In: Uncategorized20 Jul 2012
This is the main text of my recent Fund Strategy cover story on Germany.
Considering the importance of Germany in resolving the European crisis it is shocking how little is known about it in Britain. At best even those who follow the news are often ignorant of important developments within Europe’s largest economy and second most populous nation. At worst even generally well-informed commentators often fall back on clichés about the second world war in discussions of Europe’s current economic plight.
Perhaps it is best to get what could be called the Biggles Tendency out the way before moving on to more serious debate. These are commentators of both right and left who apparently draw on old movies such as the Dambusters and the Great Escape to understand contemporary Germany. They seem to have forgotten that the second world war ended in 1945; a gap of almost an average human lifespan.
Take a recent cover story by Mehdi Hasan in the New Statesman. The piece was illustrated with a photomontage of Angela Merkel, the German chancellor, wearing a leather jacket and with the left side of her face removed to “reveal” a Terminator style skull and robotic eye. Apparently it was designed to illustrate her role in “terminating” Europe and pushing it towards a new Depression.
But it was not long before Hasan switched from science fiction to old war movie territory. He said that “Merkel is the most dangerous German leader since Hitler” before arguing that she is the greatest threat to global order and prosperity. Hasan then warned that her economic policies could lead to mass unemployment in a similar way to that which propelled Hitler to power in 1933.
Hasan has every right to criticise Merkel’s economic policies. But to suggest a comparison with the leader of a regime that was responsible for slaughtering many millions of people is absurd. It says much about Hasan’s narrow mindset and nothing about contemporary Germany or Europe’s current economic plight.
There are plenty more graphic examples of this type that could be given but perhaps more shocking is a slightly more subtle piece by Anatole Kaletsky. The Reuters columnist, who for many years was principal economics commentator on the Times (London), is one of Britain’s best-informed economics writers. Yet in a recent column he spoke in similar terms, although not such colourful language, as Hasan: “Nobody should be surprised that Germany has become the greatest threat to Europe. After all, this has happened twice before since 1914.”
To be fair Kaletsky did go on to qualify his statement by arguing that Germany is not guilty of “original sin”. He related its destabilising tendency to its unusual geopolitical role in the heart of Europe. It is too big and powerful to coexist comfortably with its neighbours but not powerful enough to dominate them decisively.
Such a comparison is debatable and in any case most readers brought up in Britain, with its preoccupation with the second world war, are likely to see an implicit link with the Third Reich. Indeed even the use of the term “the War”, which is widely understood as referring to that one particular conflict, shows its centrality to British national identity.
Britain’s own economic policy is certainly seldom discussed in relation to developments in the 1930s. Commentators do not draw parallels between the current crisis and that facing the governments of Ramsey MacDonald (1931-35) or Stanley Baldwin (1935-37). Yet similar comparisons in relation to Germany are routine.
The rest of this article will be in two parts. First, it will explain why the discussion of Germany in the West so often takes such a narrow form. Second, it will look more closely at the debate in Germany itself.
The debate outside Germany
Much of the debate on the European crisis has taken an anti-German stance in recent months. That is even leaving aside the more popular media and those who make comparisons with Nazi Germany.
The June 9 issue of the Economist, with a huge worldwide circulation, had a cover image of a supertanker sinking with the words “the world economy” written on its side. A speech bubble showed the words “please can we start the engines now, Mrs Merkel”. An accompanying editorial argued that Germany should do a lot more to bolster growth in Europe.
Over at the Financial Times its internationally respected chief economics commentator, Martin Wolf, has argued a similar line. He has outlined several policy goals for Germany including support for eurobonds (bonds issued jointly by all eurozone member states), less fiscal contraction, more expansionary monetary policies and boosting domestic demand.
These criticisms are broadly similar to those made by several other western leaders including Barack Obama. No doubt the disagreements are more explicit in private conversations but even in public pronouncements it is possible to glean the broad lines of disagreement.
For example, at the G8 Summit of world leaders in May the American president put the emphasis on promoting growth and creating jobs. In diplomatic circles this is widely seen as a coded criticism of Germany as it is widely seen as putting too much emphasis on austerity.
Indeed in some respects many American and other European leaders would also lump Britain into the German economic camp. From their perspective the coalition too is putting too much faith in austerity and too little on promoting growth.
The British government would of course reject this view. British ministers feel comfortable criticising Germany but clearly would not accept similar assaults on their own positions.
From here it should be clear that there are two overlapping reasons for the vociferous attacks on Germany at present. The first is the responsibility aversion of western leaders. Rather than take a lead themselves in resolving the European crisis they prefer to pass the buck – or in this case the euro – on to Germany.
Of course politicians are always keen ensure that their own country’s economic problems are blamed on anyone but themselves. If they can implicate foreigners so much the better.
But today the trend even goes further. Politicians are particularly reluctant to take the initiative in relation to any difficult developments. Instead they simply react to events as they come along.
The second motive for criticising Germany, which should not be over-stated, is more ideological. Those western leaders who criticise Germany most, such as Obama and François Hollande of France, tend to come from what could loosely be described as a Keynesian position. They emphasise the importance of maintaining a fiscal stimulus more than those who lean more towards a free market position.
This ideological split is confirmed by looking at those non-German publications that have given most support to Merkel. Free market media, such as Time magazine and the Wall Street Journal, tend to be most sympathetic to the German leader.
However, the gap in relation to ideas should not be over-stated. As I have previously argued in Fund Strategy the differences are much more about emphasis than of substance. The Keynesian camp favours reducing fiscal stimulus a little more slowly than the more free market types. It is essentially an argument about timing rather than fundamental convictions.
The German view
It should be no surprise that many German commentators resent the criticism their country is being subjected to from abroad. They argue, with some justification, that Germany is in effect being asked to pay off the debts of other countries. In addition, they point out that Keynesian economics has not solved the economic problems facing other states. Indeed there is a plausible case that fiscal pump-priming has made matters worse.
Josef Joffe, the publisher-editor of Die Zeit, a Hamburg-based weekly, is one of the most high profile defenders of his country outside Germany. In a recent caustic article in the Guardian (June 21) he mocked initiatives such as eurobonds as schemes in which Germany would bail out others:
“In theory, these are heartening ideas – like the Three Musketeers’ motto ‘all for one, and one for all’. In practice, there is no ‘all’, there is only one: Germany.”
He was also searing towards Keynesian proposals to boost the eurozone economy. Joffe derided this approach as saying:
“be as profligate as all your eurozone neighbours. Let the European Central Bank flood Europe with liquidity, never mind that interest rates are at a historic low. Jump-start the economy by jacking up your deficit, let your wages rise above productivity to generate demand. In other words, do precisely what was done in the crisis countries from Ireland to Greece.”
Joffe’s stance seems to chime well with the views of the German public. A recent poll published by the ARD television network showed a 66% approval rating for Merkel.
The debate inside Germany in many respects mirrors that in other western countries. There is also what could be loosely called an ideological and a practical element. As in America and Britain pragmatic concerns are generally to the fore. In relation to ideas there is also more convergence between western countries than is generally recognised.
Germany’s economic policy stance can be understood in relation to what is sometimes called Ordungspolitik or literally “order policy”. In other words it is a stance that puts a heavy emphasis on the importance of stability.
It is wrong to understand this emphasis on order as simply a reaction to the Weimar hyperinflation of the early 1920s. It should be understood more generally as a reaction to the extreme turbulence of Germany’s twentieth century history. In response to its volatile past the German elite is extremely anxious to maintain a stable society.
In economic terms this translates into what is sometimes called ordoliberalism: a market economy constrained by tight rules. Back in the late 1940s this approach was pitched as a “third way” between capitalism and communism. Price stability and central bank independence have long played a central role. It also places a heavy emphasis on the prevention of cartels and monopolies. According to Sebastian Dullien and Ulrike Guérot of the European Council on Foreign Relations, a pan-European think tank:
“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” (“The Long Shadow of Ordoliberalism: Germany’s approach to the euro crisis”, Policy Brief, February 2012).
It is generally also combined with the idea of a Soziale Marktwirtschaft, social market economy, which also emerged in the late 1940s. This involves income redistribution and social safety nets. This arrangement should sound more familiar to a British readership than the German terminology might suggest. Both this government and the previous Labour administration put economic stability as the top priority over economic growth. Labour also made the Bank of England independent in 1997, giving it a mandate of price stability, and other parties have supported this approach. Overall Britain, like Germany, could be described in broad terms as a heavily regulated market economy.
The economic institutions of the European Union also typically embody a heavily regulated market economy. They include an extensive system of rules designed to maintain fiscal and monetary stability. Although this goal has not always been achieved the ideal it upholds is broadly in line with ordoliberalism.
So in ideological terms the difference between Germany and other EU economic policy is in many respects overdone. If anything recent decades have seen a convergence towards a more Germanic approach.
To the extent there are differences they are mainly practical rather than philosophical. In many respects they boil down to one simple practicality: Germany does not feel it is willing or able to pay too large a share for the bailout of other eurozone states. In that respect, like America and Britain, it is reluctant to take responsibility for tackling the crisis.
This is not to say that Germany has done nothing at all. It has pursued a more expansionary policy than is often implied by its critics and indeed its own government. For instance, it has run fiscal deficits for years. In addition, its government debt was over 81% of GDP last year.
This is in sharp contrast to the much more severe austerity in the early 1930s during the Great Depression. As Josef Joffe has pointed out the policy pursued in the final years of the Weimar republic, under Heinrich Brüning as chancellor, were extremely harsh. From 1930 to 1932 he cut public spending by a third and virtually eliminated public borrowing.
Germany has also participated in many bailouts. What really concerns Germany are initiatives such as eurobonds in which it would in effect underwrite borrowing by other eurozone nations.
The German authorities have not ruled out providing significantly more resources in principle. But the price they want to extract is a more integrated eurozone under a strict fiscal pact. Jens Weidmann, the president of the Bundesbank, the central bank, has explicitly stated that financially errant countries should be prepared to give up their national sovereignty under such a system.
Here too Germany’s concerns are in many respects practical. Although it has the largest economy in Europe by a significant margin it does not dwarf the others). Overall Germany only accounts for about 30% of the eurozone’s economic output.
Of course GDP is not the whole story. Germany has a substantially stronger fiscal position than most eurozone nations. It also has smaller allies such as Austria, Finland and the Netherlands. Nevertheless it would be stretched if it had to bail out substantial economies such as Spain, let alone France or Italy.
None of the proceeding argument is meant to suggest that Germany is blameless in the creation of the European economic crisis. It should certainly take a share of the responsibility.
Germany was a prime mover in the creation of the eurozone: a fundamentally unstable economic bloc. In the short term its heavily export-oriented economy benefitted from the artificially weak currency it adopted. If it had retained the Deutschmark its exports would have been substantially more expensive.
In supporting this system it is also implicated in the emergence of financial bubbles in several other eurozone economies. The creation of the common currency meant that weaker countries had access to cheap credit thanks to an implicit German subsidy.
For many years the German elite pursued a twin-track strategy of artificially bolstering exports through the cheap euro and squeezing domestic living standards. Wages have stagnated and welfare has been cut.
This strategy has avoided tackling fundamental weaknesses in the real economy. There has been insufficient investment to generate a new round of durable growth.
But while it would be wrong to suggest Germany is blameless it is also ludicrous to argue that it is uniquely culpable for the whole mess. Germany’s leadership has broadly pursued the same approach as other western European nations. It has pursued short-termist pragmatic measures rather than attempt to grapple with the chronic weaknesses of its real economy.
What is striking is not Germany’s particular outlook or policies. On the contrary, it is that its failures are in most respect similar to other European countries.
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