Very few people have heard of Ordoliberalism. Which is odd because Ordoliberalism is the German school of political economy that shaped the development of the West German post-war economy and governance, and which in turn provided the blueprint for the creation of the European Single Market and the flawed architecture of the Eurozone. Ordoliberalism principles drove the design of the European Central Bank and is the theoretical and policy matrix governing the responses of the EU and the ECB to the crisis of the eurozone. Ordoliberalism is the hegemonic ideology of the European project. It is the logic of Ordoliberalism that has led to mass unemployment across the southern periphery of the the EU, the relentless pursuit of absurdist expansionary contractionism within the eurozone and the mass impoverishment of millions of people.
After the victory of fascism in Italy between the wars the imprisoned Communist leader Gramsci tried to work out why the peasant masses of southern Italy were unable to organise and join the militant communists of the industrialised north. He concluded that their plight and immobility were not only caused by the post-feudal domination of the rural bourgeoisie, but rather by the peasants’ lack of a language, of a vocabulary, and of a philosophy capable of explaining the causes of their material conditions. He developed the theory of cultural hegemony when the dominant discourse can prevent the expression of alternative world-views. A hegemonic ideology becomes hegemonic by so successfully colonising the thinking of a society, of its public debate, its culture and its intellectual discourse, that it becomes mere common sense and in doing so become invisible and very powerful. Hegemonic ideologies, by appearing to be just common sense and thus obvious, operate to preclude all other ways of thinking so that alternative ideas become either invisible or just seem absurd. The hegemony of Ordoliberalism in Europe is now very powerful and it means that posing alternative propositions, arguing that for example the correct response in a deficit and debt deflationary spiral is for governments to spend more and not less, appears to be ridiculous, to lack common sense.
The hegemony of Ordoliberalism in Europe was built initially on the foundation of the general triumph of neoliberal ideas in the west dating from the Reagan-Thatcher era and the eclipse at that time of Keynesian thinking. But Ordoliberalism is not merely neoliberal ideology, it is very different in key areas, and it is its differences from neoliberalism which make it so attractive and powerful within the European project. Ordoliberalism’s rise in Europe began as a result of its success in West Germany but it became very powerful because in the later stages of the European integration project,which saw the creation of the Single Market, European Monetary Union and the creation of a European Central Bank, the core ideas of Ordoliberalism were a seemingly superb fit in relation to the practical problems of European politics. However in the context of the crisis of the eurozone, and the resulting crisis of the European project, Ordoliberalism is now a reactionary force that is preventing the development of policies and initiatives that can stabilise the single currency, repair and reform its architecture, rebuild European solidarity and allow the European project to move forward. I believe that it is very important to dismantle the Ordoliberal hegemony but in order to do that one must recognise that it exists and understand what it is.
What is Ordoliberalism?
Everyone has heard of neoliberalism, the theory that proposes that the state is always damaging to optimum economic performance and that when the state gets out of the way the market can achieve optimum equilibrium. But not many outside Germany have heard of Ordoliberalism. The clear difference between the two ideologies involves the role of the state. Neoliberalism wants to minimise the role of government, and in particular is naturally against all forms of state interference in markets. Its attitude to markets is essentially laissez-faire: leave market participants alone. In contrast Ordoliberalism sees a vital role for the state, in ensuring that markets stay close to some notion of an ideal market. Contrary to Margaret Thatcher’s well known slogan that ‘there is no alternative’ to a radical market liberalism, not all liberal theories support the simplistic idea that the ‘government is the problem’.
The German Ordoliberals tradition is better known in the Anglo-Saxon world as the Freiburg School, or German neoliberalism, and is a vital part of the theoretical foundation of the German social market economy. It origins date back to the late 1920s and early 1930s. Its foundation lies in the works of Walter Eucken, Franz Böhm, Alexander Rüstow, Wilhelm Röpke and Alfred Müller-Armack. These authors saw their work as providing a third way, a (neo)liberal alternative to laissez faire liberalism and collective forms of political economy, ranging from Bismarckian paternalism to social-democratic ideas of social justice, from Keynesianism to Bolshevism. In the face of Weimar chaotic mass democracy, economic crisis and political turmoil, they advanced a programme of liberal-conservative transformation that focused on the strong state as the locus of social and economic order. The dictum that the free economy depends on the strong state is key to its theoretical stance.
At the most general level, Walter Eucken and Ordoliberalism emphasise that economic order is interdependent with all other ‘orders’ in society, including the judicial, social, and political orders. The basis to successful economic policy is thus the establishment of a strong legal and institutional framework, which he called ‘Ordnungspolitik‘. The term ‘Ordnung’ (‘order’ or ‘ordo’ in Latin) means an economic constitution, the rules of the game upon which economic systems are based.
According to Ordoliberalism, the market is defined by the broader political, social and above all legal institutional framework which means the market is constructed by conscious design. In other words, market based economic order is subject to human design and decision-making. The market is a construction, and this radical anti-naturalistic assumption of the market is in stark contrast to the laissez-faire liberals where the market is a natural economic reality which if left alone will develop naturally to its greatest extent. For Ordoliberals, it is the task of the political decision-makers deliberately to create conditions under which the ‘invisible hand’ of the market can be expected to do its work and create optimum economic outcomes. Not only is this position quite distinct from the neoliberal tradition it is also in stark contrast to traditional French type interventionism or dirigisme where interventions on a permanent basis are the order of the day. According to ordoliberalism the functioning of the economy cannot be entrusted to market mechanisms alone, neither can the economy be entrusted to state interventions taking place on a more or less permanent basis, a position that underpinned economic policy in France. Instead Ordoliberalism stresses that it is the duty of the strong state to create a stable monetary policy and avoid large public deficits. The principles of Ordoliberalism in this regard fundamentally differ from, and oppose, the Keynesian micro management of the macro economy. Instead, what should be attempted by the government is the establishment of solid and predictable economic institutions, and not the politically driven continuous Keynesian exercise of variable fiscal policy.
According to ordoliberalism (and in contrast to laissez-faire liberalism), the free market order is not simply what one would find if government was absent. In the view of ordoliberalism, the free market forces require careful ‘cultivation’ for its maintenance and proper functioning. Ordoliberals therefore use the activities of a gardener as a metaphor for what political decision-makers should do vis-à-vis the market. They should hold back the growth that was not desired. By contrast the neoliberals often used the night watchman instead as a metaphor for what political decision-makers should do (i.e. nothing except lighting up the night), and the metaphor used by the Keynesian interventionist state is often that of an engineer which explicitly entails a process of more or less continuous social engineering.
The Ordoliberals espousal of the free economy does not entail a weak night-watchman state. The Ordoliberals declare for the strong state. They argue that economic freedom needs to be ordered so that freedom is not misused as when prices are fixed, markets carved up, and competitive adjustment avoided by means of protectionism and manipulation of monetary policy, or when workers can strike, the masses revolt, and a proletarianised mass society can force the state to concede excessive welfare. Just as Hobbs vision requires the Leviathan to sustain fundamental sociability, the Ordoliberal vision of full competition requires strong state authority to assure the orderly conduct of self-interested entrepreneurs. Economic freedom is not unlimited. It is based on order, and exists only by means of order, and freedom is effective only as ordered freedom.
Ordoliberalism therefore demands a ‘strong state’, but not necessarily a big state, rather it is a state that is strong enough to act as a “guardian of the competitive order”. At the same time, it is also a state that is constrained by a political constitution and a set of constitutionally binding regulations that prevents the government from becoming the target or pawn of special interests. This is in contrast to an interventionist state which is both strong and big and that seeks permanently to intervene in the competitive order, and is also different to the neoliberal state which is as small as possible and mostly passive.
The fundamental question at the heart of Ordoliberal thought is how to sustain market liberal governance in the face of mass-democratic challenges, class conflicts, and political strife. How, in other words, to promote enterprise and secure the role of the entrepreneur in the face of powerful demands for employment and welfare, and protection from competitive pressures. For the Ordoliberals, yielding to any one of these demands is seen as leading to “collectivist tyranny‟.
Ordoliberalism considers laissez-faire liberalism to be incompatible with the principle of the rule of law, as this form of liberalism without order always threatens to harm society as a whole (for example via the emergence of cartels and monopolies). At the same time, Keynesian and Dirigisme based interventionism also contradicts the principle of the rule of law as it does not respect the market as a common ground where actors can meet on an equal basis.
Ordoliberalism is highly critical of Keynesianism and its idea that expansionary fiscal policy could solve the economic crises and fulfil the goal of full employment, and regards Keynesianism to be a theory without order, in the sense that it set no limits to how expansionary fiscal policy could be. Thus, there was always a serious risk that Keynesianism would entail permanent public deficits. For Ordoliberals, it was not the responsibility of the state to ensure full employment but to provide the framework, stability, and predictability to enhance the possibility of this goal being met.
Ordoliberalis differ from laissez-faire liberals because in line with interventionist Keynesians it believes that the business community alone cannot be trusted to serve the common interest due to the fact that it may well serve to promote business interests at the expense of common interests. At the policy level Ordnungspolitik first and foremost implies a policy that aims at securing a competitive process that works to the benefit of consumer interests. It should always pursue consumer sovereignty to the largest possible extent because the consumer is a representative of the common interest in the Ordoliberal philosophy. It is the actor towards which all economic political decision-making should be directed. By contrast a high level of active state interventionism, state interference, may serve all sorts of purposes: national pride, political expediency (pre-election booms for example), state security purposes, the promotion of employment no matter whether it is economically productive, etc.
A central tenet of Ordoliberalism is a clearly defined division of labor in economic management, with specific responsibilities assigned to particular institutions. Monetary policy should be the responsibility of the central bank committed to monetary stability and low inflation, and insulated from political pressure by independent status. Fiscal policy (balancing tax revenue against government expenditure) is the domain of the government, whilst macro-economic policy (the division of national income and the setting of levels of wages and investment, and therefore levels of consumption) is the preserve of employers and trade unions
At the more concrete monetary policy level the essential tenets of the Ordnungspolitik and of ordoliberalism are those of price stability and central bank independence and these are seen as key elements in establishing order in the monetary field. It is often argued that it is specific German historical experiences with hyperinflation that are the sole reason for Germany’s anti-inflationary policy and not the ideology and influence of Ordoliberalism. However, many other countries such as Greece and Austria (both countries without an Ordoliberal tradition) have experienced hyperinflation, but they do not traditionally share Germany’s intense fear of inflation, which is explained by the all pervasive Ordoliberal ideas that permeate and saturate German political and economic discourse.
Ordoliberalism in post-war West Germany
The theoretical and policy framework that was deployed to rebuild the post-war West Germany economy was based on Ordoliberalism. The post-war German economic miracle, the Wirtschaftswunder, was built on Oderliberal policies and the key political figure in this process was Ludwig Erhard, Minister of Economics during the occupation and later German Chancellor. Erhard was a known Ordoliberal and adherent of the Freiburg School. it was during this period that Orderliberal thinking evolved to include the concept of the Social Market.
There were a number of reasons why Ordoliberalism was attractive to the post-war West German governing elites, and in particular the dominant Christian Democratic Union (CDU).
First of all, the German population was exhausted and hungry while the country’s capital stock was decimated. Fearing political instability, the postwar authorities needed growth, and like the population they governed, after the years of improvised and ultimately disastrous Nazi economic interventionism those authorities were suspicious of growth coming from “big-state” projects, whether from the left or the right.
Second, the Freiburg school, which claimed to be a growth project, emerged from the Nazi period unsullied and more or less intact. There was apparently no Ordoliberal involvement in the horrors and crimes of the Third Reich and its slave economy, and its core intellectuals and economists had largely physically survived the war. While some members were arrested and a few key players such as Wilhelm Ropke were driven into exile, the core of the school was in the right place at the right time, armed with what seemed to be, in the German context, new growth-friendly ideas. The Ordoliberals also had powerful sponsors in the form of the leading newspaper of the day, Frankfurter Allgemeine Zeitung, and the ear of the Allied occupation authorities, at least once the Allies moved out of the punitive phase of the occupation.
Third, Germany’s economic profile as a late developer amongst the major European capitalist nations meant it had always had a strongly export-oriented manufacturing system. With domestic demand still constrained by the costs of reconstruction and its pre-war bias towards exporting it was natural for Germany’s postwar economic elites to focus on the reconstruction of export capacities and the recovery of export markets as a way to achieve the rapid growth they sought. Ordoliberals may have sought to preserve small and middle-sized firms and feared cartels, but they had no problem with large firms per se, especially those that were able to produce export-led growth. But export-led growth requires a strict policy of cost competitiveness, which in turn requires wage control through the restriction of consumption and a strong anti-inflationary stance. This strengthened the position of the monetary authority over the fiscal authority, as controlling inflation became the monetary complement to ensuring competition. It was the triumph of Ordoliberalism that laid the policy foundations that led to the strong Deutschmark.
Fourth, the postwar political party system was a mess, and the center parties, particularly the Christian Democratic Union (CDU) were looking for a new set of ideas that could address their predominantly Catholic members’ conceptions of their interests. With its appeal to community, its distrust of private as well as public power, and its somewhat reluctant, but necessary given the conditions of the times, acceptance of welfare state redistribution, Ordoliberalism found both a willing audience and a launch vehicle in the CDU. Above all the notion of a small but strong state governing through a clear set of rules was deeply attractive after the years of an overpowering, massive, and utterly lawless, Nazi state.
As the occupation moved towards its end the Finance Minister Ludwig Erhard successfully steered the economy through the difficult process of ending price controls and rationing and towards growth and recovery. However the economic effects of the Korean crisis were damaging to a fragile West German economy and concerned with rising unemployment, the Allies pressured the Ordoliberals to consider active labor-market measures to deal with the rapidly rising numbers of people out of work. This allowed the Social Catholics within the Christian Democrats to push for a better integration of welfare policy and economic policy, which cemented the place of the welfare state in the Ordnungspolitik. This fusion gave institutional form to Alfred Muller-Armack’s idea of the social market economy (die Sozialmarktwirtschaft). This new political and social fusion, the combination of classic Ordoliberal concepts of order, rule based management of the economy through a small but powerful state, restrained government expenditure and the avoidance of deficits, the containment of wage costs secured through collective agreements built on guaranteed social welfare provision and a strong orientation toward an export led manufacturing economy was a very successful model indeed. For the Germans.
Based on this new Ordnungspolitik the CDU won every national election until 1966, a period that is referred to now as the “German economic miracle” (‘Wirtschaftswunder) during which the German economy grew strongly, based on an export led economy, purchasing power of wages increased 73 percent between 1950 and 1960, and inflation fell, increasing the real wage even further. All this was achieved while absorbing 12 million ethnic German refugees expelled from across central and eastern Europe and in a nation divided by a cold war partition.
While the German miracle was studied by everyone seeking a blueprint for growth a crucial component of West German success was often overlooked, namely that it could only happen because the wider western economies, the destination for West German exports, was being flooded with Keynsian demand through the very mechanisms that the Orderlioberal detested such as government deficits, Keynsian interventionism and the manipulation of fiscal balances to dampen the economic cycle. It was everybody else’s budget and trade deficits that fuelled the demand for exports that was a cornerstone of the West German Ordnungspolitik. For every country running export surpluses, like West Germany, there has to be countries running a deficits. It was this blindness to the fact that in order to function an economy based upon Ordnungspolitik needs to necessarily swim in a wider sea of buoyant demand, mostly deficit financed, which was to be the undoing of the eurozone Ordnungspolitik.
The success of the Socialmarktwirtschaft and the ordoliberal ideas that underpinned it was so complete that as a result Keynesianism was rarely given serious consideration as a policy option by German economists, who, if they discussed Keynesianism at all, viewed it as inherently inflationary. Consequently, when the German Social Democratic Party came to power in 1966 with a pro-Keynesian agenda in response to faltering growth rates, it found little receptivity to these ideas in either the bureaucracy or amongst the mainstream German economists. As well as this crowding out of Keynesian economic theory the actual implementation of Keynesian programs was heavily constrained by the fiercely independent Bundesbank which placed strict monetary limits on deficit financing, thus preventing any strong Keynesian programs from ever developing fully. This was all strictly in line with the original Freiburg School of Ordoliberal theory which had foreseen such a role for the monetary authority, arguing that a strong central bank would be the guardian against any misuse of power by the political authorities. In Ordoliberal terms, spending equals misuse, and the central bank was specifically designed to prevent such misuse.
Ordoliberalism in todays Germany: German Political Parties and the Euro Crisis
While the programs adopted by political parties are seldom completely formed by a single strand of economic thinking, one can clearly see the shadow of Ordoliberalism in the policy of most German political parties. The German economic mainstream believes in an Ordoliberal narrative of quick and decisive budget consolidation to be achieved through reducing government expenditure and, to a lesser extent, increasing taxes, as a way of significantly cutting the deficit and in turn favourably altering debt dynamics. According to Ordoliberalism reducing deficits reduces the risk of future insolvency and at the same time, less new debt and less government spending today mean less taxation in the future. All this is supposed to increase private sector confidence, which can in turn is 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 fiscal targets are seen as a failure on the part of the political class to make or pass the necessary cuts or tax increases and hence amount to a lack of political will. Since excessive government borrowing is seen as the cause of the crisis, bailouts are seen as a genuine threat. Rescue packages are at best a necessary evil.
The Christian Democratic Union (CDU) and its Bavarian sister party, the CSU, sees itself strongly in the tradition of the post-war “social market economy” developed under CDU economics minister Ludwig Erhard. In the euro crisis, it sees a lack of fiscal discipline as the primary cause of the sovereign debt crisis and therefore calls for austerity and fiscal surveillance in an effort to increase Europe’s productivity and growth. The CDU argued against mutualising debt and Eurobonds, invoking the Maastricht Treaty’s “no bailout” philosophy. It believed any “community of debt” would reduce political leverage for structural reforms and increase moral hazard within the EU. The CDU opposed the ECB bond purchase program, which it saw as tantamount to “printing money.” The CDU advocates an independent ECB and opposes any monetarisation of government debt.
Nevertheless, there are some indications the CDU may be willing to make some concessions in its approach to the euro crisis if and when the institutional conditions are met for the EU to eventually move towards common debt issuance. Rumours suggest the party will eventually accept Eurobonds when they receive fiscal guarantees from other eurozone countries and see signs of successful structural reform in Italy, Greece, Spain, and Portugal. However, there are also legal barriers in Germany to a mutualisation of European debt along with ideological barriers. In fact, some argue that Germany would need to create an entirely new constitution in order to allow this.
The Free Democratic Party (FDP) is a classical European liberal party and has even stronger roots in Ordoliberal thinking. As a coalition partner in the federal government during the euro crisis, the FDP’s position has, of all the five main political parties in Germany, been closest to mainstream neoclassical thinking. The FDP has defended the idea that indebted countries that find it difficult to access financial markets are in this position sole because of their own policy failures. It advocates harsh austerity measures and structural reform. It has long been in favour of high penalty interest rates for rescue loans to maintain pressure on crisis governments to cut budget deficits and engage in structural reform. It demands automatic sanctions for violations of the Stability and Growth Pact and a stricter control of national budgets for violations of EU debt and deficit limits. FDP politicians have also warned of the possible inflationary dangers posed by ECB bond purchases.
During the 1960s, the Social Democratic Party (SPD) integrated many Keynesian elements into their thinking and policymaking. Karl Schiller, economics minister from 1966 to 1972, brought Keynesian ideas into the public debate. However, in the late 1990s, the SPD moved away from Keynesianism. Under Gerhard Schröder, the party passed a number of neoliberal reforms, which included income and corporate tax cuts and the Agenda 2010 reforms to the labor market and welfare system (also known as “Hartz IV”).
Since leaving the coalition after the general election in 2009, the SPD has moved slightly to the left again. Social Democrats have attempted to square a belief in fiscal responsibility with European solidarity. They have made a clear commitment to rescue packages for indebted countries but also insisted on austerity as a condition for support. Unusual for a European center-left party, the SPD has therefore come out in favour of a stricter Stability and Growth Pact. It agreed with the government on the need for constitutional “debt brakes” to limit budget deficits in all eurozone countries and has voted for the fiscal compact. Unlike the CDU/CSU and the FDP, the SPD has also stated repeatedly that closer economic policy coordination at the European level is needed, and that such coordination should include financial market regulation and taxation issues. Moreover, in the negotiations for the fiscal compact, the SPD sided with the French Socialists, demanding a growth pact as well. Leading Social Democrats have also spoken out in favour of Eurobonds, but official party documents emphasise they can only be part of a package deal that would include much stricter rules for fiscal austerity in other countries. The SPD is also opposed to ECB bond purchases.
The Greens have long been advocates of better financial market supervision and regulation, a financial transactions tax, the abolition of bonuses in financial services, and the semi-nationalisation of banks and financial institutions. This background has shaped the Greens’ approach to the euro crisis. A significant part of the party adheres to fiscal austerity, albeit for different reasons than neoclassical economists. They argue that in an economy without economic growth (which many Greens favour), government debt is not sustainable and hence public budgets should be balanced. The Greens never thought austerity was enough on its own and did not see fiscal surveillance mechanisms as the sole solution to the crisis. Yet, in the end, they voted for the fiscal compact in the German Bundestag. The Greens also committed to the introduction of Eurobonds very early on. Unlike mainstream neoclassical German economists, the Greens accept that Germany’s trade imbalance affects the economic equilibrium of the eurozone and they want “symmetric” rather than “asymmetric” adjustment within the eurozone.
The anti-capitalist Left Party was created in 2007. Although it is not against the EU or the euro, it voted against the Lisbon Treaty and aims to radically reorganise European economic policy to deliver market regulation, financial market control, tax harmonisation, and a financial transactions tax; and to control speculation and capital flows and improve social justice. As a result, the Left’s approach to the euro crisis is very different from that of the German neoclassical mainstream. It has criticized the incapacity of the EU as a whole to control financial markets. Unlike the German mainstream, it has argued that the euro crisis is a structural crisis touching financial markets and also a crisis of neoliberalism. The Left is also in favour of Eurobonds. Of all the five main German parties, the Left is the most New Keynesian. But although some of its left-wing arguments are sound, it lacks credibility in the German party system due to its former connection to the SED (the ruling party of East Germany) and it has still is not been accepted as a serious coalition party and has thus largely been excluded from mainstream politics in Germany.
Ordoliberalism and the European Project
As European integration picked up pace after the 1980s the German Ordnungspolitik became the model for the building of the European Union, the Single Market and eventually European Monetary Union. The reason why Ordnungspolitik and the German model became the hegemonic force within the European project is two fold. One is because of the relative success of the German economy which, when Keynesian post war boom hit the buffers in the 1970s and entered a period of high inflation and stagnation, suffered the least and recovered the quickest of all the major European states. The other reason was because of the inherent attractions of a rule based system in the context of a slow, piecemeal and often very difficult ceding of national sovereign powers to a supranational body. It was easier to agree binding European rules one by one than cede huge chunks of power to the supranational body in one go, and administering and policing a collection of rules only required a light weight European administrative structure, and thus the Ordnungspolitik model was a perfect fit.
After the currency chaos, inflation and stagflation of the 1970s the Deutschmark became the strongest currency in Europe and the success of West German economy became the model that other European states wished to emulate. Much effort was spent trying to build a variety of mechanisms that would anchor various bundles of European currencies to the Deutschmark, in order to both remove the uncertainty of endless exchange rate fluctuations from depressing European trade but also because the strong Deutschmark was seen as being a cornerstone of the German success and therefore a currency worth shadowing. Most of these systems based on pegging other currencies against the Deutschmark foundered as currencies were forced to devalue and adjust, often in very disruptive moments of rupture induced by market pressure (for example Black Monday in 1992 when Britain, followed shortly by Italy, were ejected from the European Exchange Rate Mechanism). Eventually these weak currency peg systems were eventually replaced by European Monetary Union (EMU), a system of permanently fixed exchange rates, and a single currency system that was based firmly on Ordoliberal principles.
While the process of building a European currency system gathered pace the general European project also began to move ahead in the 1980s leading to the completion Single Market project in 1992 and the removal of all impediments to the free movement of goods, services, labour and capital within the European Community. This process was actually implemented by the compiling of a vast number of specific regulations covering all aspects of trade in all manner of things and delivered within a strong legal framework agreed at a Community level, a system which was designed to remove political and special interest interference from the process. This was an almost perfect expression of Ordoliberalism. Strong rules within a strong legal framework designed to thwart special interest distortion creating the space for the pure expression of market delivered competitiveness to deliver maximum economic productivity for the benefit of the consumer.
Enhancing competitiveness, which in practice meant promoting productivity, which in turn usually boiled down to restraining wage costs, became a central motif to economic policy making in the European Community and its successor the European Union. The centrality of competitiveness as the key to growth, an Ordoliberal concept, is a recurrent EU theme. Two decades of EU directives on increasing competition in every area, from telecommunications to power generation to collateralising wholesale funding markets for banks, all bear the same Ordoliberal imprint. Similarly, the consistent focus during the eurozone crisis on the periphery states loss of competitiveness and the need for deep wage and cost reductions therein, while the role of surplus countries in generating the crisis is utterly ignored, speaks to a deeply Ordoliberal understanding of economic management. Savers, after all, cannot be sinners.
The small but powerful European level state apparatus (another expression of Ordoliberal principles) extended its management of the market in Europe though the extensive use of powers to prevent what is termed ‘state aid’ and which in practice means blocking any funding from the state to directly support significant private sector business activity thus preventing national and regional governments from distorting the operation of the market (yet another expression of Ordoliberal principles). The European system seeks to deliver the Ordoliberal vision of a market operating within strong set of rules designed to deliver maximum competitiveness and growth without large-scale state economic activity or directive state intervention in the economy. All delivered through a small but strong European level state apparatus.
Within the European project there is a strong rhetoric of solidarity and of the Social Market but in reality the social dimension of the project is weak and relatively insignificant. The few tens of billions of Euros being spent each year on cohesion policies is a miniscule amount in the context of a 15 trillion Euro EU GDP. There is also a small sop to French interventionism in the form of the subsidy program known as the Common Agricultural Program but again even though CAP spending is bigger than Cohesion spending it is still a vanishingly small and trivial amount in the context of the size of the EU economy. The European Social Market and European solidarity is mostly rhetoric.
Ordoliberalism had always seen democracy as being potentially problematic in relation to good governance of the economy, the danger being that special interest groups (cartels, political movements, subsidy seekers, special interests organisations such as trade unions promoting excessive welfare, etc) could capture control of the state and then use it to interfere with the operations of the market. Such democratically delivered distortions would, according to the Ordoliberals, almost certainly always involve excessive state spending resulting in the development of large budgetary deficits and eventually the debasement of the currency and inflation. This would punish the prudent savers, by eroding their savings, and destroy the ability of the market to deliver competitiveness and thus truly optimum economic outcomes. So it was vital that above the democratic structures, which are always being pressured to make damaging short term and special interest induced manoeuvres, large parts of the governance of the economy were enshrined in a legally binding framework of rules outside of political (i.e. democratic) control. The European Union is the prefect instrument for delivering this Ordnungspolitik as democratic control, and oversight, let alone direct economic interventions, at the European level is very weak and since the creation of the Single Market and the completion of EMU there has been almost no further progress in the development of European level democratic structures capable of breaching the limits set by the Ordnungspolitik framework.
Ordoliberalism in Action: Euopean Monetary Union
The implementation of European Monetary Union (EMU) meant that a huge layer of Orderliberal strong state regulation was bolted on top of the EU structures. This included not just an independent European Central Bank but also the enforcement of major economic and fiscal policy through the Stability and Growth Pact (SGP). As we shall see the ECB was set up to be the most independent central bank of any major or developed economy in the world, and a central bank constitutionally committed to Ordoliberal ideals (see below).
In addition to the new central bank EMU currency union required building a new overarching European framework of macro-economic management and surveillance of member states public finances via the Stability and Growth Pact (SGP), a pact that actually delivered neither stability nor growth but which is deeply Ordoliberal in design. The Stability and Growth Pact is constructed from a raft of regulations about government and national finances, the most important were rules about government deficits (which were to be permanently restricted to 3% of GDP henceforth) and the proportion of government debt as a ratio of GDP (which were also to be permanently restricted, in this case to 60% of GDP). These restrictions on deficit and debt levels were to apply at all times irrespective of the economic conditions and thus deficits and national budgets could no longer be adjusted to suit the business cycle. This meant, if a government breached the limits on deficit and debt levels, it could be forced via the regulatory structure to implement pro-cyclical policies, for example it could be forced to cut government spending just as the economy was going into recession. There is a clause to allow a country in deep recession to breach the SGP limits but this was considered an extraordinary measure and the general thrust of the SGP was reduce budget deficits.
As part of the Stability and Growth Pact the Macroeconomic Imbalance Procedure (MIP) surveillance mechanism was created that uses a scoreboard of indicators to identify countries whose economies are deemed as being problematic which can eventually lead to sanctions for euro area Member States if they repeatedly fail to meet their obligations. It is via the MIP, and its enforcement apparatus known as Excessive Imbalance Procedure (EIP) that the limits on government budget deficits and debt are set, but MIP also includes clauses about current account imbalances, capital flow imbalances etc. Whats very clear in these detailed rules and regulations is that some things are considered worse than others, and some things are not a problem at all. Using the EIP, the Commission can force countries into austerity when deficits and sovereign debts are too high, but can’t force them into stimulus or tax cuts when surpluses are high. It can force countries into wage moderation and real wage declines when wages rise too rapidly, but is powerless when wages rise too slowly. EIP will kick in when a country has a negative international investment position greater than -35%, but a high positive position goes unnoticed. It kicks in when inflation is too high, it does nothing when inflation is too low. Every indicator in the EIP is biased this way.
When the Stability and Growth Pact failed to deliver either stability or growth and the eurozone slipped into crisis the response, based on Ordoliberal principles of the strong state, was to build an even more rigorous system of regulation and punishments in the form of the Fiscal Stability Treaty (FST). The FST is an intergovernmental treaty outside of EU structures because three EU member states refused to sign it, the Czech Republic, the United Kingdom, and Croatia. Member states bound by the fiscal provisions of the Fiscal Stability Treaty will face annual fines up to 0.1% of GDP, if they, after one year of the Fiscal Compact entering into force for them, have failed to enact a domestic “implementation law” establishing a self-correcting mechanism, guided by surveillance of a governmentally independent fiscal advisory council, which shall guarantee their national budget be in balance or surplus under the treaty’s definition.
The effect of this raft of regulations, rules, supervision, surveillance by bodies outside of democratic control and punishments is to effectively make Keynesian demand management illegal and punishable by laws that operate above governments. This is an Ordoloberal dream come true. Governments are curtailed by law from excessive spending, and supervision of compliance is by bodies and regulatory structures that cannot be swayed by ‘dangerous’ democratic political forces. In the Ordoliberal Europe deficits are always bad, surpluses and savings are always good, and the latter certainly do not create problems but instead create the conditions for growth. Unemployment is not to be addressed by government spending but by action to increase competitiveness which will always lead to growth and eventually to lower unemployment.
Of course the great irony of all this was that when the original Stability and Growth Pact came into force in 1998 on the eve of European Monetary Union the first countries to breach it were Germany and France, the architects and drivers of monetary union. The rules were wavered until those countries could get their house in order. Germany reduced spending and as a result suffered a severe recession and responded, under an SPD government, with the Agenda 2010 labour market ‘reforms’. The effects of these reforms was drive down German wage costs, drive up the German trade surplus to gigantic levels, drive the Eurozone periphery into deep current account deficits, trigger massive destabilising capital flows from Germany to the periphery which would eventually be a major factor in the insolvency of large parts of the European banking system. But the German surplus is not a problem in the dominant European Ordoliberal discourse because surpluses and savers are never the problem, its always deficits and spenders that are the problem.
When the time came to assemble the eurozone, which was to built within strict Ordoliberal guidelines, a final catastrophic error of judgement was made. Germany, preoccupied with getting its own embarrassing deficit under control and aware that countries who wished to join the single currency could if excluded veto the whole project, agreed for pragmatic political reasons to significantly broaden the number of members states that would be in the new single currency zone. In came Italy, Spain, Ireland and Portugal, and soon in came Greece, at which point the eurozone ceased to be an optimum currency zone, by any rational measure. Ordoliberal hubris believed that a strong set of rules, a strong political will, could triumph over the chaos of the market and vested interests, and create an orderly new currency.
Ordoliberalism in Action: The European Central Bank
The Central Banking Journal of 18th June 2013 reported a speech by Mario Draghi, president of the European Central Bank in which he insisted the ECB has not violated its “ordoliberal principles” by taking some credit risk onto its own balance sheet as a result of programs it had undertaken to support the European banking system (such as long-term refinancing operations and outright monetary transactions). Draghi, said that the monetary constitution of the ECB remained firmly grounded in the principles of ‘ordoliberalism’, particularly two of its central tenets: a “clear separation of power and objectives between authorities”; and “adherence to the principles of an open market economy with free competition, favouring an efficient allocation of resources”.
The ECB is the pivotal institution of European Monetary Union, and the best exemplar of Ordoliberal principles in the pan-European arena. This is unsurprising because in the Ordoliberal narrative the debasement of the currency is the most damaging thing that can happen to the economy (worse than, say, mass unemployment and impoverishment). The ECB is far more independent than the Bundesbank has ever been, it is also much more independent than the US central-bank, the Federal Reserve, whose legal status is far weaker and which is directly accountable to Congress and government. The ECB is the least accountable central-bank amongst of advanced nations and is built around strictly Ordoliberal principles.
The Maastricht Treaty defined the role of the ECB as having having a primary mandate to maintain stable prices it also said that “where possible without compromising the mandate to maintain price stability” the ECB will also support the “general economic policy of the EU” which includes among other goals “steady noninflationary and environmentally friendly growth” and “a high level of employment”.
This could be interpreted to mean that the ECB like the Bundesbank has to work for twin goals of low inflation and stable economic growth however the emphasis is explicitly on price stability. Not surprisingly the ECB is statutes have been interpreted as being virtually exclusively aimed at price stability. Wim Duisenberg, when he was head of the ECBs predecessor organisation the European Monetary Institute said that he favoured “a single monetary policy which strictly aims at price stability in the Euro area as a whole”.
Moreover, unlike a ‘normal’central banks such as the Bundesbank, there are virtually no checks and balances on the actions of the ECB. It is therefore practically impossible for anyone, for instance EU governments, parliaments or even the unelected EU commission, to enforce any specific goals for the ECB or for that matter enforce anything at all. Unlike the Bundesbank, the ECB is independent not only from all governments but also from all parliaments (including the European Parliament), democratically elected assemblies, and all other institutions within the EU. The Maastricht Treaty defining the ECB’s status, includes the specific and explicit clause that no democratic institution within the EU is even allowed to attempt to influence the policies of the ECB. This legally defined degree of institutional freedom from democratic oversight is unprecedented among democracies.
In addition the ECB is far less transparent than the Bundesbank was. For instance the deliberations of its decision-making bodies are secret. It is not required to publish detailed information about its transactions (this requirement for transparency was also scrapped for the Bundesbank when the ECB was established). While the ECB has the power to obtain data from any bank or company in the EU, the ECB is not obliged to publicise that data or any specific statistics. ECB staff carry diplomatic passports and hence operate under diplomatic protection. The premises and files of the ECB cannot be searched or inspected by any police force and the ECB is legally immune to any search warrants.
The design of the ECB was based upon Ordoliberal principals of central banks focusing narrowly on price stability and monetary stability and this meant the ECB was completely unequipped, both in terms of powers, constitution, systems and policies, to cope with the post 2007 Great Recession. It exercises no real lender-of-last-resort function instead it is constituted to fight inflation and so has been completely unprepared to combat deflation. While the US Fed and the Bank of England, real central banks, can accept whatever assets they want in exchange for however much cash they want to give out to ailing banks, the ECB is both constitutionally and intellectually limited in what it can accept. It cannot monetise or mutualise debt, it cannot bail out countries, it cannot lend directly to banks in sufficient quantity. It’s really good at fighting an inflation that does not actually exist. The ECB was not mandated or equipped to manage the overall health of the European banking system as a whole and has floundered from one tardy and inadequate improvised initiative after another responding to the unfolding pan-European financial crisis but never really coming to grips with the wider economic implications of the crisis.
As the crisis has unfolded the ECB has developed a series of responses, such as Emergency Liquidity Support for national banking systems and its absurdly delayed and inadequately small program of Quantitative Easing. It was also forced very reluctantly into becoming involved in the various national bail out programs (which as we have seen were primarily bank bail outs), including the biggest which was the Greek bail out. The ECB has now bizarrely taken it upon itself to administer stern lectures for the need for national governments to reduce their deficits taking itself into the realm of fiscal policy, an arena it has no legal remit to operate within, and one where it lacks expertise.
At times of severe economic crisis and recession, replacing democratic political control of economic policy by a transnational regulatory framework based on a set of principles derived from an economic theory can be politically a particularly dangerous route to follow. The independent status and ingrained Ordoliberalism of the ECB ensures that monetary policy is determined solely by a very narrow definition of ‘economic’ concerns. This in practice ensures the pursuit of policies deemed good, according to the Ordoliberal narrative, for the ‘investment climate’ and it excludes measures taken to specifically address the lack of demand in the European economy and the resulting mass unemployment. It also weakens democracy by disempowering governments because even if elected by a popular mandate they are less able to control the economy or to pursue expansionary economic policies necessary to achieve wider social objectives. The current ‘political’ turn of the ECB is not being recognised, because it is hidden behind the veil of orthodoxy. This orthodoxy however is German Ordoliberalism, pushed across the Eurozone irrespective of the democratically expressed wishes of its people (such as the Greeks). The pursuit of ordoliberalism goals is not apolitical.
Under the pressure of events as the crisis in the European banking system unfolded and deepened the ECB became increasingly assertive in relation to national governments, increasingly political, even though it has zero democratic authority or accountability. In 2010 as the banking system in Ireland came close to collapse the ECB took a very strong line in a letter written by Jean-Claude Trichet, who was then the president of the European Central Bank, to Brian Lenihan, who was the Irish finance minister. At the time, the eurozone authorities were determined to protect senior bondholders from losses in order to preserve confidence in the European banking system, a policy that was reversed in other cases as the debt crisis wore on. Mr. Trichet wrote that the position of the central bank’s governing council was that it was “only if we receive in writing a commitment from the Irish government” to seek international assistance “that we can authorise further provisions of E.L.A. to Irish financial institutions.” He was referring to Emergency Liquidity Assistance. The reason the ECB was insisting on a bail out of the banks via the Irish government, effectively bankrupting it, was so that the ECB could gain leverage over the Irish government in order to seek specific changes to the way Ireland was being governed. In the letter, having used the threat of withholding financial support (and thus effectively threatening to crash the Irish banking system) Trichet, the ECB president, then instructed the Irish government to make a commitment to undertake “decisive actions in the areas of fiscal consolidation, structural reforms and financial sector restructuring” in agreement with international partners. Here was a non-democratic body instructing a democratically elected government on how it should conduct its affairs. This was pure Ordoliberalism, democratic government cannot be trusted and must be policed from above by ‘neutral’ bodies free from democratic pressure and capable of defending ‘sound’ policy and ‘sound money’.
Similarly the ECB was the body that took the hardest line in the initial negotiations with the Greek government when its debt crisis exploded in 2010. A paper, released by the independent think-tank the Centre for International Governance Innovation (CIGI), has compiled a detailed narrative of events that show that the International Monetary Fund (IMF) had pushed for debt haircuts for private bank sector holders of Greek debt. That would have meant those banks getting less than the amount they expected to be paid back. The idea was to provide an orderly process out of the debt crisis and to put the country onto a sustainable footing to repay its creditors. However, the paper’s authors claim, the proposal came under fierce opposition from former ECB president Jean-Claude Trichet. At an ECB meeting in the spring of 2010 a member of the central bank’s executive board brought up the prospect of debt relief. Trichet allegedly “blew up,” the paper says:
The ECB president “blew up,” according to one attendee. “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!’” this person recalled. “He was shouting.”
The issue the IMF faced was that without a restructuring it was difficult to make the case that Greece’s debt profile was sustainable — that is, that the country could actually pay back the loans. This is a problem as under IMF rules it cannot lend to a country, and certainly cannot provide a loan “bigger than any the Fund had given any other country” as it proposed for Greece, unless there is a high probability of debt sustainability.
In effect, to sign up to the bailout the IMF had to either take a collision course with European institutions, including Trichet’s ECB, or flout its own rules. With the deadline fast approaching for a deal, it controversially chose the latter much to the chagrin of many within the Fund itself who worried that it risked putting the organisation’s credibility at risk.
The Greek episode once again shows the unaccountable power of the ECB, and institution built within an Ordoliberal framework.
Ordoliberalism and a Germanified eurozone
According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. … It will purge the rottenness out of the system.” The result was the Great Depression.
I have tried to show that almost without anyone noticing a powerful and hegemonic orthodoxy based on the Freiburg School of Ordoliberal theory came to dominate the European Union, its economic policy making and eventually the design and architecture of the single currency system. This Ordoliberal hegemonic orthodoxy lays out a strict and clear framework for dealing with the repercussions caused by public debt problems, and by recessionary deflation. Remember that almost all the government debt problems (other than the Greeks) in the eurozone were actually debt problems in the banking system which were transferred to the various national governments. Having transferred the problem to the arena of public debt and deficit control, comfortable terrain for Ordoliberals, the usual mandatory prescriptions could be handed out. The medicine may taste bad but its good for you and you have to take it. If states have broken the rules, the only possible policy is a diet of strict austerity to bring them back into conformity with the rules, plus automatic sanctions for those who cannot stay within the rules. And since states, from an Ordoliberal viewpoint, cannot be relied upon to provide the necessary austerity because they are prone to capture by pesky democratic forces, we must have rules and an independent monetary authority to ensure that states conform to the ordo-imperative; hence the activist interventions of the ECB, the Fiscal Stability Treaty, etc. Then, and only then, will growth return. In the case of Greece and Italy in 2011, if that meant deposing a few democratically elected governments, then so be it.
The dominant Ordoliberal orthodoxy completely failed to see the problems building up as result of gross imbalances in current accounts in the eurozone because it is incapable of seeing a surplus, even a giant one such as Germany’s, as a problem. Neither could it see that this imbalances, caused by the surplus countries such as Germany, was generating destabilising capital flows and unsustainable booms in the periphery. Similarly the development of grotesquely risky and fragile banking practices across the eurozone was also invisible to the orthodox Ordoliberals of the ECB and the European Commission in the years before the crisis. Why would they have been worried back then, after all inflation was under control.
The orthodox Ordoliberals of the ECB and the European Commission still do not see the giant surplus of Germany as being essentially any of their business.The mainstream EU view sees current account imbalances in the eurozone as a consequence of lost competitiveness and excessive consumption in deficit countries and weak investment in Germany itself. Consequently, German Ordoliberal economists believe the solution is wage restraint or outright wage cuts in deficit countries. In their eyes, such a policy would increase price competitiveness in deficit countries to such an extent that exports would increase and imports would fall. Stronger wage growth in Germany, on the other hand, would simply hamper German competitiveness and reduce German investment.
German politicians influenced by ordoliberalism, such as Chancellor Angela Merkel and Wolfgang Schäuble, the finance minister, aren’t hostile to government activism in the same way conservatives in the United States and Britain are. On the contrary, they believe in a social market economy, where the state sets the rules, including the generous provision of entitlement benefits, and vigorously enforces them. But encouraged by Germany’s success in creating an export-led industrial juggernaut, they believe that everybody else, even much less efficient economies, such as Greece and Portugal, should copy them rather than rely on the crutch of easy money and deficit-financed stimulus programs.
That’s all very well if you are an official at the Bundesbank, or one of the parsimonious Swabian housewives beloved of Merkel, but it ignores a couple of things. First, it’s the very presence of weaker economies in the euro zone that keeps the value of the currency at competitive levels, greatly helping German industry. If Greece and Portugal and other periphery countries dropped out, the euro would spike up, making Volkswagens and BMWs a lot more expensive. Second, it isn’t arithmetically possible for every country to turn into Germany and run a big trade surplus.
Martin Wolff, of the Financial Times said of this belief that the whole of the eurozone can become one big Germany, one big low wage export based economy: “Is everybody supposed to run a current account surplus? And if so, with whom—Martians? And if everybody does indeed try to run a savings surplus, what else can be the outcome but a permanent global depression
