Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Rule Germania

Harold James 31st July 2015

Harold James

Harold James

A persistent theme – indeed the leitmotif – of the way that German leaders discuss the eurozone is their insistence on the importance of following the rules. That refrain is followed by a chorus from the rest of the monetary union demanding to know why Germany is taking such an inflexible approach. The answer, it turns out, reflects the way Germany’s federal system of government has shaped its decision-making, as well as Germany’s historic experience with debt crises.

Germany’s obsession with rules long predates the current eurozone crisis. The country’s policymakers always insisted that Europe could not have a common currency without first achieving economic convergence. But that looked like it would never happen. So, in the 1990s, as the eurozone was being established, Germany argued for rigorous enforcement of the “convergence criteria,” the requirements necessary for adopting the euro.

Economists in every other country ridiculed the Teutonic fixation on firm rules. There is no reason, for example, why a debt-to-GDP ratio of 59% should be considered safe, but 62% regarded as irresponsibly dangerous. But the Germans insisted – and ultimately got what they wanted.

That approach stemmed in part from Germany’s political structure. The more federal a country’s system of government is, the more rules are needed to ensure its smooth functioning. When the responsibilities of different levels of government are not clearly delimited, there is the danger that officials will try to pass burdens to higher levels. In order to avoid this, federations often adopt a legalistic approach.

Indeed, there is a strong correlation, historically, between successful federations and a stable monetary policy undergirded by clear rules. In the late twentieth century, Switzerland, Germany, and the United States – all federal countries – were pioneers in applying a stability-oriented monetary policy. Given that the eurozone is in many ways federal in its structure, a clear commitment to the rules seemed to Germany to be a prerequisite for its success.

To be sure, even Germans know that rules sometimes need to be bent. Thinkers as far back as Aristotle have argued that rules fail when they are too rigid. In the Nicomachean Ethics, Aristotle pointed to the use by sculptors on the island of Lesbos of rulers made from flexible lead – rather than rigid iron – for cutting curved lines in stone. The ability to reshape the rulers to fit the stone served as a metaphor for the need to adjust laws when circumstance change.

But when it comes to debt, Germans have insisted on using the most rigid of rulers. Since the beginning of the eurozone crisis, the German government dug in its heels on European treaty provisions that it interprets as forbidding bailouts and monetary financing of government debt. Recently, Germany reacted to a proposal to forgive a portion of Greece’s debt by maintaining that the treaty provision that proscribes bailouts also rules out state bankruptcies and debt forgiveness.

The lesson that Germany has taken from its history is that debt is an area in which flexibility must be steadfastly avoided. This might come as a surprise to American commentators, who have argued that Germany is acting hypocritically, having defaulted on its debts in 1923, 1932-1933, 1945, and 1953, only to insist today that others do differently.

The truth is that Germans viewed nearly all of those defaults as destabilizing. The internal default in 1923, conducted via hyperinflation, weakened the German financial system and helped cause the Great Depression. The defaults in the early 1930s became inevitable when Germany could not access private capital markets and the country had lost faith in its future. Rather than set the stage for a sustainable economic recovery, deflation and default fanned the flames of nationalism – to disastrous effect.

The default of 1945 was the consequence of losing World War II. Indeed, the tradition of so-called Ordoliberalism that has shaped Germany’s post-war economic policy was a response to the Nazis’ destructive arbitrariness.

Only the debt cancellation of 1953 is viewed in a positive light in Germany, and a look at the circumstances in which it occurred reveals much about the country’s approach to the eurozone crisis. As the Yale economist Timothy Guinnane has shown, the debt that was canceled was not the principal, but accumulated interest arrears that had not been paid between the Great Depression and WWII.

More important, from Germany’s perspective, was the political context in which the negotiations took place. For starters, there had been a complete regime change in Germany. The victorious Allies had removed those responsible for the destructive, destabilizing policies of the past, providing the country with a clean break and its debtors with confidence that Germany was on a new course. Furthermore, Germany’s new policymakers had demonstrated their financial seriousness. In 1950, the country had undergone a severe balance-of-payments crisis. Some officials were in favor of capital controls, but the government instead implemented monetary austerity.

This experience explains another of Germany’s obsessions: reforms in debtor countries. Germany needed a complete change of its domestic regime to break out of its cycle of debt and default. That might be a bit much to ask in the context of the eurozone; but, without a fundamental reorientation of a country’s politics, the thinking in Germany goes, debt forgiveness will always remain a futile exercise.

© Project Syndicate

Harold James

is Professor of History and International Affairs at Princeton University and Marie Curie Professor of History at the European University Institute, Florence. His most recent book is The Creation and Destruction of Value: The Globalization Cycle.

You are here: Home / Politics / Rule Germania

Most Popular Posts

Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic

Most Recent Posts

transition,deindustrialisation,degradation,environment Europe’s industry and the ecological transitionCharlotte Bez and Lorenzo Feltrin
central and eastern Europe,unions,recognition Social dialogue in central and eastern EuropeMartin Myant
women soldiers,Ukraine Ukraine war: attitudes changing to women soldiersJennifer Mathers and Anna Kvit
military secrets,World Trade Organization,WTO,NATO,intellectual-property rights Military secrets and the World Trade OrganizationUgo Pagano
energy transition,Europe,wind and solar Europe’s energy transition starts to speed upDave Jones

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

Social policy in the European Union: state of play 2022

Since 2000, the annual Bilan social volume has been analysing the state of play of social policy in the European Union during the preceding year, the better to forecast developments in the new one. Co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), the new edition is no exception. In the context of multiple crises, the authors find that social policies gained in ambition in 2022. At the same time, the new EU economic framework, expected for 2023, should be made compatible with achieving the EU’s social and ‘green’ objectives. Finally, they raise the question whether the EU Social Imbalances Procedure and Open Strategic Autonomy paradigm could provide windows of opportunity to sustain the EU’s social ambition in the long run.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

Discover the new FEPS Progressive Yearbook and what 2023 has in store for us!

The Progressive Yearbook focuses on transversal European issues that have left a mark on 2022, delivering insightful future-oriented analysis for the new year. It counts on renowned authors' contributions, including academics, politicians and analysts. This fourth edition is published in a time of war and, therefore, it mostly looks at the conflict itself, the actors involved and the implications for Europe.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube