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The writer is an FT contributing editor and writes the Chartbook newsletter
Germany finds itself in a state of anxiety with two pressing issues dominating headlines: economic stagnation and the alarming rise in support for the far-right Alternative for Germany (AfD) party, which currently outpolls each of the three governing parties with approximately 22% of the vote. While economic concerns and political developments may seem unrelated, they are intertwined by the politics surrounding population and public investment.
Germany’s economic outlook has been clouded by various factors. The shock of rising energy prices has had a significant impact, and the slowdown in China has negatively affected German exports. However, the fundamental reason behind Germany’s economic challenges lies with the exhaustion of the growth model initiated by the welfare and labor market policies implemented by the previous SPD-Green-led government. The Hartz IV reforms, which reduced support for the long-term unemployed and promoted low-wage work, led to an “industrious revolution” rather than investment or productivity increases, ultimately driving above-average economic growth.
With employment rates at record levels, this growth model has reached its natural limit. Demographic changes are now exacerbating the situation, and if Germany wants to counter the decline in its labor force, it must boost immigration. This brings us to the AfD.
Since its establishment in 2013, the AfD has championed various causes, initially targeting Mario Draghi’s leadership of the European Central Bank and later opposing Green climate policies. It has also shown skepticism towards Covid and criticized Germany’s support for Ukraine. However, the primary concern that resonates with AfD supporters is the apocalyptic fears associated with migration.
The AfD employs ruthless scare tactics, promoting racial stereotypes and Islamophobia. Nevertheless, the transformation in German society is undeniable. Over the past fifty years, Germany has transitioned from a largely mono-ethnic society to one where 28.7% of the population (according to 2022 data) either holds a foreign passport or has one parent with a foreign background. In 2020, among children under the age of five, 40.3% were either migrants or born to at least one foreign parent. In cities like Bremen, this proportion approaches two-thirds.
The response from the Bundestag has been to liberalize citizenship rules, resulting in a remarkable change in cultural norms towards immigrants and their integration into public life. While solid majorities of Germans remain open-minded and welcoming to diversity, there is still a significant gap in funding.
As the British experience in the 2010s demonstrated, implementing austerity measures alongside large-scale migration can fuel xenophobia. To successfully execute a liberal migration policy and avoid conflicts over housing and social services, substantial public investment is necessary. Unfortunately, Germany has fallen short in this regard. Public investment has been on a downward trend since the early 2000s, and housing construction has significantly lagged. The debt brake, which limits public borrowing, has perpetuated underinvestment since 2009.
Increasing the number of apartments and childcare facilities alone will not eliminate racism. A substantial 14% of German voters hold far-right attitudes, and there is a 2% presence of bona fide neo-Nazis. While regrettable, this minority can be isolated. The real concern lies in the additional 10-15% of the electorate – individuals who worry about migration but do not explicitly support far-right positions – being drawn towards the AfD.
Closing Germany’s borders is not a viable solution. Not only does the German economy rely on labor from abroad, but millions of individuals worldwide have the right to seek asylum and improve their lives through migration. To its credit, Berlin has advocated for a coordinated and rational refugee policy within the EU. Contrary to alarmist claims, Germany is not “full” or at risk of apocalyptic disorder. However, serious bottlenecks exist in housing, education, and social care, meaning that maintaining the status quo will only lead to mounting tensions.
To halt this decline, it is crucial for all mainstream parties to offer an alternative to the AfD. They must establish a concerted program of public investment in housing and public services. If this necessitates circumventing the debt brake through an off-balance sheet special fund, similar to those created to address the Ukraine crisis and climate change, so be it. For Germany’s prosperity and domestic harmony, successfully integrating immigrants is far more important than lavishing billions on over-engineered American fighter aircraft or favoring specific industries through industrial policy.
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