What Is Your Future, Germany?

The question of the nature of German political thought has also sparked debate recently. Decision of Germany to support the EUR 750 billion European Recovery Fund has been seen as a change of direction from its traditional line, which has often been described as principled and rule-based. It has been asked whether Germany has abandoned its old doctrines of austerity and the avoidance of solidarity. It is not just the recovery fund. Germany has long approached views of France on the development of the euro area and for example by linking competition policy to wider geopolitical objectives. Germany has unreservedly accepted the shelving of the Growth and Stability Pact during the Corona crisis. More than half of the exceptional state aid procedures approved by the European Commission have concerned German industry.

So has Germany abandoned its principle or does it represent the skill of compromise in a changing environment?

Historically, German economic policy has been characterized by strict budgetary discipline, rule-making and a strict distinction between monetary and fiscal policy. At EU level, this has meant anchoring the internal market under strong competition law, but also defending an “economic constitution” based on debt and budgetary rules. Germany has emphasized the responsibility of each country for its own economy and has opposed the introduction of solidarity mechanisms, such as Eurobonds.

This set of principles is often referred to as the “culture of stability” and the thinking behind it is ordoliberalism. Its intellectual roots lie in the interwar period, when a group of economists and jurists began to consider the future of liberalism in a situation where the market economy seemed to lose the battle against fascism and communism.

Many ordoliberals felt that classical liberalism had failed because it had ignored the role of the political system in the development of a functioning market economy. Markets do not arise naturally, but need a strong state to safeguard, for example, price stability and a functioning competitive environment. If the market is left to its own devices, the result is often the power of the strongest, market concentration and inefficiency.

The Ordoliberals recognized a similar feature in the political system. Democracy is, of course, a central principle of a liberal social system, but it also involves a dangerous tendency to concentrate power. Various interest groups such as corporations easily capture a democratic system. The state seemed to have very little means of reacting to a situation in which, in essence, authoritarian movements rise to power through a democratic system. Therefore, the state must also protect itself against itself by means of executive institutions. This safeguard function is accomplished by pre-agreed rules that limit the power of policy makers.

The attitude of the Ordoliberals towards European co-operation was twofold. Many of them shy away from the French model of industrial policy, which relied on central leadership and strong state-owned companies. The original Coal and Steel Community (1949) was also a kind of cartel that did not really contribute to the establishment of a competitive market economy. Yet many Ordoliberals saw the possibility of realizing the idea of ​​a “state without sovereignty,” that is a pure political order based on rules and executive power.  It was about balancing. When the European Economic Community (EEC) was created in the mid-1950s, Germany had to give in to the demands of French protectionism, especially in agricultural policy. General competition policy was still sought to be kept firmly in the hands of the Germans. 

The same skill of compromise was evident in the context of the Maastricht Treaty. The single currency area had always been more of a French than a German project. The failed experiments with the fixed exchange rate system in the 1970s and 1980s had aroused much suspicion in Germany as well. However, Germany was involved by anchoring the common fiscal policy of the European Monetary Union in common rules and modifying the ECB's (European Central Bank) mandate in line with the German Bundesbank. When we talk today about the spirit of the Maastricht Treaty, we often refer to the German principles of rules and the avoidance of solidarity. In reality, the spirit of Maastricht was fuelled by the tension between Germany and France between the static and dynamic conceptions of integration. Germany relied on the rules, while France saw European cooperation as a process whose nature is essentially transparent. 

At a general level, the treatment of the euro crisis followed the German line. The regulatory framework for the euro area was strengthened and the powers of the Commission were increased. Germany conceded reluctantly the rescue packages and the ECB's purchase programs. At the same time, its export industry benefited significantly from the weakness of the euro. 

During the euro crisis, ideological pragmatism became established in Germany. Germany was principled, but it was also able to be flexible about its most stringent doctrines because of the greater goal of keeping the Eurozone together. At the political level, Germany did not set out to challenge crisis management, but still consistently rejected proposals of France for common Eurozone bonds. Concerns about changed line led in February 2018 to a petition by eight northern Eurozone countries for a rules-based economic union. 

However, the actual bomb rumbled in an interview with Funke Media House in August 2020, about a month after the summit on the EU Recovery Fund. In an interview, Olaf Scholz said that the revival mechanism of the Corona was an “irreversible step” for the whole of Europe - a historic event that would irreversibly change the nature of the Union. The opinion was widely quoted and interpreted as a green light for joint debt in the future. In reality, the legitimacy of the recovery fund in the public debate relied heavily on its nature for being one time solution and its link specifically to the management of the Corona crisis. The German government and most of the experts spent considerable time to distinguish between permanent and non-recurring bonds.  European markets are more integrated now than twenty years ago.  If the revival mechanisms leave on the hands of domestic Parliaments, then there is a risk that domestic Parliaments optimize their revivals, which lead to disturbance in the markets.  

The irrevocability of the recovery fund was linked to the so-called own resources system instead of borrowing. According to Scholz, a budgetary policy based purely on membership fees is helplessly too weak to meet the needs of EU and to strengthen its strategic autonomy. That is why the Union must develop a so-called own resources system, such as digital and environmental taxes.

Has Germany become a supporter of the fiscal union? Yes, but in a very narrow sense. Germany may defend joint borrowing mechanisms in the future, but its broader objectives relate to the reform of budgetary policy and financial governance as a whole.