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Special Report

ESG: The metrics jigsaw


Is German economic thinking different?

Germany’s economic policy is undoubtedly coloured by its troubled historical experience but does this make it unique or is it a just a free-market outlook with a Germanic flavour? Daniel Ben-Ami investigates

At a glance

• Many claim there is a distinct German school of economic thinking.
• What is sometimes known as Ordoliberalism was conceived as a third way between central planning and a free-market economy.
• Others argue it is simply the application of standard neoclassical economics in a German context.
• Both the foreign critics and the domestic supporters of German economic policy often reflect their particular national interests.

It would be easy to miss it but something strange is happening in the relationship between the European Central Bank (ECB) and German policy makers.

German politicians, most notably the finance minister Wolfgang Schäuble, have attacked the ECB’s easy money policies. He has even gone so far as to partly blame the central bank for the success of the populist Alternative für Deutschland party in recent regional elections. In response, the president of the Bundesbank, Jens Weidmann has criticised German politicians for undermining the ECB’s independence.

The row is particularly odd because both sides of the argument represent a key component of what is generally regarded as German economic orthodoxy. Germans are famously averse to any measures, such as easy monetary policy, which raise the possibility of runaway inflation. For related reasons they have staunchly supported the principle of central bank independence since the immediate aftermath of the Second World War.

Not that this is the only strange row involving German economics. For several years, high-profile economic commentators from English-speaking countries, most notably Paul Krugman and Martin Wolf, have railed against German economic policy. More recently, Mario Draghi, the ECB president, has joined in the chorus of criticism. 

The thrust of the critics’ argument is straightforward. In their view, the key problem in the global economy is not overborrowing in the US or the UK. On the contrary, it is oversaving by countries, most notably Germany, with large current account surpluses. They claim that, by saving too much and spending too little, the Germans are depriving the rest of the world of demand.

To grapple with such claims, it is worth examining whether there really is a distinctive school of German economics. There is certainly a case that Germany’s history of economic turbulence and war has predisposed it to adopt a unique version of economics as mainstream. However, others argue persuasively that German economics is essentially just a free-market outlook with a slightly Germanic flavour.

Its lineage is often traced back as far back as the late 1920s or early 1930s. Back then, a group of economists at the University of Freiburg developed what became known as the Freiburg school of national economy. It was also dubbed neo-liberalism but this should not be confused with the way the term is used today. Since 1948 it has sometimes been known as Ordoliberalism as its supporters were associated with the journal Ordo that was founded in that year.

Essentially, Ordoliberalism was conceived as a third way between central planning and a free-market economy. The market would be allowed to operate relatively freely but the state would provide an overall framework of stability. 

This conception of economics became enormously influential in Germany after the Second World War – no doubt helped by the fact its founders were critics of the former Nazi regime. The idea of a Soziale Marktwirtschaft (social market economy), combining private enterprise with a strict competition policy and a welfare state, won widespread support across Germany’s political mainstream. 

Indeed, it can be argued that this outlook was letter embedded in the institutions of the European Union. The Bundesbank’s Weidmann has argued in a speech that: “The entire Maastricht framework [of 1992] reflects key Ordoliberal and social market economy principles.”

Sebastian Dullien, professor of international economics at HTW Berlin, the University of Applied Sciences, argues that German economics is distinct. “It is different from other brands of liberalism around the world, especially in certain aspects it prescribes more interventions into the economy.” He singles out tough competition policy and central bank independence as key principles. “Economic liberalism in the US would call for much less microeconomic intervention than Ordoliberals would,” he says.

Dullien also points out that the Weidmann has referred favourably to the work of Walter Eucken, the founder of the Ordoliberal school. Indeed, the central bank chief has said publicly that he recommends Eucken’s book Principles of Economic Policy.

However, Dullien says it is among politicians and civil servants, rather than economists, where the outlook is most prominent. “They are much more influenced by Ordoliberalism than all the economics profession,” he says. Finance minister Schäuble, for example, trained as a lawyer rather than an economist.

Hans-Werner Sinn, arguably Germany’s best-known economist, disagrees. In his view, it is just a question of using a different name. “The neoclassical approach, which is the dominant approach among American economists, is also the dominant one here in Germany,” he says. “Some call it ‘ordoliberalism’ but it’s basically neo-classical as opposed to Keynesianism.”

German economists put a lot of emphasis on competition policy or what Americans call anti-trust policies. But Sinn says the origins of this preoccupation lie as much in the US as in Germany.

Sinn rejects the charge that Germany places too much emphasis on savings. In his view, that is part of a misplaced Keynesian outlook. He argues that the fundamental imbalance in Europe was a result of the lack of competiveness of the continent’s southern periphery. 

However, Anton Brender, the chief economist at Candriam and an honorary professor at the Paris Dauphine University, is with the critics of the German economic mainstream. He sees the criticisms of negative interest rates as moralistic, rather than based on sound economic reasoning. To illustrate his case, he points out that the German word for debt, Schuld, is also the word for guilt.

“If you reason the way many German economists do you just misread what is happening,” he says. In his view, the markets are indicating that savings at a world level are excessive.

Whatever the theoretical truth of the charges some make against Germany, they can certainly be taken too far. The country’s GDP accounts for about 3.4% of global output (based on purchasing power parity), according to the latest figures from the International Monetary Fund. That suggests that its ability to influence the global economy, whether for good or ill, should not be overstated.

Michael Burda, an American who is professor of economics at Humboldt University in Berlin, makes an interesting observation on the economic blame debate. He concludes a recent paper on the subject by pointing out that both sides often end up serving their particular national interests: “Rather than Ordoliberal religion, economics in Germany is a mixture of national self interest and healthy mistrust informed by experience.” 

The essay goes on to argue that, in that respect, German economists are not that different from their counterparts elsewhere. “German economists who can’t refrain from voicing their opinions will tend to peddle economics that serve Germany’s own self interests, just as we’d expect of the British if and when they decide to leave the EU, or the Irish when it comes to synchronizing tax rates, or of the US when interest rates are finally raised.”

It would clearly be a mistake to take this argument too far. There are important points to be debated that should not be reduced to expressions of national interest. However, it is interesting to see how many economists in different countries ultimately come down on the side of what suits their particular national interest. This is ironic, given how they typically see themselves as impartial experts.

Of course, in relation to politicians, the appeal of national interests is even stronger. This is arguably an important part of their job.

Whether Germany has its own distinct school of economics is open to debate. What is clear is that what counts as the mainstream is, as would be expected, informed by Germany’s unique and often troubled historical experience.

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