Powerful rules governing the euro: the perverse logic of German ideas

ABSTRACT

Ideas are at their most powerful as an explanatory variable when they lead agents to go against any broadly reasonable interpretation of their material self-interests. They become even more intriguing when they are instrumental in actually causing a crisis, in which actors undercut their own stated goals and then continue to make matters worse by sticking to those same ideas, even in the light of clear evidence that the policies they inspire are not working. This contribution shows two dynamics between power and ideas to explain Germany's behavior during the euro crisis. The first dynamic examines the changing macroeconomic consensus on how to conduct monetary and fiscal policy that governed the euro from 1999 to 2012. The second dynamic shows how a strict adherence to Germany's ordoliberal ideas of budgetary rules and structural reform turned a containable Greek fiscal problem into a full-blown systemic sovereign debt crisis.

KEY WORDS:

• Euro
• fiscal policy
• Germany
• ideas
• monetary policy
• ordoliberalism

ACKNOWLEDGEMENTS

The author would like to acknowledge the helpful comments from Craig Parsons, Martin Carstensen, Daniel Béland, Len Seabrooke, Manu Moschella, Wade Jacoby, Cornel Ban, James Ashley Morrison, Kate McNamara and the three anonymous referees. He also thanks the helpful research assistance provided by Brian Fox and Björn Bremer at SAIS. The usual disclaimer applies.

Notes

1 For Greece and Ireland in 2010, Portugal (and Greece again) in 2011, Spain's banking sector in 2012, and Cyprus in 2013.

2 Most constructivists would argue that what is ‘objectively’ the best solution is itself very much subject to debate, and will depend on the ideas held by the person who judges the objectivity of the solution.

3 The ‘idea’ of globalization drives down corporate tax rates in competitor countries, and the lower corporate tax rates then become evidence of the existence and structural power of globalization.

Additional information

Notes on contributors

Matthias Matthijs

Biographical note

Matthias Matthijs is assistant professor of international political economy at Johns Hopkins University's School of Advanced International Studies in Washington, DC.