The unexpected recession of 1992-93 dispelled the euphoria of unification and forced the CDU-FDP government to respond to the pressures of globalization. When economists pointed out that German competitiveness was declining, Chancellor Helmut Kohl began calling for structural changes to restore the spirit of individual enterprise, which he saw as a prerequisite for reducing mass unemployment. In response to business and media pressure, the Christian Democratic Union adopted a neoliberal party program (1994) that sought to strengthen the market and competition in order to make Germany more economically competitive. Federal President Roman Herzog’s rousing “Berlin speech” of 1997 encouraged Germans to look beyond their fears, strive for “inner renewal,” and address longstanding problems with renewed confidence and increased vigor. Frustrated by multiple obstacles to reform, publicist Arnulf Baring warned that Germany might fail if it did not overcome widespread lethargy.
Despite the rising chorus of voices calling for structural changes, it proved exceedingly difficult to actually break the political deadlock and implement reforms. Even the modest cutbacks envisaged by a government program for “growth and employment” sparked heated protests from the Confederation of German Trade Unions [Deutscher Gewerkschaftsbund or DGB], which, for its part, suggested combating unemployment by reducing working hours and spreading the remaining jobs around. Similarly, SPD chairman Oskar Lafontaine warned against joining the international competition to prune the welfare state and called for fighting the negative effects of globalization through stronger international cooperation in the creation of a new world economic order. Against the backdrop of strident criticism, DaimlerChrysler Chairman Jürgen Schrempp presented globalization as an opportunity to increase worldwide prosperity. Moderate Social Democrats like Federal President Johannes Rau tried to steer a middle course by welcoming the positive effects of globalization while combating its destructive consequences.
The red-green coalition that assumed the reins of government in 1998 therefore pursued a somewhat contradictory program of social reform and economic modernization. Trying to combine these two impulses, environmental minister Jürgen Trittin of the Green Party pushed for ecological modernization, claiming that it would create new jobs. At the same time, the majority of Social Democrats advocated additional measures to improve the business climate, such as a sizable tax cut. In a similar vein, the government decided to supplement the social security system with a private retirement program called the "Riester pension" [Riester-Rente]
When the economy fell into another recession in 2001-02, it was clear that minor adjustments to the welfare state weren’t enough to restore growth and that more drastic changes were necessary. Speaking for the business community, the German Council of Economic Experts therefore demanded further reforms and issued a twenty-point program for employment and growth. Chancellor Gerhard Schröder had the courage to oppose the wishes of many members of his own party and drafted “Agenda 2010,” a reform program that sought to reduce structural unemployment by making additional cuts to welfare benefits and by improving competitiveness by reducing payroll deductions and red tape. In response to an unexpected wave of popular protests fueled by exaggerated fears of dispossession, reform advocates retreated and the far Left (composed of post-Communists in the East and radicals in the West) profited in the opinion polls.
A new record of over five million unemployed in the winter of 2005 undercut public support for the neoliberal reforms of the SPD-Green coalition. Although the numbers were inflated because half a million prior welfare recipients were now counted among the jobless, the drastic increase caused Schröder’s popularity to plummet and cost him the support of his party’s left wing, which disagreed with his emphasis on restoring competitiveness. Since the 2005 election resulted in a near stalemate between the two major parties, new chancellor Angela Merkel abandoned the strident neoliberal rhetoric of her campaign and instead chose a policy of small steps. Initially, the Grand Coalition did pursue some necessary changes, such as increasing the value added tax to 19% and raising the retirement age to 67. But its zeal for reform soon flagged due to the unpopularity of some of these measures and the onset of the worldwide financial crisis.
Since Germans did not feel responsible for the financial crisis, the Merkel cabinet was slow to react to the situation. After it became clear that some German institutions had lost billions, the cabinet authorized a sizable rescue package of 470 billion Euros in order to stabilize the financial sector. Business commentators accepted the need for government help, but they did so reluctantly, since the loan guarantees meant additional debt that taxpayers would eventually have to repay. Through moderate wage settlements and rationalization measures, individual companies gradually regained their international competitiveness during the first decade of the 21st century and Germany remained the international leader in exports. Moreover, the business rebound and government support for reduced working hours [Kurzarbeitergeld] managed to drive down unemployment rates at a time when they rose dramatically in the U.S.