BRIEF POLICY

The long shadow of ordoliberalism: Germany’s approach to the euro crisis Sebastian Dullien and Ulrike Guérot

At the end of January, European leaders agreed the wording SUMMARY The new treaty agreed by European leaders of the new treaty aimed primarily at tightening fiscal policy in in January reflects Germany’s distinctive the euro area that was agreed in principle by 26 EU heads of approach to the euro crisis rather than collective government at last December’s European summit. The treaty compromise. Much to the frustration of many reflects German positions rather than collective compromise. other eurozone countries, Germany has imposed In particular, the treaty centres on a “fiscal compact” that its own approach – centred on austerity and price stability at the expense of economic growth compels all eurozone countries to incorporate into their – on others without considering whether the constitutions a deficit limit modelled on the German institutional flaws of monetary union beyond a Schuldenbremse, or “debt brake”. In addition, European lack of fiscal control may be the cause of some leaders once again ruled out the possibility of using European of the distortions and problems that the current Central Bank (ECB) funds to “leverage” the European euro crisis has exposed or whether its approach Financial Stability Facility (EFSF) or European Stability could have a negative impact on other eurozone Mechanism (ESM), and there was no mention of ECB bond countries. German economic orthodoxy has been widely criticised elsewhere in Europe. purchases to help stabilise bond markets.

This brief explores the historical and ideological However, although the new treaty reflects views that are foundations of German economic thinking supported by a broad consensus in Germany (strict opposition and discusses how it differs from mainstream to ECB intervention and a one-sided focus on fiscal austerity), international economic discourse. It argues that there is actually only limited support for these views elsewhere there is more to Germany’s distinctive approach in Europe. In fact, it has often been pointed out that German to the euro crisis than the much-discussed historical experience of the hyperinflation in the solutions to the euro crisis are quite different to those Weimar Republic on the one hand and simple demanded by the financial markets and the international press. national interest on the other. Rather, there is Germany has been widely criticised for its monetary policy, its an ideological edifice behind German economic inflexibility on austerity measures, its rigid legal approach to orthodoxy with which Germany’s partners must treaty change and its selfish view of trade imbalances. Much engage. While a change in the government after of what Germany has done to solve the euro crisis has caused the next general election, in 2013, would lead concern and drawn criticism from its European partners. to a change in German economic policy, it is unlikely to dramatically change the country’s approach to the euro crisis. Germany has also been widely criticised for what it has not done. In particular, both the Christian Democrats and the The long shadow of ordoliberalism: Germany’s approach to the euro crisis 2 ECFR/49 February 2012 www.ecfr.eu Free Democrats, the two coalition partners in the German German the in partners coalition two the Democrats, Free This brief aims firstly to explain to a non-Germanaudiencea toexplain tofirstly aimsbrief This The second part discusses the influence of this economic economic this of influence the discusses part second The intellectualoutlinesbriefthethe tradition of part– first The It is often claimed that the German approach to the euro crisis, Ordoliberalism as the basis of German Both were seen in Germany as undermining the principle principle the undermining as Germany in seen were Both and the idea of turning the ECB into a lender of last resort last of lender a into ECB the turning of idea the and a devaluation of external assets through inflation is almost is inflation through assets external of devaluation a based is stability, price on emphasis its particular in and ChristianDemocratsDemocrats.Freethe andwhere do But andsimple national interest on the other. Rather, there is an government, rejected two possible solutions to the euro euro the to solutions possible two rejected government, electoral majorities? crisis that were proposed by others in Europe: Eurobonds Eurobonds Europe: in others by proposed were that crisis explain the German debate. On the one hand, the dangerof thehand, one the Germandebate. Onexplainthe to sufficient not are they policy, German in role a play do historicalthehyperinflationexperiencethe on countryofor surplus capital a as interest defined narrowly its on either dramatically change the country’s approach to the euro crisis. thiswhich in waysthe show also will Germany. It indebate Principleshazard. moral creating and stabilitymonetary of euro crisis than the much-discussedthethancrisis eurohistorical experience of outline some of the essential tenets of German economic policy that might follow a change of government of change a follow might that policy economic economic thinking would occur if Germany’s foreign debtors defaulted. On the Germany’sdefaulted.debtorsforeignOn if occur would less probably is and debate public the in mentioned never which Germany’s partners must engage. While a change in change a While engage. must partners Germany’s which markets. in Itwill contrast this position with theposition interference more state regulatory and relationships market they come from? Are they somehow rooted in the German the in rooted somehow they Are from? come they the historic and economic traditions that frame the euro euro the frame that traditions economic and historic the the government after the next general election, in 2013, would hand one the RepublicWeimaronhyperinflation thethe in the Germany’sdistinctivetoapproach to more is therethat third part sketches out the possible changes in German German in changes possible the out sketches part third Germany.The politicalinparties mainfive the traditionon in the Weimar Republic. However, while these two factors factors two these while However, Republic. Weimar the in important in German policymaking than the losses that that losses the than policymaking German in important suchas monetary stability are seen as sacrosanct by both the institutionsInternationaltheas such Monetary (IMF).Fund that – ordoliberalism of theory economic the particular, in ideologicaledifice behindGerman economic orthodoxy with uh s rc saiiy cnrl ak needne state- independence, bank central stability, price as such in 2013. how German positions might shift in the future. It argues argues It future. the in shift might positions German how psyche, as some claim, or are they liable to change with with change to liable they are or claim, some as psyche, predominant in the Anglo-Saxon debate and in international alsowill crisis.underliesIt euro Germany’sthe approach to changeleadato Germanin economic policy, unlikelyisit to programmes. Based on this account, it finally briefly considers for the eurozone along the lines of the US Federal Reserve. Federal US the of lines the along eurozone the for background is reflected in recent German political party party political German recent in reflected is background Ordnungspolitik An important but rarely discussed reason for Germany’s Germany’s for reason discussed rarely but important An While ordoliberalism nowadays is no longer an important important an longer no is nowadays ordoliberalism While 1  (inwhich none of the actors are able to influence the price of Germany’s “neo-classical” mainstream Keynesian. LeonhardMiksch andHans Großmann-Doerth reactionaas Politically, ordoliberalism is closely linked to the first phasefirstPolitically, the ordoliberalism tocloselylinked is and the Bundesbank, which hires mainly from German German from mainly hires which Bundesbank, the and consider would today Germany in economists academic at have economists most Germany, in current academic alsoexperienced hyperinflation thepast,innotsharebutdo Germany’s fear of inflation and resistance to ECB intervention goods and services). Ordoliberalism differs from other schools economists in Germany. It is therefore safe to say that mostthat saytherefore toeconomistsissafeGermany. Itin early years of the twentieth century and subsequent Nazi Nazi subsequent and century twentieth the of years early German on influence the economic“ordoliberalism”thinkingtheorydevelopedof a – is stability price on emphasis otherhand, other countries such asAustria andGreece have of ordoliberalism is that governments should regulate regulate should governments that is ordoliberalism of onpreventing cartels and monopolies. At the same time, like in predominant neo-liberalism the (including liberalism of of ordoliberalism, which were reflected in the legislation of legislation the in reflected were whichordoliberalism, of ideas basic the incorporated economy market social the of Although 1966. to 1948 from economy market social the of normal course of the economy. For example, it rejects the the rejects it example, For economy. the of course normal neo-liberalism,ordoliberalism opposes intervention intothe markets in such a way that market outcome approximates approximates outcome market that way a such in markets market remains one of the most positivelymostthechargedin terms ofmarketremains one themselves to be liberal. Their thinking filters into ministries Keynesian influential few very are there States, United the the theoretical outcome in a perfectly competitive market market competitive perfectly a in outcome theoretical the the Anglo-Saxon world) in that it places a greater emphasisgreatera placesit thatAnglo-Saxon inworld) the those who are engaged in economic analysis. beyond far resonates it such, As debate. policy German the example,fortimethe–collective onlawthe bargaining, the anti- sense, that in is, and recession a in cycle business the ideas. Conversely, unlike in other European countries and and countries European other in unlike Conversely, ideas. in sovereign bond markets. increase in its standard of living during this period, the social concept the goals, social included also and broader was it some point in their career been influenced by ordoliberalistinfluencedbybeen career their in pointsome universities. Thus, although there are differences among among differences are there although Thus, universities. law. Having helped to create rapid reconstruction and a swift Bundesbank the and competition on restraints against law expansionaryofmonetary usefiscalstabiliseandpolicies to icl n mntr interventionism. monetary and fiscal by economists such as Walter Eucken, Franz Böhm, the Böhm, in liberalism unregulated of Franz consequences the to both Eucken, Walter as such economists by Wages ofDestruction,(London:Penguin,2002). to divertresourcesaway fromconsumptiontowardswarefforts.See AdamTooze, benefited fromthemaftertheirinitialriseto power.TheNazislaterusedpricecontrols von Schleicher that preceded Hitler’s first government, the Nazis kept them in place and While manyoftheprojectshadbeendesigned underthegovernmentheadedbyKurt Nazi economicpolicyincludedpublicworks programmes financedbydeficitspending. 1 The central tenet tenet central The The economists in Germany as there are in other countries, government deficits are the only area in which co-ordination there is also a consensus around basic principles that is is needed because they can lead to a debt crisis and ultimately predominant among the German economic elite. to demands for bailouts. In order to prevent this, however, all that is needed is stringent application of the Stability and This German consensus is close to what is known Growth Pact or the new framework of deficit control that will internationally as “New Classical Economics” – that is, supersede it. As the German media and politicians constantly the modern branch of macroeconomics that builds on say: everyone just needs to do their own “homework” – that neo-classical microeconomics, with a strong influence on is, cut their own deficits. rational expectations.2 Economists of this paradigm believe that markets always work smoothly – that is, financial markets always get the price of assets right if they have all External imbalances of the relevant information. They also believe that national economies have the capacity to swiftly adjust to shocks. They A closely related issue is that of external imbalances in the focus on the supply side of the economy in order to generate euro area. Since 1999, current account deficits and current growth. Output and employment are determined mainly by account surpluses in euro countries have increased to supply factors. If demand falls short of supply, neo-classical record levels. Greece, Portugal and Spain have experienced economists believe that prices and wages will adjust swiftly deficits of 10 percent of GDP and more while Germany so that demand increases again and any excess supply rapidly has run surpluses of more than 7 percent at times. These disappears. If prices and wages sometimes do not react imbalances are now seen by many outside Germany as quickly, they would argue that this is due to legal barriers major contributing factors to the euro crisis. The definition such as collective bargaining or legal minimum wages. The of a current account deficit is the variation in a country’s net solution is structural reform to make markets more flexible. external asset position. Large current account deficits thus lead to quickly rising external debt. This perception of economic mechanisms leads to a number of policy positions. According to most economic theories, external imbalances are determined by two factors: prices and aggregate demand trends. Higher prices in one country make its products less Economic policy co-ordination competitive and therefore tend to burden the current account. Strong aggregate demand in one country increases imports While many in France believe in co-ordinating economic and hence leads to a deterioration of the current account. policy (fiscal policies, wage increases, social security contributions and taxation) across the eurozone, Germans However, the German mainstream sees current account have been more sceptical. For example, when Germany imbalances in the eurozone as a consequence of a loss of lowered social security contributions in 2008 and increased competitiveness and excessive consumption in the deficit VAT, this was perceived in France as a beggar-thy-neighbour countries and weak investment in Germany. Consequently, policy: exports became cheaper because of lower wage costs German neo-classical economists believe the solution is wage in Germany and imports dropped as increased VAT lowered restraint or outright wage cuts in deficit countries. In their real disposable income and hence aggregate consumption. eyes, such a policy would increase price competitiveness In Germany, however, few thought the move would have an in deficit countries to such an extent that exports would impact on the rest of the eurozone. Instead, it was seen as a increase and imports would fall. Stronger wage growth in measure that would improve supply conditions and hence Germany, on the other hand, would simply hamper German boost growth. From a German point of view, no co-ordination competitiveness and reduce German investment. is needed as long as everyone has the correct policies.

This German view should be seen in the context of neo-classical Budget consolidation and bailouts economic thinking, which ignores the effect of improvements in supply-side conditions in one country on the demand The German mainstream believes in quick and decisive budget conditions in others. The cut in social security contributions consolidation to be achieved through reducing government in Germany improved supply-side conditions there, leading to expenditure and, to a lesser extent, increasing taxes. more output and employment. The lack of aggregate demand Significantly cutting the deficit favourably alters debt dynamics. was not considered a serious potential problem and therefore As a result, the risk of future insolvency is reduced. At the same neither were the changes in the contribution of exports and time, less new debt and less government spending today mean imports. As a result, the German elite neglected the fallout for less taxation in the future. All this increases private sector the rest of the euro area. According to this mindset, excessive confidence, which can in turn be expected to lead to more investment. According to this view, harsh austerity measures do not necessarily lead to a deep recession but rather improve the outlook for growth. Consequently, difficulties in reaching 2 In contrast to the original neo-classical works, New Classical Economics has a stronger emphasis on rational expectations and hence on the efficiency of financial markets. fiscal targets are seen as a failure on the part of the political However, since New Classical Economics and neo-classical economics are often used class to make or pass the necessary cuts or tax increases. interchangeably in the public debate, we will also do so in the remainder of this brief. 3 The long shadow of ordoliberalism: Germany’s approach to the euro crisis 4 ECFR/49 February 2012 www.ecfr.eu ECB bond purchases Financial markets’ demand for higher risk premiums and and premiums risk higher for demand markets’ Financial TheGerman mainstream therefore believes the debt crisis in ECB has purchased bonds worth several hundreds of billions In this context,thisGermanmainstreamtheIndifficulties the sees The German mainstream therefore believes that loans from loansmainstreamthattherefore Germanbelieves The It was at the July 2011 summit that interest rates for these for rates interest that summit 2011 July the at was It Rescue packages are at best a necessary evil. Bond purchases by the ECB in order to stabilise interest interest stabilise to order in ECB the by purchases Bond as the cause of the crisis, bailouts are seen as a genuine threat. are seen as constructive disciplinary forces for profligate profligate for forces disciplinary constructive as seen are government revenue, and hence increases the deficit, is not isdeficit, theincreases hence andgovernmentrevenue, German mainstream, the programme takes off the pressurethe offprogrammemainstream,Germantakes the expected to have any significant negative economic effects. effects. economic negative significant any have to expected argument The will. of lack of case a as reductions deficit governments exploiting the low interest rates offered after after offered rates interest low the exploiting governments entry into the Economic and Monetary Union (EMU). (EMU). Union Monetary and Economic the into entry governments,EFSF orESM loans should not beaneasy way deficitfinancing could lead toinflation and anerosion ofthe worries therefore mainstream German The trend. debt countrysolventembarkedhas itevenunsustainableif an on of this. countries were cut. paid initially Ireland and Portugal Greece, fact, In effect. drawing from the EFSF should pay high interest rates so as to of euros from crisis countries since May 2010. But to the the to But 2010. May since countries crisis from euros of realise markets financial after even possible overspending out that lets them off the hook. For a long time, it has therefore widely accepted because large austerity packages are not not are packages austerity large because accepted widely rates of crisis countries are viewed with similar scepticism scepticism similar with viewed are countries crisis of rates render access to these funds unattractive – a kind of deterrent monetary system. that excessive budget consolidation reduces growth and and growth reduces consolidation budget excessive that the periphery is the result of overspending by irresponsibleoverspendingby of result the isperiphery the thus higher interest rates are seen as logical consequences consequences logical as seen are rates interest higher thus that the ECB will find it hard to limit bond purchasesbondgoinglimit to hard it findwill ECB thethat seen isborrowing governmentexcessiveSince markets. the their past mistakes and cut off the countries in question from the EFSF or ESM should be expensive.shouldbeESMfinancial orAs EFSF markets the instruments left to punish misbehaving governments. Suchgovernments. misbehavingpunish to leftinstruments Germany.in Under its“Securities Markets Programme”, the in excessive spending sprees. Moreover, it fears it might might it fears it Moreover, sprees. spending excessive in engage that governments on markets financial by imposed costs. refinancing exceeded significantly that rates interest Similarly,generalalsothereisscepticism Germany inabout faced by indebted countries in implementing promised promised implementing in countries indebted by faced financing of budget deficits through the central bank, with no forward. Ultimately, bond purchases might lead to permanent make They countries. profligate in governments by faced bonds from crisis countries, it will have an incentive to keep a become a slippery slope. Once the ECB owns large volumes of incentives the affecting risk to seen are which bailouts, been the German government’s position that countries countries that position government’s German the been The “New Keynesian” alternative With regard to the adjustment of current account imbalances, This view of economic mechanisms leads New Keynesian Keynesian New leads mechanisms economic of view This In particular, New Keynesian economists take a different different a take economists Keynesian New particular, In Pact is not enough. New Keynesian economists disagree with the mainstream mainstream the with disagree economists Keynesian New andDevelopment (OECD). While these dissenting economic as Paul Krugman and Martin Wolf – both vehement critics such of economists British and American prominent in allies and wages adjust. They emphasise a number of underlying of number a emphasise They adjust. wages and Of course, even in Germany, there are dissenting voices in the and more inflation. To prevent these negativeoutcomes,co-thesepreventinflation. Tomore and economy the overheatingof to unemploymentor more and a large extent. aggregate demand is increasing fast enough. Thus the demandfactor.ifexpand Outputonlykeywill a countrygivenisany alack of aggregate demand increases unemployment. If high are important determinants of domestic demand. Wage Wage demand. domestic of determinants important are voices are few and far between, some of their ideas have have ideas their of some between, far and few are voices as such organisations international from position German view of the flexibility of an economy and how quicklypriceshoweconomyflexibilityand thean ofof view German position that it is only deficit countries that shouldcountriesdeficitthatonly is itposition thatGerman criticism (sometimes open, sometimes more subtle) of the the of subtle) more sometimes open, (sometimes criticism economic reasons why, even after comprehensiveaftereveneconomicreasonsstructural why, economists, these of approach The debate. policy economic cycle and the measures taken, they can lead to less growth less to lead can they taken, measures the and cycle market labour in changes reforms, tax think They deficits. economic policy co-ordination in a monetary union and often German the than positions policy different to economists view, this to Accordingoutlook. growth long-termcountry’s cataloguesor menus. If prices and wages are sticky, however, creating problems of its own for deficit countries. Wages Wages countries. deficit for own its of as problems seen is creating stagnation wage nominal prolonged of or cuts ordination is needed. In this view, the Stability and GrowthStabilityand theview, this Inneeded. ordinationis reform, wages and prices only adjust slowly. For example, example, For slowly. adjust only prices and wages reform, who might be called “New Keynesian”, provides an alternative neo-classical mainstream. They tend to be more favourable to new printing of that as such costs, of number a with moraleand productivity. Changing prices are also associated the IMF and the Organisation for Economic Co-operation Co-operation Economic for Organisation the and IMF the recentsupported by feel and position– officialGermanthe their see They approach. mainstream neo-classical the to to cut its employees’ nominal wages because it underminesit becausewages nominalemployees’ its cut to trade linkages. Depending on the position in the business business the in position the on Depending linkages. trade to co-ordination that goes beyond the mere control of budget and area euro the in aggregatedemanddevelopment of the thinkingnecessarypoliticalgrasptheisorderto in dynamic irrespective of the legal environment, a company does not like institutions and shifts in the overall fiscal stance can have a haveoverallcanstancefiscal the institutions inshifts and in Germany. side of the economydeterminestheemploymentgrowthand of to side unemployment persists, it may turn structural and hamper a use wage cuts to adjust. Such a policy of nominal wage wage nominal of policy a Such adjust. to cuts wage use bearing on aggregate demand at home and abroad throughabroad and home at demandaggregate on bearing beenpicked upby centre-left parties, sounderstanding their cuts are liable to lead to a period of stagnating consumption German political parties and the euro crisis in crisis countries and in the euro area as a whole, thereby causing weak economic growth. Wages are also the main Mainstream neo-classical thinking and the ordoliberal cost factor for companies, which may pass on cost changes tradition have informed the thinking of all five main political to their customers. A policy of wage cuts could thus lead parties in Germany, but alternative New Keynesian thinking to deflationary trends in deficit countries. This is liable to has also had some influence on the opposition parties. increase the number of bankruptcies and non-performing loans and further burden the already weakened banking systems in euro crisis countries. The CDU/CSU

The proponents of this New Keynesian approach are Together with its Bavarian sister party the Christian Social not opposed to measures aimed at restraining wages or Union (CSU), the Christian Democratic Union (CDU) boosting competitiveness in deficit countries. However, they has traditionally been the biggest party in the Bundestag. encourage surplus countries to take measures to support Founded in 1945, the CDU understands itself as the party domestic demand, which can increase deficit country exports. of Europe and of the social market economy. It began in the They emphasise that budget consolidation always leads to a 1940s as an almost anti-capitalist party based on Christian short-term reduction in aggregate demand. Since prices and values (for example the Ahlen programme of 1947). But in wages do not decrease quickly enough, this leads to increased the 1950s, it began to develop the idea of the social market unemployment, which is liable to create a negative spiral economy, associated above all with Ludwig Erhard (West and send an economy into recession. Harsh fiscal austerity German economics minister from 1949 to 1963 and chancellor measures can be counterproductive because they reduce from 1963 to 1966). Over the years, the party’s economic economic growth and the tax base and increase payments programme has become more market-oriented. In the 1970s, for unemployment assistance, which in turn increases its manifestos began to include ideas such as independent budget deficits. Where austerity is pursued simultaneously monetary policy and free negotiations of salaries. During the in different countries, trade linkages multiply its negative last two decades, the CDU has moved even further away from effects. its original egalitarianism towards growth, productivity, debt reduction and the liberalisation of the market. New Keynesians argue that in many of the cases where budget consolidation did lead to stronger growth there The CDU’s analysis of the euro crisis has been heavily were special factors that do not apply within the eurozone. influenced by German mainstream neo-classical economic In particular, budget cuts were usually accompanied by a thinking. The CDU saw fiscal indiscipline as the primary currency devaluation which in turn boosted exports. In other cause of the sovereign debt crisis and therefore called for cases, the central bank cut interest rates to avoid recession. austerity and fiscal surveillance and an effort to increase New Keynesians have less faith in perfectly functioning and Europe’s productivity and growth, in particular through permanently rational financial markets and focus less on the “Euro-Plus Pact” agreed at the European Council in moral hazard issues than the German mainstream does. In spring 2011. The CDU argued against mutualisation of debt their view, rescue packages merely protect countries against and Eurobonds, invoking the Maastricht Treaty’s “no bail- volatile market sentiment, which can itself push countries out” philosophy. It believed any “community of debt” would into default. Bailouts are thus seen as important, if expensive, reduce political leverage for structural reforms and increase stabilisation instruments. moral hazard within the EU. The CDU opposed the ECB bond purchase programme – which it saw as tantamount to ECB bond purchases are also seen as a way to alleviate “printing money” – and the idea of the ECB as a lender of last pressure on governments that have been pushed into resort. The CDU advocates an independent ECB and opposes liquidity problems because of volatile market sentiment. In any monetarisation of government debt. fact, New Keynesians prefer bond purchases to other ways of bailing out indebted economies for two reasons. First, they Meanwhile, the more Eurosceptic CSU has been even more are cheaper than other measures, since it does not necessitate orthodox in its response to the euro crisis. The CSU argued capital injection by partner countries. Second, where the in favour of Greece leaving the eurozone, against the EFSF, ECB credibly announces a stabilisation of interest rates, against increases in the Greek aid tranches and, of course, interventions will be much smaller. The very announcement against Eurobonds, which it sees as “debt socialism”. Last will lead to a stabilisation in interest rates. The problem of year, Peter Gauweiler, a CSU member of the Bundestag, who moral hazard is seen as secondary, so there is little fear that had already challenged the constitutionality of the Lisbon the bond purchase programme will turn into a permanent Treaty in 2008, was a plaintiff in a suit that challenged the policy and lead to an increase in inflation. constitutionality of the EFSF. (The constitutional court rejected the claim in September 2011.) In June 2011, the CSU published a “Five-Point Plan” opposing further European integration. The CSU’s Euroscepticism has seriously reduced Chancellor Angela Merkel’s room for manoeuvre.

5 The long shadow of ordoliberalism: Germany’s approach to the euro crisis 6 ECFR/49 February 2012 www.ecfr.eu As a coalition partner in the federal government during during government federal the in partner coalition a As AdenauerLudwigchangedandErhard.1969,itsidesand In The FDP This “social-liberal” coalition, first under Willy Brandt and Brandt Willy under first coalition,“social-liberal” This The Free Democratic Party (FDP) is a classical European European classical a is (FDP) Party Democratic Free The The FDP does not believe in the co-ordination at the European It advocates harsh austerity measures and structural reform. It when Nevertheless, there are some indications that the CDU may be against the possible inflationary dangers of ECB bond bond ECB of dangers inflationary possible the against Merkel, but has lost support since then. and Portugal. However, there are legal as well as ideologicalPortugal.asandwell However, legalas thereare view that no further co-ordination, beyond stricter control stricter beyond co-ordination, further no that view deficit limits by the EU. and debt of violation of case in budgets national of control engagestructuralin reform.demands It automatic sanctions economicfreedom. Formost oftheperiod from 1949 to1966, eventually moving towards common debt issuance issuance debt common towards moving eventually crisis. Some CDU parliamentarians such as Peter Altmeier and of fiscal policies, is necessary provided every country followcountrynecessaryprovidedevery policies, is fiscal of outwiththe SPDeconomicon policy andonce again became and liberties civil on both emphasis strong a put originally neo-classical thinking. The FDP has defended the idea that idea the defended has FDP The thinking.neo-classical won a record 14.6 percent of the votes in the 2009 election and new constitution in order to allow this. receiveguaranteeseurozonefiscalothercountriesfromand willingmaketosome concessions itsapproachin theeuroto mightbringdown interest ratesforperiphery countries. This markets are in this position because of their own policy failures. It liberties. civil on than freedom economic on more much the euro crisis, the FDP’s position has, of all the five main five the all of has, position FDP’s the crisis, euro the lessertaxcutsand,ato extent, deregulation. Itsfocusnowis thejunior partner in acoalition with the Christian Democrats fell FDP the when 1982, until lastedSchmidt, Helmut then though less for economic policy than for foreign policy reasons. governmentsjuniorthepartnerKonradain was of FDP the that the party will eventually accept Eurobonds when they when Eurobonds accept eventually will party the that is turn would lower the pressure on periphery countries to countriesperiphery on pressure the lower would turn is isinfavour ofhigh interest rates forrescue loans tomaintain financial access to difficult it find that countries indebted structural reforms of its own. FDP politicians have warned have politicians FDP own. its of reformsstructural see signs of successful structural reform in Italy, Greece, Spain purchases. They have also claimed that ECB interventions ECB that claimed also have They purchases. and deficits budget cut to governments crisis on pressure politicalpartiesGermany,in mainstreamclosestbeen the to forstood has FDP 1980s,the theSince HelmutKohl.under liberal party. Founded under its current name in 1949, it it 1949, in name current its under Founded party. liberal levelofeconomic policy intheeurozone. Instead, itholds the Steffen Kampeter seem to suggest that the EU should consider for violations of the Stability and Growth Pact and a stricteraStabilityviolations andGrowththefor Pactand of formedanother coalition with the Christian Democrats under (SPD), Party Democratic Social the with coalition a formed fact, some argue that Germany would need to create an entirely barriersGermanymutualisationina to Europeanof debt.In the institutionalthe conditions Rumoursmet.suggestare if and and The SPD Europeansolidarity, muchwithstrongera focusthelatteron Euroscepticcurrentparticular,withinInFDP.number the a TheSPDhasbeenpolitical a force Germanyin formore than TheSPDchanged course again during theglobal financial and The FDP believes the solution to the problem of imbalancesproblemofthe solutionbelieves toFDPthe The n epne o h er cii, h Sca Dmcas have Democrats Social the crisis, euro the to response In Keynesianelements into their thinking and policymaking. Karl uig h 16s te oil eort itgae many integrated Democrats Social the 1960s, the During attempted to square a belief in fiscal responsibility with with responsibility fiscal in belief a square to attempted hundreda years. Whenwasfoundedit thelate innineteenth an increase in the retirement age. The SPD refrained from using against the creation of the ESM in early 2012. In a non-binding emn omns pry uig h Wia Rpbi, it Republic, Weimar the during party Communist German voted against the ESM. green”government under Gerhard Schröder passed numbera lmns rm h pry rgam. h Bd Godesberg Bad The programme. party the from elements century, it was a workers’ party with a clear Marxist and socialist economiccrisis of2008/9. TheGrand Coalition under Merkel countries to adjust. Leading figures in the FDP have repeatedly of neo-liberalof reforms, whichincluded incomecorporateand of FDP members of the Bundestag are leading a campaign a leading are Bundestag the of members FDP of was included in the German constitution in 2009. Since leaving withtheGreens asjunior coalition partner in1998. Following was only in 1959, with the Bad Godesberg programme, thatretainedMarxistits the ideology untilwelllateinto1950s.the It well so that the others can catch up. There is also a strong a also is There up. catch can others the that so well reformand result in unwanted capital flows from Germany to more favourable to Keynesian arguments. movedslightly to the left again. It has called for higher taxes to governmenta formedKeynesianism and from away moved marketeconomyprivateand property, removedandMarxist madethepoint thatone cannot askGermany performto less the coalitionthehasgeneralSPDafter the election2009,the in thestructural budget deficit to0.35 percent ofGDP. This limit theresignation financeof minister Oskar Lafontaine, the“red- taxcuts, labour market andwelfare reforms (“Hartz IV”)and the periphery. The FDP has also strongly opposed Eurobonds. into the public debate. However, in the late 1990s, the SPD the1990s, late the However,debate.inpublic the into inaGrand Coalition from 1966 to 1969 and then in the “social- its own. However, it was Social Democrat finance minister Peer in the euro area is for deficit countries rather than surplus than rather countries deficit for is area euro the in payforpublic goods.fraction A theparty ofalsoisbecoming liberal” coalition with the FDP. programmepaved theway for the SPD’s return topower, first passedsubstantiala stimulus package that the SPD claimed as partyreferendum ontheissue, 44percent ofFree Democrats Schiller,the then economics minister, brought Keynesian ideas Steinbrück who pushed for a constitutional amendment limiting SPD became a modern, social democratic party. It accepted the fiscal policy to stimulate the economy for quite some time. bent.Although itmoved tothecentre after thecreation ofthe than the CDU/CSU and repeated calls for growth packages. They did not want to see the eurozone dominated by German have made a clear commitment to rescue packages for indebted economic paradigms. They argued instead for fully-fledged countries but also insisted on austerity as a condition for common European policies, particularly in the field of R&D support. The party has therefore come out in favour of a stricter and infrastructure programmes. Stability and Growth Pact. It agreed with the government on the need for constitutional “debt brakes” to limit budget deficits The Greens also committed to the introduction of Eurobonds in all eurozone countries. At the same time, however, the SPD very early on, basing the argument on the need for European recognises that austerity will hit growth in indebted countries solidarity, deeper integration and improved fiscal co- and it wants an explicit growth strategy and investment operation. The Greens also opposed the “Euro-Plus-Pact” programme to be developed in order to counteract these effects. of spring 2011 because they saw it as “biased” towards the In addition, it has welcomed the move to cut interest rates on supply-side questions like unit labour costs and productivity rescue loans for Portugal and Ireland and does not adhere to the without also including measures such as tax harmonisation. mainstream German position that countries should pay penal Unlike mainstream neo-classical German economists, the interest rates on EFSF/ESM loans. Greens accept that Germany’s trade imbalance affects the economic equilibrium of the eurozone and they want Unlike the CDU/CSU and the FDP, the SPD has also stated “symmetric” rather than “asymmetric” adjustment within the repeatedly that closer economic policy co-ordination at the eurozone. The Greens also take a less orthodox approach to European level is needed, which should include financial market the ECB than the other German parties and are closer to the regulation and taxation issues. Leading Social Democrats more pragmatic stance of other European countries. such as Steinbrück and parliamentary leader Frank-Walter Steinmeier have also spoken out in favour of Eurobonds, but official party documents emphasise that they can only be part The Left of a package deal that would include much stricter rules for fiscal austerity in other countries.3 The SPD is opposed to ECB The anti-capitalist Left party was created in 2007 following bond purchases – in line with German mainstream economic a merger between the Party of Democratic Socialism (PDS) thinking, several party officials have warned against the danger – the successor to the former East German Communist party of possible inflation – but not as strongly as the CDU/CSU and – and the Electoral Alternative for Labour and Social Justice the FDP. (WASG), a left-wing grouping led by former Social Democrat finance minister Oskar Lafontaine. Although the Left party has participated in a few coalition governments at the state The Greens level, leading SPD politicians have repeatedly excluded a coalition with it at the national level. Although it is not The Greens are a progressive left-wing party that was founded against the EU or the euro, it voted against the Lisbon Treaty only in 1980. Its priority is to restructure the economy towards and aims to radically reorganise European economic policy sustainable development and growth. Many founding to deliver market regulation, financial market control, tax members had a Marxist background but today the party is harmonisation and a financial transactions tax, and to control relatively fiscally conservative. However, since the German speculation and capital flows and improve social justice. economic miracle does not play a role in the party’s history, it is not strongly linked to German mainstream economic As a result, the Left’s approach to the euro crisis is very thinking. Instead, the Greens aim to detach prosperity from different to that of the German neo-classical mainstream. It constant growth and some Greens oppose globalisation. has criticised the incapacity of the EU as a whole to control They have long been advocates of better financial market financial markets. Unlike the German mainstream, it has supervision and regulation, a financial transactions tax, argued that the euro crisis is a structural crisis touching the abolition of bonuses in financial services and the semi- financial markets and also a crisis of neo-liberalism. For this nationalisation of banks and financial institutions. reason, the Left opposed austerity measures for southern European countries. The Left has also argued for “democratic This background has shaped the Greens’ approach to the control of the ECB” and a broadening of the ECB’s remit to euro crisis. A significant part of the party adheres to fiscal extend it beyond that of stabilising prices.4 It does not see a austerity, albeit for different reasons than neo-classical stricter Stability and Growth Pact or penal interest rates for economists. They argue that in an economy without economic indebted countries as part of the solution to the euro crisis. growth (which some Greens favour), government debt is not The Left is also in favour of Eurobonds. Of all the five main sustainable and hence public budgets should be balanced. German parties, the Left is the most New Keynesian. But On the other hand, the Greens never thought austerity although some of its left-wing arguments are sound, it lacks was enough on its own and did not see fiscal surveillance credibility. mechanisms as the sole solution to the crisis. The Greens

4 S Die Linke, Programme der Partei DIE LINKE, Erfurt, 23 October 2011, p. 35, 3 See, for example, Frank-Walter Steinmeier and Peer Steinbrück, “Germany must available at http://www.die-linke.de/fileadmin/download/dokumente/programm_ lead fightback”, Financial Times, 14 December 2010, available at http://www.ft.com/ der_partei_die_linke_erfurt2011.pdf?PHPSESSID=c5b89fdf1162733aed6dbbaa6e2 cms/s/0/effa001c-07ba-11e0-a568-00144feabdc0.html#axzz1lzmXWwBB 2d9ff 7 The long shadow of ordoliberalism: Germany’s approach to the euro crisis 8 ECFR/49 February 2012 www.ecfr.eu to the ordoliberal / neo-classical mainstream German party positionson economic issues relative Figure 1 “++”: surplus deficit To 60% integration To demand current prescription (in government taxation To To stabilise political To bonds To Growth deficits EFSF/ESM consolidation To improved debtors Net Sum (# of “+” minus # of “-”) of To make

government what what what

what what what what what a Very

of putative

taking

countries

from

GDP)?

decisively

countries,

much

Pact,

account discretion should

extent

extent extent

extent or interest extent in extent extent extent

confidence loans

common

surplus

EMU

of

out

so; with

of brings deficits, situation

is does is payment does be

economic

does

rates? does “+”: does

–

does such

structural imbalances should the the

countries and

including

in tighter rather

forced countries?

somewhat;

imposing to the European

party party the might

the

loans quickly,

the the the

bear and

where

party difficulties?**

pay party

limits than party to

opposed opposed party

party party and

such

higher

outweigh

unattractive? accept reforms on

including

high

should

believe positive

sanctions?

believe coming unemployment

“0”: common on

economic favour

fiscal

as believe oppose believe

wages

government can’t

interest Spain debt

to to

the

come and that

effects

that

the a policies, the

both say/neutral; common

write-downs stricter

negative

liability

that and and that

growth?

the countries

ECB’s idea

by the

rates

exclusively from

stemming

more Italy

idea adjustment cutting

private

insurance?

debt

of

limitation

policy Stability beyond

is

in

effects deficit Eurobonds

in European “-”:

limited

domestic of receiving and

order

order

budget

in not

sector to closer

from case from

and

and that less buy really; the

of of to to to

“--”:

CDU

not ++ ++ ++ ++ ++ ++

12 0 at 0 / CSU

all FDP ++ ++ ++ ++ ++ ++ ++ 15 + SPD ++ ++ -3 ------0 0 - G reens ++ -7 ------+ - - L -12 ++ eft ------Summarising the German parties’ positions What would a different German government do? German party positions can be mapped according to how far they adhere to the traditional German view or alternatively As this brief shows, the political landscape in Germany is more to the New Keynesian approach. Figure 1 makes such an complex and diverse than is sometimes realised elsewhere attempt for the five main German parties, based on party in Europe. This means that the German negotiating position body decisions and party programmes, and it covers different in Europe could shift significantly should there be a change policy questions discussed abroad. It shows there is a strong in government. This is important because negotiations over difference in the parties’ approach. details of the new treaty agreed in January are likely to drag on for months and the ratification process could take Figure 2 further aggregates this information. An index value years. Moreover, the treaty may not be the last if it is deemed for each party is compiled (and presented at the bottom of insufficient by financial markets. The next general election Figure 1), adding up the plusses in the table and subtracting is scheduled to take place in September 2013. It is possible, the number of minuses. The index thus compiled can range though at the moment not likely, that the government could from minus 16 (strong opposition to all traditional German collapse before then if the FDP were to leave the coalition positions) to plus 16 (strong agreement with all traditional and the Merkel government lose its majority. In that event, German positions). While, of course, this index is very the Social Democrats or any other party would be unlikely to simplified given that it does not give differentiated weights to agree to form another Grand Coalition and the SPD would the different questions (which in itself would be problematic, probably demand early elections. as it would imply normative assumptions), it gives a good approximation where the parties stand. Figure 2 shows the Polls suggest that Merkel would be unlikely to be able to form FDP is the party closest to the neo-classical and ordoliberal another coalition with the FDP, which is expected to do much approach, the Left the party closest to the New Keynesian worse than in 2009. Whatever happens, since the FDP is the approach, with the SPD and the Greens in between. party closest to the mainstream neo-classical paradigm, a change of government is likely to result in a shift away from neo-classicism and towards New Keynesianism. The extent and nature of the shift will depend on who the coalition partners in the new government will be. There are four other possible permutations: a Grand Coalition; another “red- green” coalition between the SPD and the Greens; a “red-red- green” coalition between the SPD, the Greens and the Left; and a “black-green” coalition between the CDU/CSU and the Greens.

Figure 2 German parties’ adherence to the traditional German position in the euro crisis debate (Index: 16 Points = perfect adherence)

Complete agreement with “New Keynesian” Position

Left Party

Green Party

SPD

CDU / CSU

FDP

Complete agreement with ordoliberal / neo-classical German Position

-16 -12 -8 -4 0 4 8 12 16

9 10 The long shadow of ordoliberalism: Germany’s approach to the euro crisis ECFR/49 February 2012 www.ecfr.eu Whatever happens, however, the basic German approach to the When negotiating with Germany, its European partners should Theshift inGerman policy under Granda Coalition would be The most difficult to predict is a “black-green” coalition because European partners. interventions,ECB constructive proposals Eurobondsfor are The same goes for the question of current account imbalances: Under“red-green”a coalition, theshift might ratherbe more Democrats and also has strong support inside the Green party. and it would be unlikelywouldbeitchangeandthe thattherein a would be German stance towards the current-account adjustment, as the andfiscal policy thatmight lower Germany’s current-account anoutside perspective, the final outcome might still look very German. But it might still make life easier for Germany’s Germany’s for easier life make still might it But German. massive under be would party Left the including coalition coalitionfeaturing theSPD,theGreens andtheLefthighlyis coalition,Germany wouldalso mostlikely less beopposed to euro crisis is unlikely to change. The mainstream neo-classical thisissueonariseshould and other eurozone partners make channelling of unused EU funds into investment programmes demandpan-European investmentgrowthand programmes on issues on change a expect than rather expected, be can of the new fiscal treaty, a more promising strategy would be to of attacking excessive austerity and demanding a renegotiation theofSPDstill thinks that“Germany cannot punishedbe for minimal. The basic austerity approach would remain the same with more spending and taxation power shifted towards towards shifted power taxation and spending more with whichthere consensusisa inGermany. Forexample, instead not overly affect the German position in this regard. would like to implement elements of an expansionarywagean implementof elements to likewould morelikely to be accepted by the German political elite. From thepurchase ofgovernment bonds bytheECB. three-party A urgencyeconomic new a shouldEurobonds of questionthe the two parties have such different positions. the European level. One approach would be to demand the demand to be wouldapproach One level.European the GrandainCoalition. Butthere might somebe movement on there is a broad consensus that the burden of adjustment should shift towards the New Keynesian position. However, such a Keynesianposition.However,suchNew the towards shift significant.Sincecoalitionboth partners principle,inare, in sufficient guarantees for sustained austerity. its export successes”. A change in government would therefore “red-green”awhether. Under of than ratherwhen, and how stimulusmorepermanentbuildanda institutional structure surplus, this is not official party position. A significant portion pressureprovetoserious is it withregard economicto policy. unlikely.becameitreality,Butif a would itmean thebiggest Social Democrats open to reforms here would be marginalised understandingfromBerlin.insteadAndpushing oflarge for later.Similarly, instead opposingof balanced budgets, asking favour of Eurobonds, the discussion might become one of one become might discussion the Eurobonds, of favour for the ailing eurozone periphery to provide a short-term short-term a provide to periphery eurozone ailing the for focus on issues where some movement in the German position for more time in reaching them might be met with more more with met be might them reaching in time more for belief in the need for stricter fiscal rules is shared by the Social be borne by deficit countries. Although some Social Democrats Acknowledgements About the authors

To a large extent, this brief is the result of a workshop ECFR Ulrike Guérot is a Senior Policy Fellow and Representative organised in Berlin in December 2011 on the euro crisis, in for Germany at the European Council on Foreign Relations. which participants from the parliament, ministries, media, Previously she was Senior Transatlantic Fellow with the foundations, research institutes and financial institutions German Marshall Fund, and prior to that the head of the tried to analyse the ideological discrepancies when it comes European Union unit at the German Council on Foreign to discussing the economic origins of the euro crisis. The Relations (DGAP) in Berlin. She was also Professor for authors would like to above all thank the participants who European Studies at the Paul N. Nitze School for Advanced helped to frame the research: Alexandra Brzezinski, Dr. Arndt International Studies and worked for Jacques Delors at Notre Freiherr Freytag von Loringhoven, Sven Giegold, Thomas Europe in Paris. Fricke, Thomas Hanke, Ulrike Herrmann, Holger Kerzel, Thomas Kirchner, Jens Lorentz, Dr. Andreas Marchetti, Dr. Sebastian Dullien is a Senior Policy Fellow at the European Wolfgang Merz, Anja Mikus, Georg Schuh, Mark Schieritz, Council on Foreign Relations and a professor of International Martin Wiesmann, André Wilkens and Dr. Henning Wins. Economics at HTW Berlin, the University of Applied Sciences. From 2000 to 2007 he worked as a journalist for The brief also benefited from ongoing discussions with the Financial Times Deutschland, first as a leader writer and Thomas Bagger, Reinhard Blomert, Quentin Peel, Daniela then on the economics desk. He writes a monthly column in Schwarzer, Dr. Jörg Semmler, Shahin Vallée and Guntram the German magazine Capital and is a regular contributor to Wolff. Special support to the authors was provided by the Spiegel Online. whole ECFR Berlin office: Olaf Böhnke, Felix Mengel and the interns Thomas Linsenmaier und Linda Walter.

Finally, the heads of ECFR’s other national offices, Dimitar Bechev, Konstantin Gebert, Silvia Francescon, Thomas Klau and José Ignacio Torreblanca, provided valuable insights and perspectives from their countries on this German discussion. Last but not least, the ECFR team in London, Alba Lamberti, Nicholas Walton and Alexia Gouttebroze made the internal publication process swift and smooth, while Hans Kundnani’s editing has brought clarity to both the structure and language as always.

The authors would also like to thank the Stiftung Mercator, whose generous financial support which helped to realize this publication.

11 The long shadow of ordoliberalism: Germany’s approach to the euro crisis 12 ECFR/49 February 2012 www.ecfr.eu • • • that ECFR values-based across objective first The ABOU www.ecfr.eu individuals with Stiftung Communitas Internacionales Spanish ECFR   Ahtisaari, within and thematic meets from politicians, distinguished A its researchers communications. ECFR A offices In in ECFR, A focus. media of policy pan- distinctive research and policy development process. physical presence in the main

pan-European the Berlin,

E ECFR’ define objectives

other

has uropean is feedback

T the

has

Europe

backed

uniquely

their future

once Mercator reports, ECFR

ECFR’s E foundation are

outlets.

is

developed uropean

gatherings EU’s

task organisations

London,

or Joschka its brought to

decision platforms own

Foundation,

a

institutions. conduct activities:

European and

ECFR

on

C

member through activities

Council forces,

year by on

y

ouncil on private among

el and countries.

the

the

practitioners policy

think-tank. C

Madrid, plans

Fischer Diálogo together FRIDE

as

ouncil. a

makers, in

development

Soros Steven members

research strategy

for

of

a

innovative

meetings EU

include states

foreign

European

but

ideas

full

over to the (La research, F

capitals and

oreign

Paris, The ECFR

Exterior), open

Foundations does

body.

a

Fundación Heinz. Italian

thinkers

Launched one

and

team

and

with

from primary Mabel and policy.

Council provide

has

and an Rome, projects not

Through think-tanks, hundred R

candidate and of

help

debate,

three EU UniCredit ECFR elations

promote of

all

office the

brought

coherent, make public

and

member states. van distinguished

over outreach

is

research, para

in with ECFR

Sofia Bulgarian

Network, works

distinctive

chaired

with business October in Oranje.

geographical Members

grants advocacy

Europe debates,

(ECFR)

ECFR’s Brussels.

las informed countries

group, staff together and

has

a

effective in

Relaciones pan-European to

publication

by

partnership

the with

Warsaw. to

offices

is 2007,

strategic elements activities people to

the Martti

the

‘friends

-

and

advance

Our

a debate - advice

and which

and its

of ECFR supported develop The of business of launched political and of actors. states for and also and scholars website, The T states’ Looming fundamental system. that one on efficiency to But defending quo. HE

its seven these integrate

the

them.

for

Reinventing Germany hand, have

Warsaw. others political REIN

hosting In pan-European created

to

other. excessive too ECFR mid-2011,

and Europe’s

a scenarios

and offices featuring

discuss

behind

V

leaders, ECFR and

a lost

new EN what

long, by and

to

special

the

is economic process, an

Between

crisis: others. a

T

ECFR’s the feed patience in

legitimacy, ION holding

will

set Reinvention voters

eurozone

in ongoing

Europe

is European Europe

Europe’s

the

sovereign leaders

building Stiftung

its

Berlin,

contributions turning

also and

of relevant

OF series the

Council research perception

innovative

alternatives for

who

the

a EUROPE

scenarios with near-collapse analysis

facilitate project and

series debate

example

London,

are

they Mercator

insolvent in of

out on seemingly

leaders

have

debt of ideas

multilateral

of order publications, Reinventing

caught

its

team to Europe

are

political,

of draws

think

from and of

work activities lost be on is

for for

into

Madrid, meetings

to exploring through how

have a

banks and will an the

Europe. patience implications

find larger the between tank,

irreconcilable

staff,

of

platform on the on

unsustainable

intellectual Europe map future

decision-making Steven

the

found

future Europe

Germany a

the by

evolving including

and Paris,

and

Council appeals. zone

and

in

EU’s

various

Council

ECFR out unique

with

of EU

global

some themselves in of Heinz. its is

more

Rome, projects

Europe of political

a

order of

seen member

Europe. network

has

debate series globalisation members, and

in the demands

discussion

the

scenarios

ECFR members

assets member markets

Europe status

also

by possible.

to Sofia crisis

on

are

of on

is other

its

, the

of Also available Supporting Moldova’s Egypt’s Hybrid Revolution: Ukraine after the Tymoshenko from ECFR Democratic Transition a Bolder EU Approach verdict Nicu Popescu, October 2009 Anthony Dworkin, Daniel Korski Andrew Wilson, December 2011 New World Order: The Balance (ECFR/17) and Nick Witney, May 2011 (ECFR/47) of Soft Power and the Rise of (ECFR/32) Herbivorous Powers Can the EU rebuild failing European Foreign Policy Ivan Krastev and Mark Leonard, states? A review of Europe’s A Chance to Reform: How the Scorecard 2012 October 2007 (ECFR/01) Civilian Capacities EU can support Democratic February 2012 (ECFR/48) Daniel Korski and Richard Gowan, Evolution in Morocco A Power Audit of EU-Russia October 2009 (ECFR/18) Susi Dennison, Nicu Popescu Relations and José Ignacio Torreblanca, Mark Leonard and Nicu Popescu, Towards a Post-American May 2011 (ECFR/33) November 2007 (ECFR/02) Europe: A Power Audit of EU-US Relations China’s Janus-faced Response Poland’s second return to Europe? Jeremy Shapiro and Nick Witney, to the Arab Revolutions Paweł Swieboda, December 2007 October 2009 (ECFR/19) Jonas Parello-Plesner and (ECFR/03) Raffaello Pantucci, June 2011 Dealing with Yanukovych’s (ECFR/34) Afghanistan: Europe’s Ukraine forgotten war Andrew Wilson, March 2010 What does Turkey think? Daniel Korski, January 2008 (ECFR/20) Edited by Dimitar Bechev, June (ECFR/04) 2011 (ECFR/35) Beyond Wait-and-See: Meeting Medvedev: The Politics The Way Forward for What does Germany think of the Putin Succession EU Balkan Policy about Europe? Andrew Wilson, February 2008 Heather Grabbe, Gerald Knaus Edited by Ulrike Guérot and (ECFR/05) and Daniel Korski, May 2010 Jacqueline Hénard, June 2011 (ECFR/21) (ECFR/36) Re-energising Europe’s Security and Defence Policy A Global China Policy The Scramble for Europe Nick Witney, July 2008 (ECFR/06) François Godement, June 2010 François Godement and Jonas (ECFR/22) Parello-Plesner with Alice Can the EU win the Peace in Richard, July 2011 (ECFR/37) Georgia? Towards an EU Human Rights Nicu Popescu, Mark Leonard and Strategy for a Post-Western Palestinian Statehood at the Andrew Wilson, August 2008 World UN: Why Europeans Should (ECFR/07) Susi Dennison and Anthony Vote “Yes” Dworkin, September 2010 Daniel Levy and Nick Witney, A Global Force for Human (ECFR/23) September 2011 (ECFR/38) Rights? An Audit of European Power at the UN The EU and Human Rights The EU and Human Rights at Richard Gowan and Franziska at the UN: 2010 Review the UN: 2011 Review Brantner, September 2008 Richard Gowan and Franziska Richard Gowan and Franziska (ECFR/08) Brantner, September 2010 Brantner, September 2011 (ECFR/24) (ECFR/39) Beyond Dependence: How to deal with Russian Gas The Spectre of a Multipolar How to Stop the Pierre Noel, November 2008 Europe Demilitarisation of Europe (ECFR/09) Ivan Krastev & Mark Leonard Nick Witney, November 2011 with Dimitar Bechev, Jana (ECFR/40) Re-wiring the US-EU relationship Kobzova & Andrew Wilson, Daniel Korski, Ulrike Guerot and October 2010 (ECFR/25) Europe and the Arab Mark Leonard, December 2008 Revolutions: A New Vision for (ECFR/10) Beyond Maastricht: a New Democracy and Human Rights Deal for the Eurozone Susi Dennison and Anthony Shaping Europe’s Afghan Surge Thomas Klau and François Dworkin, November 2011 Daniel Korski, March 2009 Godement, December 2010 (ECFR/41) (ECFR/11) (ECFR/26) Spain after the Elections: the A Power Audit of EU-China The EU and Belarus after “Germany of the South”? Relations the Election José Ignacio Torreblanca and John Fox and Francois Godement, Balázs Jarábik, Jana Kobzova Mark Leonard, November 2011 April 2009 (ECFR/12) and Andrew Wilson, January (ECFR/42) 2011 (ECFR/27) Beyond the “War on Terror”: Four Scenarios for the Towards a New Transatlantic After the Revolution: Europe Reinvention of Europe Framework for Counterterrorism and the Transition in Tunisia Mark Leonard, November 2011 Anthony Dworkin, May 2009 Susi Dennison, Anthony Dworkin, (ECFR/43) (ECFR/13) Nicu Popescu and Nick Witney, March 2011 (ECFR/28) Dealing with a Post-Bric Russia The Limits of Enlargement-lite: Ben Judah, Jana Kobzova and European and Russian Power in European Foreign Policy Nicu Popescu, November 2011 the Troubled Neighbourhood Scorecard 2010 (ECFR/44) Nicu Popescu and Andrew March 2011 (ECFR/29) Wilson, June 2009 (ECFR/14) Rescuing the euro: what is The New German Question: China’s price?’ The EU and human rights at the How Europe can get the François Godement, November UN: 2009 annual review Germany it needs 2011 (ECFR/45) Richard Gowan and Franziska Ulrike Guérot and Mark Leonard, Brantner, September 2009 April 2011 (ECFR/30) A “Reset” with Algeria: the (ECFR/15) Russia to the EU’s South Turning Presence into Power: Hakim Darbouche and Susi What does Russia think? Lessons from the Eastern Dennison, December 2011 edited by Ivan Krastev, Mark Neighbourhood (ECFR/46) Leonard and Andrew Wilson, Nicu Popescu and Andrew September 2009 (ECFR/16) Wilson, May 2011 (ECFR/31)

13 14 The long shadow of ordoliberalism: Germany’s approach to the euro crisis ECFR/49 February 2012 www.ecfr.eu Parliament; formerPrimeMinister former PresidentoftheEuropean Member oftheEuropeanParliament; Jerzy and CentralEurope Chairman of the Institute for the Danube E Writer andacademic I Minister (Taoiseach) Ambassador totheUSA;formerPrime Former EuropeanCommission John defence and spokesperson forforeignaffairs Member ofParliamentand (The H Commissioner Vice PresidentoftheSenate;formerEU E President ofVenture EquityBulgariaLtd. Founder, CommunitasFoundation and S Private Employers–Lewiatan President, PolishConfederationof H Foreign Minister C Council; formerPrimeMinister Chairman, PrimeMinister’s Economic Jan Krzysztof Reconstruction andDevelopment Chief Economist,EuropeanBankfor E GmbH Roland BergerStrategyConsultants Chairman, Founder andHonorary R former PrimeMinister Governor, NationalBankofPoland; M Deputy Director, ElPaís L Prime Minister School ofEconomics;formerDeputy Professor ofEconomicsattheWarsaw L Minister Member ofParliament;formerForeign D Former PrimeMinister G Member ofParliament G Chairman, EnciclopediaTreccani Chairman, CentreforAmericanStudies; President oftheEuropeanConvention; Former PrimeMinisterandvice G President Management Initiative;former Chairman oftheBoard,Crisis M Party spokesperson fortheSocialDemocratic Committeeandforeignpolicy Affairs Deputy ChairmanoftheForeign U and ChairmanofBavarianNordicA/S President andCEO,A.J.AamundA/S A countries. candidate and states member EU the from figures cultural and activists leaders, business intellectuals, public ministers, and parliamentarians former and current commissioners, European presidents, ministers, prime former are Relations Foreign on Council European the of members Among an luís eszek rhard mma rik vetoslav oland arl sger ora rban an ten enryka ordon ustavo de iuliano arek artti B B B N B uruma (The B erglöf ( B B ildt ( assets ( A etherlands) A ruton ( A akoyannis ( B B B uzek ( B B amund ( htisaari ( B onino ( hlin ( elka ( usek ( alcerowicz ( B A erger ( B ajnai ( B roeke S mato ( ochniarz ( ojilov ( weden) A S S P I ristegui ( S weden) reland) P B weden) A oland) pain) I oland) ielecki ( taly) G H ustria) D

F I N ermany) ungary) taly) B enmark) inland) G etherlands) ulgaria) reece) P P oland) oland) S P pain) oland) I International ChamberofCommerce Generalofthe Former Secretary ( M Cooperation Minister forInternationalDevelopment G former ForeignMinister Chairman, BalticDevelopmentForum; U Research Institute,SIPRI Stockholm InternationalPeace National Minorities;formerChairman former OSCEHighCommissioneron Nations SpecialCommissiononIraq; Former ExecutiveChairman,United R Former FinanceMinister H Foreign Minister M Member oftheEuropeanParliament A On-line Chair, Dog˘an GazetecilikandDog˘an H President, DEMOSHungary Tibor Economy andDevelopment Vice-President andDirectorofGlobal Kemal (Bratislava) Marshall FundoftheUnitedStates Senior Transatlantic Fellow, German P Parliament formerMemberoftheEuropean office; (Confindustria)-Brussels Industry Director, ConfederationofItalian G former PrimeMinister Member oftheEuropeanParliament; Jean- Poet andCulturalCritic A Foreign Minister A Affairs ofStateforForeign Under Secretary M Minister andForeign Progressive Studies;formerPrime President, FoundationforEuropean President, ItalianieuropeiFoundation; M (SNSPA); formerFinanceMinister of PoliticalandAdministrativeStudies Professor ofEconomics,NationalSchool D the ThyssenKrupp Boardof Chairman oftheSupervisory G Action Service Counsellor oftheEuropeanExternal R Member oftheEuropeanParliament D former StateSecretary Ambassador totheUnitedKingdom; N of EastAnglia;formerHomeSecretary Visiting ProfessorofPolitics,University C Minister ofDefence C Director of Melak Investments/Journalist pek S olf avol obert harles armen ndrew leš hmet aniel aniel ffe ans anzade icola unilla ianfranco erhard witzerland) aria ikuláš arta assimo E D C E keus ( D E L llemann-Jensen ( D em Taha (Turkey) ebeljak ( L D uc ichel ( C D C D essewffy ( D C ivanos emeš ( C C lase ( D assù ( ohn- D aianu ( ervis (Turkey) C ooper ( avutoglu (Turkey) arlsson ( C larke ( D D D zurinda ( hacón ( uff ( romme ( ’ ehaene ( og˘an S A D weden) G B lema ( ell’ S U I S ermany) endit ( C taly) weden) S R lovakia) nited Kingdom) U U attaui lovenia) A omania) B H nited Kingdom) S S nited Kingdom) lba ( oyner (Turkey) weden) S pain) ungary) G I lovakia) taly) B ermany) G elgium) I ermany) taly) D enmark) Minister Gulbenkian Foundation;formerForeign Trustee totheBoardofCalouste ( Teresa International Relations(IPRI) Chairman ofthePortugueseInstitute C University Professor ofEuropeanStudies,Oxford ( Timothy former ForeignMinister Former SpeakeroftheParliament; Jaime for Climate,EnergyandGenderEquality Member ofParliament;formerMinister L Investment Bank Business Leader;formerCEOCarnegie Karin Chancellor Former ForeignMinisterandvice- Joschka Foreign Minister President, ChamberofDeputies;former G Member oftheEuropeanParliament Tanja Policy Representative forForeignandSecurity European CommissionandEUHigh Adviser totheVicePresidentof S former EuropeanCommissioner Member oftheEuropeanParliament; D Former NATO General Secretary (The Jaap de País; President,FRIDE Co-founder ofSpanishnewspaperEl D Foundation Washington DC Executive Director, Bertelsmann A Lansdowne PartnersLtd Co-Founder &Co-Chairman, S Minister forInternationalDevelopment H former DefenceMinister Chairman, DefenceCommission; H for DemocraticTransition President andCEO,InternationalCentre I Former DefenceMinister ( Karl-Theodor zu European ExternalActionService Head oftheUSandCanadaDivision, ( F at theUN General forPeacekeepingOperations Institution; formerUnder-Secretary- (New York); SeniorFellow, Brookings Conflict Resolution,ColumbiaUniversity Director oftheCentreonInternational Jean- Director, CentreforEuropeanReform C – Brussels Executive Director, OpenSocietyInstitute ( H stván P U G P U ykke ernando teven teven arlos harles nnette anuta iego eidi ans eather ianfranco ortugal) ortugal) nited Kingdom) nited Kingdom) ermany) N H M H F F F etherlands) H G G G ajon ( orseke ( P riis ( ækkerup ( autala ( E H arie H G idalgo ( yarmati ( ama ( atricio aspar ( verts (The G F H H G einz ( ischer ( übner ( rant ( A arton euser ( oop rabbe D ndresen F G S enmark) ini ( lovenia) uéhenno ( P A S S F U G P ortugal) S ustria) weden/ cheffer inland) I A nited Kingdom) G ortugal) pain) G ouveia P taly) G H

D sh oland) ermany) uttenberg ermany) N ungary) enmark) G etherlands)

uimarães

USA F rance) ) (The International Cooperation and Minister forEuropeanAffairs B Writer andcolumnist O Editorial Director, LeMonde S diplomacy of Turkey onforeignpolicyandpublic Senior AdvisortothePrimeMinister I Professor, LondonSchoolofEconomics M Society Foundation International AdvocacyDirector, Open M Allianz SE Global HeadofGovernmentAffairs Chairman, MunichSecurityConference; W President Toomas Initiative Executive Director, CrisisManagement Former Ambassadorandformer Jaakko Member oftheEuropeanParliament A European Parliament Brussels; formerMemberofthe programme, EuropeanPolicyCentre, Course leaderoftheFutureLabEurope M CEO, MenemshaLtd A former MinisterofJustice Member oftheEuropeanParliament; ( Juan Relations Director, EuropeanCouncilon Foreign M Minister forFood,Agriculture&Fishing B Commissioner Director-General ofWTO;former EU President,NotreEuropeand Honorary P Member oftheEuropeanParliament ( A formerForeignMinister Service; Central Asia,EuropeanExternalAction Managing DirectorforEuropeand M Minister Minister ofDefence;formerPrime M Former President A Strategies Chair ofBoard,CentreforLiberal I Former MinisterofForeignAffairs B University Graduate SchoolofDesign,Harvard Architect andurbanist;Professoratthe R Initiative Executive DirectoroftheArabReform B former StateSecretary Vice Chairman,DeutscheBankGroup; C Initiative andCarrCenterFellow Chairman oftheEuropeanStability G brahim Kalin (Turkey) van Krastev ( S G ylvie Kauffmann ( ascal em Koolhaas (The en Knapen (The runo ernard Kouchner ( assma Kodmani ( aio Koch- nna dam lexander leksander Kwas´niewski ( erald Knaus ( lli Kivinen ( pain) ary Kaldor ( inna Järvenpää ( ichiel van ark iroslav art olfgang ermany) N F L L I etherlands) brisagic ( ernando aar ( L L eonard ( L e ury ( I amy ( I loniemi ( lves ( L M ajcˇák ( I schinger ( G W E aire ( H U stonia) F raf eser ( inland) B ulten U nited Kingdom) F E rance) stonia) A ulgaria) nited Kingdom) U S L L ustria) S F weden) ópez F nited Kingdom) ambsdorff rance) lovakia) N inland) G F F F

etherlands) F rance) rance) inland/ N ermany) rance) G etherlands) A ermany) guilar P US oland) ) Emma Marcegaglia (Italy) Vesna Pusic´ (Croatia) Paweł S´wieboda (Poland) President, Confindustria Foreign Minister President, Demos EUROPA – Centre for European Strategy David Miliband (United Kingdom) Robert Reibestein Member of Parliament; Former (The Netherlands) Teija Tiilikainen (Finland) Secretary of State for Foreign and Director, McKinsey & Company Director, Finnish Institute for Commonwealth Affairs International Relations George Robertson (United Alain Minc (France) Loukas Tsoukalis (Greece) President of AM Conseil; former Kingdom) Professor, University of Athens and chairman, Le Monde Former Secretary General of NATO President, ELIAMEP Nickolay Mladenov (Bulgaria) Albert Rohan (Austria) Erkki Tuomioja (Finland) Foreign Minister; former Defence Former Secretary General for Foreign Foreign Minister Minister; former Member of the Affairs European Parliament Daniel Valtchev, (Bulgaria) Adam D. Rotfeld (Poland) Former Deputy PM and Minister of Dominique Moïsi (France) Former Minister of Foreign Affairs; Education Senior Adviser, IFRI Co-Chairman of Polish-Russian Group on Difficult Matters, Commissioner of Vaira Vike-Freiberga (Latvia) Pierre Moscovici (France) Euro-Atlantic Security Initiative Former President Member of Parliament; former Minister for European Affairs Norbert Röttgen (Germany) Antonio Vitorino (Portugal) Minister for the Environment, Lawyer; former EU Commissioner Nils Muiznieks (Latvia) Conservation and Nuclear Safety Director, Advanced Social and Political Andre Wilkens (Germany) Research Institute, University of Latvia Olivier Roy (France) Director Mercator Centre Berlin and Professor, European University Institute, Director Strategy, Mercator Haus Hildegard Müller (Germany) Florence Chairwoman, BDEW Bundesverband Carlos Alonso Zaldívar (Spain) der Energie- und Wasserwirtschaft Daniel Sachs (Sweden) Ambassador to Brazil CEO, Proventus Wolfgang Münchau (Germany) Stelios Zavvos (Greece) President, Eurointelligence ASBL Pasquale Salzano (Italy) CEO, Zeus Capital Managers Ltd Vice President, International Institutional Kalypso Nicolaïdis Affairs, ENI Samuel Žbogar (Slovenia) Foreign Minister (Greece/France) Stefano Sannino (Italy) Professor of International Relations, Director General for Enlargement, University of Oxford European Commission Daithi O’Ceallaigh (Ireland) Marietje Schaake Director-General, Institute of International and European Affairs (The Netherlands) Member of the European Parliament Christine Ockrent (Belgium) Editorialist Pierre Schori (Sweden) Chair of Olof Palme Memorial Fund; Andrzej Olechowski (Poland) former Director General, FRIDE; former Former Foreign Minister SRSG to Cote d’Ivoire Dick Oosting (The Netherlands) Wolfgang Schüssel (Austria) CEO, European Council on Foreign Member of Parliament; former Relations; former Europe Director, Chancellor Amnesty International Karel Schwarzenberg Mabel van Oranje (Czech Republic) (The Netherlands) Foreign Minister CEO, The Elders Giuseppe Scognamiglio (Italy) Marcelino Oreja Aguirre (Spain) Executive Vice President, Head of Public Member of the Board, Fomento de Affairs, UniCredit Spa Construcciones y Contratas; former EU Commissioner Narcís Serra (Spain) Chair of CIDOB Foundation; former Vice Cem Özdemir (Germany) President of the Spanish Government Leader, Bündnis90/Die Grünen (Green Party) Radosław Sikorski (Poland) Foreign Minister Ana Palacio (Spain) Former Foreign Minister; former Senior Aleksander Smolar (Poland) President and General Counsel of the Chairman of the Board, Stefan Batory World Bank Group Foundation Simon Panek (Czech Republic) Javier Solana (Spain) Chairman, People in Need Foundation Former EU High Representative for the Common Foreign and Security Policy & Chris Patten (United Kingdom) Secretary-General of the Council of the Chancellor of Oxford University and co- EU; former Secretary General of NATO chair of the International Crisis Group; George Soros (Hungary/USA) former EU Commissioner Founder and Chairman, Open Society Diana Pinto (France) Foundations Historian and author Teresa de Sousa (Portugal) Jean Pisani-Ferry (France) Journalist Director, Bruegel; Professor, Université Goran Stefanovski (Macedonia) Paris-Dauphine Playwright and Academic Ruprecht Polenz (Germany) Rory Stewart (United Kingdom) Member of Parliament; Chairman of the Member of Parliament Bundestag Foreign Affairs Committee Alexander Stubb (Finland) Lydie Polfer (Luxembourg) Minister for Foreign Trade and Member of Parliament; former Foreign European Affairs; former Foreign Minister Minister Charles Powell Michael Stürmer (Germany) (Spain/United Kingdom) Chief Correspondent, Die Welt Deputy Director, Real Instituto Elcano Ion Sturza (Romania) Andrew Puddephatt President, GreenLight Invest; former (United Kingdom) Prime Minister of the Republic of Director, Global Partners & Associated Moldova Ltd. 15 Published inassociationwith [email protected] 35 OldQueenStreet,London,SW1H9JA,UnitedKingdom Published bytheEuropeanCouncilonForeignRelations(ECFR), ISBN: 978-1-906538-49-1 © ECFRFebruary2012. its authors. Relations, representsonlytheviewsof of theEuropeanCouncilonForeign positions. Thispaper,likeallpublications Relations doesnottakecollective The EuropeanCouncilonForeign Relations. of theEuropeanCouncilonForeign requires thepriorwrittenpermission and non-commercialuse.Anyotheruse publication exceptforyourownpersonal circulate inanywaythecontentfromthis You maynotcopy,reproduce,republishor European CouncilonForeignRelations. Copyright ofthispublicationisheldbythe

Design by David Carroll & Co davidcarrollandco.com