Coping with Crisis: Government Reactions to the Great Recession

Chapter 5. Policymaking in Hard Times: French and German Responses to the Eurozone Crisis

130 Chapter 5 Policymaking in Hard Times: French and German Responses to the Eurozone Crisis Waltraud Schelkle Times are hard for economic policymaking. A financial crisis of unprecedented scope shattered politicians’ beliefs in the received economic wisdom that had informed two decades of continuous reform. After the demise of pump-priming Keynesianism in the late 1970s, governments tried to reduce their involvement in the direct provision of goods and services. They concentrated on setting regulatory frameworks and left the details to industry self-regulation or independent agencies; they came to follow rules in their budgetary policies and reduce discretionary interventions; and they established independent central banks that target inflation rather than the level of economic activity directly (Eichengreen 2007). The project of European integration was revived in the mid-1980s and became a major force in redefining what national government should and could do when intervening in markets. Yet, in 2008 and 2009, the international financial system would have collapsed had public authorities remained faithful to these hands-tying innovations instead of giving monetary and fiscal life support to banks. A comparison of the French and German responses to a series of crises is of interest not least because the two have played a key role for the EU’s concerted effort to combat recession and a meltdown of euro bond markets . The irony to be explored here is that what the two governments stated publicly, and at the EU level categorically, fitted the stereotype of dirigiste France and ordoliberal Germany, but it was the opposite of what they practiced at home. The French asked for decisive joint action, the Policymaking in Hard Times    131 Germans proposed self-restraint and principled collective action only where absolutely necessary. In practice, the French government relied heavily on the built-in stabilizers of their tax-transfer system with largely symbolic extra spending that at least in one case was discriminatory against European partners. The German government, by contrast, topped up the built-in stabilizers with a sizeable subsidy to encourage labor hoarding by firms and generous support for the car industry, undeterred by considerable spillovers that stabilized demand for its European neighbors to the east. These observations points us to a standard puzzle of comparative political economy: why did two center-right governments of similarly advanced capitalist democracies favor such different responses to a common shock? Financial markets were liberalized around the time Peter Gourevitch published Politics in Hard Times (1986), which compares the responses in five advanced capitalist democracies to the international economic crisis then. The very first sentence states that “policy needs politics” because only political mobilization gives support and political power to those who can select among the many economic solutions available. This dominance of politics in the choice of economic policies is meant to hold generally but the argument is that we become aware of it only in times of crisis, when “patterns unravel, economic models come into conflict, and policy prescriptions diverge” (Gourevitch 1986, 17). The hypothesis that “politics dominates policy choice” has informed some of the most interesting work on the longer-term changes that led up to the recent crisis, most notably Peter Hall (2010) and Jonah Levy (2010), who show how reformed institutional pathways shape policies now. Mark Vail (2011), who covers the same ground as this contribution, namely crisis responses in France and Germany, emphasizes the constitutive role of political ideas for present crisis management. So what kind of politics can explain the dual difference —in political presentation and in effective policymaking—between two governments that are ideologically close and subject to the same constraints of EU institutions? In its simplest form, the answer proposed here lies in a combination of electoral and interest group politics. Electoral politics tries to appeal to the majority or the median voter in each nation and thus projects a coherent as well as a reassuring, that is, expectable, narrative of crisis management. Interest group politics, by contrast, pushes policymakers to select among all the possible and feasible responses to the economic imperatives that different material interests represent. Tensions between these two arenas of public presentation and policy enactment will inevitably arise. It is the art of politics to make the narrative look sufficiently joined up with observable actions. 132    Coping with Crisis The speeches given and the measures taken for domestic political consumption and in EU crisis management provide evidence for the dual politics explanation of...