Published in Business Spectator (Melbourne), 12 February 2015
When Greek Finance Minister Yanis Varoufakis visited his German counterpart Wolfgang Schäuble in Berlin last week, there was a telling scene at their joint press conference. Schäuble, in trying to keep a diplomatic semblance of harmony despite the fundamental disagreements between the two governments, claimed that they had “agreed to disagree”.
Varoufakis, however, would not even compromise on such phrases. “We didn’t even agree to disagree from where I’m standing,” the Greek guest responded.
Now Varoufakis is, of course, a self-confessed Marxist well-versed in the art of dialectics. But what he must have meant is that there was simply no common understanding between Schäuble and himself at all. That is because Germans and Greeks do not speak the same language — both literally and metaphorically.
In fact, as far as economics is concerned, the Germans do not really speak anybody’s language. Which is probably why they feel misunderstood so often.
As in so many other ways, when it comes to economic policy Germany has chosen its Sonderweg (‘special path’). A Sonderweg is the idea that there is something very distinct about the Germans.
It is not just that the Germans feel different from other people. That in itself would not make them that special at all, because most nations somehow feel peculiar about themselves — just ask the Brits or the French. With the Germans, however, it is far worse. They are quite different indeed. Except they often do not even realise how different they are.
So when a Greek (or British, Italian or French) finance minister visits Berlin, he better prepare for a culture shock. There are some cornerstones of German economic thinking which have never managed to cross Germany’s borders. First among them is the idea of the primacy of Ordnungspolitik, a term you cannot even properly translate into English.
‘Order policy’ would be the literal translation of the conception that has shaped German economic policy since the end of World War II. Surprisingly, it has nothing to do with giving orders. ‘Order’ in this sense refers to the order of things within which economic activities take place. It does not have to do much with ‘policy’ either since Ordnungspolitik is sceptical about any discretionary interventions into market processes.
Ordnungspolitik therefore refers to a framework of economic policy settings that guide economic activity. This includes secure property rights, competition law, and clearly defined rules for liability and the law of contract.
If all of this sounds more like a legal philosophy than an economic theory, it is because it was developed by German lawyers and economists, mainly during the interwar and immediate post-war period. They emphasised the need for a stable legal and political framework in order for the economy to thrive.
To the present day, Ordnungspolitik remains Germany’s guiding principle for good policymaking, even if Germany does not always play by its own rules. The basic idea is to establish a stable and predictable economic order, in which money is sound, contracts are sacrosanct and government preferably remains in the background. Non-German economists will probably see some parallels with the ‘new institutional school’ of economics.
Interestingly, Ordnungspolitik is regarded as an ideal by both German conservatives and social democrats. In contrast, Prozesspolitik gets a bad rap. ‘Process politics’ summarises all the myriad ways in which governments can and do interfere with the economic order established by Ordnungspolitik: subsidies, minimum wages, redistribution, stimulus programs, bailouts, to just name a few variants.
It is easy to sum up German economic thinking: Ordnungspolitik good, Prozesspolitik bad. This is what German students learn at school, study at university and are supposed to practice later in life as politicians. And at every step of the way they are becoming more convinced that upholding rules for economic order is good and intervening in economic processes is bad.
Now, please do not get me wrong: I have more than just a bit of sympathy for this view. I am German after all. But more than that, I am an economic liberal who sees the value in stable and predictable economic institutions.
There is nevertheless a problem with this German way of thinking about the economy. It is really a perspective that does not get shared by any other country. Tellingly, if you search for Ordnungspolitik on the internet, you will struggle to find any non-German language resources. And that makes dealings with the Germans hard, as Varoufakis found out.
For non-Germans, it is hard to appreciate how much value German policymakers and academics place on sound economic institutions, and how little they care for ad-hoc considerations in setting economic policy, no matter how urgent they may be.
Varoufakis and Schäuble probably exemplify this chasm like no other pair of politicians. On the one hand, the Greek finance minister is an internationally experienced post-Keynesian economist with previous academic positions in Britain, Australia and the US. On the other hand, the German finance minister’s academic background is in law and he wrote his PhD thesis on “The public accountant’s professional legal situation within accountancy firms” before entering Parliament and continuously serving as a federal MP since 1972.
For Schäuble and other followers of Ordnungspolitik, their actions will be guided by a ‘pacta sunt servanda’ philosophy. They would first look at the legal implications of their actions. They would ensure conformity with European treaty law and, if need be, consult domestic and European courts. But they would never ever just jump onto a fashionable or even practical bandwagon that deviates from their commitment to Ordnungspolitik.
With Varoufakis it is the other way around. Not only will he not believe that Ordnungspolitik could help him out of his immediate misery, but he is highly unlikely to even have heard of the term. He is trying to find solutions to his country’s most pressing problems. But in doing so, he needs the cooperation of his German counterpart, who happens to be a lawyer wedded to an economic philosophy Varoufakis does not know and speaks a language he does not understand.
For Varoufakis and Schäuble, there really is little hope of finding any common ground. They are personally too different to bridge the gap between their upbringings and beliefs. If they do not even agree to disagree, that is probably the best anyone can hope for.
Indeed, had they agreed to disagree, it is only likely they would have misunderstood each other.