To play or not to play the ‘moral hazard card’: Germany and the European Union’s response to the Covid-19 crisis

ABSTRACT

Avoiding moral hazard is a recurrent argument of those seeking to limit the development of European financial support mechanisms. Germany has been the traditional leader of this coalition of actors in the European Union (EU). However, in reaction to the Covid-19 pandemic, Germany supported an EU response which included grants and massive debt issuance. What was previously presented as unacceptable – because of moral hazard – became appropriate. This contribution seeks to explain why the German government ceased to emphasise the moral hazard problem in EU economic governance. We argue that the answer is not because of a challenge to the relevance of moral hazard per se, or because the Germans lost interest in the moral hazard problem, but rather because German policymakers were discursively constrained by one of the dominant meanings of moral hazard they had previously imposed – which lost its relevance in the context of a symmetric exogenous shock.

KEYWORDS:

• Germany
• moral hazard
• Covid-19 pandemic
• Next Generation European Union (NGEU)
• Euro area crisis
• responsibility
• text analysis
• discursive constraint

Acknowledgments

The authors benefitted from the helpful feedback from academic colleagues participating in a number of workshops and conferences (at the Université Libre de Bruxelles, Trier University, the European University Institute, the 2022 EUSA conference and the 2023 CES conference). The authors have notably been inspired by the friendly guidance and encouragement of professors Amandine Crespy and Vivien Schmidt, and Tiago Moreira Ramalho. Three anonymous reviewers provided very helpful and detailed comments and constructive criticism. A number of expert interviewees provided invaluable information and advice.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The empirical literature in neoclassical economics also distinguishes between two different types of moral hazard: ex ante moral hazard refers to actions that increase the probabilities of outcomes; ex post moral hazard refers to actions that increase the costs of outcomes. This distinction is worth mentioning because it provides a reminder that, in the academic literature, moral hazard is not restricted to cases of endogenous shocks.

2 Other German institutions — notably the Bundestag — are of analytical interest and should be analysed in future research.

3 The data were collected in mid-January 2022. The corpus of press documents is composed of speeches, interviews, guest contributions, declarations, and press releases (expressing an opinion).

4 The press documents are available on the respective institutional websites and personal webpages.

5 Keywords search to filter by topic: Eurozone crisis [Eurozone crisis, Euro crisis, Euro area crisis, debt crisis]; Covid-19 crisis [corona, covid].

6 List of proxies based on synonymous and antonymous concepts: incentive (anreiz in German) [wrong, weaken, adverse, reduce, misguided, false, disincentives, for excessive risk, for risk taking, for debt versus correct, appropriate, right, for sound public finances, for fiscal consolidation, for reform]; ownership (eigenverantwortung in German). Each occurrence of proxies has been manually filtered to ensure that there is indeed a relation to moral hazard.

7 The corpus is made of documents in English and in German. When necessary, translation tools have been used.

8 A direct reference means an explicit occurrence of the term ‘moral hazard’, while an indirect reference means a proxy of moral hazard (36 documents of the corpus contain at least one proxy).

9 We first looked in a number of major German newspapers but did not find occurrences of moral hazard in articles where the topic of Covid was also present. For this reason we then focused on international newspapers.

10 The interviews represent the interviewees’ personal opinions and do not necessarily reflect the views of the German government.

11 It should be noted that the results of semantic fields are by case study (i.e., Eurozone and Covid-19 crises) and not by actor. Therefore, in the case of the Covid-19 crisis, no distinction is made between press documents from German policymakers and newspapers.

12 It should be noted that we make exclusive reference to the role of German policymakers' discourse during the Eurozone crisis because it is the subject of our empirical investigation. However, we recognise that the discursive constraint was also reinforced by the discourse of other actors who had a similar discourse on moral hazard.

Additional information

Funding

The authors would like to thank the University Association for Contemporary European Studies (UACES) and the James Madison Charitable Trust for their generous doctoral research travel grant which, in part, funded Laura Pierret to conduct the interviews referenced in this article.

Notes on contributors

Laura Pierret

Laura Pierret is a Doctoral Researcher at the Institute of Political Science, University of Luxembourg.

David Howarth

David Howarth is a Full Professor in Political Science (European Union Studies) at the Institute of Political Science, University of Luxembourg.