Germany's Role in Crafting a Solution to the 2010 EMU Sovereign Debt Crisis: Persuading with Power or the Power of Persuasion?

Matthijs, Matthias M. (2011) Germany's Role in Crafting a Solution to the 2010 EMU Sovereign Debt Crisis: Persuading with Power or the Power of Persuasion? [Conference Proceedings] (Submitted)

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Abstract

The sovereign debt crisis that shook the euro zone and took the Brussels-based policy elites by surprise in 2010 was in many ways the logical consequence of the global financial crisis which started in the US housing market in 2007. The euro crisis has raised serious questions as to the original design and long-term viability of Europe’s Economic and Monetary Union (EMU) as it was originally constructed in Maastricht in December 1991. Throughout 2010, Europe’s heads of state and their finance ministers cobbled together various ad hoc bail-out responses, first to solve the pending Greek default in the spring of 2010, and then to stave off Irish default in the autumn. In order to prevent Portugal, Spain, Italy, and others from falling down the same cliff, Germany and France agreed on a “permanent mechanism” to deal with future crises, to be formally approved in a European Council meeting in March 2011. This paper argues that – even though there were at least five crisis “narratives” of what had gone wrong with the euro zone and how it could be fixed – Germany’s narrative would ultimately prevail and German ordoliberal ideas rather than French-Mediterranean Keynesian ideas will inform the future institutional structure of the EMU. The paper argues that Germany’s stance prevailed in 2010 and 2011 because of the persuasive power of its economic ideas, rather than because of Germany’s abuse of its all-powerful position as Europe’s largest and most dynamic economy to push through reforms to serve their own national interests. The paper concludes that the German position is inherently unsustainable, however, but likely to prevail during the medium-term, forcing Europe on yet another lengthy period of austerity. In that sense, there is a German problem again, but not for the reasons most people believe.

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