Angela Merkel’s chancellorship is ending. It is time for an evaluation. She has ruled Germany since 2005. After the election in September 2017 she began her fourth term, yet in October 2018, she abdicated as the chairman of her political party, the CDU (Christian Democratic Union). She indicated that she may resign also from the chancellorship and make room for a successor. Meanwhile, Merkel has received very benevolent treatment from the media, as she is the first female chancellor of Germany, and has earned additional sympathy because she grew up in the Eastern part of the country when it was under Soviet rule and a socialist economy. But her legacy is mixed. On the surface, her achievements seem impressive. Yet a closer look behind at the performance of the German economy reveals that she excelled at the art of deception.

Macroeconomic Performance

During her time at the helm, the German economy has shown a formidable macroeconomic performance, first, with employment. After a rise in unemployment from 1975 to 2005, which lifted the unemployment rate from 1 percent to over 10 percent, the rate declined during Merkel’s time in office and has come down to 3.3 percent as of the end of 2018.

Figure 1: Germany. Official unemployment rate, 1950–2018

The decline of the unemployment came along with an expanding workforce and a rise of the labor participation rate. Under Merkel’s chancellorship, the German economy experienced a swift recovery of the crisis of 2008 and after 2010 could register steady annual growth rates of around 2 percent. After the period of weak growth before the crisis of 2008 and the turbulence during the financial crisis, the German economy moved back to its long-term growth trend.

Stability of the price level was another mark of the German economy during Merkel’s chancellorship although Germany is part of the eurozone, and the European Central Bank gets the final say in monetary decisions. Nevertheless, price-level stability serves as a criterion for the economic performance of a national government, and most of the period of Chancellor Merkel’s time in office, Germany’s core inflation rate has oscillated within the small range of between 1 and 2 percent annually over her years in office.

The main support of the growth performance of the German economy, not much different from what happened in the United States, came from the low interest rates that the European central bank had implemented after the 2008 financial crisis.

Figure 2: Germany. Economic growth (annual growth rate of the gross domestic product) and policy rate of the European Central Bank (ECB), 2008-2018

The German economy has always been a top export performer and held its rank among the main three export economies along with the United States and China during Merkel’s time in office. In contrast to the United States, however, which imports more than it exports, Germany has become the world champion as the largest net exporter in 2017 with a trade surplus that outperforms that of China. The government praises this achievement and ignores that persistent trade surpluses are as problematic as persistent deficits and that high export surpluses reflect low investments relative to domestic savings.

During Merkel’s chancellorship, Germany’s public debt burden stopped to grow. While America’s debt quotient rose from 60 percent before the 2008 financial crisis to a current level of 105 percent, Germany’s debt quotient, which stood around 65 percent at the time when Merkel took office stands now at 64 percent.

The Other Side of the Coin

The good side of Merkel’s time in office are not of her making. They result from the policies of her predecessor, and the low-interest rate policy of the European Central Bank. The crises at the Southern fringe of the eurozone have kept the exchange rate of the euro down and boosted Germany’s international competitiveness. The low public debt burden is not the result of curbing social spending but of lower public investment in the country’s infrastructure.

Nor does Merkel deserve credit for the decline of the German unemployment rate that occurred during her time in office. It was her predecessor, Gerhard Schröder (chancellor from 1998 to 2005) who put the reforms in place that would reduce unemployment. He achieved the almost impossible task of bringing the trade unions on board and to get the measures through the parliament.

Schröder’s reforms, summarized as “Hartz IV”in Germany, managed a profound reform of the German labor market and put limits on access to welfare programs. The reform laws passed parliament in 2003 and became effective in January 2005. In September of the same year, Angela Merkel became chancellor after defeating Gerhard Schröder in the general elections — just in time to take the credit for what her predecessor had achieved.

Merkel did not go on with the reforms of the excessive welfare state. She scaled back Schröder’s reforms of early-retirement policies and introduced, for the first time in German history, minimum wage laws. In 2010, in an emotional reaction to the Fukushima nuclear accident in Japan, she pushed through the decision to exit nuclear power in Germany as early as until 2020. It will be after Merkel’s time in office, when the costs of this decision will show up.

Crisis Management

Merkel’s time in office witnessed three big crises: the international financial crisis of 2008, the Greek debt crisis, which began in 2010, and the migration crisis of 2013. During the financial crisis of 2018, she left the practical work to the European Central Bank which brought down rates the same way as the Federal Reserve in the United States. Her part of the crisis management existed in moral persuasion. She could convince the public that bank deposits were safe and helped to prevent a bank run.

In the Greek debt crisis, the role of the German government was calamitous. When the euro-member Greece ran into difficulties of paying its debt, she did not follow the rules laid down by the Treaty of the European Union that each member state holds individual responsibility for its public debt. Instead, Chancellor Merkel and her Finance Minister Wolfgang Schäuble announced a half-hearted bailout promise. With this move, the German government did not clarify its true position but added to the confusion. As a result, the crisis became a tragedy. The fact that the Greek government had: first, cheated about the fiscal conditions when the country applied for euro membership; second, that the Greek government took careless advantage of the privileges that came with the euro membership; and third, that it was up to Greece itself to clear the mess with its public finances, became so blurred that in the end the blame for the Greek debt crisis fell on Germany’s unwillingness to finance a full bailout.

Merkel’s handling of the migration crisis in 2015 shows a similar pattern. She proclaimed a national duty to save the refugees from a conflict which was not Germany’s responsibility. She also did not recognize that a national welfare state and the welcoming of millions of foreign refugees do not go well together. Merkel deceived the Germans with her claim “we can make it” when in fact she should have asked her people: "Do you want to harbor millions of immigrants or maintain your welfare state?" It is no surprise that this policy has weakened the traditional mainline parties and instigated the rise of radical parties.

Legacy

The legacy of Angela Merkel as chancellor of Germany is mixed. She may call herself lucky for the performance of the German economy during the time of her rule. She failed as a crisis manager and has changed the political landscape of her country to the worse. During her time in office the parties at the extreme ends of the political spectrum have risen in importance. With her policy, she has sped up the decline of her own party and that of her coalition partner, the Social Democratic Party (SPD).

The political system, once centered in a few main parties, is now fragmented. In the latest general election of September 2017, the share of Merkel’s government coalition partner, the Social Democratic Party of Germany, declined to 20.5 percent and Merkel’s own party union, the Christian Democratic Union and its Bavarian branch fell to 32.2 percent. Extreme parties of both the Left and the Right fringe are on the rise. The “Alterative for Germany” (AfD), which showed up for the first time in a national election, gained a share of 12.6 percent, while the far-left party (Die Linke), which traces its roots back to the Communist party in the former East Germany, received 9.2 percent of the votes.

Angela Merkel’s popularity, which only recently is on the decline, was based on delusions. She took credit for the falling unemployment which was not her achievement. Instead of maintaining the momentum of her predecessor and move on with the urgent reforms of the overblown German welfare state, she has promoted the illusion that no reforms are necessary and that one may expand the social state. She introduced a policy of minimum wage and thus hampered the integration of the immigrants whom she welcomed. In a move more led by emotion than rational considerations, she started Germany’s hasty exit from nuclear power. She bears a considerable share of responsibility for the growing disunity among the member states of the European Union. With her demand to distribute the refugees whom she had welcomed to Germany across the European member states, she has inadvertently contributed to the Brexit vote of the United Kingdom and to the rise of nationalist movements and authoritarian governments in Eastern Europe. It remains to be seen whether the low unemployment will last when the central banks will tighten money. But even without an increase of the interest rates, Germany’s unemployment will rise when the export boom ends. Then the true costs of Merkel’s policies will become evident.