Discussion Papers in Business and EconomicsRainer HillebrandGERMANY AND THE EUROZONE CRISIS:EVIDENCE FOR THE COUNTRY’S ‘NORMALISATION’?Discussion Paper No 10October...

Discussion Papers in Business and EconomicsRainer HillebrandGERMANY AND THE EUROZONE CRISIS:EVIDENCE FOR THE COUNTRY’S ‘NORMALISATION’?Discussion Paper No 10October 2014Herausgeber/Editor:Hochschule Fulda/Fulda University of Applied SciencesFachbereich Wirtschaft/Faculty of BusinessMarquardstraße 3536039 FuldaDeutschland/Germanywww.hs-fulda.de/wirtschaftISSN: 2194-73091GERMANY AND THE EUROZONE CRISIS: EVIDENCE FOR THE COUNTRY’S‘NORMALISATION’?Rainer Hillebrand, Fulda University of Applied SciencesAbstractThis article looks critically at the explanation provided by the so‐called ‘normalisation’literature for Germany’s apparent reluctance and closefisted approach to the Eurozone crisis.In contrast to the ‘normalisation’ argument which attributes the handling of the crisis to amore self‐interested and assertive stance in Germany’s European policy, this paperemphasizes the role of economic ideas as an explanatory factor. Based on the economicschool of ordoliberalism in Germany, the crisis is perceived of as a debt and institutional crisisrather than a financial crisis, as suggested by ‘normalisation’ proponents. Consequently, aprofound long‐term solution is thought to require policies of debt reduction and supply‐sidereform as well as amendments to Eurozone institutions. In addition, unconditional financialbail‐outs are deemed inadequate to fight the source of the crisis. While the ‘normalisation’literature stresses change in Germany’s approach to European integration relative to theearly 1990s, the view outlined here suggests that there is a significant degree of continuitywith the founding period of the European Economic and Monetary Union. Both then andnow, Germany is primarily concerned with sound money, fiscal discipline and the institutionalset‐up of the Eurozone, all based on principles derived from ordoliberal economic thinking.2INTRODUCTIONSince the beginning of the Eurozone crisis in 2009/10, Germany’s European policy has beenthe subject of numerous political and academic debates. The interest in Germany is, first ofall, due to the fact that it is the largest and financially strongest economy in the EuropeanUnion (EU). Thus, by virtue of its size and solvency the country plays a key role in fundingbail‐out packages for countries in trouble, such as the European Stability Mechanism, theEurozone’s newly established permanent rescue scheme. Similarly, political action, let aloneinstitutional reform in the EU are not conceivable without endorsement from the ‘regionalhegemon in Europe’.1 Beyond that, and more importantly for the argument produced in thispaper, debates have arisen both domestically and internationally in regard to Germany’sway of dealing with the crisis. Thus, the conservative‐liberal government (2009‐2013) hasbeen heavily criticised by other European governments, financial market actors, the mediaand academics alike2. In essence, these criticisms focus on the country’s slow reaction to thecrisis and that it continuously delayed agreement on the rescue packages, thereby makingthem more expensive. Even though its export industry and banks have benefited hugelyfrom the Euro, the Federal Republic is said to have refused to assume responsibility for themacroeconomic imbalances in the Eurozone which are at the heart of the crisis. What ismore, the country, it is argued, shows little solidarity with its Eurozone partners in trouble.In a nutshell, the prime concern is Germany’s supposedly more selfish behaviour and themanner in which it exercises power rather than the very fact that the country takes ‘centrestage’3 in resolving the current calamity.This analysis of the Eurozone crisis coincides with a broader argument amongstscholars concerning Germany’s foreign and security policy.4 The question is whether and towhat extent unified and sovereign Germany has given up its exceptional role as a ‘tamed’,‘normative’ or ‘civilian power’ of the pre‐unification years in order to turn into a ‘normal’power; i.e. a country more interested in traditional power politics rather than ‘concernedwith the peaceful advance of multilateral networks of governance’5. With respect to theEuropean level, observers of ‘normalisation’ have witnessed a shift of Germany’scommitment to EU integration. While the country acted as a staunch supporter of everincreasing Europeanisation between World War II and the mid‐1990s, it is said to havechanged, over the last 15 to 20 years, to become a more ‘normal’ member state: one that isconcerned with national sovereignty and driven by narrowly defined self‐interest, much like3the other big member states such as France and the United Kingdom.6 From this perspective,Germany’s policies during the current Eurozone crisis are further evidence of the country’s‘normalised’ behaviour.Against this background, this paper examines Germany’s handling of the current crisisin Europe. The intention is not to assess the country’s strategy or its policy proposals from anormative standpoint pertaining to their supremacy or adequacy for crisis solution. Rather,the aim is to explore the country’s rationale for pursuing its specific approach; and whetherthis is rooted in ‘normalisation’ and thus substantially different from what would beexpected from the enthusiastic pro‐EU Germany that is said to have existed until the mid‐1990s. The key argument is that the ‘normalisation’ explanation underestimates the role ofeconomic beliefs held amongst political decision‐makers in Germany when it diagnoseschange in the country’s EU policies. It implicitly presupposes a Keynesian view of the crisis asa financial crisis, while it largely neglects Germany’s economic tradition of ordoliberalism inelucidating the country’s behaviour. Following the ordoliberal line of argument, the currentpredicament is not primarily perceived of as a failure of financial markets but a debt crisis ofsome member states and a failure of Eurozone institutions. This interpretation leads to aspecific set of remedies which are thought to be in the long‐term interest of the Eurozone,while they might appear stingy and self‐interested from a ‘normalisation’ perspective. Thus,depending on the theoretical perspective taken, the country’s displayed policy is interpretedas a change towards the ‘normal’ (from the ‘normalisation’ perspective informed byKeynesianism) or a sign of continuity with the principles of ordoliberalism and the country’sfocus on the EU’s institutional milieu (from the ordoliberal perspective predominant inGermany).The paper proceeds as follows: in the next section, the ‘normalisation’ argument isdelineated more generally and subsequently applied to the specific case of the current Eurocrunch. Two key criticisms of Germany’s policy approach are outlined and linked to theallegedly more self‐interested motivation. The following section then deals with theordoliberal appraisal of recent events and its significance for policymakers’ crisis responses.The last section addresses the question of change in Germany’s European policy anddiscusses whether the handling of the Euro crisis provides evidence for the ‘normalisation’perspective.4THE ‘NORMALISATION’ ARGUMENTThe ‘normalisation’ thesis is based on the idea that (West) Germany played a special, i.e.abnormal, role in international affairs until the mid‐1990s. After military and political defeatin two world wars and with the experience of division, the Federal Republic abstained fromtraditional power politics and emerged as a civilian power which ‘favours diplomacy overforce and nurtures mutual interdependence in preference to dominance and national self‐interest’.7 Katzenstein, for instance, deemed Germany distinct from other countries in that itwas a ‘tamed power’ whose ‘political leaders exercise power only in multilateral,institutionally mediated systems’.8 This was especially evident in the realm of Europeanintegration where Germany, unlike other big member states, acted as a ‘reflexive’ – ratherthan an ‘instrumental – multilateralist’.9 Whilst the latter pursues national interest if possiblewithin the EU framework and if necessary at the expense of it, Germany as a reflexivemultilateralist perceived European unity as a byword for its own interests. Despite thecountry’s growing economic strength, its European diplomacy engaged in soft power,characterised by a ‘culture of restraint’, a strong commitment to EU institutions and the useof fiscal means to facilitate compromise.10 According to Bulmer, Jeffrey and Paterson, themain policy aims consisted in shaping the regional milieu, i.e. the building of Europeaninstitutions.11 Within the EU, the Federal Republic ‘assumed the role of a bridge and broker –between big and small countries, between the national governments and the EU‘s Brusselsinstitutions, between Gaullist France and Atlanticist Britain’.12The apogee of Germany’s European orientation, and thus its ‘anomaly’, occurred inthe early 1990s, after the fall of the Berlin Wall.13 Counter‐intuitively, the enlarged and fullysovereign country did not use its apparently increased power to pursue its self‐interestunilaterally, but it remained ‘decidedly multilateralist, oriented towards institution building,and aimed at reassuring allies and partners. Germany was accumulating trust, not power’.14In the European arena, the Kohl government engaged in promoting EU integration ratherthan acting alone, e.g. by ‘co‐initiating’ the Economic and Monetary Union (EMU). Thishelped to bind in Germany and allay its European partners’ fears that an enlarged Germanymight give up on the European project and become too dominant.15 While monetaryintegration resulted in a more Europeanised Germany, it also made the EU more Germanthrough the uploading of ‘German models of governance to the European level’16. The prime5examples are the independent central bank, the ultimate goal of price stability and fiscaldiscipline, all of which emulate the German monetary and fiscal constitution.However, since the mid‐1990s scholars have observed a change in Germany’s foreignand European policies described as ‘normalisation’ and characterised by a ‘rebalancing awayfrom indirect institutional power to the hard bargaining of agent power’.17 In EU affairs,Germany’s approach has become more instrumental: ‘more Europe is no longerautomatically desirable’18 but subject to German national interests. Jeffrey discerns ‘a moreprotectionist Germany’ with a ‘much stronger notion of using Europe for specific nationalends which is replacing the notion that national and European ends were one and thesame’.19 According to Hellmann, Germany has gained self‐confidence and with it a‘sharpened awareness of power and status’.20 Examples regularly given include Germany’sforceful conduct during the EU budget negotiations in 1999/2000, the breach of the Stabilityand Growth Pact alongside France in 2002/2003 and the Nord Stream pipeline deal withRussia, without properly consulting EU partners. In addition, it is underlined that politicalrhetoric has altered from pro‐European narratives, common under Chancellors Schmidt andKohl, to ones that emphasise national interest.21 In summary, Bulmer and Paterson concludethat ‘twenty years after unification, […] Germany has become a normalised member state inthe EU.’22Several factors explain Germany’s noted transformation towards the ‘normal’: on theone hand, the external environment, i.e. the geopolitical set‐up has changed dramaticallysince the end of the Cold War.23 Multilateral institutions such as NATO are less important forGermany’s security than they used to be for West Germany in the bi‐polar world. At thesame time, the EU has deepened and enlarged substantially, leading to a ‘shrinking core’ andan ‘expanding periphery’, consequently making Germany’s traditional multilateral approachin close alliance with France less viable.24On the other hand, and key to the argument here, the Federal Republic hastransformed internally.25 With the defeat of Chancellor Kohl in the 1998 federal elections, anew generation of leaders assumed office that has no immediate war experience.Oppermann argues that decision‐makers in Germany have adopted a new national roleconception, one that no longer accentuates civilian power but increasingly conceptualisesGermany as a ‘normal country’.26 Accordingly, the reasons for more Europe have alteredfrom ‘a matter of war and peace’ to a question of ‘costs and benefits’27. In addition, the6formerly high level of public enthusiasm for European integration has subsided, andconverged towards the lower European average. One reason put forward for this cooling‐down effect is unification:28 for one, approximately 17 million East Germans who arehistorically less attached to European integration than their western counterparts becamepart of the Federal Republic’s electorate. For another, the economy lost momentum afterdecades of economic dynamism, exacerbated by unification. This has made taxpayers morereluctant to transfer funds to the EU, thus rendering the country’s traditional cheque‐bookdiplomacy of facilitating compromise through side payments less acceptable. Beyond that,other developments in Germany have been put forward as reasons for the changeddomestic conditions in European policy‐making, such as the increased role of Ländergovernments in European policy, the somewhat EU‐critical rulings of the FederalConstitutional Court on the Treaties of Maastricht and Lisbon, the increased role of theBundestag and the fraying of the pro‐European party consensus, to name the mostimportant.29GERMANY AND THE EUROZONE CRISIS: THE ‘NORMALISATION’ VIEWTo many commentators, Germany’s policy in the current Eurozone crisis provides furtherevidence for the country’s ‘normalisation’.30 Indeed, criticisms of Germany’s behaviour areregularly linked to a more assertive demeanour and the pursuit of a narrowly definednational interest that disregards European concerns. Bulmer and Paterson as well asOppermann use the crisis policy as explicit case studies to illustrate Germany’s normalisedbehaviour.31 In what follows, these criticisms will be briefly summarised in two keyarguments: the first one focuses on Germany’s reluctance to provide funds on a scaledeemed necessary to contain, if not solve the crisis, which were expected by many otherEuropeans. The second argument gives further justification for demands on Germany in thatit looks at the country’s role as ‘originator’ of the macroeconomic imbalances in Europe andthe benefits it received from the Euro.Germany is responsible for precipitating and aggravating the Eurozone crisis because it does‘too little, too late’.According to this argument, investors would have considered neither Greece’s persistentand well‐known fiscal mess nor the data falsification scandal in 2009 sufficient to shy away7from Greek bonds. This is because they expected ‘that countries […] would be bailed out ifthey ran into difficulties’,32 notwithstanding the codification of a ‘no‐bail‐out clause’ in theEuropean treaties in 1992 (Art. 125 AEUV), which explicitly negates shared responsibility forother country’s debt. Hence, if the Eurozone partners and especially Germany had declaredtheir commitment to support Greece in a timely and decisive way, thereby confirming theinvestors’ working hypothesis, the country would probably not have lost access to privatecapital, and the crisis could have been contained.33 Instead, the German Chancellor drewpublic attention to the no‐bail‐out rule (‘Rules have to be followed’), thus disclaimingGerman responsibility for Greek sovereign debt (‘Greece must accept its responsibility forreform’).34 According to Jones, these statements triggered and aggravated the Eurozonecrisis: ‘By refusing to back Greece, however, Merkel created uncertainty and scared offinvestors. […] More importantly, she helped nurture a wider crisis of confidence in bothsovereign‐debt markets and in the Euro itself’.35Even though eventually in March 2010 Germany accepted the need for financial aidto Greece and (later) other Euro countries, the government is blamed for its failure toassume leadership.36 Rather than easing capital markets via proactive initiatives, the Germangovernment protracted negotiations. For example, Chancellor Merkel insisted on strictconditionality in the rescue packages at the March 2010 European summit:37 loans would begranted, conditional on fiscal austerity and structural reform in the crisis countries and IMFinvolvement. In addition, Germany stipulated that public money would be used as a ‘lastresort’, once borrowing from capital markets had been exhausted and the Eurozone as awhole was in jeopardy.38 This reluctance is said to have deepened and spread the crisisacross the Eurozone; it increased ‘the cost of the bail‐out, unsettled financial markets andpoisoned the political atmosphere in Europe’.39Both domestically and internationally, the government’s behaviour has beenexplained by the country’s ‘normalisation’ and the changed domestic situation: Jonesspeculates with respect to Merkel’s handling of the Greek crisis in late 2009 that ‘she mayhave had strong domestic reasons’.40 Barysch and Flassbeck both mention the Land electionsin North Rhine‐Westphalia on 8 May 2010 as a key event for explaining Merkel’s hesitancy tooffer an effective bail‐out to Greece.41 Habermas agrees that ‘Der Vorrang nationalerRücksichten ist nie zuvor so blank in Erscheinung getreten wie im robusten Widerstand einerKanzlerin, die vor ihrem Debakel vom 8. Mai 2010 die europäische Hilfe für Griechenland und8den Rettungsschirm für den Euro wochenlang blockierte‘.42 With respect to the outcome ofthe EU summit in March 2010 where Germany got its way regarding the IMF involvementand conditionality, Bulmer and Paterson speak of ‘a triumph for a more obviously self‐interested Germany.’43 More generally, Stephens considers the German Chancellor’s policyto be rooted in ‘a nation that has turned inwards – one that has reassessed, and downsized,its obligation to Europe.’; a country ‘that has a narrower – some would say selfish – view ofits interests’.44Germany is not willing to accept responsibility for macroeconomic imbalances in theEurozone and does not show sufficient solidarity despite the huge benefits from the Euro.This second line of argument concentrates on Germany’s role as export champion; it addsfurther impetus to demands that the country should lead the Eurozone by providing morebail‐out funds and boosting its domestic demand. Since the start of the monetary union in1999, Germany inter alia has built up extensive export surpluses, after years of economicweakness following reunification.45 This excellent trade performance is seen by some asproof of the benefits that Germany has gained from the Euro, for instance due to lowertransaction costs and the discontinuation of competitive devaluations by its Europeantrading partners.46 What is more, in a country’s balance of payment the outflow of goods isaccompanied by an outflow of capital. In the Eurozone, this capital export primarily took theform of German banks lending to borrowers in the southern EU periphery. For Germanfinancial institutions, this business used to be especially profitable because the terms ofborrowing in the south yielded a higher return since the risk of a currency devaluationceased to exist, while the possibility of default was neglected. Whereas the Germaneconomy benefited from monetary integration, its southern European partners accumulatedtrade deficits and debt. It is these macroeconomic imbalances in the trade and capitalbalances that are – according to proponents of this line of argument – the root of theEurozone crisis.47Against this economic background, the German political elites are accused of havingfailed in two ways: firstly, the government did nothing to lead the Eurozone on a path ofconvergence, for instance by boosting its chronically weak domestic demand, as then FrenchFinance Minister Christine Lagarde postulated.48 To the contrary, by means of the Agenda2010 labour market reforms and wage moderation throughout the last decade, Germany9deliberately devalued in real terms, thereby improving its industries’ competitiveness, whilethe peripheral countries had to face inflation and wage rises. In fact, as Young and Semmlerput it, Germany pursued a ‘beggar‐thy‐neighbour’ policy to its own advantage and at thesame time, in a self‐righteous way, blamed southern European profligacy for the crisis.49Secondly, politicians shied away from communicating properly to the wider publicthat Germany had benefited massively from the Euro, that it had to assume responsibility forthe situation and that it would be Germany’s turn to provide the bulk of funds necessary tosave the Euro. For instance, Bulmer and Paterson are of the opinion that ‘a straightforwardbail‐out might have been the “least worst” option in view of the huge benefits that EMU hadconferred on Germany’.50 In lieu thereof, German politicians portrayed the concessions thecountry eventually made as ‘painful but necessary for the sake of Europe’51. By doing so, theelites gave in to the public feeling that European integration is a sacrifice Germany makes.Consequently, ‘the Germans do not feel enough solidarity with their southern neighbours topay for the costs of their fiscal mistakes or burst property bubbles’52.Admittedly, recent public debates concerning the Eurozone crisis give reason toattribute Germany’s behaviour to the process of ‘normalisation’. In polls, people haverevealed little solidarity with Greece or other countries in crisis.53 After almost a decade ofausterity and fiscal constraints at home and with new debt piling up since the recenteconomic and financial crisis, Germans feel even more reluctant when it comes totransferring taxpayer’s money to Brussels or elsewhere. In former times, the mediasafeguarded Germany’s European vocation; in contrast, nowadays tabloids such as BILD fuelanti‐European sentiments. While the pro‐European public consensus increasinglyevaporates, European policy issues have gained salience on the political agenda so thatpublic sentiments become more significant.54 In addition, elite consensus, once a decisivepillar of Germany’s pro‐Europeanness, seems to be crumbling in the Eurozone crisis. For thefirst time since the 1950s, a major party did not support the traditional cross‐party pro‐European consensus: SPD and the Green Party abstained in the Bundestag decision on theEurozone stabilisation package on 21 May 2011.55 Besides, the number of pro‐integrationfederalists active in politics has shrunk. In particular, Angela Merkel – whose East Germanorigin is usually taken as an indicator of her lack of attachment to the European idea – isreproached for pursuing Germany’s European vocation without passion and leadership.5…