Supporters and even critics of the European Monetary Union (EMU) often see its policies — its rejection of Keynesian demand management that was written into the Maastricht Treaty and later transformed into the Stability and Growth Pact (SGP), as well as its monetarist belief in the priority of anti-inflationary policies over any other economic policy goal — as merely a practical application of neoclassical textbook models. Such a view is part of the myth of an apolitical economy, without which the EMU would not have been possible. The perceived economic neutrality of the EMU as regards social conflicts and political interests is a wonderful disguise for the Europeanization of “Modell Deutschland” that eventually culminated in the EMU. Such a “monetary veil” (to put one of the basic notions of monetarism to ironic use) was necessary to gain legitimacy for the common currency.
The Europeanization of Modell Deutschland comprises two closely related developments which, had they been debated openly, most likely would have led to insurmountable opposition to the EMU. One is Germany’s outstanding economic growth (especially in terms of growing world market shares) during the post-war boom, which laid the foundation for its economic hegemony in Europe. Given Germany’s Nazi and Second World War history, any increase in German strength, no matter that it was limited to the economic sphere for the time being, was met with suspicion by the peoples and governments of other European countries. The other development is Germany’s export-oriented corporatism. Though Germany saw (as did other advanced capitalist countries during the long boom after the war) remarkable increases in welfare provisions and social standards, the development of the German welfare state was always subjugated to growth rates. The mercantilist and productivist consensus that was part of German corporatism differed considerably from the welfare states in other European countries, which were more openly institutionalized forms of class compromises between labor and capital.
There were two major steps towards the Europeanization of Modell Deutschland. The first step was the failure of a left-wing coalition in France to combine Keynesian spending boosts with redistribution from capital to labor in order to build a strong domestic economy that would allow for full employment and be less dependent on world market developments. After the Communist ministers of that government resigned and the Socialists turned to austerity, there remained only small countries, like in Scandinavia, that maintained Keynesian and redistributive polices. However, theirs were niche strategies — not starting points for a Keynesian and welfarist Europe. Quite the contrary, the Single European Act was signed and ratified to create a bigger and more unified home base for the export drive of European corporations. Though it is true that such a common market is, according to textbook models, the logical next step of integration after a customs union is established, something Europe had achieved as early as 1968, Modell Deutschland would not have out-competed other European economic and social models without a period of economic turbulences, intensified class conflicts, and political crises in the 1970s which hit other countries harder than Germany.
The second step started with the fall of the Berlin Wall and ended with the introduction of the euro. The establishment of the European single market occurred under the monetary hegemony of the deutschmark, which had become a symbol of price stability and export growth all over Europe and also a crystallization point for economic nationalism in Germany. Without the unification of Germany, which for some time seemed to shift nationalism from economic issues to foreign policies, it is most unlikely that any German government would have agreed to replacing the deutschmark by the euro. As with the common market, however, the euro was presented to the public as the realization of iron economic laws, when in fact it was the contingent collapse of state socialism in Eastern Europe that paved the way for a common currency. The terms under which the common currency was created then were pretty much dictated by the German government. The price that prospective EMU members had to pay for Germany to give up its beloved currency was the institutionalization of rigid policy guidelines in the Treaty of Maastricht, the subsequent SGP, and the statute of the European Central Bank (ECB). These comprise upper limits for public deficit and debt levels and an unconditional priority of anti-inflationary measures over other economic policy goals.
The second step of the Europeanization of Modell Deutschland thus institutionalized policies that were de facto pursued by German governments for most parts of post-war history. The greatly enlarged currency area, however, made a big difference between the regional monetary hegemony of the deutschmark and the potential of the newly introduced euro. In terms of production, trade, and productivity, the euro area comes close to the U.S. economy. While the deutschmark had become an international reserve currency in the 1980s, only a few observers ever thought it could become the world’s leading currency, thus challenging the U.S. dollar’s position. Matters are different for the euro, which is not only the successor of the deutschmark’s regional hegemonic position but potentially also a world currency.
The second proposition of this paper is, as I have argued above, that the euro area economically is big enough to challenge the leading role of the U.S. dollar in global finance but is neither pursuing a hegemonic project nor prepared to cooperate with other powers in order to stabilize the world economy. The political economy of German and, subsequently, European mercantilism, is the starting point for understanding why Europe has not set up a hegemonic project and why it is not prepared for economic policy cooperation in the global arena.
Politically, the necessary myth of an apolitical European economy, explored in the preceding section, is a serious obstacle to the pursuit of a hegemonic project. A hegemonic project would imply the formulation of political goals and means to achieve them. No matter what the goals and means would be, they would contradict the myth that Europe is only about welfare gains, which supposedly come with economic integration that supersedes political regulations at the level of nation-states. The dominance of this economistic ideology over any other conception of Europe becomes visible in a series of unsuccessful attempts to define a distinct European identity grounded in its culture or its social model. It also became obvious after the Dutch and French referenda, which by just saying “No,” brought the process to introduce a European constitution to a crushing halt. Yet, it is not totally impossible that a European identity strong enough to carry a hegemonic project might emerge. There were some speculations that anti-war sentiment in Europe during the U.S.-led campaign against Saddam Hussein’s regime in Iraq would do that job. But even if such an identity would emerge, any attempt to develop a hegemonic project would either fail or require an economic basis that would be totally different from the Europeanized Modell Deutschland.
Why? Since capitalism entails the market imperative to accumulate capital, a hegemon has to stimulate economic growth not only at home but also in the countries that are under its hegemony. Also, the social actors in the subordinated countries have to have an incentive to copy the hegemon’s institutions, thus accepting them as a role model for their own countries.
Though Modell Deutschland presented itself successfully as a European role model after the failure of the French experiment in Keynesian reflation and redistribution and the collapse of state socialism in Eastern Europe, it always had severe difficulties in stimulating growth after the end of the post-war boom. The best that can be said in this respect is that domestic demand always lagged behind export growth. Since the latest cyclical downturn of the world economy in 2001, domestic demand in the two major euro area economies, France and Germany, seems to be disconnected from export stimuli altogether.
The reason for this obvious inability to stimulate growth lies in the mercantilism that the EMU has inherited from Modell Deutschland. The private sectors in advanced capitalist countries do not generate sufficient demand to keep up with the development of aggregate supply. Therefore, external demand stimuli are needed to raise the levels of profitability, capacity utilization, and employment. Though individual countries, especially small ones, may choose to generate such stimuli by promoting their exports, the capitalist world economy as a whole cannot pursue such mercantilist policies. External growth stimuli can only be generated by the state, or a group of states.
Thus Keynesian policies are indispensable to overcome the stagnationist tendencies of advanced capitalism. Such policies, which not only triggered domestic demand but also spurred world economic growth, were, and still are being, pursued by the United States. The growth effects of American Keynesianism have become smaller through the years. Also the exploding U.S. public and foreign debt may undermine investors’ confidence in the U.S. dollar’s leading position in global finance. All this does not mean, however, that, without Keynesian policies, growth rates would be higher and debt ratios lower. The euro area clearly shows that this is not true.
Before the Treaty of Maastricht and the SGP, German mercantilism could rely on growth stimuli from not only the United States but also some of its European neighbors. This is no longer possible, because of the geographic extension of that model all across the euro area. Since then, European dependence on U.S. growth has become even stronger and contributes as much to imbalances in the world economy as the continuing American spending spree. In fact, European mercantilism and American Keynesianism are complementary factors causing these imbalances. It is worth noting here that export-oriented growth in large parts of Asia, especially China, is almost negligible in terms of export values compared to trans-Atlantic trade flows.
With the growth effects of Keynesianism getting smaller and debt ratios reaching ever-higher levels in the United States, and the euro unable to replace the US dollar as the world currency, a hegemonic gap has opened up in global finance. This might not be a problem if the United States and the EMU were capable of and willing to coordinate their monetary policies. The prospects of such coordination are pretty bleak, however. The United States is not prepared to do so because of its hegemonic tradition, which is more about leadership than about cooperation. Mercantilist traditions of European countries (especially Germany), which once were complementary to the U.S. post-war position and promised economic growth and mitigation of class conflict at home, still shackle Europe today, though the position of the current European economy is quite different from what it was — it is now simply too big not to affect the world economy. The SGP’s and ECB’s preoccupation with fiscal austerity and price stability does not allow the necessary flexibility to intervene in cases of financial instabilities. Neither does it provide Europe with the necessary economic tools to intervene in them; nor does it even prepare Europe to take political responsibility for international financial stabilization. Europe’s impotence looms larger, the more U.S. hegemony is undermined by its own economic overstretch.
Ingo Schmidt is Research Associate at the Institute for European Studies, University of British Columbia, Canada, and the Institute for Regional Research, University of Göttingen, Germany. He can be reached at <firstname.lastname@example.org>.