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Research: German policies bad for Southern Europe

Germany dominates economic policy in Europe. But this dominance has costs. New University of Copenhagen research

German economic thinking has brought on unintended consequences to some of the EU member states of Southern Europe. This is according to new research from the EuroChallenge project, a part of University of Copenhagen’s (UCPH) Excellence Programme for Interdisciplinary Research.

Germany is the largest economy in the European Union with an unmatched low level of unemployment and a high level of export growth. Other EU member states view Germany’s superior position as one that implies having special responsibilities. They expect the Germans to lead in the same way they did during the crisis with Greece this summer. But a newly published analysis of the German economic thinking by EU researcher Professor Peter Nedergaard and assistant professor Holly Snaith provides reasons to be less optimistic about the potential for German leadership in the Eurozone.

”The German solution to the Eurozone crisis works for the countries of Northern Europe with Germany as the centre, but the German way of thinking about economic policy causes several unintended consequences for the South – including Greece,” says Professor Peter Nedergaard, The Department of Political Science, UCPH.

German officials: The only way

Labour market reforms, low inflation, strict fiscal discipline, austerity and balanced budgets all represent a rock solid German formula for German success, but it will not be easy for Southern European countries to make progress by adapting this formula, according to Peter Nedergaard.

Peter Nedergaard: “The officials had few considerations about what consequences the German take on European policy may have on other European countries”

Together with his colleague at UCPH, Assistant Professor Holly Snaith, Peter Nedergaard assessed the impact of the German political economic thinking on European economic policy. The two scholars trace economic and political thinking back to the initiation of the European Monetary Union (the EMU) and portray how it evolved until today with the almost insurmountable economic crisis in Southern Europe. The scholars have interviewed ten top officials from the German Ministry of Finance and Ministry of Foreign Affairs. Among many questions, the officials were asked about their thoughts regarding the spread of German economic policy to the rest of Europe.

”Essentially, the German top officials participating in this study believe that their way of conducting economic policy is the only right way. The officials had few considerations about what consequences the German take on European policy may have on other European countries”, says Peter Nedergaard.

Situation in Greece is different

As an example, Peter Nedergaard points to German expectations on a sky-rocketing youth unemployment in Greece. According to Nedergaard, German officials expect Greece to start liberalising their labour market – just as was done in Germany. From 2003-2005 the so-called ‘Hartz reforms’ lowered the minimum wage in Germany, made part time work more widespread and made it easier for employers to dismiss workers.

Peter Nedergaard: ”Our analysis clarifies how the ordoliberal philosophy is easily activated – like an auto-pilot that is switched on – whenever Germany is making crucial decisions that affect European politics.”

This resulted in a low level of unemployment and more flexibility on the German labour market, but the situation in Greece is different, and, apparently, Germany does not take this into account.

”Germany has a welfare system that ensures that people have access to unemployment benefits when they are temporarily unemployed or when they are at risk of being forced out of the labour market. The important difference is that Greece does not have such a comprehensive welfare system that supports people when they lose their job. Regardless of how you might consider the way Greece has conducted economic policy historically, it is clear that with the lack of a fully functioning system of unemployment and other social benefits, Greece is left in a very difficult situation when facing the task of liberalising the labour market”, explains Peter Nedergaard.

German ‘ordoliberalism’

German officials did not foresee the negative consequences brought upon Southern Europe, Peter Nedergaard and Holly Snaith argue. And the consequences now faced by Southern Europe should be seen in the light of the fact that German economic policy is influenced by a long tradition of economic thinking.

The two scholars revisit a classical theory formulated by Robert Merton in 1936 about unintended consequences. The scholars apply Merton’s theoretical framework to the policy solutions that were inspired by German thinking and which were adapted in order to deal with latest Eurozone crisis. They show how these solutions derive from a line of thinking rooted in ordoliberalism, an older German economic philosophy. Ordoliberalism is to be understood as German ‘Ordnungspolitik’ – an ordered way of conducting government policies that enables the efficient functioning of a free market.

”Our analysis clarifies how the ordoliberal philosophy is easily activated – like an auto-pilot that is switched on – whenever Germany is making crucial decisions that affect European politics. Unfortunately, this also means that Germany is losing control over the Eurozone crisis, as the best solution may not necessarily be to keep providing economic assistance to Greece in an attempt to force a ‘German’ solution down their throats”, says Peter Nedergaard.

A third bailout providing EUR 86 billion was recently approved for Greece. According to Peter Nedergaard, it is uncertain if and when another Eurozone crisis might strike, or how the Eurozone might develop in the future.

The article As I Drifted on a River I Could Not Control’: The Unintended Ordoliberal Consequences of the Eurozone Crisis was recently published by Peter Nedergaard and Holly Snaith in the journal JCMC: Journal of Common Market Studies.

The two authors have also written a blog post on the blog EUROPP – European Politics and Policy, London School of Economics.

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