At each stage of the euro crisis during the past two years, Chancellor Angela Merkel has seemed to do the absolute minimum needed to keep the single currency together – but no more. This minimalist approach to the euro crisis may have ultimately cost Germany more in terms of bailouts than it would have if it had acted sooner and more decisively. On the other hand, it has kept inflation down and the euro weak – both of which are good for German exports. In fact, a cynic might say the current situation – a weak but still existent euro – is ideal for the Germany’s export-driven economy.
However, it is not so good for many other eurozone countries. That is illustrated by new figures this week showing the highest levels of employment in Germany since reunification, but higher-than-ever unemployment in Spain – a country that, unlike Greece, was not fiscally irresponsible and in fact has a lower debt-to-GDP ratio than Germany itself.
The economic theory behind this minimalist approach to the euro crisis, in so far as there is one, is ordoliberalism – a peculiarly German form of economic liberalism influenced by Adam Smith but also by 20th-century German history. Developed in the 1930s and 1940s by Walter Eucken and the Freiburg School, ordoliberalism is based on the idea that the role of the state is to create an economic and legal framework to enable the market to work efficiently – above all through the maintenance of price stability.
The ordoliberals (sometimes called neoliberals) had in mind both the failure of the Weimar Republic on the one hand and Nazism (to which Eucken was opposed) and communism on the other. Thus while they believed in greater state interference in the market than classical Anglo-Saxon liberals (in particular to prevent the emergence of monopolies and oligopolies), they believed in less interference than Keynesians. For example, ordoliberals staunchly oppose expansionary fiscal and monetary policy during an economic downturn.
Although ordoliberalism is little known elsewhere, it is hugely influential in Germany, particularly on the centre-right. It is seen as the basis for the post-war “social market economy” and the “economic miracle” it created in the Federal Republic in the 1950s. Merkel’s economic advisers are deeply influenced by ordoliberal ideas – particularly on the role of the European Central Bank. To them, the role of a central bank is above all to maintain price stability – and thus promote growth only indirectly – rather than intervening to expand the money supply as the Federal Reserve and the Bank of England have done in the past few years.
Thus the former ECB chief economist Jürgen Stark – who called Eucken’s book Principles of Economic Policy “a constant source of inspiration throughout my career” – resigned last September after it purchased Italian and Spanish government bonds. Bundesbank president Axel Weber quit last February for similar reasons. His successor, Jens Weidmann – formerly an adviser to Merkel – is equally opposed to the ECB’s bond purchase programme.
However, ordoliberalism is predominantly a theory about how to make a national economy work efficiently rather than about how to organise the global economy or create a single currency zone. It therefore doesn’t help much in the current context, in which imbalances between eurozone economies are a key problem. As a result, few mainstream German economists accept the idea that Germany’s surpluses – themselves, in part, the result of the euro – are the flipside of other countries’ deficits and therefore part of the problem. Instead, they see surpluses simply as the product of good economic management.
Thus ordoliberal ideas lead Germany to pursue economic policies that are in its own interests rather than those of the eurozone as a whole. Germany’s “stability culture” may be influenced by the collective memory of hyperinflation but there is also another reason for it that is both more rational and selfish: even a moderate increase in inflation would reduce the competitiveness of Germany’s exports around the world and reduce the value of its savings.
Germany’s hawkishness on inflation means it has no solution for deficit economies except ever greater austerity – even where, as in the case of Spain, the crisis was not caused by excessive sovereign debt. In this context, German conservative economic thinking is almost indistinguishable in practice from that of the American or British right. In fact, Germans seem almost to espouse a kind of European version of “trickle down” economics: growth, they suggest, will eventually flow downwards from the top to the bottom of the eurozone.
It may be that the euro is a failed experiment, as Harvard economist Martin Feldstein has recently argued. But even if the European single currency survives, Germany’s economic narcissism means the rest of the eurozone is likely to pay a high price for it over the next decade.
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