Hegemonic leadership is what states make of it: reading Kindleberger in Washington and Berlin

Abstract

What explains the nature of a dominant state’s systemic crisis response? In the wake of the global financial crisis of 2008, the U.S. acted as the hegemon for the world economy, showing ‘benign’ leadership by serving as consumer, investor, and lender of last resort. During the euro crisis two years later, Germany played a rather different role, practicing a more ‘coercive’ form of rules-based leadership within Europe’s regional context. In this paper, I explain how ideas and crisis narratives, informed by national economic traditions, shaped how the leading states behaved. By rescuing Charles Kindleberger’s original version of hegemonic stability theory from both its realist and liberal institutionalist interpreters, the paper clarifies why elites in the U.S. followed a hardheaded path of soft Keynesian ideas resulting in global public goods provision while their counterparts in Germany, be it more constrained, opted for a more principled road of rule enforcing ordo-liberal ideas avoiding public goods provision. The crucial role of ideas – in addition to structural and institutional factors – in defining the national interest during periods of crisis helps us better understand “why hegemonic leadership is what states make of it.” This led American and German elites to interpret Kindleberger in very different ways.

Keywords:

• hegemonic stability
• leadership
• crisis
• ideas
• public goods
• Germany
• United States

Acknowledgements

For helpful comments and lively discussion, I am indebted to Jonathan Kirshner, Eric Helleiner, Jerry Cohen, Erik Jones, Wade Jacoby, Mark Blyth, Cornel Ban, David Steinberg, Dan Honig, Jeff Colgan, Gabriel Goodliffe, Miguel Otero-Iglesias, Simon Bulmer, Willie Paterson, Frédéric Mérand, Sergio Fabbrini, Hanns Maull, Hubert Zimmermann, Daniel Kelemen, David Singer, Iacopo Mugnai, Dan Drezner, Jeff Frieden, Henry Farrell, Greg Fuller, Abe Newman, Kate McNamara, Manu Moschella, Mark Vail, Vivien Schmidt, Cornelia Woll, James Ashley Morrison, Hans Kundnani, Eleni Tsingou, Juliet Johnson, Len Seabrooke, Randy Germain, Wes Widmaier, Craig Parsons, and Robert Skidelsky. For terrific research assistance, I want to thank Björn Bremer, Brian Fox, Christian Herman, Christina Toenshoff, Daniel Frey, Alexander Haag, and Christopher Brodsky. All errors and omissions remain my own.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Reinhart and Rogoff 2009, 208. For a review of the vast literature on the GFC, see Lo 2012. For an analysis of the consequences of the crisis, see Helleiner 2014.

2 The Emergency Economic Stabilization Act (EESA) was signed into law on October 3, 2008.

3 For more detail, see Chinn and Frieden 2011, chapters 4 and 5

4 Note that the other main growth engine to the world economy was China (see Tooze 201886, chapter 10), which also had a major fiscal stimulus. Also, one could argue that the US stimulus was too small relative to its size (see Farrell and Quiggin 2017)

5 Drezner 2014a, and 2014b, 15-19. See also Kirshner 2014a for a critique of Drezner’s book, as well as Kirshner 2014b for a more critical analysis of the US role during and after the GFC.

6 The popular term ‘European sovereign debt crisis’ is a misnomer, however. The euro crisis was mainly a banking crisis, which only morphed into a sovereign debt crisis after large public sector bailouts converted private into public debt. Blyth 2013, chapter 3.

7 For an overview of the euro crisis, as well as its major causes, see Matthijs and Blyth (2015)

8 IMF (2014), p. 86, p. 180

9 Ibid., p. 181

10 In 2008, the German government in Berlin did bail out its #2 bank, Commerzbank, and the second-largest commercial property lender, Hypo Real Estate. However, by the end of 2009, it decided further direct bailouts would lead to a public outcry, and hence chose the indirect route, via the troika’s bailout of Greece (see Thompson 2013).

11 After the ‘Greek summer’ of 2015, the acute phase of the euro crisis was over, but the Eurozone economy was far from fixed and the institutional infrastructure remained incomplete. See, for example, Spiegel (2014b) and Matthijs and Blyth (2015)

12 Olson (1965), p. 28

13 As one of the reviewers pointed out, there is only a collective action problem if you think of the global order as ‘multipolar.’ If you conceive of it as the United States ‘long’ on dollars and every other state as ‘short’ on dollars, then there is no collective action to solve. From that point of view, the US is its own K group. Of course, the GFC required more than dollar liquidity.

14 See Krasner (1983), Keohane (1984, [2005]), and Milner (1997). For a response to the main critique to Hegemonic Stability Theory as put forward by Keohane (1984, [2005]), see Kindleberger (1986b).

15 Kindleberger’s original list included three public goods: a market for distress goods, lender of last resort facilities, and long-term countercyclical lending (see Kindleberger (1973, [2013])). In Kindleberger (1981), he would add two more: managing “in some degree, the structure of foreign-exchange rates” and “provide a degree of coordination of domestic monetary policies.” In Kindleberger (1986a), he further expanded the latter good to become “coordination of macroeconomic policies,” presumably also including fiscal policy.

16 Kindleberger (1986a), chapter 14, pp. 288-303. I will omit ‘stable exchange rates’ from this list, since it makes less sense to include in a comparison of the world economy with flexible exchange rates (post-Bretton Woods), and the Eurozone (by definition a fixed exchange rate regime, with one single currency).

17 Kindleberger (1986a), p. 304

18 IMF (2014) and own calculations

19 Ibid.; European Commission (2014), Ameco Database.

20 See Kindleberger (1997), pp. 223-228 on whether one power’s decline is followed by the rise of another.

21 Kindleberger (1986a), p. 289. I will exclude ‘stable exchange rates’ from my analysis as it has less importance in a world dominated by floating exchange rates, while it is irrelevant within the Eurozone, which abolished exchange rates between member states by introducing one single currency, the euro.

22 Jones (2009b), pp. 243-252

23 Kindleberger would have flinched at being called a ‘Keynesian’ however. He thought the labels counterproductive and missing the overall agreements in economics. Nevertheless, his solutions to a systemic crisis today would fall under the broader Keynesian umbrella.

24 Serving as the lender of last resort can be seen as standard central bank practice. Here, the European Central Bank from 1999 until 2012 was a clear outlier, and more the exception to the rule.

25 As quoted in Eichengreen (1992), p. 251

26 Lake (1993), p. 485

27 Ibid.

28 For the U.S. role during the GFC, see Drezner (2014b), Helleiner (2014) and Kirshner (2014b); for Germany’s role during the euro crisis, see Bulmer and Paterson (2013) and Newman (2015)

29 See especially Kindleberger and Aliber (1978, [2011])

30 As quoted in Delong and Eichengreen (2013), p. 6. The interview at INET’s Bretton Woods conference in 2011 can be viewed online at https://www.youtube.com/watch?v=Vgg5DoPkgYc

31 Schäuble (2010), translated from German.

32 Ibid.

33 Fourcade (2013) and Matthijs and McNamara (2015)

34 Thompson (2013), p. 15

35 ECB (2019) https://www.ecb.europa.eu/mopo/eaec/fiscal/html/index.en.html

36 There is, of course, a qualitative difference. While the U.S. built the new liberal economic order at Bretton Woods in 1944 primarily out of its own initiative and largely by its own design, the Germans only reluctantly agreed to Economic and Monetary Union (EMU) at Maastricht in 1991. While EMU largely tailored to German preferences, Germany never fully accepted its ‘leadership’ role in EMU: fiscal and inflation rules would replace the need for leadership, was the logic in Germany at the time.

37 See footnote 36.

38 For an overview of those accounts, see Drezner (2014b), pp. 39-42

39 New York Times (2008)

40 IMF (2009) and G-20 (2009)

41 Watch Post G20 summit remarks here: https://www.americanrhetoric.com/speeches/barackobama/barackobamag20summitpressconference.htm

42 Obama (2009d) remarks on the economy at Georgetown University (April 14, 2009) can be accessed here: https://www.nytimes.com/2009/04/14/us/politics/14obama-text.html

43 Column in Financial Times (September 23, 2007), accessible at: http://larrysummers.com/commentary/financial-times-columns/beware-moral-hazard-fundamentalists-september-23-2007/

44 For a more detailed analysis, see Helleiner (2014), pp. 38-45

45 Federal Reserve Bank of New York (2014), Tooze (2018), p. 212

46 See Project Syndicate podcast, available here: http://larrysummers.com/2019/07/05/the-g20-on-shaky-ground-a-project-syndicate-podcast/

47 See also Matthijs and Blyth (2011)

48 Eurostat (2010), p. 145

49 Waysand, Ross, and de Guzman (2010)

50 As quoted in Matthijs and Blyth (2011)

51 Wolfgang Schäuble speech at Chatham House (October 2011). Available online at: https://www.chathamhouse.org/sites/default/files/public/Meetings/Meeting%20Transcripts/171011schauble.pdf

52 See Blyth (2013), chapter 3

53 See also Fubini (2013)

54 Indeed, during remarks at a bipartisan meeting at the White House, Trump promised to “bring back trillions of dollars – we have trillions of dollars overseas and we’ll bring back, and we’ll bring them back quickly.” Online available at: https://www.youtube.com/watch?time_continue=156&v=nx2RaxQZJ1k

55 Peter Navarro (2017), NPR interview on May 2, 2017. http://www.npr.org/2017/05/03/526621048/peter-navarro-a-bricklayer-of-trumps-protectionist-wall

56 Washington Post (July 23, 2019). Online available at https://www.washingtonpost.com/business/economy/the-federal-reserve-is-not-your-friend-trump-quest-to-remake-the-fed-hinges-on-judy-shelton/2019/07/22/d6440a3e-a35e-11e9-b8c8-75dae2607e60_story.html?utm_term=.497381684d3c

57 As carefully documented in The Wall Street Journal by Bojan Pancevski and Laurence Norman: “How Angela Merkel’s Change of Heart Drove Historic EU Rescue Plan” (June 21, 2020). Available online at: https://www.wsj.com/articles/angela-merkel-macron-covid-coronavirus-eu-rescue-11595364124

58 Kindleberger (1986c)

Additional information

Notes on contributors

Matthias Matthijs

Matthias Matthijs is Associate Professor of International Political Economy at Johns Hopkins University’s School of Advanced International Studies and Senior Fellow for Europe at the Council on Foreign Relations in Washington, DC. He is the author of Ideas and Economic Crises in Britain from Attlee to Blair (2012) and co-editor (with Mark Blyth) of The Future of the Euro (2015).