Key aspects of Germany’s approach to the Eurozone crisis are structural, but they still have a ‘dark side’
So, Greece managed to make its loan repayments (€750m to the IMF) on 11 May 2015. However, the road ahead remains arduous, with almost daily speculation about GREXIT. Relations with Germany were never going to be easy, given their governments’ diametrically opposed positions on the Eurozone crisis. And so it has turned out.
One significant failing has been the Greek government’s diplomacy. By raising the issue of claiming wartime reparations from Germany and excessive ‘diplomatic’ grandstanding, especially by Finance Minister Yanis Varoufakis, it has succeeded in getting other Eurozone states behind the German position. A more productive tactic would have been to try and expose some of the weaknesses of Germany’s position and obtain sympathy from the likes of France and Italy, rather than alienating them. Germany likes to portray itself as being on the moral high ground, but can only sustain this claim on an uncritical reading of its policy stance.
What kind of critique can be levelled against the German position? From the outset it should be emphasised that some aspects of Germany’s contribution to the Eurozone crisis are structural and deeply embedded, rather than the product of government policy or that articulated independently by the Bundesbank.
Firstly, the original ‘Maastricht’ design for EMU privileged German ideas. It institutionalised the Bundesbank model of price stability and central banking. It placed the burden of economic adjustment on other states. It insisted on the inclusion of a ‘no bail-out clause’ and prohibited the ECB from monetary financing of Eurozone states’ public debt. It pressed for the continued surveillance of fiscal discipline, the Stability and Growth Pact (SGP), backed up by the Excessive Deficit Procedure. All this was done with a very limited budget for fiscal transfers via the Cohesion Funds and with no budgetary provision at all for macroeconomic stabilisation. Lastly, the German government was party to the decision to let Greece in.
Some German policy-makers and commentators have justifiably blamed the crisis on ill-disciplined operationalisation of these rules. Yet Germany and France broke them and blocked sanctions under the SGP in 2002-4. They were party to the EU decision to weaken the SGP in 2005. The Dutch Finance Minister at the time, Gerrit Zalm, predicted the Eurozone members would ‘pay the price of French and German fiscal incontinence’. More recently, Jens Weidmann, the President of the Bundesbank, has criticised the ECB’s purchasing of bonds and quantitative easing, arguing that it approaches the prohibited monetary financing of Eurozone states’ public debt. But what other exit is there from the ‘burning edifice’ of the Eurozone under the existing design, which strongly reflects German preferences?
Secondly, the reforms since the outbreak of the crisis have largely reinforced the surveillance and discipline missing in the original EMU design. The logic was that there were too many sunk costs in the existing Eurozone structure; its break-up could not be contemplated. Hence Germany has exported its domestic ‘debt brake’ and other rules to Eurozone states, requiring them to move to balanced budgets. In consequence, further spending cuts are prescribed at a time of crisis and weak demand. And yet, as The Economist reminds us, during the financial crisis Berlin itself adopted fiscal expansion. Why not with the Eurozone? The answer is clear: Berlin’s priority is to reduce German financial exposure to Eurozone debtor states.
Thirdly, this tightened EMU straitjacket fits the German (and northern European) model of political economy well. As Peter Hall has argued, deploying his ‘models of capitalism’ interpretation, northern European states operate export-led economies suited to German-inspired EMU rules. The southern Eurozone states, with their-demand led models of growth, are shackled to the export-led ones, but have no capacity to adjust exchange rates. The only tool left to them is microeconomic reform. Of course, reforms can be made. But, as analysts at the Max-Planck Institute in Cologne have pointed out, the industrial relations system of Germany and other northern European states allows workforce-employer coordination to facilitate the suppression of wage demands in the interests of firms’ competitiveness. By contrast, a long legacy of fragmented industrial-relations systems in southern Europe precludes this kind of adjustment.
Which brings me, fourthly, to Germany’s trade surpluses. Amidst concerns at the ‘flat’ Eurozone economy, Germany’s surplus in foreign trade rose to €217 bn in 2014, its largest ever. Simon Tilford has argued that the imbalances in the German economy may be worsening and that, in the absence of government efforts to rebalance, ‘the Commission should step up the pressure on it to do so’. However, helpfully for Berlin, the EU’s Macroeconomic Imbalance Procedure (under which it has been censured) lacks the teeth of the Excessive Deficit Procedure. The German government can ignore the pressure from Brussels and respond that the EU as a whole needs to improve its trading competitiveness with China and the BRICs.
Fifthly, there is the ‘dark side’ of ordoliberalism. Debtor states must take responsibility for their plight. In other words, the German economic model asserts a self-centred, beggar-thy-neighbour approach, at odds with the solidaristic values that were at the heart of European integration. Ordoliberalism simply demands that other states – in the mantra of the Berlin government – ‘do their homework’. Little wonder that the German economic debate has become uncoupled from that elsewhere on the continent.
One critical voice is that of Marcel Fratzscher, President of the German Institute for Economic Research. Die Deutschland-Illusion criticises the dominant view that all is well in the German economy and the problems lie abroad. He identifies three illusions: that Germany’s employment growth and ‘world-champion exporting’ connote success; that Germany can live without the EU/Eurozone; and that the EU is just after Germany’s money. He knocks down these arguments and then explores some under-examined weaknesses, such as Germany’s poor record on investment. Instead of investing in the German economy, the banks – sitting on the considerable savings of the thrifty German public – preferred to invest in southern Europe: another aspect of the Eurozone crisis.
And what of his recommendations? Number one is that Germany should act as the locomotive hauling the European economy out of the crisis by increasing demand. Number two is a European agenda for investment. So, what has happened, bearing in mind the book’s endorsement by Sigmar Gabriel, the Social Democrat Deputy Chancellor and Federal Minister of Economics? Commission President Jean-Claude Juncker has launched a €300 bn initiative to boost jobs, growth and investment, having to make very creative use of limited policy instruments. By contrast, last autumn German Finance Minister Wolfgang Schäuble announced a €10 bn programme of investment starting only in 2016. It amounts to 0.1 per cent of German annual GDP, so a very modest yet symbolic move.
Perhaps the Greek government would have been better advised to encourage more debate on EMU’s strong bias towards German interests. The Berlin government’s apparently relaxed attitude towards a Greek exit diverts attention from fact that the ‘hairshirt’ approach of ordoliberalism is likely to lead to problems further on, possibly even in Italy or France.
As a long-term admirer of ‘things German’ – including its cars! – my recent research on the Eurozone crisis is leading me to remove the self-centred character of German ordoliberalism from the list.