Acting in the Shadow of German Hegemony? The Role of Small States in the Economic and Monetary Union (Introduction to the Special Issue)

ABSTRACT

This article introduces the special issue on smaller states and their relation to Germany in the Economic and Monetary Union (EMU). While there has been a mushrooming literature on the role of Germany in EMU, there has been hardly any research on how smaller states interact with EMU’s most powerful member. However, recent developments such as the rise of populism, Brexit, or the emergence of small state coalitions such as the ‘New Hanseatic League’ and the ‘Frugal Four’ give reason to take a closer look at the role of smaller states. Therefore, this special issue gathers the preferences of smaller EMU members, analyses the strategies they use to pursue them vis-à-vis Germany, and investigates the reasons for their choice as well as Germany’s reaction. At a theoretical level, we put forward an analytical framework providing causal propositions on why and how smaller states adopt certain strategies when they act in the shadow of hegemony. At an empirical level, we present the findings of the single contributions. We conclude by discussing the results in the light of our theoretical expectations.

Introduction

At least since the outbreak of the eurozone crisis, Germany has moved centre stage in the European Union (EU) (Paterson 2011). This applies in particular to the Economic and Monetary Union (EMU) (Bulmer 2014; Jacoby 2015; Schoeller 2019). While its central role has prompted many authors to write about Germany’s hegemony in the eurozone (Bulmer and Paterson 2019; Schild 2020; Webber 2019), there is hardly any research on how smaller eurozone states interact with EMU’s most powerful member. However, recent developments give reason to take a closer look at the role of smaller states.

On a global scale, the retreat of the United States under President Trump as a reliable partner for Europe has caused fears among smaller states. For example, the eurozone’s so-called creditor states fear that Germany could make concessions to France in EMU, given the need for cooperation in other policies such as defence, and the Baltics push for more integration to hedge against geopolitical risks emanating from Russia (Vilpišauskas this issue). At the European level, Brexit gives small liberal states reason to mobilise, as the exit of Great Britain means the loss of a powerful ally (Verdun this issue). At the national level, finally, the rise of populist parties and an increasing ‘constraining dissensus’ (Hooghe and Marks 2009) make it more difficult for smaller states to compromise at the European level and, in particular, to follow a Franco-German compromise (Jones this issue; Heidebrecht and Schoeller this issue). In view of these developments, it is hard to justify that we still lack in-depth knowledge about the preferences and strategies¹ of smaller states in interacting with the eurozone’s alleged hegemon.

These developments are reflected in unprecedented emancipation efforts of some smaller member states. Most notably, eight smaller countries built a coalition, labelled the ‘New Hanseatic League’, to promote their fiscally frugal views on EMU governance and reform. In doing so, they bypassed or even opposed Germany and its hegemonic position in the eurozone. For instance, the New Hansa rejected the Franco-German proposal of a genuine eurozone budget (Schoeller 2020b). In the context of fighting the economic consequences of the COVID-19 crisis, another coalition, called the ‘Frugal Four’ (Austria, the Netherlands, Denmark, Sweden), opposed the spending plans proposed by the Franco-German tandem and the European Commission (Lofven 2020). The four smaller states rejected a Franco-Germany plan for a recovery fund and put forward their own proposal, which is based on loans rather than grants (Bayer, Smith-Meyer, and de La Baume 2020). When the final recovery package (‘Next Generation EU’) was negotiated as part of the EU budget negotiations, the Frugal Four, joined by Finland, took a hard bargaining stance and reached a reduction of grants for crisis-stricken member states (as compared to loans) and a considerable increase of EU budget rebates for themselves (Fleming, Khan, and Brunsden 2020). Most recently, a group of twelve smaller EU member states issued a position paper expressing a rather reserved stance on the ‘Conference on the Future of Europe’, which is in stark opposition to the originally great expectations put forward by France, for example (Khan and Hindley 2021; Non-Paper 2021).

Against this background, this special issue provides a comprehensive analysis of the relations between smaller EMU member states and Germany: It gathers the preferences of smaller states, analyses the strategies they use to pursue them vis-à-vis Germany, and investigates the reasons for their choice as well as Germany’s reaction. Hence, in this special issue we seek to answer the following questions: What are the preferences of smaller states in EMU governance and reform, and how do they relate to those of Germany? How do smaller states pursue their preferences in the shadow of German hegemony, i.e. what strategies do they use to influence or circumvent Germany? What explains their choice of strategies, and how is this choice conditioned by their relationship to Germany? Finally, how does Germany react?

Analysing the role of smaller states in the ‘shadow of hegemony’ invokes the controversial question of whether Germany can actually be considered a hegemon in EMU (see e.g. Matthijs 2020; Schild 2020). While we do not associate any normative content with the concept of hegemony, we acknowledge that Germany’s role in EMU goes beyond that of a merely powerful actor and thus differs considerably from its role in other EU policy fields. Relying on the below criteria derived from Hegemonic Stability Theory (e.g. Gilpin 1987; Kindleberger 1981; Snidal 1985), we therefore see an analytical value-added in applying the concept of hegemony to the relations between Germany and smaller states in EMU. However, we refrain from making any deterministic assertions on whether Germany acts as a ‘benign hegemon’ à la Kindleberger or rather as a ‘coercive hegemon’ as described by Robert Gilpin, for example. First of all, and opposed to other powerful actors, Germany is systemically relevant for EMU: without its most powerful member, the present monetary union is not conceivable in Europe. Second, Germany determined the ‘rules of the game’ in EMU, ranging from the early convergence criteria over the independence of the European Central Bank and the prohibition of monetary financing through to the Stability and Growth Pact (Dyson and Featherstone 1999; Schild 2020; Schoeller and Karlsson 2021). Third, a stable monetary union as upheld by Germany is a collective good, even if the way to achieve it is controversial (Caporaso forthcoming 2022). Fourth, as Germany benefits asymmetrically from this collective good (Jacoby 2015; Scharpf 2018), it is willing to maintain it by bearing a large part of the costs itself or by imposing them on other states.

With regard to its theoretical contribution, our special issue focuses on the conceptualisation and explanation of small state strategies in dealing with a hegemonic power (see below: ‘Theoretical Framework’). When it comes to theorising these strategies, Robert Keohane’s early call to study the ‘Lilliputians as carefully as the giant’ (1969, 310) has largely been ignored (Long 2017, 157; Thorhallsson and Wivel 2006, 664). To be sure, there is an abundant literature on the (economic) adjustment strategies of small states in a globalised environment (Katzenstein 1985; Jones 2008; Baldersheim and Keating 2015). However, except for some notable exceptions (e.g. Panke 2010a), little has been written on the diplomatic strategies that small states may use to pursue their preferences in the context of regional (economic) integration (see below: ‘State of the Art’). Therefore, we put forward an explanatory framework providing causal propositions on why and how smaller states adopt certain roles when they act in the shadow of hegemony, such as ‘foot-dragging’ or ‘pace-setting’ (Börzel 2002),² and what strategic tools they may use to realise them. Drawing on the ‘institutional fabric’ (Krotz and Schild 2013, 29–35) and the power asymmetry between smaller states and the hegemon, the framework also provides conjectures on whether smaller states confront or bypass the hegemon, and whether they rely on bargaining- or persuasion-based strategies in doing so. By applying the common framework, the individual contributions to the special issue not only examine the varying relations between smaller states and Germany, but also help us understand Germany’s reactions, that is, whether Germany acts as a leader, ally, mediator, or even opponent of smaller states.

Empirically, we contribute to the small states literature in International Relations and European integration (e.g. Archer, Bailes, and Wivel 2014; Cooper and Shaw 2009; Thorhallsson 2000). As Bohle and Jacoby (2017) have pointed out, the success of small states depends not only on their domestic adjustment strategies, but also on external factors. We therefore introduce the role of Germany as a key factor in understanding the strategies of small states in EMU. Moreover, the questions of which strategies small EMU member states adopt vis-à-vis Germany and why they vary in time and across states have not been answered in the academic literature. Finally, by examining the strategies and relations of small states towards Germany, we link up with the burgeoning literature on Germany’s reluctance to take the lead in EMU governance and reform (Bulmer and Paterson 2013; Newman 2015; Schoeller 2018a). Based on carefully targeted empirical studies of small states and their relationship to Germany, our special issue thus addresses a blind spot in the analysis of Germany’s role in the EU.

Besides Germany, our universe of cases comprises all ‘small’ EMU member states that have adopted the euro. As regards the definition of ‘small’, we apply a pragmatic approach. Despite an abundant literature on the conceptualisation of ‘small states’, there is no satisfactory – let alone generally agreed – definition of ‘smallness’ in International Relations or European integration research (see e.g. Long 2017; Sutton 2011; Thorhallsson 2006; Verdun 2013). For heuristic reasons, we therefore use total GDP as an adequate indicator of size in the context of EMU politics, defining ‘small states’ as those with a GDP below the eurozone average (see Table 1). In addition, given their recent role as a leader of smaller eurozone states (see Verdun this issue), we include the Netherlands in this selection, even though their GDP is somewhat above the eurozone average.

Table 1. Eurozone countries’ GDP at market prices 2019 (in million euro). Source: Eurostat (own compilation).

Within this universe of cases, our contributors offer theory-guided analyses of seven smaller eurozone countries and their relations to Germany (Austria, Belgium, Estonia, Lithuania, Latvia, Greece, the Netherlands). The seven smaller states represent different positions on the cleavages between ‘creditor’ vs. ‘debtor states’ and old vs. new member states. This case selection helps us identify generalisable patterns that do not depend on the idiosyncrasies of single countries. Moreover, our selection reflects the fact that there are more small creditor states than small debtor states in the eurozone. It thus allows us to draw general conclusion that apply to the entire universe of cases. An additional contribution to the special issue analyses how the newly founded ‘Hanseatic League’ affects the alleged hegemony of Germany, and how the German government is torn between them and France (Howarth and Schild this issue). The final contribution unites the various themes of the special issue – Franco-German leadership, hegemony, and the role of small states – by arguing that smaller states find it increasingly hard to follow Germany or the Franco-German tandem as their political leaders are increasingly constrained by domestic political developments (Jones this issue) (for brief summaries, see below: ‘Contributions’). Regarding data collection, the contributions draw on a broad range of untapped sources, such as elite interviews, policy documents, public speeches and declarations, voting patterns and public opinion polling.

State of the Art and Gap in the Literature

There is a distinct strand of literature dealing with the role of small states in international relations (see Archer, Bailes, and Wivel 2014; Chong and Maass 2010; Cooper and Shaw 2009; Ingebritsen et al. 2006). The origins of this literature date back to the 1960s, when mostly US-American scholars discovered that alliances with the United States increased the influence of small states on American foreign policy (see Keohane 1969, 1971). Paradoxically, small states were thus found to exercise substantial influence over great powers through alliances and multilateral institutions (Lindell and Persson 1986). A second strand of literature has focused on the role of small states in international political economy and the adjustment strategies they use to adapt to a competitive environment (see Bishop 2012; Jones 2008; Verdun 2013). The arguably most seminal work in this strand of literature is Katzenstein’s (1985) study of small states in world markets (see also Katzenstein 2003).

For a long time of European integration research little attention was paid to the role of small states (for an exception, see Jones 1993). However, since the EU’s 1995 enlargement, political scientists have increasingly turned to the role played by small states in Europe (Archer and Nugent 2002; Goetschel 1998; Jakobsen 2009; Nasra 2011; Thorhallsson and Wivel 2006). In so doing, they also focused on policies outside the realm of foreign and security issues (Arter 2000; Lee 2004; Panke 2010a; Thorhallsson 2000). On the one hand, this literature has highlighted the structural disadvantages of small states in the EU: ‘Small states have fewer votes, undersized staff and fewer financial means’ (Panke 2010b, 801). Moreover, the size and openness of their economies provide little bargaining leverage when it comes to issues of Single Market or economic governance in the EU. On the other hand, scholars revealed alternative sources of power that are typical of small states.

First, small administrations allow for more informality, flexibility, and autonomy in EU decision-making (Baillie 1998, 200; Thorhallsson 2015, 2–3). Second, relative gains of small states are less threatening to their larger partners, whereas losses or concessions are deemed less acceptable (Baillie 1998, 202–4). Third, small states may profit from their typical role as a broker between larger member states in EU negotiations (Maes and Verdun 2005, 343; Thürer 1998, 39). Finally, a crucial but often neglected way of compensating for structural disadvantages is the use of particular agenda-setting and decision-making strategies (Björkdahl 2008; Grøn and Wivel 2011; Schure and Verdun 2008).

However, the political or diplomatic strategies of small states in EMU – let alone their relation to Germany – have been analysed by very few scholars. Maes and Verdun (2005) analysed the roles of Belgium and the Netherlands in the creation of EMU, concluding that they played a significant role as pace-setter and gate-keeper, respectively. The few other works dealing with the role small states in EMU (Chang 2006; Jones, Frieden, and Torres 1998) do not focus on these states’ political strategies or their relation to Germany.

Theoretical Framework

In analysing the preferences and strategies of smaller states acting in the shadow of hegemony, we adopt a parsimonious theoretical framework. We conjecture that a small state’s choice of strategy is determined by its preferences in relation to the status quo, the power asymmetry in the relationship to the hegemon, and the ‘institutional fabric’ (regularised intergovernmentalism, symbolic acts and practices, and ‘parapublic’³ underpinnings; see below) of this relationship. In favour of theoretical parsimony we keep our conjectures as general and – at the same time – as limited as possible, but we do not rule out that additional factors may crucially affect the strategies of small states in dealing with a hegemon. This regards in particular the role of domestic factors, which are often idiosyncratic and therefore hard to theorise (see e.g. Waltz 1979). We thus leave room for our empirical contributions to collect inductive insights that go beyond our ex ante propositions.

We define preferences as an actor’s evaluative rank order of outcomes possible in a given environment. A strategy, by contrast, is an actor’s attempt to come as close as possible to its most preferred outcome. In the words of Jeffry Frieden:

‘States, groups, or individuals require ways to obtain goals, paths to their preferences. These paths must take into account the environment – other actors and their expected behaviour, available information, power disparities. Given this strategic setting, strategies are tools the agent uses to get as close to its preferences as possible’ (1999, 45).

For example, if a small eurozone state prefers national adjustment over fiscal redistribution in EMU, it may choose a ‘foot-dragging’ strategy (see below) to preserve the status quo and prevent the build-up of risk-sharing mechanisms such as ‘Eurobonds’ or a European Deposit Insurance Scheme (EDIS). In order to implement its strategy, the state can use various strategic tools such as putting in a veto or bringing forward compelling arguments against fiscal redistribution. While putting in a veto is a bargaining-based approach, arguing is a persuasion-based practice (see Table 2). However, the distinction between bargaining and persuasion constitutes a continuum rather than a clear-cut dichotomy, as many strategic tools, such as agenda-setting or brokering, include both dimensions. In addition to dragging its feet, a state can opt for a passive or free-riding role (‘fence-sitting’), actively contribute to bringing about policy change (‘co-shaping’), or even set the pace for others to follow (‘pace-setting’). Table 2 gives an overview of these strategies and the strategic tools available to implement them. Below we put forward causal propositions explaining why a state opts for certain strategic tools.

Table 2. Small state strategies vis-à-vis hegemon (strategies in italics, bilateral interaction with hegemon shaded in grey) Reference: own compilation.

Hence, we understand a strategy as a behaviour that helps small states achieve an interaction result as close as possible to their most preferred outcome. This corresponds to the understanding of strategies as applied in the works of Panke (2010a) or Grøn and Wivel (2011), for example. However, our definition differs from what the political economy literature refers to as an ‘adjustment strategy’, which is a small state’s way of adapting its political institutions and public policies to problems of international competitiveness (e.g. Bohle and Jacoby 2017; Jones 2008; Katzenstein 1985).

In the context of Europeanization research, Börzel (2002) has proposed a useful distinction between three types of member state behaviour (or roles), namely ‘foot-dragging’, ‘fence-sitting’ and ‘pace-setting’. We build on this typology to categorise the multitude of strategic tools that we find in the literature and previous empirical research (e.g. Panke 2010a; Ingebritsen et al. 2006). Accordingly, our conceptualisation starts with the proposition that the choice of a certain strategy depends on the distance between a state’s preferences and the status quo (SQ), ranging from ‘foot-dragging’ (smallest distance) via ‘fence-sitting’ and ‘co-shaping’ through to ‘pace-setting’ (largest distance) (see Table 2).

If states prefer the status quo to any policy or institutional change on the table, they will use a veto or at least threaten to do so, build counter-coalitions and blocking minorities, or try to delay the decision-making process in other ways (e.g. through rhetorical action). Although such ‘foot-dragging’ manoeuvres may not suffice to prevent a policy or institutional change altogether, they can bring about concessions (package deals), compensation (side-payments), or derogations (opt-out clauses) (Börzel 2002, 205).

If smaller states fear that any such action may be more costly than the expected outcome (be it status quo or change), we expect them to opt for ‘fence-sitting’. In this case, they adopt a passive position and may even swap coalitions (Börzel 2002, 206). If, by contrast, they conclude that an active participation in the decision-making process pays off, they will use ‘shaping strategies’ (Panke 2010a, 20–9) to influence the outcomes in the desired way (‘co-shaping’). These strategies range from bargaining tactics such as issue-linking or pre-negotiations to persuasion-based activities such as framing and shaming (see Table 2). Once a group of states has decided to actively engage in the decision-making process, the question arises who will move first and ‘set the pace’ for the others to follow. We argue that those who suffer the highest status quo costs move first as they would profit most from change.

As illustrated by Table 2, the choice of a certain strategy (foot-dragging, fence-sitting, co-shaping, pace-setting) implies a given set of strategic tools available to a small state. However, this does not tell us whether the state relies on bargaining or rather opts for persuasion-based activities in pursuing its preferences vis-a-vis the hegemon (Panke 2010a, 20–9). We argue that this choice depends on the asymmetry of power between the small state and the hegemon. Defining power by a state’s ‘fall-back position’ (i.e. its best alternative to negotiated agreement), we assume states with a good fall-back position to expect more success from employing a bargaining-based strategy. Less powerful states, by contrast, anticipate the futility of bargaining against a hegemon and therefore tend to rely on persuasion-based strategies. Hence, our second proposition states: The larger the asymmetry in power between a smaller state and the hegemon, the more likely the smaller state will rely on persuasion rather than hard bargaining.

Our third and last proposition concerns the question of whether a state interacts directly with the hegemon or seeks to bypass it through multilateral action (e.g. in international organisations or counter-coalitions). We argue that this depends on the ‘institutional fabric’ of the relation between the small state and the hegemonic power. According to Krotz and Schild, the institutional fabric consists of ‘regularised intergovernmentalism’ (i.e. patterns of interaction and communication between individual representatives of their states), symbolic acts and practices, and ‘parapublic underpinnings’ such as cultural exchange programmes or transnational partnerships (2013, 29–35). We therefore expect states with a ‘dense’ institutional fabric in their relationship to the hegemon to channel their preferences directly through the hegemon, whereas others choose to bypass the hegemonic power. However, they will bypass the hegemon only if they regard this as truly worthwhile. In other words, the divergence between a small state’s preferences and those of the hegemon also plays a role: in case of a thin institutional fabric, we expect states to oppose a hegemon only if they have strongly diverging preferences. If, by contrast, their preferences diverge only slightly, these states will not make the effort of bypassing the hegemon, but rather adopt a ‘free-rider strategy’ by accepting the anticipated outcomes and saving transaction or bargaining cost (see Figure 1).

While the divergence of preferences from the status quo and the power asymmetry between small states and the hegemon are variables that are well embedded in the rationalist research tradition, the institutional fabric of bilateral relationships relates to a rather constructivist reasoning. However, as it is not our aim to test a theory, but to provide a sufficient explanation of empirical outcomes, we consider it appropriate to combine these variables in a coherent theoretical model. In other words, by engaging in ‘eclectic theorising’, we ‘engage adherents of different traditions in meaningful conversations about substantive problems in international life’ (Katzenstein and Sil 2008, 111).

Table 2 and Figure 1 summarise our conceptualisation of possible strategies and relate them to our theoretical propositions. Those strategic tools that can (also) be used in direct interaction with the hegemon are shaded in grey.

Figure 1. Multilateral vs. bilateral strategies directed at hegemon Reference: own illustration.

Contributions and Findings

In the first empirical contribution to this special issue, Michele Chang examines the role of Belgium, which traditionally acted as a bridge between Germany and France. By comparing Belgium’s preferences and strategies before and after the outbreak of the global financial crisis and relating them to those of Germany, Chang finds that Belgium evolved from a co-shaper and pace-setter into a fence-sitter in EMU politics. While the EU founding member formerly relied on persuasion-based strategies, cultivated alliances and brokered compromises, the financial crisis and domestic turmoil constrained its room for manoeuvre. The findings largely confirm our propositions. Given the large power asymmetry in the relationship to Germany, Belgium relied on persuasion-based strategies rather than hard bargaining. Moreover, as the institutional fabric of the bilateral relationship is weak compared to that of other member states, Belgium preferred multilateral settings over direct interaction with Germany. For the post crisis period, however, our theoretical expectations could be assessed only to a limited extent since Belgium was largely absent from the debate.

In the special issue’s second contribution, Sebastian Heidebrecht and Magnus Schoeller focus on Austria’s role in EMU governance and its relationship to Germany. They argue that despite strong political, cultural and economic ties between the two countries, Austria has assumed an increasingly independent role. Based on the analysis of three different periods of EMU reform since the outbreak of the eurozone crisis, the authors investigate how and why the close partnership of the two countries is slowly growing apart. They find that converging economic preferences and the strong power asymmetry of the bilateral relationship can explain Austria’s cooperative strategy until 2016. By contrast, Austria’s shift from loyal followership towards more pronounced independence is largely caused by domestic developments, notably a rise of populism and a particularly assertive head of government responding also to the Eurosceptic parts of the electorate.

Shifting the focus to the Baltic States – Estonia, Latvia and Lithuania – Ramūnas Vilpišauskas sets out to examine three small states whose role in EMU governance is largely underexplored. The author shows that the three Baltic states not only consider the economic dimension of EMU. As a project that further deepens European integration, EMU also implies a geopolitical dimension for the Baltics: by being part of the EU’s core, they also seek to hedge against external security risks stemming from Russia. Although their economic preferences differ to some extent from those of Germany, with the Baltics being more sceptical about fiscal integration but more integrationist in financial governance, their geopolitical interests are paramount. Hence, after they had succeeded in joining the eurozone, the Baltic States adopted the role of cautious ‘fence sitters’.

Georgios Maris and Panagiota Manoli scrutinise Greece’s strategies in EMU governance and reform as well as the difficult relationship between Greece and Germany. Standing on the brink of economic collapse and eurozone exit, Greece had an extremely bad fall-back position in pursuing its preferences during and after the eurozone crisis. By putting the asymmetric power relation between chief creditor (Germany) and main debtor (Greece) at the centre of their analysis, the authors plausibly explain why Greece adopted ‘only’ a fence-sitter position in EMU politics. However, Greece’s short-lived repositioning during the negotiations of the third bailout in 2015 and its failed attempts of hard bargaining cannot be explained by changes in the power relations, but rather by relying on an incremental decision-making model in which decisions are taken based on unclear and changing government preferences. Like other contributions to this special issue, the analysis of Maris and Manoli therefore shows that domestic politics can be indispensable to sufficiently explain specific small state strategies in the context of EMU politics, even if they are often idiosyncratic and therefore hard to theorise.

In her analysis of the Netherlands and the New Hanseatic League, Amy Verdun shifts the focus on the other side of the continuum in terms of member state preferences, as the Dutch are seen by many observers as the most hawkish state in EMU governance and reform. In addition to their special role in terms of preferences, the Netherlands are an extremely important case because, as the author points out, they can be seen as ‘the greatest of the small’ eurozone members. Verdun finds that Dutch preferences are close to the status quo in EMU, which often results in a pronounced foot-dragging role. In order to pursue their preferences, the Dutch have built or joint counter-coalitions such as the New Hanseatic League or the Frugal Four. Although the Netherlands maintain a good rapport with Germany, the smaller asymmetry in power (compared to other member states) makes the use of bargaining-based strategies more rewarding. Based on a relatively dense institutional fabric of the bilateral relationship, the Dutch also engaged in intense bilateral contacts with Germany. Hence, Verdun’s case study finds confirming evidence for all three of our theoretical conjectures.

Putting Germany at the centre of their analysis, David Howarth and Joachim Schild trace how EMU’s most powerful state is torn between France and the New Hanseatic League countries. They argue that economic preferences can partly explain the extent of concessions made by Germany to both the New Hansa countries and France. However, in order to explain the choice of German governments on how and with whom best to pursue their preferences, the authors also consider existing norms of cooperation and geostrategic interests. As a result, they find that German governments have performed a balancing act between the New Hansa and France, which is skewed towards the latter. Moreover, the authors argue that the presence of economic crises increases the degree to which this balancing act is skewed towards France.

In the final contribution to this special issue, Erik Jones unites its various themes: Franco-German leadership, reluctant hegemony, and the role of small states. In doing so, Jones bridges the gap between the Political Economy literature on the adjustment strategies of small states and the International Relations literature on their diplomatic strategies. Jones argues that small states find it increasingly hard to follow Franco-German leadership in EMU. While political fragility, based on a breakdown of internal compensation mechanisms and increasing domestic conflict, results in an inability to follow, strongly held views in the domestic arena lead to an unwillingness to compromise at the European level. Both developments are reflected in the Eurosceptic populist movements that are also highlighted by some of the other contributions to this special issue. As Jones points out, these EU-wide domestic tendencies are likely to result in foot-dragging strategies vis-à-vis Germany (and France) despite striking asymmetries in political power and economic interdependency. Taking the example of the Netherlands, he concludes that a small country government can resist any proposal (‘foot-dragging’), but it can hardly persuade larger member states that are not experiencing the same combination of social forces (‘co-shaping’ or ‘pace-setting’).

In summary, the empirical analyses of this special issue corroborate our theoretically informed expectations that the preferences of small states and the asymmetry of power vis-à-vis Germany determine their choice of strategy and thus the relationship to the eurozone’s hegemon. In addition, the articles reveal important insights leading beyond our parsimonious framework. First, the material preferences related to EMU do not reflect a cleavage between large and small member states, but rather a creditor–debtor divide, with export-oriented ‘creditor states’ in the north preferring national adjustment (‘austerity’) and less competitive ‘debtor states’ in the south promoting fiscal redistribution (‘solidarity’). While this confirms previous research (e.g. Armingeon and Cranmer 2018; Frieden and Walter 2017; Lehner and Wasserfallen 2019), we found that the preferences of smaller eurozone states are more heterogeneous than meets the eye. Even the supposedly homogeneous camp of ‘creditor states’, formerly led by Germany, is split on crucial EMU issues such as a genuine eurozone budget, EDIS, or the regulatory treatment of sovereign exposure in the context of Banking Union (also Howarth and Quaglia 2018; Schoeller 2020a). This heterogeneity has even led to new coalitions of fiscally conservative states without Germany, such as the New Hanseatic League or the Frugal Four.

Second, despite this divergence of preferences, we observe much fence-sitting and increasing instances of foot-dragging, but only very little co-shaping or pace-setting attempts. To be sure, until the negotiations of a COVID-19 recovery package in 2020⁴, and with the exception of the Netherlands, no smaller member state had opposed EMU initiatives by deploying hard bargaining strategies such as the use or threat of a veto. Smaller states may find it increasingly hard to follow, but they also know that they need other member states in future decisions or different policies. They therefore have long time accepted second-best outcomes rather than blocking a decision. At the same time, however, the stance of smaller states appears to be hardening, as recent small state coalitions opposing Franco-German initiatives have shown. The contributors of this special issue have investigated the New Hanseatic League as one of these small state coalitions. Still, it is still not clear whether the New Hansa actually supports Germany (Verdun this issue) or rather keeps it from making important compromises with France (Jones this issue). Moreover, pointing to some weaknesses and countervailing dynamics, Verdun is rather sceptical about the continued existence of the coalition.

Third, our empirical findings reveal that the institutional fabric of the relationship between smaller states and the hegemon has less influence on the choice of strategies than expected. Contrary to the Franco-German relationship (Howarth and Schild this issue), in the case of smaller states economic preferences seem to prevail over the institutional fabric if the two are at odds.

Fourth, several contributions have emphasised the importance of domestic factors in explaining small state strategies in EMU governance (Chang; Heidebrecht and Schoeller; Maris and Manoli; Jones this issue). From a theoretical perspective, the consideration of domestic idiosyncrasies is problematic as they hardly allow us to generalise. However, our contributions have pointed to some generalisable developments, most importantly the rise of populism and an increasing constraining dissensus regarding further integration. Hence, the ‘domestic variable’ constitutes a relevant avenue for future research on smaller states in EU or international economic governance and should therefore not be omitted.

Finally, this special issue focuses on the strategies that small eurozone states use to pursue their preferences in the shadow of German hegemony. Their actual influence, by contrast, has partially been assessed elsewhere (Lundgren et al. 2019) and remains an important task for future research. Still, based on the contributions to this issue, we can draw some tentative conclusions on the power and influence of small states in EMU. While our authors find that their influence roughly corresponds to their size, as they lack material, institutional and bureaucratic resources compared to their larger peers, small states can punch over their weight by using certain strategies (see above; Panke 2010a; Schoeller 2020b).

The most effective strategic tool to exert influence is to build coalitions (Verdun this issue) if they are credible and consistent in presenting their positions. Although small states also have veto power in many EMU-related decisions, they tend not to use it (Vilpišauskas this issue). The reason may be that they lack the ‘go-it-alone power’ of their larger peers. At the same time, we observe a growing number of instances, where states like the Netherlands or Austria at least threaten to use a veto, which may point to the fact that smaller states find it increasingly hard to follow the Franco-German tandem (Jones, this issue). The salient impact of smaller states in negotiating the Recovery and Resilience Facility, for example, can thus be read in two ways: On the one hand, the ‘Frugal Four’ plus Finland succeeded in decreasing the amount of grants from 500bn, as proposed by Germany and France, to 390bn. On the other hand, the ‘frugals’ failed to prevent debt-financed grants from entering the EU agenda in the first place (Howarth and Schild this issue). This episode also shows how problematic it is to estimate influence by mere preference attainment. Moreover, our case studies indicate that attaining preferences through free-riding – if not on the negotiation efforts of France or Germany, then on those of the Netherlands – rather than exerting own influence seems to remain characteristic of smaller states in EMU (see Chang this issue).

With regard to the role of Germany, we saw that it considers the relationship with France as way more important than that with smaller eurozone states. Neither has Germany acted as a mediator vis-à-vis smaller states, nor has it been a real ally. Even where economic preferences largely converge, as in the case of the New Hanseatic League, Germany has been cautious not to impair the relationship with France by openly siding with smaller member states. On the contrary, the German strategy has always been to seek a bilateral and often difficult compromise with France before consulting its smaller partners (Dyson 1999; Krotz and Schild 2013; Webber 1999). While there are good reasons for applying this strategy also to EMU governance and reform (see Schild 2013; Schoeller 2018b), the increasing emancipation of smaller states shown by this special issue suggests the need for a more explicit consideration of their preferences. This does not mean that Germany and France should forego the tried and tested practice of striking bilateral deals to further European integration. Rather, they should consult smaller states early on and, once an agreement has been found, make explicit how they have included their preferences. This might make it easier for smaller states to compromise at the European level despite a constraining dissensus at home.

Disclosure Statement

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

Additional information

Funding

This work was supported by funds of the Oesterreichische Nationalbank (Austrian Central Bank, Anniversary Fund, grant number 17643) in the context of a research project led by Gerda Falkner. Moreover, Magnus Schoeller is a recipient of an APART-GSK Fellowship of the Austrian Academy of Sciences (grant number: 11878).

Notes on contributors

Magnus G. Schoeller

Magnus G. Schoeller is Principal Investigator and APART-GSK Fellow of the Austrian Academy of Sciences at the Centre for European Integration Research (EIF), Department of Political Science, University of Vienna. His research on the governance of the Economic and Monetary Union, Germany's role in the EU, and political leadership appeared with Palgrave Macmillan and journals such as the European Political Science Review, the Journal of European Public Policy, or the Journal of Common Market Studies.

Gerda Falkner

Gerda Falkner directs the Centre for European Integration Research in the Department of Political Science, University of Vienna, Austria. Her publications focus on various EU policies and their implementation, with publishers such as Oxford University Press, Cambridge University Press, Routledge, and the leading international journals in the field. Most recently, she set up a team researching the EU's role in the digital revolution and how to protect democracy.

Notes

1 While we define ‘preferences’ as actors’ evaluative rank orders of possible outcomes in a given environment, we understand ‘strategies’ as ways to get as close as possible to the preferred outcome (for a more elaborated definition, see below: ‘Theoretical Framework’).

2 In defining the different roles we build on a typology proposed by Börzel (2002), but enhance it by adding a causal explanatory framework, specifying the respective strategic tools, and contributing the category of ‘co-shaping’ (see below: ‘Theoretical Framework’).

3 ‘Parapublic underpinnings of international relations are cross-border interactions that belong neither to the public world of states nor to the private realm of societies’ (Krotz and Schild 2013, 32). Although these activities are usually state-financed or -organized, the participants do not act as official state representatives. Parapublic relations include, for example, school exchange or municipal partnerships.

4 At the negotiations of a COVID-19 recovery package (‘Next Generation EU’), the ‘Frugal Four’ (Austria, the Netherlands, Denmark and Sweden), later joined by Finland, took a hard bargaining stance and thus reached a reduction of grants for crisis-stricken member states and an increase of EU budget rebates for themselves.