Germany and the euro-zone crisis: between hegemony and domestic
politics1
Simon Bulmer
University of Sheffield
[email protected]
Paper for the SPERI conference on ‘Austerity vs Growth: The Future of the
European Political Economy’, University of Sheffield, 1-3 July 2013.
Draft: Not for quotation without author’s permission
1
Introduction: German centrality
The financial and euro-zone crises have combined to present the biggest challenge to the
European economy in the post-war period. Not only have individual states faced fundamental
challenges but the European integration project has been placed under the spotlight as well.
Thus, whilst most individual states have had to try and come to terms with changed economic
realities, for the European Union (EU), and in particular the euro-zone, serious questions
have been posed about their ability to respond in a timely manner both to the longer-term
challenges of policy adaptation as well as to the shorter term ones emanating from the
financial markets. It is no exaggeration to say that the questions posed for the euro-zone are
existential, while the implications for integration are likely to be profound.
On the economic side the euro-zone crisis has revealed the need to set up suitable
funding schemes for states whose public finances become unsustainable. It has revealed the
need to have stronger budgetary oversight than originally designed into monetary union, such
as through fiscal union. It has revealed the need for much stronger banking supervision, given
the way that private sector debt pushed Ireland and Spain into the crisis. And, at the same
time, the EU needs to encourage economic growth in such a way as to restore stable public
finances over the longer term. There are a number of political challenges as well. They relate
to efficiency and democracy in the decision-making process. Efficiency has been undermined
by the ambiguity over leadership in the euro-zone crisis. The interventions of the President of
the European Central Bank, the President of the European Council, the President of the eurogroup Council and the President of the European Commission, plus that of the German
government (intermittently in joint initiatives with France) have neither impressed the
financial markets for a sustained period nor offered the clear leadership necessary to gather
output legitimacy from the public. Equally, the formal democratic legitimation for the
resultant policy measures is lacking. None of the afore-mentioned euro-zone or EU-level
2
politicians is elected in the conventional sense, and the perception of Chancellor Merkel
being decisive raises concerns relating to German dominance in policy making.
This article examines the role of Germany, the largest economy and creditor state, and
thus central to the outcome of the euro-zone crisis. In the context of a longer-term review of
German centrality to economic and monetary integration as well as to integration more
widely, it will argue that the euro-zone crisis has led to Germany falling back on its ordoliberal principles at a time when its principled commitment to the integration process has
declined. The article then explores this shift in German preferences during the euro-zone
crisis. On one hand, euro-zone and EU states have placed strong expectations upon Germany
to provide solutions to the crisis, especially as it is the leading economy. Berlin has been
expected to play the role of benevolent hegemon, offering the necessary public goods to
assure the euro-zone’s stability. However, the policy prescriptions arising from its ordoliberal principles are divisive in the euro-zone because of their impact in the debtor states.
Any prospect of a moderation of the austerity policies emanating from Berlin is limited
because of the domestic support for them in Germany. Much more than in previous episodes
of integration, public opinion, party-political circumspection and the role of domestic
institutions such as the Federal Constitutional Court have acted as constraints upon the
federal government’s policy manoeuvrability. The domestic politicization of European policy
is arguably at its highest level since the 1950s. Germany has found itself in a position where
its twin postwar principles of sound money and European integration are in conflict (Wolf
2010).
Historical context: of sound money and European integration
The ordo-liberal tradition
In this first section of the article I explore how these two principles have played out over the
course of European monetary integration. The (West) German model of capitalism is
3
understood to be a co-ordinated market economy characterised by ‘a unique configuration of
institutional mechanisms to co-ordinate capital, labour and public authority’ (Kitschelt and
Streeck 2004: 2). The key principles in relation to the euro-zone crisis are the ongoing
commitment to monetary stability, international competitiveness and a fiscal conservatism
that flirted only relatively briefly with Keynesianism. Ordo-liberalism provided the
intellectual underpinning.2 Two experiences of hyper-inflation reinforced the commitment to
a culture of monetary stability. The Bundesbank, established in 1957, was key to this
commitment and given a very high degree of independence (Marsh 1993). As Peter
Katzenstein (1987: 107) put it in his ‘semi-sovereign’ interpretation of West Germany
economic policy: ‘Coalition governments, cooperative federalism, and parapublic institutions
create a dense network of multiple dependencies which inhibits all actors, including the
federal government, from taking bold steps in new directions’. This institutional nexus was
perceived as a strength but can also be regarded as a weakness if the policy process cannot
keep pace with economic change. Thus Kitschelt and Streeck (2004: 3) later argued that it
was ‘the very stability and incrementalism of its political system—once a distinctive German
asset—[that] now seems to stand in the way of a constructive response to the new and highly
uncertain demands of a changed world’. These attributes contribute to the caution of the
federal government’s response to the euro-zone crisis, as will be seen.
Tensions between European integration as an overarching foreign policy goal and
economic and monetary stability objectives are not new with the euro-zone crisis. Indeed,
Dyson and Featherstone (1999: 275) sought to trace such differences back to the divergences
between Adenauer and Erhard about their respective political and economic views of the
value of European integration to the West German economy. Unsurprisingly, therefore,
earlier episodes in monetary integration necessitated some balancing of Germany’s proEuropeanism with the commitment to ‘sound money’. During the initial attempt at Economic
4
and Monetary Union, commencing in 1969, Germany was firmly in the economist camp that
comprised those who wished to see economic convergence before monetary union, at a late
stage, became the ‘coronation’ of EMU (in German, the Krönungstheorie). France led the
other camp, the monetarists, who favoured the initial creation of a monetary bloc that would
oblige economic convergence. Imported inflation was a particular German fear about the
latter strategy (Tsoukalis 1977: 92-3), and the limit to what German negotiators were
prepared to entertain was a strict parallelism between economic and monetary integration.
Despite parallelism being the route-map proposed in the Werner Report, international
monetary turbulence put paid to the original plans for EMU, with it eventually becoming a
small group of states led by Germany (in the so-called mini-Snake). The resultant
arrangement therefore did not entail conflict between sound money and (geographically
limited) integration.
During the gestation of the European Monetary System (EMS) in the late-1970s
Chancellor Schmidt and his economic advisers played a central role in shaping the agreement
with partner states but also securing domestic support from the Bundesbank (Ludlow 1982:
135-9). As the system developed it became clear that the key policy decisions were those
taken by the Bundesbank, such that interest rate changes in Frankfurt were closely shadowed
by other states. With the D-Mark as the anchor of the system, the asymmetrical nature of the
EMS therefore did not challenge German stability culture, and the system’s achievements
could satisfy the twin goals of sound money and (a particular form of) European integration.
Part of the appeal to France of EMU in the Maastricht Treaty—beyond the wider goal
of binding the reunified Germany further into integration—was prospective liberation from
being a policy-taker from decisions made in Frankfurt. German elites’ preparedness to move
to the rules established in the Maastricht Treaty was enabled by the large-scale export of
German policy models to the EU level: the stability rules written into the convergence criteria
5
on entry into the single currency (and later in the Stability and Growth Pact); and the very
strong impact of the Bundesbank upon the statute for the European Central Bank (Bulmer,
Jeffrey and Paterson 2000: 92-103). In addition, Chancellor Kohl’s key role in the European
Council as well as his overall commitment to integration was important in setting the tone of
negotiations. Nevertheless, while emphasizing that there was no major conflict between the
two camps, differing German motivations could be detected in the Maastricht negotiations,
reflecting ordo-liberalism and pro-integrationism (Dyson and Featherstone 1999: 262-3).
Thus Chancellor Kohl, officials in the Federal Chancellor’s Office together with the Foreign
Office saw the wider challenges posed by reunification for Europe’s international order. The
‘ordo-liberal coalition’ had seen progress in economic convergence with France develop
through the EMS and welcomed the member states’ progress to a single market. Even so, the
Bundesbank and the federal ministry of finance insisted on the institutionalisation of sound
money principles. Dyson and Featherstone note that there was some fragmentation within the
ordo-liberal coalition, however, with academic economists being marginalized.3
German public opinion had been resistant to abandoning the D-Mark because it had
been one of the symbols of West German success when national symbols were problematic
due to the Nazi legacy and Germany’s continuing division. Similarly, the Bundesbank had
attained a high level of public respect. It was for these reasons that the strong reliance of the
European Central Bank on the Bundesbank model was reassuring domestically, as was the
ECB’s subsequent location in Frankfurt. Promoted at EU level by German Finance Minister
Theo Waigel, the Stability and Growth Pact (SGP), agreed in June 2007, was designed to
ensure that the Maastricht convergence criteria were not a one-off test of admissibility to the
euro but would offer continuing discipline for the new currency. Pressure for a stability pact
had originated from a 1992 report by the German Council of Economic Experts
(Sachverständigenrat), and gathered momentum in the political arena (for details see
6
Heipertz and Verdun 2004). Important here was the role of the Bavarian Christian Social
Union under Minister-President Stoiber, a critic of aspects of European integration.4
Although the election in May 1997 of French Socialist President Lionel Jospin led to
French attempts to emphasize growth, the pact was strongly skewed towards stability. The
SGP was to ensure sustainable domestic fiscal policies, euro-area stability and consistency
with the ECB’s objective of price stability. As the German economist Otmar Issing had
already pointed out (2008: 199), euro-zone finance ministers were in a situation where it
might be one of them breaking the rules at home, yet it would be for them to introduce the
sanctions. ‘How can one expect potential transgressors to pass judgement on actual
transgressors?’ In the early 2000s this question became especially pertinent as Germany
became one of the transgressors. In November 2003 Germany (along with France) was in the
Commission’s firing-line and, by contrast with smaller states (Portugal, Ireland) that had been
sanctioned, succeeded in halting application of the Excessive Deficit Procedure that
enshrined Germany’s own stability culture at EU level. Germany thus escaped from making
the budgetary cuts that the pact should have required. In 2005 the SGP was reformed with
relaxed rules. At this time the cumulative fiscal effects of German re-unification were taking
their toll on German public finances. Germany’s breach of the SGP—now overlooked in
Berlin—was not so much a departure from Germany’s fiscal conservatism than an illustration
of Chancellor Schröder’s willingness to back up his less integrationist policy discourse with
action that he perceived as the in national interest.5 In other words, the Schröder government
was hemmed in by the fiscal legacy of the Kohl era and spending by the federal states, and
chose to undermine SGP rules as the solution. Apart from this particular instance, the
commitment to sound money has been a continuing feature of the German political economy.
However, whilst this principle has been reinforced by the euro-zone crisis, the principle of
support for integration weakened, albeit gradually.
7
Pro-Europeanism
Germany has been the most consistently pro-integrationist member state policy since the
1950s. European integration at the outset was an attempt to bring solutions to problems at
whose epicentre lay Germany. West Germany at this time was largely a passive player in
bringing about these solutions, overshadowed by the victor powers, at the front-line of the
Cold War and lacking the full trappings of a sovereign state. Right up to its reunification in
1990 Germany’s position in the European Community (EC) remained constrained externally
and internally (Bulmer and Paterson 1989).
Prior to re-unification Germany’s European diplomacy was characterised by several
features. First, there was strong pro-integrationist rhetoric that found expression in the tone
set by from the Foreign Office and, to varying degrees, by individual chancellors. Second,
West Germany was also involved in a range of concrete integrationist initiatives: the 1973
enlargement, the creation of the European Monetary System, institutional reforms measures
and a host of others that shaped the rules of the EC (Bulmer 1997). Third, the Franco-German
relationship had become the preferred vehicle for advancing such integrationist proposals,
(Krotz and Schild 2013). Fourth, after the SPD reconciled itself to European integration in the
1950s, and the Free Democrats did so in the 1960s, a strong party-political consensus in
favour of integration prevailed. Such differences as existed over European policy were
essentially about substance rather than pro-integrationist principle. Thus, to take an example,
the Social Democrats (SPD) did not have support for the German farming community as a
priority, whereas the Christian Democrats (CDU/CSU) did; and the Greens favoured a more
ecological CAP. Fifth, the German Parliament was relatively unimportant in European
policy-making because there were no major partisan or territorial cleavages over European
policy. Its work focused largely on detailed examination of policy but would take on a larger
8
role when major initiatives were under way at EC level. Sixth, German trading interests had
become effective lobbyists at both domestic and EC levels.6 Seventh, opinion was amongst
the most pro-European at both the elite and mass levels, although the permissive consensus
for integration at mass level was coming under increasing strain. Finally, this broad picture of
positive engagement was qualified in the domains of policy transposition and the judicial
system. Germany’s transposition record was rather average, though improving over time,
owing to the domestic implementation chains associated with the federal system (Maurer
2003: 136-8). On the judicial side, the Federal Constitutional Court had already questioned
the supremacy of EC law in its 1977 ‘Solange Beschluss’ on the grounds that the EC lacked
the catalogue of fundamental rights present in the German Basic Law.
These characteristics began to undergo gradual change in the aftermath of German reunification and with the end of the Cold War, although not suddenly in 1989/90. Indeed,
Chancellor Kohl’s commitment to deeper integration represented continuity and masked
some indications of a changing outlook. Internationally, many Cold War constraints fell
away, as did the exposure of West Berlin. However, the Maastricht Treaty of 1992 increased
the impact of the EU upon Germany (as on other states) and altered the domestic politics of
German European policy. Notably, the German Länder (as represented in the Bundesrat)
secured stronger participation rights in policy-making impinging upon their interests, while
the Federal Constitutional Court (FCC) emerged as a key player with its rather
intergovernmental view of the EU in which the member states are Herren der Verträge
(‘masters of the treaty’). Accordingly, the Maastricht ruling required explicit approval from
the German Parliament of certain key integrative steps, particularly the decision to move to
stage 3 of EMU. The FCC deemed that the German Parliament rather than the European
Parliament represented the democratic means of legitimation in its intergovernmental
conception of the European order.
9
Over time, Peter Katzenstein’s (1997) encapsulation of Germany’s status within the
EU as ‘tamed power’ began to be challenged. German European policy-making became more
contingent on internal politics (Harnisch 2006); policy content became ‘weaker, leaner,
meaner’ (Harnisch and Schieder 2006). Analysts began to draw on case-study evidence from
newer areas of European policy such as immigration policy to identify a ‘normalisation’ in
German power (Hellmann 2006). At the level of discourse the European ‘community of
destiny’ under Helmut Kohl gave way to a preparedness to present policy in terms of national
interests under Chancellor Schröder’s Red-Green coalition (Hyde-Price and Jeffery 2001).
Beverly Crawford’s analysis of Germany’s breach of the SGP contributed to her
identification of Germany’s growing assertiveness in advancing national interests as an
‘embedded hegemon’. A further turning-point came with the Lisbon Treaty of 2009. The
salvage work from the failed Constitutional Treaty was in no small measure down to
Germany and Chancellor Merkel’s leadership (Bulmer 2010). But, once ratified, for the first
time the German Foreign Office had no active aspiration to further integration and, in the
current coalition, for the first time is resistant to an EU enlargement (to Turkey).
The euro-zone crisis has represented a new stage in German European policy. The
shift in rhetoric under Schröder is now matched by a change in Realpolitik: national interests
and assertiveness have become more evident in policy practice. A more unilateral approach to
EU policy has been apparent during the euro-zone crisis rather than Germany acting as
‘benign hegemon’ (Morisse-Schilbach 2011). The sound money principles of ordo-liberalism
have been prescribed as the medicine for the debtor countries. At the same time the prointegrationist sentiment, and its traditional bastion, the Foreign Office, has become a
somewhat weaker player in German European policy. The FCC, by contrast, has become a
co-player because of recent judgments, with federal policy-makers seeking to avoid litigation.
This explains the federal government’s dilemmas in finding a solution to the multi-faceted
10
euro-zone crisis. Germany is widely seen as the predominant power in the euro-zone, not
only because of its economic importance but because of the influence of its policy ideas. As
the largest contributor to bail-out mechanisms, it carries considerable weight in setting the
conditions of the assistance. On the other hand, it cannot play a leadership role in the classic
manner because of increased domestic institutional and political constraints. I now explore
turn to the manifestations of German hegemony and the constraints of international
legitimacy and domestic politics that have precluded Berlin acting as a benevolent hegemon.
German hegemony in the euro-zone?
In broad terms hegemony is understood in a twofold sense: as domination and leadership (see
Lentner 2005: 736). The former meaning tends to be used more critically, and there is plenty
of scope for this in light of German history. Analytically the term hegemony tends to be
deployed in either the international relations (IR) or international political economy (IPE)
sub-disciplines. The former literature has tended to emphasise the predominance of one state
in providing systemic order on the basis of its material capabilities. The classic example is the
role of the United States in the post-1945 western world and its strategy of hegemonic
leadership in the 1950s (Nye 1990a; also O’Brien and Clesse 2002 for comparison with
nineteenth-century ‘Pax Britannica’). Building on Kindleberger’s assumption that global
stability was dependent on the pre-eminence of a single power, IR analysts developed
hegemonic stability theory (HST) (Kindleberger 1973; Keohane 1980; Gilpin 1987: 72-80).
In HST the hegemon provides for a liberal market system, with three specific pre-requisites
in Gilpin’s understanding: hegemony, liberal ideology and shared interests (Gilpin 1987: 73).
Typically articulated in a neo-liberal institutionalist framework of IR, HST sees the hegemon
offering enlightened self-interest, providing institutionally-embedded public goods and
includes reliance on soft power. Soft power includes the less tangible forms of power: the
11
cultural, ideational and institutional (Nye 1990b). Owing to its lack of nuclear capacity and a
strong streak of anti-militarism. Germany has typically been portrayed as a civilian power
(Maull 1992). The transfer of its fiscal principles or the Bundesbank’s institutional model to
EU level serve as illustration of soft power.
As Keohane (1984: 137) made clear, ‘The hegemon seeks to persuade others to
conform to its vision of world order and to defer to its leadership’. In Gramscian terms
ideological hegemony requires the support of partner states. Without it hegemony is either
unstable or becomes domination rather than leadership. What tends to be neglected in HST is
another dimension of consent: that of domestic support for the hegemon. Although
explorations of the politics of ancient Greek city-states noted that internal-political decay
could lead to a hegemon’s decline, the need for domestic consent was neglected in HST (but
see Nye 1990a, 202-30).
The IPE literature also potentially sheds some light on the issues at hand. In this
version of hegemony a group or social class offers intellectual and moral leadership (see
Lentner 2005: 740). Inter-class relations are not the focus here but this literature does bring
other dimensions into focus, notably ideology and belief systems. Joseph (2002: 139) has
taken this further by arguing that ‘hegemony is broader than just ideology in that it
encompasses not just ideological processes but the material forces that generate these
ideologies’. Amongst the specific characteristics he mentions are ‘a wide range of social
practices, the institutional ensemble of the state, its representative apparatus, education,
welfare, economic processes, national institutions and so on’ (ibid.). These insights can shed
light on the ‘battle of ideas’ in the process of seeking a euro-zone solution. Within Germany
we find a further iteration of the tension between those who see the euro-zone as part of a
political project and the ordo-liberals whose main concern is with underpinning the stability
culture. However, there is a difference with this iteration. The former group has been
12
weakened for a number of reasons, whilst the latter is of decisive influence in determining the
fiscal conditions, not least because Germany is the largest contributor to the euro-zone bailout mechanisms. It is not just this shift from pro-Europeanism towards ordo-liberalism that is
striking, but it is the politicization of the euro-zone crisis within Germany that has made this
iteration much more remarkable. The policy debate is not conducted behind the scenes but in
the tabloid press, with its (extensive) critical attention to Greek pension arrangements (Bild
2010), or ECB President Mario Draghi’s plan to purchase the bonds of weaker members in
September 2012 ‘blank cheque for debtor states’ (Bild 2012).
The different perspectives on hegemony raise questions about the potential of
Germany to play a leadership role within the euro-zone. First, does Germany occupy a
predominant role in terms of resources and capabilities? Second, is hegemony to be based
simply on international capabilities, while neglecting domestic circumstances? Ignoring the
domestic dimension is problematic in the German case, since semi-sovereignty was
institutionalized in the Basic Law in order to avoid international resurgence. The legacy of
history means that Germany’s will to lead is constrained. Third, the euro-zone is one
component of a much denser set of institutionalized interactions between 27 member states in
the EU. It is in this framework that Germany has to secure consent for any initiatives on a
euro-zone rescue. The Union has a set of values set down in the Treaty on European Union.
These include promoting ‘economic, social and territorial cohesion, and solidarity among
Member States’ (Article 3, TEU); the ‘principle of sincere cooperation’ in assisting each
other to carry out treaty commitments (Article 4, TEU); as well as various principles of
equality, democracy, not to mention a set of institutions which are designed to strengthen the
collective interest as well as providing a strongly institutionalized system of multilateralism.
In short, even if the German economy predominates in terms of material resources, there are
13
strong institutional and political provisions both domestically and in the EU that constrain
hegemonic leadership.7
If we turn to the economic resources and capabilities of Germany first, we find that, in
comparative terms, it has extremely strong fundamentals (see Tables 1 and 2). Viewed
amongst its peer group of large, economically advanced EU member states, it is the largest
state in population terms, in terms of Gross Domestic Product (GDP) and GDP per capita. Its
unemployment rate was the lowest of this group, and its real unit labour costs had not risen
against a 2005 benchmark (unlike several competitors). Germany’s trade performance is very
striking, with a large surplus of € 154bn in 2010. As Table 1 shows, this trade balance is very
large both in terms of intra- and extra-EU trade. However, whilst the size of Germany’s trade
balance with EU partners demonstrates its economic strength, it is also symptomatic of a
structural imbalance in the relationship amongst euro-zone economies. The World Economic
Forum’s competitiveness ranking places Germany highest amongst this peer group. Finally,
in terms of the SGP criteria, in 2011 Germany’s budget deficit was modest, although its debt
ratio was above the 60 per cent reference value. On this set of indicators (which could be
extended by reference to time-series data) the German economy displays considerable
strength, albeit increasingly conditioned by the economic and euro-zone crises. Notably in
these statistics it is well ahead of France, which lost its ‘Triple A’ status with Standard and
Poor’s in January 2012. Germany’s economic standing is therefore a dominant one in the
euro-zone because, apart from France, the other states are either small or are recipients of
financial support or, in the case of Italy, are in a difficult fiscal situation. Whilst in the EU it
used to be possible to see joint leadership on the part of France and Germany (cooperative
hegemony in the argument of Pedersen 1998), in the euro-zone the economic fundamentals
do not justify such an approach. Whilst the two states are the biggest creditors of euro-zone
bail-outs, France has clearly lost comparative standing.
14
Consistent with these underlying economic indicators, Germany has played a leading
role in advocating solutions to the euro-zone crisis, sometimes with France, sometimes
without. For example, the Competitiveness Pact (February 2011) was a Franco-German
proposal but heavily influenced by Germany, and designed to bring about political reforms in
order to make the SGP more sustainable. Eventually known as the ‘Euro-Plus Pact’ and
agreed in March 2011, the measures include assisting competitiveness, employment, ensuring
the sustainability of public finances and reinforcing financial stability, together with efforts to
improve tax policy coordination. When originally launched, though, these measures
encountered strong criticism. As Euractiv (2011) reported at the time: ‘Merkel made clear
that agreement on these measures, designed to align economic policies more closely with
Berlin’s, must be sealed in March before she will agree to strengthening the rescue fund for
debt-stricken euro-zone countries’. This conditionality method has been prominent in the
German response to the euro-zone crisis, and evident in, as examples, the insistence on the
involvement of the International Monetary Fund in bail-out actions (unlike France’s initial
position); the unilateral announcement that bond investors should take a ‘haircut’ in the
Greek rescue; the requirement that all euro-zone states should have legally binding debt rules
at the domestic level (enshrined in the Fiscal Compact); and the requirement that savings
depositors in Cypriot banks also take a haircut. Germany has sought to export its commitment
to a stability culture to fellow euro-zone states, and the Fiscal Compact reflects this culture to
a considerable degree (Dullie and Guérot 2012: 1). The Compact’s rules on annual structural
deficits and on the reduction of debt ratios of states currently over the 60 per cent threshold
reinforce the SGP and add new policy instruments. Conditionality has also been
complemented by Germany acting as veto player. This position has been clearest in
objections to the creation of eurobonds or to a ‘transfer union’ (Müller-Brandeck-Boucquet
15
2012: 2-3), although in September 2012 the ECB under Mario Draghi eventually found a way
to side-step a formal scheme of that kind.
There is then evidence for Germany having played, through its policy actions, both a
dominant role and a leadership role in the euro-zone crisis. However, there is other evidence
that qualify this hegemonic role. First, there were repeated efforts by the German government
to choreograph the major proposed policy solutions with its French counterpart; hence the
Merkozy label in early initiatives. However, Germany has been the predominant partner and,
following the election of François Hollande as president, bilateral diplomacy has subsided
further owing to his divergent wishes for a complementary euro-zone growth strategy. Thus
Franco-German ‘cooperative hegemony’ Pedersen (1998) tends to be façade rather than
reality. Germany’s position has been much the tougher of the two states in terms of stability
culture. Second, Germany (and Chancellor Merkel) have been criticised for prevarication in
offering solutions, which on occasion has spooked markets, notably increasing the costs of
the initial Greek bail-out (Jones 2010). Here we find Merkel’s difficulty of finding a balance
between playing a leadership role in the EU and her more characteristically reactive style of
establishing agreement in government after weighing up the arguments.
More broadly, though, it is the emergence of divisions amongst the euro-zone states
into what is sometimes seen crudely as a north-south split that highlights the problem of
establishing a set of hegemonic beliefs about how to resolve the crisis. Unlike the situation
obtaining during the ‘fair weather’ conditions of the Maastricht negotiations, the
preparedness of all other states to emulate German practice is now much less clear-cut. Quite
apart from the anti-German feeling in the Mediterranean debtor states, it can be protracted to
secure agreement. It was secured for the Fiscal Compact (formally, the Treaty on Stability,
Coordination and Governance in the Economic and Monetary Union) but the emphasis on
austerity and the resultant impact on public services and welfare provision is questioned as a
16
sustainable solution to the crisis.8 Public resistance in some of the debtor states is also
striking, with fears growing over the risk of democratic instability. German hegemony in the
euro-zone thus has limits because it lacks full acceptance by all states. However, it is not just
securing agreement internationally in the euro-zone that is making Germany a ‘ reluctant
hegemon’ (Paterson 2012), it is also due to developments in domestic politics.
Domestic politics
Explaining the increased salience of domestic politics takes up the analysis in section 1
relating to the re-balancing of ordo-liberal and pro-integrationist forces but does so in the
immediate time-frame of the financial and euro-zone crises. As a first piece of context, it is
important to note that there was rising domestic concern during the 2000s about the need for
economic reform. Whilst the Hartz reforms contributed to an increased competitiveness in
German labour costs (Eichhorst and Marx 2011), the apparently inexorable rise in public
debt—from under 20 per cent of GDP in 1960 to over 60 per cent in 2006—had developed
even before the financial crisis. A Federal Ministry of Finance paper (2009: 3) predicted the
figure would reach 83 per cent in 2013: well in excess of the 60 per cent reference-point set
down in both the Maastricht Treaty and the SGP. High levels of debt, an aging population,
demographic change and increased social security commitments, together with the provisions
of the EU’s SGP, necessitated governmental action, and were accelerated by the financial
crisis. The consequence was the creation of the new balanced-budget rule, embodied in
Article 115 of the Basic Law, taking effect in 2011 (Federal Ministry of Finance 2009). This
heightened concern reinforced fiscal orthodoxy domestically and created a climate in which
neither the government, nor a public that was encountering domestic fiscal restraint and
falling welfare benefits was well disposed to financial rescues of euro-zone partners. Little
wonder that the red-top press made hay from the Greek bail-outs. It is also little wonder that
17
German policy-makers were keen to export the balanced-budget rule to the euro-zone through
comparable provisions in the Fiscal Compact.
As already noted, the principled support for deeper European integration had been
sated by the time the Lisbon Treaty was finally ratified. In the deteriorating economic climate
German diplomacy has lacked the positive pro-European narrative of yesteryear.
Consequently, it has become more hard-edged in euro-zone negotiations, reinforced by the
preparedness to make unilateral demarches. The pro-integrationist commitment to integration
was revived well into the crisis, particularly at the time of the CDU party congress in autumn
2011 but also in informal soundings with partner states in autumn 2012. These moves arose
from domestic concerns about populist discourse promoted in some parts of the press, as well
as from worries about the EU’s legitimacy amidst the crisis measures. Their prospects look
uncertain.
As in the past, there have been differing emphases emerging from within government.
The federal finance ministry has been prominent in stipulating the conditions for bail-out
arrangements. The finance minister, Wolfgang Schäuble, whilst one of the remaining prointegrationists, leads a ministry that is typically associated with ‘sound money’, and the latter
position has prevailed. Free Democrat cabinet members, such as foreign minister Guido
Westerwelle, have also found themselves conflicted; historically their party that has been
both pro-European and pro-enterprise. With a series of crucial state elections in 2011/12, the
FDP took a firm ordo-liberal line, e.g. in opposing Eurobonds. The other coalition partner in
Berlin, the Bavarian Christian Social Union (CSU) has also followed a hard line ahead of
state elections, causing Chancellor Merkel to plea for more solidarity with EU partners
(Süddeutsche Zeitung 2012). Both CSU and FDP have become more Euro-sceptic in outlook.
Senior politicians from both parties have called for Greece’s exit from the euro-zone.
18
These differences amongst the Berlin coalition parties, albeit matters of emphasis
within broad support for conservative fiscal and monetary policies, have reflected a broader
politicization of European policy.9 As chancellor, Merkel has had to work with an array of
coalition party positions, taking into account party positioning ahead of the autumn 2013
federal election. For their part the Social Democrats (SPD) have had a rather inconsistent
line. In May 2010 they initially failed to support the coalition in the Bundestag in voting
through the €750m Greek bail-out. In August 2012 its Chairman Sigmar Gabriel moved to
welcome a report from Jürgen Habermas and others that recommended strengthening
integration in a ‘core Europe’ of the 17 eurozone states (euractiv 2012). The party shown
support under Gabriel’s for Eurobonds, although the approaching election was doubtless a
factor in reverting to a hardline on the March 2013 rescue of Cyprus. This politicisation hems
in the coalition and acts as a constraint on its scope for leadership within the euro-zone.
Appearing profligate with German tax-payers’ money would be dynamite in a federal
election year.
Further upstream, so to speak, are the views of public opinion. The general level of
support for the EU has been subject to a gradual decline over time. Systematic data over
attitudes to the euro are difficult to find, although saloon bar commentary is readily available
at many a German Stammtisch.10 Nevertheless, the principles behind Germany’s economy
command strong support, and there is wide respect for the FCC, which like the Bundesbank
and the D-Mark, were important symbols of West German identity.
The FCC has now become a major reference-point. Its view that the member states
are ‘masters of the treaty’ has meant that it has repeatedly required domestic legitimation
through Parliament of major integrative steps. Adding to the Maastricht judgment’s insistence
on an explicit vote on joining the euro-zone, its 2009 Lisbon ruling called for enhanced
parliamentary procedures that would be used if new powers were transferred to the EU using
19
provisions in the Lisbon Treaty. As Becker and Maurer (2009) anticipated, the risk of
recourse to the FCC has become one of the framing elements of German European policy.
References to the FCC have taken place in relation to the European Financial Stability
Facility and to the European Stability Mechanism and Fiscal Compact, with rulings in 2011
and September 2012 respectively. Judgments have enunciate stipulations analogous to its
Maastricht ruling, e.g.
The Bundestag must individually approve every large-scale federal aid measure on
the international or European Union level made in solidarity resulting in expenditure.
Sufficient parliamentary influence must also be ensured on the manner of dealing with
the funds provided (FCC 2012).
Thus, the ESM was declared legal but any increase in its resourcing would have to receive
specific parliamentary approval. The consequence has been to add to Chancellor Merkel’s
caution in agreeing to bail-out arrangements. Not only has the FCC become a player in its
own right through its judgments but it has become an addressee for petitions from politicians,
lawyers and economists. Moreover, by empowering the Bundestag in each of its rulings, it
raises the potential that politicization might prevent the approval of a measure necessary for
the euro-zone’s survival.
Finally, the Federal Bank has re-emerged as an important voice relating to euro-zone
solutions (see Marsh 2012), and advocating conservative fiscal positions. Its president, Jens
Weidmann, repeatedly opposed the ECB’s bond purchase plan and reportedly considered
resignation in August 2012 (Financial Times 2012). Weidmann considered the purchase of
bonds undertaken by the ECB to be a ‘gambit [that] betrayed its founding principles, which
were rooted in the traditions of the Bundesbank’ (Wall Street Journal 2012).11 However, he
was outvoted in the ECB.
Conclusion: reluctant and contested hegemony
20
In this paper I have argued that two fundamental principles of the (West) German state have
increasingly come into conflict. Historically, they were resolved, and generally through
German sound money principles being the path taken by European monetary integration. The
euro-zone crisis has re-configured the diplomacy because Germany has emerged as the
leading power owing to its greater economic strength than its traditional partner, France. The
efforts to keep the Franco-German relationship to the fore cannot disguise divergences in the
two states’ preferences. The idea that Germany has become ‘normalised’ as an EU member
state is scarcely tenable in the context of the euro-zone because of the huge (and destabilising) trade surplus that Germany has with its partners. This shift in circumstances has
coincided with longer-term trends in the ‘domestic politics’ of German European policy.
Government policy has become more hard-edged; the party-political climate more politicised;
public opinion displays considerable ‘Europe-fatigue’ (Europamüdigkeit) that is exacerbated
by the travails of the euro-zone; and the FCC has entered political calculations in an
important manner. The consequence of these developments is a pronounced shift away from
cooperative hegemony or even benign hegemony. The result is reluctant and contested
hegemony; reluctant because of the domestic constraints; contested because the ordo-liberal
medicine is difficult to swallow in southern Europe. Due to these constraints, and despite the
comprehensive nature of the challenges posed by the euro-zone crisis, Germany’s approach
to the crisis looks entrenched.
21