Handelsblatt Exclusive In Berlin, A War of Economic Words

Economics Minister Sigmar Gabriel wanted to make income inequality the central focus of a key policy document, Handelsblatt has learned. His coalition partners, and political rivals, believe he is using the document as a way to challenge Chancellor Angela Merkel in an election year.
Fighting about income inequality? (L to R) German Economics Minister Sigmar Gabriel, Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble at a budget debate in November.

An escalating dispute within Germany’s coalition government over the language used in its annual economic report has laid bare deep philosophical differences between the center-right Christian Democratic Union and their center-left partners, the Social Democrats, in the run-up to federal elections.

Every year, the German government publishes a report that broadly lays out its economic policy priorities. Normally, drafting the report is a staid bureaucratic process that attracts little public attention.

But the decision by Economics Minister Sigmar Gabriel, who is also head of the Social Democrats, to make income inequality a central focus of his draft version has sparked a fierce backlash from the coalition’s conservative budget hawks led by Finance Minister Wolfgang Schäuble, a member of Chancellor Angela Merkel's Christian Democratic Party, CDU.

There have been changes to the document. In the revised version previously clear statements have been watered down to bipartisan platitudes.

Christian Democrats object in particular to the title chosen by Mr. Gabriel: Towards Inclusive Growth and Societal Inclusion in Germany and Europe. Experts in Mr. Schäuble’s ministry say it sounds "too social democratic," according to sources in the government.

The coalition’s conservatives are concerned that Mr. Gabriel plans to use the report as a campaign platform to challenge Chancellor Merkel in the upcoming federal elections. Mr. Gabriel is Germany’s most senior Social Democrat and is widely expected to run as the party’s chancellor candidate.

Not to be outdone, the Christian Democrats have forced a series of revisions to Mr. Gabriel’s first draft of the report. In the revised version, obtained by Handelsblatt, previously clear statements about income and social inequality have been watered down to bipartisan platitudes.

In the first version, for example, Mr. Gabriel’s experts clearly stated that, “too high a degree of social inequality can put a brake on economic growth.” The new revised version, however, states that, “the exact relationship between income inequality and economic growth needs additional research.”

Social Democrats accuse their Christian Democratic "frenemies" of trying to whitewash the growing economic challenges that are posed by inequality in Germany.

Economists are divided on the issue. Marcel Fratzscher, head of the German Institute for Economic Research, has concluded that Germany is one of the must unequal economies in the industrialized world.

Others disagree with Mr. Fratzscher’s analysis and argue that after wealth is redistributed through social welfare programs, Germany actually ranks around the middle of the list when one looks at net income.

06 p7 Wages on the Rise-01

In fact, inequality in Germany did increase between 1995 and 2013, according to the federal government’s wealth and poverty report. The poorest 10 percent of the population saw gross hourly wages decline by 4 percent, while the wealthiest 10 percent saw incomes grow by 16 percent.

Both the International Monetary Fund, or IMF, and the Organization for Economic Cooperation and Development, or OECD, have identified income inequality as a major global problem as a rising tide of populism has swept Britain out of the European Union and Donald Trump into the White House.

The OECD, like Mr. Gabriel, has warned that widening income inequality actually slows economic growth overall. Both the IMF and the OECD have called for “inclusive growth” by taking advantage of low interest rates to boost public investment in education and infrastructure.

Mr. Gabriel shares this view and his ministry, in its original draft version of the annual economic report, called for Germany to “use the fiscal leeway, which has come about through low interest rates, for more investment and social inclusivity.”

The Christian Democrats, however, are concerned that additional spending would jeopardize the balanced budget achieved by Mr. Schäuble’s finance ministry, a first in decades. Mr. Schäuble regularly faces calls from his foreign counterparts at international financial summits to boost investments.

The German finance minister maintains that public investments have increased significantly over the past three years. There’s no shortage of money, he has said, but there is a lack of planning and capacity.

In the revised version of the report, Mr. Gabriel’s call to action has been recast as a feel-good pat on the back for the coalition government and Mr. Schäuble: “The past years have demonstrated that the consolidation of public budgets and additional investment and social inclusivity can go hand in hand.”

This war of words is not yet over. The government ministries can propose revisions to the draft report through the end of this week. The opposing factions within the coalition will then come together to resolve their differences and agree on a final version. Ms. Merkel and her cabinet are due to sign off on the document on January 25.

 

Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office.  Martin Greive is a correspondent covering financial issues from Berlin. To contact the authors: [email protected][email protected]