What Are The Germans Doing?: Einbindungspolitik, Ordnungspolitik, and National Interest Volatility

by Abraham Newman on January 18, 2011

After nearly a half century, the “Germany through Europe” bargain, intended to help Germany overcome the political and cultural legacies of World War II, has unraveled. In just a few years, Germans have demanded a rebalancing of the European budget, strict rules governing monetary union, have pushed Eastern European member states into the hands of the International Monetary Fund, and balked at a quick bailout of Greek sovereign debt. In short, the European free ride on the German economy is over.

In many ways, the new Germany is a product of the reunification experience. Far from becoming an emboldened revanchist nuclear state, post-reunification Germany slogged through years of slow growth, record budget deficits, and difficult economic adjustment. As the East failed to bloom, long effective political narratives calling for a European _Einbindungspolitik_ lost their luster. Unification, far from making Germany into a resurgent great power, shackled the nation with mounting debt and decades of regional transfer payments.

Some observers argue that Germany has simply become a normal nation following its self-interest. As the memory of World War II fades and a reunified Germany has become an accepted part of the international landscape, Germany can be just another member of the league of nations. But the crisis reveals that Germany’s situation is more complicated and perhaps more dangerous. The shackles of Europe have been thrown off, but a new driving paradigm has not emerged to shape German policy. In quick succession, beliefs in moral hazard, the inherent prudence of the German people, Chancellory infighting, and regional party politics have shaped the German response. The incoherence of this response has often hurt the position of key interest groups like export oriented firms or big banks typically associated with simple national interest stories.

Germany’s decisions to oppose European stimulus measures and the timing of the Greek bailout plan highlight these shifting motivations. Although the German economy is overwhelmingly dependent on exports to other European countries, German officials strongly opposed pan-European interventions in the wake of the financial crisis. Instead, German politicians raised the specter of moral hazard and run-away inflation by its neighbors. Ordo-liberal beliefs in market stability trumped calls for pan-European solidarity and fears among German exporters. Krass Keynesianism captured the German view of stimulus efforts in countries with large budget deficits. The response to the Greek debt crisis was shaped by similar ordo-liberal concerns. German policy-makers feared the signal that might be sent to other EU debtor countries if Germany became the bank of last resort. But at the same time, bailout efforts became entwined in regional German elections. The Chancellor repeatedly delayed efforts to put together a pan-European response to Greek’s debt crisis, hoping to push off the decision until after elections in North Rhine-Westphalia. This delay cast a further cloud on Greek debt, raising the price of the bailout and putting further pressure on German banks with large holdings of Greek sovereign debt. In a blow to the Chancellor the Greek debt crisis came to head days before the regional election, where she lost in part due to her attempt to politically game the timing of the bailout.

The demise of Germany’s Europe strategy has not created a Bismarckian realpolitik, where predictable political horse trading has replaced Euro-optimism. Instead, it has resulted in a period of extreme policy volatility marked by shifting positions and the absence of a clear logic behind German decision-making. Faced with the mounting uncertainty of the crisis, the natural instinct of a rules-based society like Germany is to turn to more rules. But without trust in other European partners to follow the rules, this approach has quickly hit a dead end. German leaders have turned to a series of ad hoc responses that are strikingly erratic, in contrast to the Teutonic caricature.

The German case calls for a reevaluation of the national interest in foreign policy debates. International relations scholarship has increasingly relied on rational-calculation models to understand state preferences. In many foreign policy situations, however, high levels of uncertainty reign. Policy-makers face circumstances in which it is very difficult to calculate the risk associated with different courses of action. In the face of such uncertainty, underlying beliefs about the nature of the world frequently steer decision-making. The British special relationship, Gaullist independence, or _Einbindungspolitik_ are historically derived beliefs that guide policy when probabilistic calculations become incalculable. The current German case is a stark illustration of how socio-cultural events such as reunification can undermine basic belief structures and leave national decision-makers tossed in the wake of shifting guiding paradigms.

This new volatility has several critical policy implications. In the short-term, we cannot rely on Germany to deal with Europe’s mess. In fact, Germany will likely be part of the problem, calling for new austerity rules that will further squelch growth on the European Continent, which is already faltering. As further financial trauma hits the region, US policy-makers must actively engage the situation and resist the temptation to count on the old engine of Europe. Within Europe, German volatility severely weakens the hand of the European Commission. Long enjoying the de facto support of Germany, the Commission’s ability to maneuver has been curtailed and with it pan-European governance.

In the long-term, in order to face the challenges of the post-crisis environment and the rise of competitors in Asia, we need a strong transatlantic partnership. Given the current state of economic and political affairs in the United Kingdom, Germany should play the major role in that partnership. Ironically, Germany is one of the few advanced industrialized countries that is doing well. The US has the opportunity to help Germany find a new foreign economic agenda based in _prudent sustainable growth._ This agenda would have two key pillars. First, regulate risky Anglo-market excesses of the past decade (e.g. unregulated derivatives) that many Germans blame as a root cause of the crisis. Second, reframe global trade imbalances between deficit and surplus countries as a cornerstone to German and global macro-prudential stability. In short, give the Germans an easy win in the former and couch the latter in terminology that appeals to their concerns about risk and economic instability. By reframing German interests, the US has the opportunity to fill a void in German foreign economic policy and shape the development of the global economy for the next half-century.

Germany is up for grabs and the short-term might see a Sino-German alliance based on stability and shared export strength. Ordo-liberal beliefs guiding much of German monetary policy could easily emerge as a pillar of a Sino-German economic regime. At the same time, we could witness a cozy new relationship between the two export engines of the world economy. But without functioning import markets, the engine will quickly overheat.

{ 23 comments }

1

hix 01.18.11 at 5:08 pm

“In the long-term, in order to face the challenges of the post-crisis environment and the rise of competitors in Asia,”

Empthy rethoric. Every country is an economic competitor up to a point, but ultimatly, everyone profits from the others prosperity. If theres a necessity to pick an alliance, the natural choices would be Asias rich democracies, mainly the bigest and most stable one, Japan.

” Given the current state of economic and political affairs in the United Kingdom, Germany should play the major role in that partnership. ”

What about France, Italy and Spain, all countries with similar economic strenght as the UK or just a common EU foreign policy?

2

Walt 01.18.11 at 5:22 pm

It’s tempting to conclude that current policymaking says that something about Germany, but maybe it just says more about Merkel? The erratic behavior suggests incompetence at the top.

3

David Hobby 01.18.11 at 8:01 pm

FYI, “Einbindungspolitik” is currently misspelled in the title.

4

Detlef 01.18.11 at 8:19 pm

Walt,

it´s tempting but possibly wrong. She´s been called cautious and indecisive in Germany at times but not incompetent. Being a German myself I think that any Chancellor, any German government – regardless which political parties involved – would have the same problem.
“Feeling like they are between a stone and a hard object” I believe it´s called?

She´s facing 2 problems:

1.
There are state elections in 7 of the the 16 German states in 2011. And voters are furious. They made sacrifices (stagnant wages, rising taxes, cuts in the social safety net) for most of the last decade. And when the German economy finally started to grow again in 2006/07, the financial crash arrived in late 2008.

Now they had to bail out with tax money some German banks while reading that some of the bankers still insisted on their bonuses (and suing the state for it). Plus, some of the banks had created subsidiaries in Ireland (which then blew up and crippled the German bank) because of even less regulation there.
They´ve read about Greece lying about their budget for years. They´ve read about housing bubbles in Ireland and Spain.

Very, very simplified German voter view (just in my opinion though):
Some countries/people were irresponsible. Borrowed lots more than they should have. Lived a nice life. Gloated about their GDP growth compared to Germany. While the majority of Germans sacrificed. And now these exact same countries ask Germans to bail them out?

That view might not be entirely true or rational. Nonetheless it is there.

Not to mention that a majority of Germans were against the Euro in the 1990s. They simply weren´t asked for fear they might vote against it. The situation might be different if a German plebiscite had approved the Euro. In that case we would have been “asked” and “involved” in the decisions.

Meaning Merkel has to decide between several election losses this year in a row following a bail-out (political suicide) or a potential Euro crash after a no-bail-out. Or simply hoping that some temporary band-aids might somehow be enough.
(While in the meantime the low Euro helps German exports.)

Do you know any government leader in a Western country who would say: Damn the torpedoes (election losses and political suicide), full speed (bail-out) ahead?
I suspect most of them too would choose the “kick the can down the road” approach and hope for the best (a miracle?).

2.
The German Constitutional Court
There were judicial challenges to the introduction of the Euro in Germany.
(Given that we didn´t have a plebiscite this was the only way to challenge it.)
IIRC the Court essentially said that the Euro was okay because it didn´t involve a fiscal union (no-bail-out clause, financial stability pact proudly presented by the then German government). Because they seem to view the “budget right” (vote on revenue and spending) one of the basic rights of a democratically elected government and parliament.
And right now, they say that the EU Commission and parliament don´t have the same democratic legitimation than a national one (one man, one vote).
(A German parliament member represents 859,000 voters, a Maltese one 67,000 for example. )

While I´m not sure if the German Constitutional Court really would dare to rule that some EU treaty or measure is unconstitutional, it would be dangerous to involve them in a game of “dare”…

5

Henry 01.18.11 at 8:33 pm

David – thanks – fixed.

6

Barry 01.18.11 at 8:44 pm

“In short, the European free ride on the German economy is over.”

Oh, BS. Germany depends on exports to the rest of the EU, and German banks happily loan large sums of money in deals which they had to have known were fraudulent (does anybody really think that the large German and UK banks didn’t have detailed inside information about the Greek government, for example?).

What the government is doing is to insist on the bankers getting bailed out, while everybody else eats the losses that the bankers should, on top of their own losess, and on top of the financial destruction caused by the bankers.

7

chris 01.18.11 at 9:31 pm

Why is it that in discussions like this it’s always taken for granted that when A loans money at interest to B, B benefits, even though he has to pay back more than he received? (Assuming interest > inflation, which it almost always is.) ISTM obvious that the *loan* transaction benefits A and harms B, and B should only enter into such a transaction at all if it enables him to do something *else* which is so valuable that he can beat the house and profit even after paying off A (an outcome which is clearly rarer than optimists estimate).

Yet the lender always acts like they’re doing such a great favor by collecting interest, and the people who have to pay more than they ever got out of the deal ought to feel grateful for the privilege of supporting the financier’s income and lifestyle.

IMO our societies and economies should rely less on debt and more on investment, where the investor is aware that he will only make money if the venture succeeds, and does not ask or expect to have his return shielded from all risks including the failure of the project. Risk-free return is a mirage that can only be simulated by placing the real risk on a third-party guarantor, often uncompensated, even unaware that he is acting as such (particularly the people of democratic societies whose governments bail out the creditor in the event of failure of the investment).

The social utility of hiding risk and shifting it to people unaware of its presence is dubious, at best.

8

chris 01.18.11 at 10:21 pm

Krugman’s recent blog post on inflation and why Germany being at the wheel is so bad for the PIGS is good, but neglects to mention *why* Germany has such a hard-money stance: they are the ones holding (a significant part of) the debt that is so burdensome to the PIGS. The prospect of the PIGS easing their debt burden by inflation (or devaluation, if they had their own currency and their debt was denominated in it) is precisely the prospect of German banks losing their asset portfolios to that same inflation. That’s what makes the conflict zero-sum, and since the Germans are winning, the PIGS are losing. (In fact, they’re being crucified on a cross of hard euros — nothing new under the sun.)

On the other hand, if German investors had equity stakes in businesses operating in the PIGS, then they would only prosper if those economies prospered, and policy could be set from a perspective of mutual interest rather than zero-sum opposition, and there would be less hard-money bias because the investments would make a real profit (i.e. proportional to the price level) rather than having a fixed nominal value.

Maybe what the PIGS really need is some sort of debt-to-equity conversion w.r.t. their creditors, to bring the Germans into the same boat with them.

9

IM 01.19.11 at 7:45 am

On the other hand, if German investors had equity stakes in businesses operating in the PIGS

of course, in the real world, as compared to your conspiracy rule world, that is the case. The only German bank that has considerable exposure to government debt in Greece etc. is HRE, being a government financier. But HRE is now rescued and nationalised anyway.

Perhaps you should read the blog post or even better the comment by Detlef. There is no diabolical german plan. It is drift, constrained by the prejudices of the german public, informed by a bundle of anti-inflation prejudices. You have also to remember – a fact ignored by talking about the Germans – that we have a right-wing government now, with all the economic consequences.

10

Walt 01.19.11 at 8:18 am

Detlef: Merkel’s biggest failure is not trying to tamp down the nationalist and moralistic sentiment that you describe. GDP growth is not a reward that God hands out to nations as a reward for their virtue, a fact that politicians find convenient to forget.

11

IM 01.19.11 at 10:31 am

GDP growth is not a reward that God hands out to nations as a reward for their virtue, a fact that politicians find convenient to forget.

That attitude is hardly unique to Germany.

@Abraham:

. By reframing German interests, the US has the opportunity to fill a void in German foreign economic policy and shape the development of the global economy for the next half-century.

But isn’t the american situation very similar? Isn’t the american foreign policy since the cold war as much drifting as the german one? Isn’t the economic policy of the uS similar egocentric and short-sighted. The german political mind is inward looking and focused on the next regional election. The american political thinking is provincial and focused on the nexzt mid-term or the next presidential election. Compared to the republicans even the german right-wingers are sane. How can you give Germany an “easy win” if you can’ t anythign meaningful through congress

So you advise a USA that only exists in your wishes. Real existing drifting America is hardly able to act on your recommendations.

12

Steve LaBonne 01.19.11 at 11:58 am

Is it fair to blame German taxpayers and their attitudes for the ill effects of a common currency that they would have rejected if their assent had been asked for?

13

chris 01.19.11 at 2:02 pm

It is drift, constrained by the prejudices of the german public, informed by a bundle of anti-inflation prejudices.

Hmm, I guess I was assuming that the anti-inflation attitude was coming from genuine interest (i.e. holding a lot of euro-denominated nominal instruments) rather than irrational prejudice. Maybe a mistaken assumption.

It seems like the underlying point remains though: whether selfishly or stupidly, the Germans, being in the driver’s seat of euro monetary policy, are in fact crucifying the PIGS on a cross of hard euros. And if they would be better off cutting it out, then somebody please tell them so!

14

ajay 01.19.11 at 2:26 pm

As the East failed to bloom, long effective political narratives calling for a European Einbindungspolitik lost their luster

For those of us who don’t speak German, it might be nice to translate “Einbindungspolitik”. The top Google responses are mainly to this post, or to articles in German, which isn’t too helpful. “Policy of unification”? Or does this have some more specific meaning?

15

ogmb 01.19.11 at 3:04 pm

For those of us who don’t speak German, it might be nice to translate “Einbindungspolitik”. The top Google responses are mainly to this post, or to articles in German, which isn’t too helpful. “Policy of unification”? Or does this have some more specific meaning?

I’m not sure if there is an accepted translation, but it’s roughly the German attempt to embed itself into international institutions (UN, EU, NATO).

16

ajay 01.19.11 at 3:56 pm

Ah, got you. Thanks ogmb.

17

Detlef 01.19.11 at 9:55 pm

chris,

Hmm, I guess I was assuming that the anti-inflation attitude was coming from genuine interest (i.e. holding a lot of euro-denominated nominal instruments) rather than irrational prejudice. Maybe a mistaken assumption.

Depends on how you define “genuine interest” and “irrational prejudice”. :)
The fact is that the word “inflation” alone is unpopular in Germany. You can say that the Weimar Republic, hyper inflation and several currency reforms happened decades ago. Still I wouldn´t want to be a German politician presiding over sharply rising inflation today. Say, from 2% to 6%. Deeply unpopular.

Not to mention that every employee gets paid in “euro-denominated” bills. :)
How high are the chances that in the era of globalization wage rises would compensate for higher inflation?

18

Detlef 01.19.11 at 10:21 pm

Walt,

Merkel’s biggest failure is not trying to tamp down the nationalist and moralistic sentiment that you describe.

Well, she is making statements and speeches about that. Very cautiously of course. :)
But in the end, a government leader middle or long-term needs the consent and support of a majority of voters. With the influence state governments have on federal legislation via the “Bundesrat” (state chamber) she – or any other imaginary German Chancellor – simply can´t afford to lose all those state elections this year.
And of course – as is usual in Germany – she´s the leader of a coalition government.

It´s very difficult to explain to voters that they should bail out other Eurozone countries. Especially when you already raised taxes, made cuts into the social safety net, made cuts in infrastructure investments etc. in the last few years on the grounds that right now we can´t afford them. We had to balance the budget.
And now hundreds of billions suddenly are available to bail out other countries?

You want to try that approach in the USA?
Not to be snarky but just look at the gridlock a 2 party system can produce.

GDP growth is not a reward that God hands out to nations as a reward for their virtue, a fact that politicians find convenient to forget.

LOL.
You´re right, but as IM said, hardly unique to German politicians.

19

Walt 01.21.11 at 2:05 pm

Detlef, decision-making in the US is of course a disaster. I’m reduced to hoping for some economic miracle that will allow us to delay the inevitable day of reckoning. Germany seems to have better political institutions, and a less-pathological political culture, so I would hope it could do better.

20

hix 01.21.11 at 2:11 pm

“LOL.
You´re right, but as IM said, hardly unique to German politicians”

Worse, such rethoric is uncommon in Germany and very common in America, thus another case where some foreign country gets blamed for local problems.

21

Detlef 01.21.11 at 8:19 pm

hix

Worse, such rethoric is uncommon in Germany and very common in America, thus another case where some foreign country gets blamed for local problems.

Well, a German government of course wouldn´t involve God in it. You don´t want voters wondering about your sanity.
But they would loudly tell voters before elections that said GDP growth definitely is the result of their enlightened economic policies. Plus normally praise “voluntary” wage restriction as a virtue. So in a sense IM is right.
(Although I have to admit that in the last few months quite a few government members have called for higher wage rises.)

22

Detlef 01.21.11 at 10:29 pm

Walt,

Germany seems to have better political institutions, and a less-pathological political culture, so I would hope it could do better.

Well, you shouldn´t sell your country short here (is that the right term?). The US Constitution has survived for more than 200 years by now. While Germany went from Imperial Germany ->Weimar Republic->Nazi Germany->Federal Republic of Germany in less than 100 years (with a communist dictatorship in East Germany till 1989). Not quite that impressive, I´d say?

There are of course historical and cultural differences between Germany and the USA. Concerning your statement (quoted above) it seems to me that there are 3 main differences right now between the USA and Germany which influence the actual situation:

1. I think Germany is essentially a pretty “conservative” country.
Conservative in the old sense. Don´t discard something old that works for something new just because it is new. Which means that Germany probably won´t ever become a trend-setter in changing a society. The “1960s revolution” didn´t start in Germany for example. On the other hand once a societal change is “digested” and consensus is reached it becomes pretty hard for a “roll-back”.
So a sudden Reagan / Thatcher “fight the unions, government is the problem” political revolution would be unthinkable in Germany. Likewise the idea that a pharmacist could refuse to sell the birth control pill to an unmarried woman because of his / her Christian faith once the pill is legal. Once a consensus is reached, it´s mainstream.
Concerning “financial innovation” I´d say we were simply lucky. :)
German politicians were starting to push for it around 2005. Thankfully consensus wasn´t reached before the financial crash in 2008. Which killed any such thoughts. :)
Sometimes the 10 years innovative “delay” between the USA and Germany seems to have a positive side.

2. The people writing the 1949 German constitution were adults during the (failing) Weimar Republic and Nazi Germany. So they tried to write a constitution with fail-safes against extremism.
Which includes – on the one hand – restrictions on free speech that would be foreign to Americans. While – on the other hand – we have privacy laws that are probably more stringent than US laws.

3. The election systems are different.
No “first past the post” system in Germany. Makes it harder to form a government. It´s more likely to result in coalition governments. Which means that:
a) you can´t demonize other parties because you might need them to form a coalition government and
b) probably either your party or your new coalition member party was a member of the last government coalition. Would be awkward to repudiate everything they did since – most likely – some of your shiny new government members were involved in it.

23

Oliver 01.23.11 at 7:11 pm

It´s very difficult to explain to voters that they should bail out other Eurozone countries.

It would also fundamentally change the status of the EU project from something the elites unanimously favored to something that is open to public discussion. Public discussion implies that some will come to the conclusion that the Euro is too expensive to save.

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