gasoline-powered engines by environment-friendly alternatives to the displacement of individual car ownership by car-sharing schemes and the transition to self-driving cars. The biggest risk for the today’s car producers is that they will become easily replaceable suppliers for the future firms managing mobility needs and that the cars themselves will become commodities. Germany’s car industry with its specialisation on petrol-driven premium cars is especially exposed to such a development.
So far, however, these risks have not yet materialised, so that Germany’s dominance in Europe is leading to the emergence of a dangerous character trait among its political and economic elites – hubris.
The clearest example of this hubris is Germany’s attitude towards Brexit, Britain’s announced withdrawal from the European Union on 29 March 2019. Led by Germany, the EU is treating Britain in the ongoing negotiations on the details and consequences of the withdrawal like an enemy defeated in a war. First, Britain was presented by the EU with a”divorce bill” of reportedly EUR 100 bn for its share in future EU projects and liabilities to which it had agreed while still a member.
This is a bit like a husband telling his estranged wife during divorce proceedings that he wants her to pay half the price of a house which they had ordered together, which will be completed in future, and which the husband will inhabit alone (or with his new companion). To underline its demand, the EU has told Britain that it will only start negotiations on future trade and other relations between Britain and the EU, once Britain had agreed to pay the divorce bill. This, in turn, is like if the husband in the above example was telling his wife that, before she does not agree to pay half the sum for his future house, he will not start talking to her about visiting arrangements for their joint children. In reality, of course, if the demands of one partner in a divorce are outrageous, the case will go to court which is likely to bring about a more fair arrangement. Indeed, it is Britain’s bad luck that there is no court in can turn to.
Pressed by Britain’s companies, especially in the financial sector, who want to know how they will be able to sell their products and services to the EU after Britain has left, Britain finally capitulated. In November 2017, Prime Minister Theresa May announced that Britain would accept the divorce bill. But now the EU says that a binding agreement on future trade relations can only be concluded once Britain has become a “third country”, i.e. has already left the EU.
This shows that the EU’s earlier promise to start negotiations on future relations once Britain has accepted the divorce bill was insincere and that it is not negotiating in good faith.
Moreover, the EU has made it clear, that it will not agree to Britain’s demand for free mutual market access for both goods and services once it had left the EU. The EU presents Britain with only two alternatives: either market access only for goods – and not for the services which are Britain’s most competitive sector – or agreeing on an association agreement which involves Britain having to accept migrants and refugees from the EU as well as decisions by the European court of justice, both of which are anathema for the British government. In addition the EU has let it known that British asset management companies will have to follow EU rules, including limits on bonus payments if they will want to sell their products in the EU.
Britain would like a two-year transition period starting after the formal end of its membership in March 2019 to give time to its companies to prepare for life after Brexit. The EU has responded that a transition period could only last until end-2020 and has stressed that Britain would have to obey all EU rules and pay its full membership fees to the EU during this transition period, without being allowed to participate in EU decisions.
If someone was entrusted to put together a set of demands which puts Britain in the most difficult situation possible, he could not have come up with better ones.
The sector hit most by the EU position is London’s financial sector, which is the crown jewel of Britain’s economy. It is no coincidence that the city which would profit most from the transfer of banking operations from the City of London to the continent is – Frankfurt, followed by Paris. However, despite the competition between Paris and London as a location for banks, France’s acquiescence to Germany’s hard Brexit stance seems to be motivated mainly by its desire not to irritate Germany for the sake of a question which is not essential for France. French president Macron has his own policy projects, such as creating an EU finance ministry and a Eurozone parliament, for which he will need German support.
Merkel is charting the course
We know that Germany is behind the EU’s hard Brexit course at latest since last June, when German chancellor Angela Merkel has declared: “For me, the shaping of the future of the 27 member states has priority also before the negotiations with Britain on the exit.” In a speech held last November – significantly at the annual conference of the association of German employer organisations in Berlin – the EU’s chief Brexit negotiator, Michel Barnier changed Merkel’s above quote (without acknowledging the change) into: “The future of the EU is more important than Brexit”, to justify the EU’s hard stance towards Britain. Currying favour with his audience, Barnier peppered his speech, which otherwise was held in French, with the newly created and nationalistic German term “Heimatmarkt” (homeland market) to highlight the acceptance of the EU’s domestic market by German companies.
But the non-economic aspects seem to be more important in explaining the harsh stance vis-a-vis Britain. For the EU is putting pressure on Britain even in those areas, such as the length of the transition period, where this benefits nobody.
For one, because toughness vis-a-vis other countries is popular among the German electorate. This was the case during the negotiations with Greece on new credit lines and is the case with Brexit today. In line with policies, the language used is also changing. For example, BDI-chief Joachim Lang said in October: “The British government is talking a lot but has not shown to have a clear concept.“ The other non-economic reason for harshness vis-a-vis Britain is simply hubris, the satisfaction to be in such a strong position as to afford to humiliate the other.
Inevitably, the scene of the proclamation of Wilhelm I in 1871 as German emperor comes to mind, which happened, of all places, in the mirror hall of Versailles castle, in the heart of France, which had just been vanquished by Prussia. France paid back the humiliation almost 50 years later, when the negotiations on a peace treaty at the end of World War I took place in the same hall.
At those negotiations, France, with British support, pushed for a hard peace, marked by high German reparation payments. Originally, Britain’s premier Lloyd George had supported the conciliatory approach of US president Wilson but had then adopted the hard line of France’s president Clemenceau, due to approaching elections in Britain and because he new that toughness vis-a-vis Germany was popular. George won the elections.
Then France with Britain’s consent against Germany, today Germany with France’s consent against Britain. Did no one learn anything from history? What sense does it have to make life after Brexit difficult for Britain? Does Europe, does Germany, do our friends from BDI think that an unstable Britain is in their interest?
The words come to mind which Wilhelm II told in 1897 to his generals: “You all don’t know anything. Only I know something, only I decide”. Has the New Wilhelminism reached the same degree of hubris?
To summarize: Germany’s enormous external surpluses benefit only a small elite, consisting of the owners and top managers if industrial firms. Apart from this, they hurt everyone else: German workers, the German service sector, future German generations and Germany’s trading partners. They also hurt the German government, which is increasingly perceived as unreasonable and aggressive, and the EU, which more and more is looking to be as dysfunctional in solving its internal problems, as the German empire was.
It is telling that in Germany, the land of the Exportweltmeister, the parties of the political center, Ms. Merkel’s CDU, the latter’s Bavarian sister party CSU and the Social Democrats (SPD) lost 14% of votes during the last parliamentary elections of last September. These votes went to parties further on the left and right. If Mrs. Merkel will agree on a coalition or on silent support of her government by the SPD, the far-right AfD will become Germany’s main opposition party. These changes in Germany’s political landscape are a classic sign of voter dissatisfaction.
There are similar developments all over Europe and also separatist tendencies, from Catalonia to Scotland, have gained ground. Is it not strange that everybody is dissatisfied, the Germans as well as those dominated by them? This can only be explained if we recognize that the New Wilhelminism is only benefitting a small elite in Germany.
Liberation of thinking
What can be done?
First, Germany’s public and its political class need to free themselves from manipulation by the industrial elite and renounce the export ideology.
Once this happens, concrete measures will become possible. One such measures should be a tax reform which reduces taxes for the population and increases taxes for industry. This would hit the least competitive part of Germany’s industry, which would reduce exports, while imports would rise due to increased consumption made possible by higher net incomes. Increased consumption would also benefit Germany’s service sector and stimulate the economies of Germany’s trading partners.
Abandoning the export ideology would also pave the way for making expansionary fiscal and monetary policies possible in time before the next downturn arrives.
Finally, in Germany’s relations with other EU countries, including Britain, the present climate of confrontation should be replaced by a spirit of cooperation. Partly, this would come about by itself, once Germany’s external surplus declines.
The German empire can serve as a positive example: even though Prussia had a dominant economic weight in the empire, even more so than Germany within the EU, it was always trying to keep the smaller member states of the empire happy, by listening to their needs when formulating policies which affected them. This considerate policy stance was developed by the empire’s first chancellor, Bismarck, after assuming office in 1871, long before the reign of Wilhelm II.
Germany should use the occasion of the centenary of the downfall of the empire in 1918 to follow Bismarck’s example.