Cotransformation: The Case of Germany

Transformation studies have tended to deal with Eastern Europe as if it were a box, with fixed boundaries drawn during the Cold War. The West was present in this box, but only as a model of development and superior advisor for reforms. Transfers in the reverse direction, by contrast, and the question of whether and how changes in the postcommunist world influenced the West, have rarely been addressed. In the period after 1989, the winners of the Cold War felt so smugly superior (evident in book titles such as The West and the Rest) that learning from the East would have appeared sacrilegious.

Studying the European and global feedback effects of transformation also poses some serious hermeneutic problems: Although similar phenomena can be observed in Western as in Eastern Europe (such as neoliberal reform debates), direct causal connections cannot necessarily be inferred. Moreover, certain changes in Western Europe might be due to stimulation by an external, global source, such as the Washington Consensus. The distinction must also be made between loose connections, correlations (causal connections), and interdependence (necessary and mutual connections). The term “cotransformation,” then, is not advanced as a simple explanation but to signify links between the contemporary history of Eastern and Western Europe (and maybe extending to North America). It does so under the premise that “East” and “West” are not inflexible units and that the states and societies within these wider areas have diversified both in relation to each other and internally.

The cotransformation is especially intriguing in Germany. A number of towns in East Germany have become so prosperous and picture-perfect that they have prompted some observers (especially in the now run-down former industrial heartland of West Germany) to question the sense of the billions in transfer payments for East Germany. Poverty is not restricted to the East anymore; West Germany now has its own Rust Belt that looks almost as depressed as the former GDR in the 1990s. In short, the West has become partially like the East, and the East has become like the West. Overall, the countries lining the former Iron Curtain have undergone the most striking changes in the last twenty-five years. Is this due to the proximity to the formerly opposing Bloc countries—combined, in Germany, with unification in 1990? Have the reforms in Eastern Europe placed Sweden, Germany, and Austria under greater pressure to adjust to neoliberal economic and social policies?

These questions have methodological implications. Historical research into cultural transfers has now found plenty of examples to refute the earlier notion that systems, models, or ideas spread more or less unchanged from country to country.1 Neoliberalism is one example of a school of thought that ever more countries adapted rather than faithfully and rigidly adopted.2 Neoliberal “speech acts” played a crucial role in spreading neoliberal ideas. In public, and especially on the international stage, politicians such as Václav Klaus portrayed themselves as radical market liberals.3But the content of their acts varied depending on whether they were addressing national or international publics, and did not always reflect the policies they actually pursued. This underlines the need to integrate a more data-based social history with a more discursive cultural history approach.

The following section will start by analyzing the reception and discussion of the course and outcomes of postcommunist transformation by the public in the West, and especially in Germany. On the basis of its findings, it will go on to ask whether the reforms in East Central Europe and East Germany in particular contributed to the cotransformation of (former) West Germany. Three topics from recent German history will be spotlighted: the social and labor market reforms of 2001–5, the debate on “civil society,” and the role of politicians who come from the GDR, but have made their career in the transformed Germany. Time’s 2015 Person of the Year, Angela Merkel, is among them.

Social and Labor Market Reforms in Germany

In the first years after unification, influences from East Germany were simply not welcome in the former West Germany. A number of former GDR dissidents called for amendments to Germany’s constitution in order to carry over some elements of the democratic revolution to the West. But German chancellor Helmut Kohl, acting the Cold War victor, refused such demands point-blank. Still, the mood in Bonn was less triumphant than that in the United States, where Ronald Reagan, George H. W. Bush, and prominent intellectuals such as Milton Friedman and Francis Fukuyama consigned socialism to the scrap heap of history. The Kohl government simply would not be told how to shape the constitution, or the future of the country, by civil rights activists who had been campaigning for a “third way” between capitalism and socialism, or for a reformed and independent GDR, just one year previously. Consequently, unification was legally accomplished by the “accession” of the five “new German states,” pursuant to article 23 of (West) Germany’s basic law, rather than by drawing up a new constitution “on completion of unity”4 as had been envisioned under article 146. Furthermore, the (West) German government did not want any changes made in the economic sphere. The tradition of collective bargaining agreements, the strong position of the banks as shareholders in industry, and other elements of Rhineland capitalism were retained. In political and legal terms, German unification was the extension of the “old” Federal Republic of (West) Germany.

Expectations at first were that the former GDR would be quickly hauled up to the level of prosperous West Germany. This goal legitimized transfer payments of billions to the five new German states. But following a brief postunification boom, from which West German industry profited most, the first serious problems began to surface. Instead of the projected privatization revenues of six hundred billion German marks, the Treuhand trust agency incurred a loss of over 250 billion marks (amounting to around fifteen thousand marks per GDR citizen, or almost ten thousand US dollars at the time).5

Unemployment in the former GDR soared, placing a huge financial strain on the German labor office. The federal pension fund was also stretched to its limits by the many new clients in East Germany, and proliferation of early retirement programs. The public health insurance system struggled with the lack of contributions from the new German states and was obliged to regularly transfer funds to East Germany.6 Modernizing the former GDR’s decaying infrastructure devoured countless additional funds. In overall terms, then, the “Reconstruction East” (Aufbau Ost) program—which some observers have more aptly paraphrased as “Deconstruction East” (Abbau Ost)—and its social and political consequences created large deficits in the welfare state and national budget (see fig. 9.1).

Despite the country’s many fundamental problems, Helmut Kohl won the parliamentary elections of 1994. The electorate was not only rewarding Kohl for unification, but also responding to his party’s “red socks” campaign, which played on Cold War fears and warned of the dangers posed by a left-wing alliance. It was a genuinely conservative election campaign, promising to continue “Reconstruction East” in the five new German states and preserve the status quo in West Germany. The difficulties caused by transformation were thus duly externalized. The problems in East Germany were presented as problems of East Germany. They were personified by the metaphorical Jammerossi, the passive, complaining East German, who calls out for help from the West because he does not know how to help himself.

The mood turned in Kohl’s last years as chancellor. The problems in the former GDR had grown so acute that they were starting to hurt the west of the country, too. Doubts began to arise about the superiority of the West German system. Economists criticized government regulation of the economy, the close ties between German industry and banks, and the country’s high public expenditure. The employment offices could not cope with the level of unemployment in East Germany; social security contributions were steadily raised. Eventually, Chancellor Kohl’s government faced accusations of a “reform gridlock.” The language of transformation, with its fixation on reforms, had reached the former West Germany.

Fig. 9.1.  A faded sign in Magdeburg, April 2004. Photo: DPA/Landov.

Kohl’s main contender, the Social Democrat Gerhard Schröder, won the elections of 1998. It was clearly time for a change—like his role model Konrad Adenauer, Helmut Kohl had missed the right moment to step down—and Schröder’s promise of a “new center” (Neue Mitte)7 proved popular. Inspired by Tony Blair and “New Labour” in the United Kingdom, and in some respects Bill Clinton in the United States, it marked the first time in Germany that the old right-left political axis was sent spinning. This move of the Left to the center was a scenario familiar from Eastern Europe. The Polish, Hungarian, and Czech Social Democrats had achieved landslide election victories between 1993 and 1998 by distancing themselves from classically left-wing ideas. Schröder in turn declared he intended “not to do everything differently, but a lot better” and styled himself a man of action, who would combat unemployment with an “alliance for jobs.”8

In its first year in office, however, the SPD-Green coalition government was preoccupied with internal problems. A sudden rift with Oskar Lafontaine, a prominent representative of the SPD’s left wing, stunned the party. A short time later, it suffered an unexpected election defeat in the politically significant state of Hessen, where the Christian Democratic Union (CDU) had successfully waged a dirty campaign against dual citizenship—a symbol of the ongoing dispute over German national identity. In summer 1999, the government sustained a blow from abroad when the Economist described Germany as the “sick man of the euro” and listed the reasons for the country’s economic stagnation.9 This indirect comparison with the Ottoman Empire, which had been considered the “sick man of Europe” one hundred years earlier, ignited a widespread debate in Germany, which Schröder—the “media chancellor”—observed with vigilance. He subsequently charged his minister of employment and social affairs, Walter Riester, with reforming the German pension system. Riester, a high-ranking representative of the trade unions, was a clever choice: he had the best credentials for convincing workers of the need for social cuts (analogous to the popular, down-to-earth Solidarność activist Jacek Kuroń, who defended neoliberal reform policies in the same position in Poland). The pension system was in most urgent need of reform as the above-mentioned transfer payments to the former GDR had plunged it deep into the red.

The central element of the pension reform of 2000–2001 was the introduction of a capital-based pension scheme (dubbed the Riester-Rente) to supplement the government’s pay-as-you-go pensions, which were set to be reduced beginning in 2011.10 Pension cuts were part of the package. This unleashed a wave of protests, with trade unions and opposition politicians lambasting the government. The protests touched a weak spot of almost all neoliberal reforms: they went hand-in-hand with social cuts despite their claim of making existing systems more efficient and therefore affordable.

The transfer payments to East Germany were not the only grounds for the pension reform. In 1997, the contribution rate for state pensions had risen to over 20 percent, costing both employees and employers (who each paid half) additional billions. And the international hegemony of neoliberalism was at its zenith. The “new economy” boasted high growth rates, and stock prices climbed to record highs (though the attack on the World Trade Center soon brought the boom to an abrupt end). The time seemed ripe for a capital-based pension scheme in which contributions were invested on the stock exchange. (In the United States, where private pension schemes are common, the pitfalls of the system became painfully apparent after the stock market crash of 2008—many pensions were drastically reduced.) The insurance companies, which stood to make billions out of such a scheme, naturally promoted the idea.11 Their arguments were supported by contemporary doubts that the pay-as-you-go model, in which beneficiaries are paid out of the contemporary contribution pool, would stretch far enough. The latter system conflicted with neoliberalism’s principle of private ownership. Capital-based pensions, like life insurance plans, give contributors the sense of saving individually for their old age, but they are vulnerable to stock market fluctuations, not to mention crashes. And of course, having a contribution account at an insurance company is not the same as having private assets or a savings account.

As well as responding to global trends, policymakers in Germany and Sweden also took developments in Eastern Europe into account when debating the privatization of old age provision, hitherto a key responsibility of the welfare state. Most postcommunist countries had introduced privately financed components to their pension systems in the late nineties. The first to do so had been Latvia, which passed legislation on capital-based pensions in 1995, in response to the deep economic crisis following independence. Unemployment was so high that there was only one contributor to every one-and-a-half pensioners. To prevent pension contributions and tax subsidies from going through the roof, Latvia also raised the age of retirement.12 This measure encountered the greatest resistance (as it did in Germany some years later). Few Latvians could afford to pay into a private insurance scheme and many did not know what to make of the pension fund. Yet despite the protests and various hitches delaying its introduction, after a few years the reform was generally deemed a success.

An interesting aspect of the Latvian case is its close connection with the Swedish pension reform, the foundations of which were laid by the parliament in Stockholm in 1994.13 Swedish economists were very active in the Baltic states, where they advised neoliberal reforms. In the late nineties, however, the dynamic reversed. The system changes in Latvia and Estonia showed Sweden’s reformers that they were on the right path. Developments converged in 1998, when Sweden and Estonia simultaneously introduced a “three-pillar system” (the word “pillar” suggesting unshakeable stability) to play a key role in privately financed old-age provision. A short time later, Poland followed suit.

A dazzling impression of the brave new world of private pensions is conveyed by the Estonian pension scheme’s slickly designed website, which is also accessible in English and Russian.14 At the push of a button, potential pensioners can check how meager their state pensions will be. (As in many Western European industrial nations, these are derived from two sources: a contribution-based fund and tax subsidies.) By far the largest link in the header leads to the Baltic stock exchange index, Nasdaq QMX—a name that calls to mind high-octane business and the riches of Manhattan. A click on this link reveals flashing charts and examples of stocks one could invest in. This site makes German or French pension scheme information look as dry as dust.

In relation to these trends in East Central Europe, as well as on a global level, Germany was a latecomer to pension reform and privatization. But supposed backwardness can sometimes be an advantage. When the Wall Street stock market crashed in 2008, dragging the retirement funds of millions of Americans with it, German pensioners were able to observe from a safe distance. Being more closely linked to wages and salaries, their pensions were not as vulnerable to stock-market vagaries (though Americans are currently enjoying rising stock market prices again).

After the pension system, Germany reformed its labor market in 2003–5. The reforms (formally divided into four legislative packages, known as “Hartz I–IV”) were modeled on Blairite policies and involved even deeper cuts in the welfare state and social security system. Prior to the reform, most benefits had been calculated according to the amount of contributions previously paid into the social security systems. Contributors had a legal claim to these payments. For twelve months, unemployed people received at least 60 percent of their previous net wage (68 percent until 1982; 63 percent until 1993). This initial phase of unemployment benefit was known as Arbeitslosengeld. Subsequently, beneficiaries were entitled to a reduced payment (Arbeitslosenhilfe), also aligned to their previous labor income, for an indefinite period. By today’s standards, social benefits in Germany were generous.

The Hartz reforms de facto abolished Arbeitslosenhilfe and replaced it with Arbeitslosengeld II. Rather than relating to previous wages, payments under this system (technically termed Lohnersatzleistung—“wage-replacement benefits”) were calculated according to the claimants’ current situations, incomes, and assets. Municipal social assistance was traditionally allocated in a similar way, to satisfy the beneficiaries’ most basic needs. Now skilled workers, craftspeople, and many others who had fallen into long-term unemployment had to prove how poor they were in order to claim state benefits. It was a humiliating experience that conflicted with the popular understanding of the welfare state. (Sozialstaat, as the welfare state is known in German, has deeper implications than the English equivalent, including a social claim to a caring government, and acts as a point of identification among the public.) Arbeitslosengeld II, better known in Germany as “Hartz IV,” is only paid to those who have used up their savings (down to a minimal personal allowance). It is possible, then, for individuals who paid social security contributions for several decades before becoming unemployed to be refused benefits because they still possess some personal assets. Unemployment thus became synonymous with deprivation. Affecting over four million people (plus their dependent family members) in the years 1997–99 and 2002–6, it was a problem confronting a substantial part of German society.

The basic premise of these reforms was that the prospect of losing all one’s assets would motivate the unemployed to become more active and flexible. Tony Blair’s slogan “welfare to work” put the principle in a nutshell.15 The carrot-and-stick approach (promoted in Germany as Fördern und Fordern—support and demand, or give and take) was designed with a new idea of man (and woman) in mind. Citizens were expected to be autonomous subjects who took active control of their lives. By this logic, their freedom—a key concept in reform legislation—was coupled with an obligation to assume responsibility for themselves and the general good. In keeping with this conception, it was presumed that the unemployed would make rational choices in favor of badly paid jobs over the Hartz IV rate of benefits (€331 per month in East Germany or €345 in West Germany in 2004). In fact, unemployment was to be completely banished. In the new parlance, people were either employed or “jobseekers” (Arbeitssuchende).16 One aspect the policymakers forgot to consider was the number among the population, including single mothers and those caring for sick relatives, who were not in any position to act as homo economicus.

The stringency with which Hartz IV was applied elicited furious criticisms and protests. Under the previous unemployment regulations, it had been relatively easy to turn down a position on grounds of overqualification or unreasonable distance. But the new legislation demanded that jobseekers accept whatever the employment agency offered them, even if it was a “one-euro job.” Officially termed Arbeitsgelegenheit mit Mehraufwandsentschädigung (literally, “work opportunities with additional expenses compensation”), these were mostly community services that beneficiaries performed for one euro per hour in addition to their Hartz IV income. Soon, legions of frustrated one-euro jobbers were trailing through the parks of Berlin, collecting litter and the city’s notorious piles of dog dirt. Anyone who refused to report for duty or attend training courses as instructed risked immediate cuts in their benefits. Another highly unpopular innovation was the deduction of spouses’ earnings from calculations of potential beneficiaries’ “need.” Couples tried to circumvent this by sham separations, but faced the possibility of a visit from an inspector, checking for two toothbrushes in the bathroom or other evidence of cohabitation. It was a paradoxical situation: individuals were treated as subordinates, subjected to authoritarian monitoring, at the same time as being encouraged to be free and flexible citizens and take control of their destinies. In the former GDR, especially, the chances of finding new employment were exceedingly slim, with thirty-six jobseekers contending for each vacancy around the time that Hartz IV was introduced. Residents of Leipzig even revived the revolutionary tradition of Monday Demonstrations, much to the chagrin of Chancellor Schröder, who condemned it as an abuse of history (see fig. 9.2).

Fig. 9.2.  Mass protests against Hartz IV in Leipzig, August 16, 2004. Photo: ullstein bild / snapshot photography / Tobias Selliger.

The Hartz laws also included provisions facilitating the founding of Ich-AG (the equivalent of “Me, Inc.”), a program to smooth the path to self-employment (at the cost of inferior social security), and the creation of a low-wage sector (Niedriglohnsektor). The relatively high wages in Germany were seen to have become a deterrent to industry. In transformation-era Berlin this problem was evident in many of the city’s major construction sites. The government district and the new Potsdamer Platz (an area where the Berlin Wall had degraded the city in the worst possible way), for instance, were built largely by foreign subcontractors. Often the architects and the site managers were the only German-speakers. The many British, Italian, or Portuguese construction workers were obviously prepared to work for lower pay than the locals. But it was the “cheap competition” from Eastern Europe that featured most prominently in public debates.

The low-pay sector created by the Hartz reforms worked on the principle that the state added to (aufstocken) benefits under Hartz IV for recipients who pursued a regular occupation (and who were consequently known as Aufstocker). Internationally, demands had long been voiced for a “negative income tax” whereby governments would raise the income of the working poor by providing tax subsidies. One of the most prominent supporters of a state-subsidized low-pay sector was Milton Friedman—surprisingly, as the state bureaucracy it required contradicted the neoliberal goal of minimizing government. In the 1980s, several US Rust Belt states had conducted trials of the low-pay sector model on the initiative of the Chicago School.17 But every one of the trials was aborted when it emerged that employers stopped creating regular jobs in these circumstances, and that the unemployed who were now earning again frequently contented themselves with their topped-up incomes instead of looking for new and better jobs. These unintended side effects apparently did not deter Germany’s reformers.

Why not? One answer lies in German society’s traditional confidence in a strong state, which, paradoxically, was needed to push through neoliberal reforms. Another answer can be found in Eastern Europe: while currency union caused wages and salaries in the former GDR to rise several times higher than those in neighboring Poland and the Czech Republic, Hartz IV lowered them back to the same level. Admittedly, this comparison is somewhat imbalanced, as Hartz IV beneficiaries could apply for a number of additional subsidies, such as accommodation allowance. Few received the minimum rate only, but up to a maximum of €651 for single people and €1,251 for families18. However, the topping-up system made cheaper German labor available, and reduced the incentives for German companies to employ Eastern Europeans (something already subject to a number of restrictions under the treaties regulating EU expansion, more on which in chapter 10) or relocate production to Eastern Europe. In summary, after upward alignment—the strategy in 1990—had failed, Germany tried downward alignment by means of the labor market reforms and the establishment of a low-pay sector.

The reality of the postcommunist world had caught up with unified Germany. It hit the former GDR especially hard, bringing social cuts and high unemployment. This is reflected in the statistics on social inequality, which grew considerably after the introduction of reforms. The Gini index, cited above in chapter 5, rose from 25 in 2001—roughly comparable to Scandinavian welfare states—to 30.4 in 2007, exceeding Slovakia and Hungary. Bear in mind, however, that the standard of living in Germany was still far higher. Poverty in rich industrial countries is always relativized by local wealth.

Officially, average incomes in Germany’s eastern neighbor countries did not influence Hartz IV rates. But it was certainly no coincidence that the largest labor market reform in Germany was introduced almost simultaneously with European Union enlargement (which took place on May 1, 2004, but had been resolved at the Copenhagen summit in late 2002). When the SPD-Green government implemented its reforms, it was known that the citizens of the new EU member states would be entitled to settle in Germany by 2011 at the latest (after completion of the seven-year interim period). After the Hartz IV reforms, Germany’s eastern neighbors no longer had a competitive advantage in terms of labor costs, at least not over the 1.3 million working poor topping up their benefits.19 The “cheap competition” (Billigkonkurrenz), a derogatory stereotype used to describe employees from Eastern Europe, could now be found within the country.

An inherent problem seems to have been thereby overlooked: When individuals can be employed so cheaply, there is little incentive to create regular, better-paid positions or to adhere to collective bargaining agreements. Entire branches of industry have become Hartz IV sectors. One example is the call center business, into which the state paid 36 million euros in wage subsidies in 2013.20 Another problem is temporary work: A number of firms no longer supplement their own workforce if their commissions increase but turn to temporary employment agencies. They operate on the principle of maximum flexibility and minimum pay, combined with agency charges. Here, too, a kind of downward alignment has taken place. Short-term employment contracts are now the norm in Poland, in turn rendering temporary employment agencies superfluous.

Comparison with Eastern Europe reveals another commonality between the SPD-Green social reforms in Germany and the neoliberal reforms that were implemented in the early nineties in Poland and the Czech Republic: the manner in which they were communicated by politics. Gerhard Schröder presented his “Agenda 2010” using an apodictic rhetoric, never failing to point out that the reforms were either “necessary,” “unavoidable,” “inescapable,” or “the only alternative”—period. His reputation for blocking any further discussion earned him the nickname of the “that’s that chancellor” (Basta-Kanzler). It is hardly likely that Schröder, a former radical and leader of the SPD youth organization, copied his rhetoric from the similarly unequivocal Margaret Thatcher.21 He was more inspired by Tony Blair, who often pursued as hard a line as Thatcher, but cloaked it in affability. A second element of SPD-Green rhetoric was the use of progress-related terms such as “modern age,” “modernization,” “innovation,” “new departure,” and the all-important “future.” These terms implied that the opponents of reforms (again, as in the early nineties in East Central Europe) were fusty, blockheaded reactionaries. The dialectical construct of old versus new, nostalgic versus progressive, was one of the key mechanisms of neoliberal reform discourse.

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