A “normal” creditor country?

At a discussion I had with Stephen Green and Quentin Peel at Chatham House recently, a member of the audience put it to me that German policy in Europe was normal for a creditor country in a debt crisis. In particular, he suggested that it was playing in a similar role in the euro crisis as the United States did in the Latin American debt crisis in the 1980s. “The thinking in Berlin is no different from the thinking in Washington during the Latin American debt crisis”, he said. It was an interesting point, which prompted me to think more about the similarities and differences between the two crises and between the role of Germany in Europe and creditor countries in other debt crises. It is also relevant to the question of the relationship between ordoliberalism and neo-liberalism, which I discussed in my previous post.

Perhaps the first thing to say is that, if it were true that Germany is now acting in a similar way to the United States in the Latin American debt crisis, that would itself be quite a condemnation of German policy. It is of course true that Germany is the major creditor country in the eurozone, which shapes its interests. The structural reform demanded by the so-called troika is also somewhat similar to the structural adjustment demanded by the International Monetary Fund in the Latin American crisis. But German policymakers such as Wolfgang Schäuble would reject that idea that they are acting like the United States in the Latin American crisis. After all, as I mentioned in my previous post, German economic thinking – based on the theory of ordoliberalism and the idea of the social market economy – is meant to be more “social” than the neoliberalism associated with US policy in Latin America.

However, it seems to me that that there are two important differences between the Latin American debt crisis and the euro crisis. The first is political or even moral: Germany has quite different obligations towards its eurozone partners than the United States did towards Latin America. It is not just that there is meant to be “solidiarity” within the European Union (to many pro-Europeans, a “community of fate”) in general but also that the smaller group of countries that joined the European single currency made an even greater political and economic commitment to each other. The crisis revealed that the single currency had produced divergence rather than convergence among eurozone economies and that therefore needed to be an adjustment. But surely countries in a single currency have an obligation to undertake such adjustment in a more symmetric way than in other debt crises?

That brings me to the second difference, which is economic. In practical terms, the creation of the single currency deprived eurozone countries of the option of devaluing their currency – one of the few options for debtor countries in a crisis. Because the single currency meant that external devaluation was not an option for eurozone countries, adjustment was not just asymmetric but had to be based entirely on internal devaluation – in other words, cuts in wages and other costs – which therefore had to be even more brutal than in the other cases such as the Latin American one. In particular, economists argue that this internal devaluation led to extremely levels of unemployment in Greece and Spain. It is with this in mind that left-wing Eurosceptics such as Wolfgang Streeck describe the single currency as the ultimate neoliberal project based on a Hayekian blueprint.

This in turn raises questions about the difference between ordoliberalism and neoliberalism. In my previous post, I wrote that Germany’s response to the euro crisis suggested that, rather than being a more “social” alternative to neoliberalism, ordoliberalism might in this context translate into a rather extreme form of neoliberalism. We all know that, influenced by ordoliberalism, German economic orthodoxy is particularly hawkish on inflation. In the context of a single currency area in which countries cannot externally devalue, this makes German policy particularly tough on debtor countries: they have no prospect of inflating away even part of their excessive debt and on top of that have extremely limited policy space. Further integration since the crisis began – to which there was “no alternative” – has limited that space even more.

It seems to me that these differences explain why no one talks about a “Berlin Consensus”. It is worth remembering that the concept of the “Washington Consensus” – which the questioner in the discussion at Chatham House mentioned – referred originally to a set of 10 policy instruments about which there was “a reasonable degree of consensus” among US policymakers. Nevertheless, it came subsequently to refer to a broader international consensus among economists, though of course there was always much opposition and resistance to it – not least in Latin America itself. But it seems to me as if German policy now is seen in eurozone debtor countries as being even less legitimate than US policy was in Latin America in the 1980s. As I wrote in my book, The Paradox of German Power, Germany has successfully exported rules but not norms.

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One thought on “A “normal” creditor country?

  1. The German thing is different from the U.S. experience in Latin America, although some might argue there are a few similarities.

    I think the actions of Merkel and Schaeble are closer to a Bismarckian approach as some European commentators such as former French Minister Arnaud Montebourg have pointed out.

    Hans Kundnani has brilliantly shown how Germany is a semi-hegemon in Europe but in geo-economic, not military terms.

    B. Campbell

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