The balance of influence which exists in Europe’s Economic and Monetary Union (EMU) is, on a institutional level, skewed. Structurally, Germany retains a larger degree of clout in the form of veto powers, a reality that can be attributed to the political factors which lead to the EMU’s formation. Germany has utilized their influence to effectively dictate the entire nature of the Eurozone’s economic recovery policy since the onset of the currency area’s crises. Indeed, Germany has exercised its veto power to deny the implementation of policies of fiscal stimulus called for by the periphery economies which sought to combat deflationary pressures by stimulating domestic demand. Germany rationalized its ardent stance against such measures by citing the Maastricht Treaty, which did not grant the European Central Bank (ECB) the powers to act as a ‘lender of last resort’. This strict adherence to rules is reflective of the German free market philosophy of Ordoliberalism— Germany’s own brand of neo-liberalism. Ordoliberalist rhetoric has been ever present in Germany’s political culture, its institutional make-up, and by extension, has also proved to be a decisive factor in the formulation of state policy. Given Germany’s influence on the European stage, the presence of Ordoliberalist rhetoric within the realm of the Eurozone’s monetary policy and its implications can not be over looked.
The Political Origins of Imbalance
It is important to recognise that the impetus to establish the European Monetary Union (EMU) was very political in its origins, tracing back to the political dilemmas which came about in the immediate aftermath of the Second World War. Parallel with the ideology professed by neo-functionalism, Europe’s political elite believed that institutional integration (primarily via trade) was vital to maintaining a continental peace. Furthermore, the nations of Western Europe shared a collective foreign policy which equated to “Keeping the Americans in, the Soviets out, and the Germans down.” The third factor was most significant in the EMU’s formation. Following the fall of the Iron Curtain, which divided Germany for nearly five decades, France- as a major leader within Europe- remained skeptical of a unified Germany. As such, the French subscribed to the neo-functionalist belief that the best way to keep Germany in check in the face of the country’s probable unification, was to facilitate the convergence of the interests of a unified German state with those of Western Europe. To this end, the EMU was born. Both French President Mitterand and German Chancellor Kohl believed that the best way to consolidate the interests of their countries’ was to bind the economic fates of Germany and Europe as one. The French were satisfied that a unified Germany would not cause trouble in the continent following its incorporation into a trans-European apparatus, and the Germans subsequently received the much needed French approval for its unification. However, the Bundesbank, the German central bank, remained skeptical that the liberal fiscal norms which characterized economies such as France would not be conducive to the more disciplinary German financial standards. Catering to this issue, Germany was granted substantial influence in the negotiation process of the Maastricht Treaty, which established the rules of the EMU and effectively set the process of monetary unionization in motion.
The prevailing feature of Ordoliberalism is a steadfast adherence to rules, premised on the belief that any venture away from codified stipulations (i.e., in order to cater to individual or case-specific difficulties) will prove to be a self-perpetuating phenomenon, and ultimately catalyze the unraveling of the entire system. In short, Ordoliberalism encourages actors to ‘weather the storm’, and to struggle through short term difficulties by sticking to their beliefs in order to ensure systemic prosperity in the long-run. However, since the formulation of policy is subjugated to pre-determined rules, an Ordoliberal agenda effectively eliminates the potential for case-specific assessment to factor into the policy-making process. To the extent that it removes the possibility of state practices diverging from state institutional-systemic mandates, one can conclude that a key concept of Ordoliberalism is its aim to discourage democratic influences in policy making. The ECB’s painfully rigid attempts to mitigate the Eurozone crises and its vehement refusal to compromise epitomizes the inefficiency of Ordoliberalism in dealing with case-specific dilemmas, particularly when the solutions to them do not explicitly feature in the proscribed rules. This is in itself pays testament to the influence which the German agenda wields in EMU policy making.
The ECB: Holding Europe Hostage
Returning to the political impetus of the creation of the EMU, the bargaining power granted to West Germany in the monetary unionization process was significant in establishing institutional mechanisms at the inter-European level which would be conducive to Ordoliberal rhetoric. The degree of inflexibility which characterizes the rules stipulated under the Maastricht Treaty reflects this reality, particularly those which specify the roles of the ECB. Consequently, Germany has utilized the rigidity of these rules to legitimize its decisions to veto any policies which would see the ECB take on the role of ‘lender of last resort’ (done primarily to ensure the implementation of the Troika’s preferred policies of austerity).
The situational framework of the financial crises have produced the conditions which allow the leaders of the ECB to take advantage of its role as the sole creator of money within the Eurozone, and manipulate situations in order to further a neo-liberal agenda through austerity measures. The ECB’s handling of the sovereign debt crisis sufficiently illustrates how the economic elite have utilized the fear brought on by economic catastrophe as political leverage: The sovereign bonds of the periphery economies were declining in price while their interest rates soared, which exerted extreme downward pressure on price levels. As such, these countries badly needed the ECB to purchase their corrupted bonds in order to ease the deflationary pressures plaguing their economies. However, the ECB stated that its purchase of (bad) sovereign bonds from periphery economies would be contingent upon the agreement to the conditions set forth by the Brussels-Frankfurt consensus, namely the acceptance of austerity and the liberalization of labour markets. In short, the ECB held the periphery countries hostage, threatening to stand by and watch as their economies rotted if their demands for austerity were not accepted.
The rationale for such malicious maneuvering is grounded in Ordoliberal ideology, with the ECB’s leaders emphasizing the importance of adhering to institutional codes as justification for their frugality. Indeed, the ECB elites time and again highlighted the stringent rules proscribed by the Maastricht Treaty, which prohibit the ECB from financing sovereign government budgetary deficits. It is through austerity conditions that the ECB wants the periphery countries to refinance their debts. It should be noted that, under austerity conditions, the hope is that debt can be reduced or financed by running a primary surplus (reducing government expenditure so that revenue from taxes exceeds public spending). In the Troika’s view, the primary surplus which it hoped the periphery economies would run would serve as a ‘pay-in’ to ECB bond-purchasing programs, and therefore the economic aid would not equate to a full-scale bailout by the ECB. However, the austerity measures have proved to be largely ineffective, and even detrimental in nature, as in cases like Greece, where such measures have actually perpetuated the debt-to-GDP ratio, thus engendering a paradoxical deflationary effect (since falls in price level increase the real interest rate, which inflates the real value of an economy’s debt).
The Myth of Pan-European Idenitity
Unfortunately, the Eurozone crises created the optimal conditions in which central bankers can (and have) utilized economic catastrophe as a means to consolidate political influence and hold economic aid hostage at the cost of accepting toxic austerity measures. The necessity for such subjugation is rationalized by the premise that the Troika’s end goal is to combat deflation (despite contradictory evidence of its effectiveness), and vindicated by false notions of economic discipline invoked by the banking elites’ adherence to rule-consequentialism. The fact of the matter is that Europe’s economic recovery process has adopted an almost social-justice oriented mindset which seeks to identify ‘the perpetrators of the crime’ and demands retribution. Indeed, the stigmatization of Greece this past year epitomized this sentiment in its entirety. At the end of the day, the political-oriented solutions to economic adversity in the Eurozone have only served a self-defeating purpose with respects to the defining principles of the European project: to promote peace in Europe, to foster a sense of pan-Europeanism identity, and for nations to coexist in democratic prosperity. However, monetary integration and the subsequent handling of economic crises in the Eurozone have produced the exact opposite effects where relations between previously friendly countries are strained, right-wing political groups grown in popularity as nationalism rises, undemocratic governments have come into power, and the idea of a pan-European identity now seems like something closer to myth than reality.
Declan Walker is a graduate student at the University of Glasgow, in the process of completing an MSc. in global security. He completed his undergraduate degree at the University of Toronto (2015), where he studied political science and economics.