Understanding how Berlin thinks is now more important than ever. If EU leaders want Angela Merkel to listen to calls for growth, they first need to understand her economic mindset which is deeply rooted in a concept known as 'ordoliberalism'.
To anybody familiar with German rock music, it should be clear that Germany sometimes dances to a different tune to the rest of Europe. Nowhere has that been more obvious than in the frenetic attempts to find a solution to the euro crisis that threatens to break apart not just the single currency, but potentially the whole European project. As EU leaders gather in Brussels to sign a German-led fiscal compact, understanding what Berlin thinks is now more important than ever for Europe's politicians and money men.
The bad news for those politicians is that Merkel's steadfastness is not simply a bargaining tool, and that Berlin genuinely believes in a German solution for the whole of Europe. The good news is that understanding the reasons behind this is also the key to finding areas where Merkel is able to compromise.
Germany has been widely criticised for its monetary policy, inflexibility over austerity, rigidity over treaty changes and a selfish view of trade imbalances. It is also blamed for rejecting both eurobonds and turning the European Central Bank into the lender of last resort. Across Europe, politicians and economists have lined up to tell the Germans that their stubbornness is preventing a solution, or worse, making the crisis deeper. Yet Berlin has continued to call the shots.
Many have sagely noted that this all comes down to a deeply embedded psychological aversion to inflation, thanks to the role Weimar-era hyperinflation played in the rise of the Nazis. But it is wrong to put too much emphasis on this. After all, other countries such as Greece and Austria have also experienced hyperinflation without developing a lasting allergy to some of its causes.
Let us introduce you to "ordoliberalism". If at first it seems dry, then persevere: it explains a lot of the way Germany thinks about economics. Crucially, its importance in German thought also suggests that a change in government in the next general election in 2013 is unlikely to change Berlin's approach to the big issues.
Put simply, ordoliberalism is about governments regulating markets only to the extent that they replicate theoretically perfectly competitive markets. Other forms of state intervention are taboo, as are the type of expansionary policies that Keynes would argue for. Such a theory clearly does not sit happily with ideas such as firing up the ECB printing presses for use as a lender of last resort.
While much of the rest of Europe starts screaming about growth, the German reply is once more in keeping with ordoliberalism. Harsh austerity measures break the cycle of debt and the threat of insolvency, reassuring the private sector and thus triggering natural and sustainable growth. Failure to reach fiscal targets is seen as a political failure of will, and much of the eurozone crisis is seen as rising from an irresponsible straying from the path thanks to indulgence in low interest rates.
Underlying this harsh and unforgiving ordoliberal outlook is the national narrative of the German experience. In 1945 the country was in ruins, and look what happened. In the early 1990s, the richer western part of the country had to unify with the poor, ex-communist east, and look what happened. In the German mind, postwar success is firmly linked to ordoliberal policies, even if the reality might be more complex than that. These central tenets that lay out how to run an economy are largely an article of faith across Germany. Even the Greens have strong support for ordoliberalism.
What does this mean for the rest of Europe, as they negotiate with Berlin and try to plot a route out of the crisis? The first lesson is that Merkel's intransigence is not some vulnerable ideological cul-de-sac, but one with genuine political support and coherent intellectual foundations. Attacking excessive austerity and demanding a renegotiation of the new fiscal treaty will simply fall on deaf ears. Instead, a more promising strategy might be to demand pan-European growth and investment programmes with more spending and taxation power shifted towards the EU level. Unused funds could be channelled into investment in the ailing periphery to build sustainable foundations for private-sector growth. Instead of opposing balanced budgets, the argument should be to ask for more time for the balancing.
One of the incontrovertible effects of the euro crisis has been to push Germany into the leadership of Europe. The impact will undoubtedly be that Berlin will want Europe to get out of the crisis by being more German – not through some half-remembered Weimar memory of wheelbarrows full of cash, but through a widely held belief in what works for an economy. The rest of Europe simply needs to understand this and work with Berlin.
Of course, this will mean a bleaker growth outlook than getting rid of austerity altogether. But Germany will not give in to more.
This article first appeared in The Guardian (Comment is free)
ECFR has published The long shadow of ordoliberalism: Germany's approach to the euro crisis, a paper by Sebastian Dullien and Ulrike Guerot about German economic thinking and its implications for Europe.