Blaming the Germans

If the critics are to be believed, Germany is once again causing turmoil in the heart of Europe. If only Germany would pursue a less hawkish economic policy, so the argument goes, the continent could be on its way to recovery.

Germany’s most high profile critics are typically those who claim more generally that this is the time to promote growth rather than pursue austerity. In reality, this just means keeping the stimulus going a little longer. They include Martin Wolf of the Financial Times and Paul Krugman of the New York Times. International organisations such as the International Monetary Fund and the Organisation for Economic Cooperation and Development have made the same point in more guarded terms.

It is therefore particularly welcome when experts look closely at German policy rather than express exasperation at the country’s behaviour. For this reason a recent paper by Sebastian Dullien and Ulrike Guérot of the European Council on Foreign Relations provides some useful insights into the debate.

The two authors argue that Germany’s approach to the eurozone crisis cannot be explained solely by reference to national interests or an historical fear of hyperinflation. Instead they focus on a particular German approach to economic policy known as “ordoliberalism”. The fact that the term is not well-known in Britain probably reveals how little it understands Germany (although I have touched on it in a previous article and Oliver Marc Hartwich has written an excellent piece on the subject here.

Dullien and Guérot argue that ordoliberalism emerged as a reaction to the consequences of both the unregulated liberalism of the early twentieth century as well as the fiscal and monetary intervention of the Nazis. Their definition is worth quoting at length:

“The central tenet of ordoliberalism is that governments should regulate markets in such a way that market outcome approximates the theoretical outcome in a perfectly competitive market (in which none of the actors are able to influence the price of goods and services). Ordoliberalism differs from other schools of liberalism (including the neo-liberalism predominant in the Anglo-Saxon world) in that it places a greater emphasis on preventing cartels and monopolies. At the same time, like neo-liberalism, ordoliberalism opposes intervention into the normal course of the economy. For example, it rejects the use of expansionary fiscal and monetary policies to stabilise the business cycle in a recession and is, in that sense, anti-Keynesian.”

The authors then go on to show that ordoliberalism is influential across the German political spectrum. Its staunchest advocates are the current governing parties, the Christian Democrats and the Free Democrats, but the Social Democrats support many of its principles. Those who are closest to an Anglo-Saxon Keynesian position are the Left party followed by the Greens.

Although the economic policy differences between Germany and Britain are significant they should not be exaggerated. Both sides are more pragmatic than their sometimes-angry disagreements suggest. For example, I pointed out in a recent Perspective column that even the notoriously hawkish Bundesbank has said that it is prepared to accept higher inflation.

Ultimately such pragmatism is the key problem with both sides. They tend to react to the latest bout of trouble rather than have any vision of how to rejuvenate their respective economies.

This blog post was first published on Fundweb today.