This paper looks at the politics of the liberalization of the German welfare and employment regime and the repercussions on underlying political coalitions in the last two decades. The German welfare and employment system has been confronted with moves towards liberalization without approaching a liberal market economy. This paper traces the shifts of preferences of key actors in two distinct arenas：the economic arena dominated by employers and unions and the public finance arena dominated by fiscal constraints on public budgets. This paper argues that the shifts of positions of key actors in both arenas were interrelated but that they responded to two different sets of problems. This suggests that a wider set of environmental factors are of crucial importance for the maintenance of political economy institutions.